Environmental economics and policy is a branch of economics that studies the economic and policy effects of environmental issues such as climate change, pollution, or resource depletion It takes a consequentialist approach to understanding the impacts of the environment on economic activities, the costs of environmental protection, and the optimal allocation of resources for environmental protection. Environmental economics and policy seeks to understand how to best address environmental problems in an economically sustainable way.
Example 1: Carbon Tax
A carbon tax is a tax levied on the production and/or consumption of fossil fuels as a way to incentivize the reduction of carbon emissions. Carbon taxes are one of the most common proposals for reducing carbon emissions and reducing the global impacts of climate change. The primary benefit of a carbon tax is that it provides incentives for the reduction of emissions, while the economic effects are generally considered to be a net positive.
Example 2: Tradable Permits
Tradable permits are an economic policy instrument which provides markets with incentives to reduce emissions. Tradable permits are a form of “cap and trade” system which sets a total emissions limit and distributes tradable permits to emitters. Emitters can then buy and sell permits to meet the emissions limit, incentivizing emissions reductions as the limits become tighter. Tradable permits have been used to reduce emissions of sulfur dioxide in the United States, contributing to a reduction of acid rain in the Northeast.
Example 3: Subsidy Reform
Subsidies provided by governments for polluting activities often outweigh the incentives for reducing emissions. Subsidy reform is the process of removing or reducing the significant subsidies for activities such as oil exploration, making it more difficult to pollute and thereby reducing emissions. Subsidy reform has been implemented in many countries, including the United States, and is an effective way to reduce emissions.
Example 4: Renewable Energy
Renewable energy is energy generated from sources such as solar, wind, and geothermal which do not produce carbon emissions. Renewable energy is seen as a key component of a successful transition to lower carbon emissions. Many countries have implemented subsidy and incentive programs to encourage the adoption of renewable energy sources, providing economic benefits while reducing emissions.
Example 5: Environmental Regulations
Environmental regulations are laws, regulations, and standards that specify environmental requirements and limit the amount of pollution that a company or business may emit. Enforcement of environmental regulations typically takes the form of fines or other penalties for non-compliance, thereby incentivizing businesses to reduce their emissions. Environmental regulations are seen as a critical part of an effective environmental policy, providing an incentive to reduce emissions while simultaneously reducing the health impacts of air pollution.