Macroeconomics, International Economics, & Green Accounting

How can macroeconomic & int’l policy affect the environment?

The income effect

Recall theory: Income is an argument of demandIf consumption of a good:

Increases with increased Y, normal goodDecreases with increased Y, inferior good

Recall Environmental Kuznet’s curvePollution is first (+) correlated with income, then (-) correlated.

Individual to societal demand

How translate individual demands into societal demand and government policy?

Aggregate individual demands, translate into government demand

Think of environmental quality as a public goodLevel of provision depends on form of government.Democracy more likely to provide public goods?

What is “supply of environmental quality”?What is “demand for environmental quality”?

Demand and supply for environmental quality

Demand: value to consumersHow consumers value (are willing to pay for) things like clean air, clean water, biodiversity, ecosystem services, (non)-use values.

Supply: cost to provideRicher economies have larger industrial base, increasing MC of providing environmental quality (not necessarily)

Interaction of supply and demand

Both supply and demand may shift when incomes in a country increase.

D0

D1

S0

S1

Environmental QualityQ0 Q1

$Drawn this way,environmental quality increaseswith increased Y.

But environmental quality may

D0D1

S0

S1

Environmental QualityQ0Q1

$Drawn this way,environmental quality decreaseswith Y.

Safe water vs. income

% w/o safewater

Income

Regression analysis on 86 Countries from around the worldShows improvement in drinkingWater quality with Y.

Why are we studying this?

How to improve environmental quality in poor countries?

Could focus international effort on protecting resources, improving environment directlyIf we believe Kuznet’s curve, could focus attention on increasing incomes of poor people, who will then demand increased environmental quality.Insufficient data to be certain about outcome.

Transboundary pollution

Pollution that migrates beyond jurisdiction of source.GHGs, SO2 (acid rain), water pollution, some biodiversity loss, exotic species.Possible policy instruments

Tariffs, standards for cleanliness, international environmental agreements, non-targeted international agreements.

Green national accounting

Measures of national income: GNP, GDP

Don’t account for environmental degradation and resource depletion

Can give misleading measure of national “well-being”, may lead to wrong policy.Many adjustments have been proposed to “correct” standard measures.

“Natural capital” depreciation

Natural capital: the available endowment of land and natural resourcesMeasure depletion of natural resources (oil, timber, minerals, soils)Subtract from standard measuresResult: many developing nations show substantial effect

Indonesia example: “Adjusted Net Domestic Product”

Pollution control & cleanup

How should pollution control and cleanup costs be accounted for in developed nations?Should cleanup expenditures contribute to GNP? Some think not.Main issue: don’t double count. These are legitimate expenditures in order to maintain environmental values.

How are national accounts used?

Primary use: assist policy makers in government.

E.g. Gov’t expenditures on scientific research are linked to current economic performance and climate.

United Nations has proposed a “System of Environmental and Economic Accounting”, some adjustments underway.

Paying for public goods

Public goods will be under-provided, externalities will not be internalized in free market. Government intervention: tax revenues can pay for cleanup, regulation, public goods provisionBut many taxes “distortionary”

E.g. Income tax discourages work!Costs $1.40 to raise $1 in revenue

Double dividend

If we substitute distortionary taxes with pollution taxes, we may earn a “double dividend”

Reduce pollution (and therefore damage from pollution)Reduce distortionary taxes on labor and thus the DWL from those taxes • This is called the “revenue recycling

effect”

A 3rd effect of pollution taxes

“Tax interaction effect”Polluting good and leisure are substitutesTax pollution, demand for leisure shifts outIf labor is still taxed, shift introduces an additional DWL attributed to pollution

Decreases social welfare.Overall size of tax interaction effect varies among polluting industries

Estimate: pollution tax should be set at 63% of marginal damage.