WT 2022/23

ENVIRONMENTAL AND RESOURCE ECONOMICS

Chapter 1
Introduction

Prof. Dr. Karen Pittel

Course Structure

1. Introduction

2. Externalities, Public Goods and Sustainability

3. Environmental Policy

4. Climate Economics

5. Non-Renewable Resources

6. Renewable Resources

7. Environmental Valuation and Cost-Benefit Analysis

8. International Environmental Problems

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Literature, Course Material and Exam
Literature
− Perman, R. et al. (2011), Natural Resource and Environmental Economics, 4th ed. Harlow:
Pearson.
− Further references will be provided specifically for the individual chapters.

Course Material
− Will be provided successively (via LSF) during the term.

Prerequisites?
− Knowledge of the topics and methods introduced in microeconomics and macroeconomics
is assumed.

Exam: written (online), last week of the term (probably February 6, 2023)

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Next Week‘s Lecture: ZOOM

ZOOM room for lecture on Oct 24:

https://ifo-
cesifo.zoom.us/j/97876065425?pwd=bVFhaC9pRm9PcE1wSDJYUFdTdjk3UT09
Code: 416905

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Suggestions

Attend the lecture (and tutorials) regularly – the slides are not a perfect substitute
for the lecture!

Procure notes on lectures and tutorials from your fellow students if you are unable
to attend.

Make notes of the key points of the lecture.

Consult further literature.

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Chapter 1

Introduction

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What is environmental and resource economics?

Economics: Analyzes the allocation of scarce resources

Economic activities draw upon scarce natural resources and environmental

assets

→ Environmental and Resources Economics…

… apply economic principles to the question of how the environment and

resource stocks develop over time and how they are / can be managed

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What is different about environment and resources?

− Normally: prices reflect the relative scarcity of goods and production factors

 level and intensity of use depend on the price

In the case of environment and natural resources:

− Prices often do not reflect actual scarcity, resp. cost of use to society
− Market prices do not exist for many environmental assets

− The quantity of resources available at one point of time depends on the use at other
points of time.

− Irreversibility of some developments („planetary boundaries“, depletion of fossil

resources, long-term environmental damages)

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Planetary boundaries

European Environment
Agency (2020)

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Related questions

Given the stated problems, are the price and usage of environmental goods and
resources…
… efficient?
… welfare optimal?
… sustainable?

Efficiency: Does the price reflect all marginal costs/benefits of

environmental goods and resources?

Welfare optimality: Does a specific allocation of environmental goods and

resources maximize welfare?

Sustainability: Can development be maintained in the long term?

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Important topics

Property rights and regulation

→ missing property rights for natural resources/environment
→ excessive use and depletion of natural resources/environment
→ design of effective and efficient regulation

Valuation of environmental benefits and costs

→ monetization of environmental benefits/costs as basis for decision makers

(Inter-)Temporal dimension of environment and resource use

→ efficient/optimal use and extraction from an intertemporal perspective

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History of Environment and Resource Economics

Environment and resources were already an important topic in classical economics.

However, „Environmental and Resouce Economics“ is a relatively young discipline.

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History of Environment and Resource Economics
The Classics (17th/18th Century)

Robert Malthus (1766-1834): Due to the limited availability of land and decreasing marginal rates
of return, living standards will converge towards the subsistence
level as population increases.

(In the long run: a constant population will live at the subsistence
level)

John Stuart Mill (1806-1873):
Technological progress counteracts decreasing marginal rates of
return at least temporarily and allows for higher living standards in
the long run (still: long-run steady state).
Globalisation mitigates local resource scarcity.
Recognizes the beauty of nature as part of human welfare (see
next slide).

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History of Environment and Resource Economics

„If the earth must lose that great portion of its pleasantness which it owes to things
that the unlimited increases of wealth and population would extirpate from it, for
the mere purpose of enabling it to support a larger, but not a happier or better
population, I sincerely hope, for the sake of posterity, that they will be content to be
stationary long before necessity compels them to it.”

John Stuart Mill (1857)

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History of Environment and Resource Economics

19th/20th century until today

− Interaction of environment/resources and the economy receives little attention

initially

− Changing perception in the 1970s:

− Oil price shocks and increasing pollution

− „The Limits of Growth“ (Meadows et al. 1972)

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Forecasts of the Club of Rome (1972)
Resources

Population

Pollution

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History of Environment and Resource Economics

19th/20th century until today

− Interaction of environment/resources and economy receives little attention initially

− Changing perception in the 70ies:

− Cause: Oil price shocks and increasing pollution
− „The Limits of Growth“ (Meadows et al. 1972)

− Resource scarcity and planetary boundaries are seen as critical for long-term
development

− Sustainable development emerges as additional criterion for the assessment of long-

term development

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Current situation: Selected facts and forecasts

1. Pollution (Environmental/Climate Economics)

a. CO 2 emissions
b. SO 2 emissions

2. Resources (Resource Economics)

a. Renewable resources
b. Non-renewable resources

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Pollution: CO2

Climate protection, climate change and market failure

Greenhouse gas emissions: ...cause externalities

Atmosphere: ...is a common resource

Emitters "consume" the atmosphere by putting carbon into it. The more carbon is emitted,
the less of the atmosphere is available (before serious climate impacts occur).

Climate protection: ...is a global public good

Its benefits are global, no country can be excluded from it. There is no rivalry in the use of
the benefits from climate protection.

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Observed and simulated temperature development

IPCC 2021

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CO2-, NOx- and CH4 emissions and temperatures
(Pre-)historical observations: 625000 BC to 2007

IPCC 2007

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CO2 emissions, atmospherical CO2 and temperature

Illustrative scenarios: decrease of CO2 emissions to zero (after reaching a concentration

peak of 450/ 550/ ... ppmv*)

→ Implications for CO2 concentration and temperature

*ppmv = cm3 CO2 per mio cm3 of atmosphere Solomon 2009

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Paris Agreement (2015)

Article 2
This Agreement … aims … [h]olding the increase in the global average
temperature to well below 2°C above pre-industrial levels and pursuing efforts
to limit the temperature increase to 1.5°C above pre-industrial levels,
recognizing that this would significantly reduce the risks and impacts of climate
change…”

Nationally determined contributions so far not sufficient to reach these goals.

More than 100 countries have pledged to reach climate neutrality by or around
2050, however, policies/measures assuring that this goal is reached are largely
unclear.

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IPCC – Intergovernmental Panel on Climate Change

“IPCC assessments provide a scientific

basis for governments at all levels to
develop climate-related policies, and they
underlie negotiations at the UN Climate
Conference – the United Nations
Framework Convention on Climate
Change (UNFCCC). The assessments are
policy-relevant but not policy-
prescriptive…”

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Net CO2 emission paths compatible with 1.5°C target

IPCC 2018

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Pollution: SO2

Source
− Primarily combustion of fossil fuels in the industrial and energy production sectors.

Impacts
− Respiratory illness
− Aggrevation of cardio-vascular diseases
− Impairment of visibility
− Contribution to acid rain

„Economic“ damages
− Damages from acid rain, reduced productivity due to health effects…

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Germany: SO2 emissions by sources

UBA 2021

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International development of SO2 emissions

Our World in Data 2021

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Topics in Climate/Environmental Economics

What are the (expected) economic impacts and consequences

of climate change/pollution?

What are the drivers of emissions and projection of future emission pathways?

What are the (expected) economic costs of pollution/climate change (mitigation and
adaptation)?

How do efficient environmental/climate policy measures look like?

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Renewable resources: Forests

Annual forest area net change by decade and region, 1990–2020

FAO 2020

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Consequences of deforestation

Multidimensional impacts of forest loss:

− Biodiversity loss

− Release of CO2 into the atmosphere

− Local climate impacts

− Water management

− Amenity value

− …

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Non-renewable resources: Fossil energy resources
Remaining fossil fuel stocks (in terms of stored carbon)

EIA: Energy Information Administration (EIA 2011)

GAC: German Advisory Council (GAC 2011)
GAE: Global Energy Assessment (GEA 2012) Hansen et al. 2013

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Fossil energy resources

How much of these fossil energy stocks can still be burned?

IPCC 2021

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Topics in Resource Economics

What determines the optimal harvest/extraction path and the optimal price of
resources?

How do environmental policies affect resource extraction and price paths?

How do extraction costs, substitutes and the discovery of new resources affect these
paths?

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In this course…

…we will not be able to address all the topics / analyses outlined in this introduction

The focus will be on basics of

− Environmental policy
− Climate Economics
− Resource use and pricing
− Valuation of the environment
− International challenges

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