Environmental Economics Lecture 1

Introduction

Instructor: Xianling Long

Spring 2024
 Outline

• Basic course information

• Course structure
• Some questions in environmental economics
• Examples of environmental economics research
 Outline

• Basic course information

• Course structure
• Some questions in environmental economics
• Examples of environmental economics research
 Basic course information

• Instructor: Xianling Long (龙显灵)

• Time: Tuesday 18:40-21:30
• Office hours: Wednesday 14:00-15:00 (by appointment)
• Office location: National School of Development (国发院承泽园)
Room 332
• Email: [email protected]
• TA: Ding Ma (马丁)
• TA’s email: [email protected]
 Basic course information (continued)

• Course materials:
– Slides: will be put online before class
– ”Environmental and Natural Resource Economics” by Tom
Tietenberg and Lynne Lewis
• Electronic version on 教学⽹

• Other references:
– 张帆、夏凡，《环境与⾃然资源经济学》，格致出版社，2015
• Electronic version: 北⼤图书馆
– “The Economics of The Environment“ by Peter Berck and Cloria
Helfand
• Electronic version: https://archive.org/details/economicsofenvir0000berc/
 Basic course information (continued)

• Grading:
– 3 homework: 35%, due in class
– Class participation: 5%
– Final exam (closed-book): 60%
• June 18, 2024, 18:30-20:30
• Exam questions in both English and Chinese
• You can answer in either language
– NO cheating!
 Why do you pick this course?
• Survey results from last year
– ~50%: 时间⽐较合适，学分需求
– ~40%: 对碳⾦融、ESG、⽓候变化、环境政策、可持续发展等相关问
题⽐较感兴趣
– ~30%: 对⽼师的名字和简历感兴趣
– ~10%: 认为新⽼师⼀般考试和给分都⽐较友好；感觉内容不会太难；
预期能获得⽐较好的成绩
– ~10%: 与主修专业内容相近或相关
– ~10%: 未来希望在⽓候、环境、资源等⽅向继续深造，有志于相关领
域的研究
– ~10%: 由于环境问题、⽓候变化是现在的热门话题，希望增加了解、
拓宽视野
– ~5%: 修读过相关的课程（如唐⽅⽅⽼师的《低碳⾦融》）或参加过“双
碳”相关的⽐赛和科研项⽬，想要学习更多的内容
 Who shouldn’t take this course?

• I strongly discourage you from enrolling in this course

– If you haven’t taken Intermediate Microeconomics
– Or if you strongly rely on self-study with textbook
– Or if you expect to learn green/carbon finance and ESG
– Or if you are only interested in my name
 Outline

• Basic course information

• Course structure
• Some questions in environmental economics
• Examples of environmental economics research
 Course structure

• Questions environmental economics seeks to answer:

– Why are there environmental problems?
– Costs of pollution control. Who bears costs?
– Benefits of pollution control. Who enjoys benefits?
– How to design policy?
Sections Questions Lectures
Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
Design policy Evaluate policy

How can firms reduce emissions Lecture 8: Production and pollution

How to make firms reduce

Lectures 9-10: Incentive-based mandatory
Addressing envr issues Environmental policy
Lecture 11: Other policies

Lecture 12: Depletable resource

Resource management
Lecture 13: Non-depletable resource
 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
Design policy Evaluate policy

How can firms reduce emissions Lecture 8: Production and pollution

How to make firms reduce

Lectures 9-10: Incentive-based mandatory
Addressing envr issues Environmental policy
Lecture 11: Other policies

Lecture 12: Depletable resource

Resource management
Lecture 13: Non-depletable resource
 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
Design policy Evaluate policy

How can firms reduce emissions Lecture 8: Production and pollution

How to make firms reduce

Lectures 9-10: Incentive-based mandatory
Addressing envr issues Environmental policy
Lecture 11: Other policies

Lecture 12: Depletable resource

Resource management
Lecture 13: Non-depletable resource
 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
Design policy Evaluate policy

How can firms reduce emissions Lecture 8: Production and pollution

How to make firms reduce

Lectures 9-10: Incentive-based mandatory
Addressing envr issues Environmental policy
Lecture 11: Other policies

Lecture 12: Depletable resource

Resource management
Lecture 13: Non-depletable resource
 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
Design policy Evaluate policy

How can firms reduce emissions Lecture 8: Production and pollution

How to make firms reduce

Lectures 9-10: Incentive-based mandatory
Addressing envr issues Environmental policy
Lecture 11: Other policies

Lecture 12: Depletable resource

Resource management
Ultimate goal Lecture 13: Non-depletable resource

How does trade influence environment Lecture 14: Trade and environment

Define and measure sustainability

Sustainability
Linkage between sustainability and environment Lecture 15: Sustainable development

China’s sustainable development

 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
Design policy Evaluate policy

How can firms reduce emissions Lecture 8: Production and pollution

How to make firms reduce

Lectures 9-10: Incentive-based mandatory
Addressing envr issues Environmental policy
Lecture 11: Other policies

Lecture 12: Depletable resource

Resource management
Ultimate goal Lecture 13: Non-depletable resource

How does trade influence environment Lecture 14: Trade and environment

Define and measure sustainability

Sustainability
Linkage between sustainability and environment Lecture 15: Sustainable development

China’s sustainable development

• What is your preference?
– Survey
• Survey results from last year (next page)
– In red
 Sections Questions Lectures

Intro What is environmental econ? Lecture 1: Introduction

Theory How does envr become a problem Lecture 2: Market failures

How is envr decision made Lecture 3: Social choice

Criteria
Method for analyzing envr How to analyze envr issues Lecture 4: Cost-benefit analysis

Measure net benefits

Lecture 5: Market valuation
How to estimate benefits and costs
Lectures 6-7: Non-market valuation
Design policy Evaluate policy

How can firms reduce emissions Lecture 8: Production and pollution

How to make firms reduce

Lectures 9-10: Incentive-based mandatory
Addressing envr issues Environmental policy
Lecture 11: Other policies

Lecture 12: Depletable resource

Resource management
Ultimate goal Lecture 13: Non-depletable resource

How does trade influence environment Lecture 14: Trade and environment

Define and measure sustainability

Sustainability
Linkage between sustainability and environment Lecture 15: Sustainable development

China’s sustainable development

Valuation: Lectures 5-7
Valuation: Lectures 5-7

Does !! have value?

How to estimate her value?
Valuation: Lectures 5-7

How to estimate the value

of pollution control?
 Environmental policies: Lectures 9-11
!"()*
Emission tax
Cap and trade
Tradable allowances
Market-based
!"#$%&' Tradable performance standard

Mandatory Taxes on inputs or goods associated with emissions

Mandated abatement technology

Command &
Addressing emission control
(Non-tradable) performance standard
externality

Subsidies for abatement

Voluntary Emission credits/offsets #+&',-./01&'

Policies

Information disclosure programs 234

R&D policies #!567

Addressing knowledge spillover
externality
Technology deployment policies
Environmental policies: Lectures 9-11
• Environmental policies in China:
– Market-based + Command & Control, but mainly command &
control
– Top-down
– High participation of media, which improves public scrutiny
– Low participation of NGO
– Low judicial involvement in environmental disputes, but has
increased in recent years
The Position of Environmental Economics
within the Economic Discipline

• A field of applied economics

• Based on microeconomics, public finance, and industrial
organization
• Extensively applies econometric methods
– New trend: satellite data
• Main differences from other fields:
– Theory: Introduces new value concepts
– Method: Uniquely developed non-market valuation methods
• Estimating value of goods without a market
• Disclaimer: Course structure is subject to (minor) adjustment
 Outline

• Basic course information

• Course structure
• Some questions in environmental economics
• Examples of environmental economics research
 Earliest question in envr econ
• Will environment become better or worse?

• Pessimistic:
– Thomas Malthus: “An Essay
on the Principle of
Population”. 马尔萨斯《⼈⼜
论》 1798
– Club of Rome: “The Limits to
Growth”. 罗马俱乐部《增长的
极限》1972
– They ignore technological
innovation
 Earliest question in envr econ
• Will environment become better or worse?
• Optimistic:
– Kuznets curve 环境库兹涅茨曲线 1991
 Newest question in envr econ
• One currently trendy question is Climate Change
 Newest question in envr econ
• One currently trendy question is Climate Change
 Newest question in envr econ
• Is climate really changing?
 Misconception 1:
“The climate is cooling/always changing”
 Misconception 2:
“GHG’s are a trace element (微量元素)”

https://skepticalscience.com/CO2_is_a_trace_gas.html
Misconception 3:
“It is the Sun”
Misconception 3:
“It is the Sun”
Misconception 3:
“It is the Sun”
Misconception 3:
“It is the Sun”
Misconception 3:
“It is the Sun”
Misconception 3:
“It is the Sun”
 Misconception 4:
“It is not bad”
Right. It's going to be worse than that.
 Misconception 5:
“There is no consensus”
 (Mis)conception 6:
“Models are unreliable”
 (Mis)conception 6:
“Models are unreliable”
 (Mis)conception 7:
“Animals and plants can adapt”

• Yes, to some degree.

Another newest question in envr econ
• Biodiversity
Increase fisheries Crop yields Mitigate income shocks from droughts
(Worm et al., 2006) (Dainese et al., 2019) (Noack et al., 2019)

Pharmaceuticals Non-market value

(Costello and Ward, 2006) (Kolstoe and Cameron, 2017)
 Another newest question in envr econ
• Biodiversity trend

Source: WWF
Another newest question in envr econ
• Biodiversity

• 196 governments agreed to put nature back on track with the adoption of the Kunming-
Montreal Global Biodiversity Framework (GBF) in December 2022.
• The GBF identifies a funding gap of $700 billion a year needed to halt and reverse the
biodiversity loss.
 “Your” question in envr econ
• Examples of questions that are closely related to you
– Impacts of air pollution on cognitive ability (认知能⼒)

Ref: Zhang et al. (2018) PNAS

 “Your” question in envr econ
• Examples of questions that are closely related to you
– Impacts of air pollution on game performance

Ref: Mo et al. (2023) JEEM

 “Your” question in envr econ
• Examples of questions that are closely related to you
– Impacts of air pollution on game performance

Ref: Mo et al. (2023) JEEM

 “Your” question in envr econ
• Examples of questions that are closely related to you
– ”Ignored” soil pollution
 History of environmental economics

• Pre-history – Welfare economics of Pareto

• Developments in externality theory – Pigou in 1920s
• Property rights – Coase in 1960
• Environmental movement of the 1960s and environmental policy
in early 1970s
• Applications of Pigou’s insights and development of marketable
permits as an alternative to taxation – 1970s and 1980s.
• Valuation of non-market goods – late 1960s – 1990s
• Large scale implementation of marketable permits – 1990s
• Climate change (biodiversity, ESG) – 21st century

Reference: Ronald Gallant

 Outline

• Basic course information

• Course structure
• Some questions in environmental economics
• Examples of environmental economics research
 Research examples
• Environmental unintended impacts
– Mo et al. (2023) JEEM: LoL
• Unintended environmental impacts
– Currie, J. and Walker, R., 2011. Traffic congestion and infant health: Evidence from E-
ZPass. American Economic Journal: Applied Economics, 3(1), pp.65-90.
• Valuing the environment
– Chay, Kenneth Y., and Michael Greenstone. Does air quality matter? Evidence from the
housing market. Journal of Political Economy 113, no. 2 (2005): 376-424.
• Does policy work?
– Karplus, V.J. and Wu, M., 2023. Dynamic responses of SO2 pollution to China’s
environmental inspections. Proceedings of the National Academy of Sciences, 120(17),
p.e2214262120.
– Zou, E.Y., 2021. Unwatched pollution: The effect of intermittent monitoring on air quality.
American Economic Review, 111(7), pp.2101-26.
– Weitzman, Martin L. Prices vs. quantities. The Review of Economic Studies 41, no. 4
(1974): 477-491.
• Climate change
– Carleton, T. A., & Hsiang, S. M. (2016). Social and economic impacts of climate. Science,
353(6304), aad9837.
 Unintended environmental impacts
• Measuring environmental outcomes
• Determining impacts range

Reference: Currie, J. and Walker, R., 2011 (AEJ)

 Unintended environmental impacts
• Who should be the control group?
– Those living near a major highway but further away from a toll plaza

Reference: Currie, J. and Walker, R., 2011 (AEJ)

 Unintended environmental impacts

• Possible confounding factors?

– Housing price

Reference: Currie, J. and Walker, R., 2011 (AEJ)

 Valuing the environment
• House prices are related to the environment
• The value of the environment is included in house prices
– Hedonic pricing method (Lectures 6-7)
• The concern of endogeneity (内生性), e.g., omitted variable (遗漏
变量)

Reference: Chay, KY., and M Greenstone 2005 (JPE)

 Valuing the environment
• Addressing the concern of endogeneity (内生性)
– Quasi Experiment (准实验)
– US Clean Air Act
– Who should be the treatment and control group?

Reference: Chay, KY., and M Greenstone 2005 (JPE)

 Does policy work?
• Intermittent Monitoring in China: 环保督察

Reference: Karplus, V.J. and Wu, M., 2023 (PNAS)

 Does policy work?
• Do the policy effects last?

Reference: Karplus, V.J. and Wu, M., 2023 (PNAS)

 Does policy work?
• Intermittent Monitoring in the US

Reference: Zou, 2021 (AER)

 Does policy work?
• Intermittent Monitoring in the US

Reference: Zou, 2021 (AER)

 Climate Change

Ref: Carleton
and Hsiang,
Science (2016)
Survey