Environmental economics seeks to quantify present and future losses from damaged health and depleted natural resources that are due to environmental degradation. The most efficient way to reduce these losses is determined by comparing the cost of environmental damage to the cost of mitigation options.

Environmental economics emerged as a discipline in the 1950's and 1960's, when its primary focus was on natural resource economics as concern over environmental degradation began to develop. Environmental economics borrows heavily from the theories of its precursors and is couched in many neoclassical economics assumptions. Environmental economics has evolved to address ever-emerging issues, such as pollution and fishery issues. Currently, efficiently mitigating and adapting to climate change, which is a multidiscipline issue, is a main focus.

Environmental economics is predicated on the concept that natural resources and environmental health can be valued monetarily, which is contested by some environmentalists. Economic value is determined by people's preferences and the intersection of supply and demand for the valued entity. Money is a convenient and familiar metric to decision makers determining "optimal" environmental policies. Monetary valuation has been established as a precedent by legally mandated economic reparations in major environmental disasters, such as the 1989 Exxon Valdez oil spill off Alaska.

The economic value of an environmental good is assessed subjectively, is relative to the value of other goods, and is marginal (that is, it is altered by changes in the broader state of affairs). There is no formal market for environmental goods; therefore, economists have developed methods to elicit individuals' valuation. "Revealed preferences" methodology deduces valuation based on people's observed behaviors. Alternatively, "stated preference" methodology techniques directly ask people their valuation of environmental goods.

Monetary valuation of the environment remains an ethical question. This brand of valuation is based upon a utilitarian philosophy, which is anthropocentric and consequentialist. It can be argued that individual preferences are a poor guide for social decision making. To appropriately weigh all aspects of a decision, the environment should not be ignored; some monetary valuation is arguably better than none at all. In 1997, researchers estimated that the worldwide flow of environmental services was $33 trillion, demonstrating that the environment is a larger provider of economic goods and services than conventional economic estimates reflect.

Economic valuation allows comparison of diverse benefits and costs associated with ecosystem conservation. In this way, the wider array of benefits and costs associated with a project can be considered in deciding which alternative produces the largest net benefit to society. Economists study how people make decisions when faced with scarcity. Scarcity implies that resources devoted to one end are not available to meet another; hence, there is opportunity cost associated with any action. For example, funds used by a municipality to retrofit a sewage treatment plant cannot also be used to improve the local community center. Pareto improvements are an important consideration in this process.

Cost-benefit analysis (CBA) is the economist's applied tool for assessing the efficiency of alternative public choices and policies. Economists favor the use of CBA because it requires transparency and encourages objectivity by the analyst. CBA provides an organizational framework for identifying, quantifying, and comparing benefits and costs of a proposed action. Generally, economists suggest policies providing greater benefits than costs; CBA allows ranking of alternatives in this manner.

The Coase theorem states that under ideal circumstances, when polluters and polluttees bargain, the equilibrium level of pollution is independent of the allocation of property rights. Ideal circumstances include perfect information about costs and benefits and assume no transaction costs. In the real world, externalities can lead to market failures, and the use of market-based instruments can provide more equitable outcomes. The optimal level of pollution is determined where the marginal cost of emissions and marginal benefits are equal. The target level of the policy is then calculated, taking into account the potential for gaming and principal agent problems.

The four main economic instruments used are pollution taxes, clean technology subsidies, tradable permits, and hybrid schemes. Pollution (Pigovian) taxes and clean technology subsidies are price instruments; issuance of tradeable emissions permits is a quantity instrument.

Pigovian taxes are levied to correct negative externalities. The tax shifts the marginal private cost (MPC) curve up by the amount of the tax, thus providing incentive for producers to reduce output to the socially optimum level. Subsidies are useful when taxes are politically unrealistic, though they run contrary to the polluter pays principle and can result in efficiency losses. Emissions trading guarantees that the pollution quantity reached is optimal (unlike taxes) but does not cap the costs of achieving the target. The European Union Emission Trading Scheme (EUETS) is the largest multinational emission trading scheme in the world.

Environmental economics is increasingly involved in climate change mitigation strategies, which present unique problems due to their global nature and the long time-horizons affected.

Estimating abatement costs can be achieved through two different approaches: resource cost estimates (RCE) and macroeconomic cost estimates (MCE). RCE rely on deriving the marginal abatement cost (MAC) curve by estimating and ranking the technologies and their emissions potential. MCE models examine behavioral responses to carbon price increases.

Economic estimation of potential global warming damages necessitates an integrated assessment (IA) approach, considering scientific findings and socioeconomic forcings. IA models differ considerably in impact representations, which are especially sensitive to the discount rate and applied elasticity of marginal utility.

Environmental economists are tasked with recommending policies that reflect appropriate division of scarce resources on the societal level. However, there is controversy over the correct manner of nonmarket good and services valuation and whether environmental economics is overly anthropocentric. When dealing with environmental issues, ethical considerations are necessary. For instance, climate change economics is currently dealing with the ethical dimension of discount rate valuation. The long-term nature of climate change coupled with the complexity of climate systems complicates economic analyses by producing inherently high uncertainty as to potential outcomes.

Bibliography:

1)         Diamond, P., and J. Hausman. "Contingent Valuation: Is Some Number Better than No Number?" Journal of Economic Perspectives 8, no. 4 (Autumn, 1994): 45-64.

2)         Hanneman, M. "Valuing the Environment Through Contingent Valuation." Journal of Economic Perspectives 8, no. 4 (Autumn, 1994): 19-43.

3)         Pizer, W. "Combining Price and Quantity Controls to Mitigate Global Climate Change." Journal of Public Economics 85, no. 3 (2002): 409-434.

4)         Stern, N., et al. Stern Review on the Economics of Climate Change. New York: Cambridge University Press, 2006.

5)         Tietenberg, Tom, and Lynne Lewis. Environmental and Natural Resource Economics. 8th ed. Boston: Pearson Addison Wesley, 2009.

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