Environmental Economics

In a broad sense, the field of Environmental Economics aims to relate and apply economic concepts to the environment.

One tenet of Environmental Economics is that the enjoyment of “environmental amenities” (or conversely that the usage or degradation of those resources) has an intrinsic value to humans that goes unaccounted for in the purely market-based model. These unaccounted costs are considered market failures and carry negative externalities.

The greatest single example of a negative externality of global importance is the emission of greenhouse gases (carbon dioxide, methane, nitrous oxide) from the combustion of hydrocarbons (coal, gasoline, diesel, oil). The true cost is not reflected in the lower price one pays at e.g the gas station. Consequently, the equilibrium quantity consumed is higher than the socially optimal quantity. Environmental economists seek to model the costs and benefits of a reduction. How could we reduce the quantity to the social optimum and weigh in the costs and benefits of such a reduction?

As a result, a major proportion of research and work within the field is devoted to building tools to reveal, address, and evaluate economic policies aimed at internalizing these externalities.

Very often, these policy tools as applied by a government constitute interfering with the market to a varying degree. We can model environmental economic policies into two subsets:

  • Command and Control: When the government limits the amount of pollution to control a negative externality, e.g letting each emitter in the market emit a fixed amount of GHG gases.

  • Market-based: Where the government sets an emission goal, then introduces incentives or subsidies to alter market behavior. It is left to each market actor to decide how much to emit. A carbon tax and a cap-and-trade (carbon quotas) are examples of marked-based interventions.

A useful environmental economic model is The Marginal Abatement Cost Curve (MAC) which aims to describe the cost of abatement (not emitting) greenhouse gases into the atmosphere using various strategies. A famous version of this was contained in a report McKinsey 2009 “Pathways to a Low Carbon Economy”. This example we will discuss as an example of the intersection between of Environmental Economics and Data Science. In this notebook, we’ll walk through the concepts of it and build one of our own!

Related to the discussion of global greenhouse gas emissions, we will also explore the Environmental Kuznets Curve through data, and compare the pathways of increasing emissions across countries and across time.

These are only a few of the applications of environmental economics, there are many more fields to explore, and even an entire major at UC Berkeley to explore.

Student Learning Outcomes:

  • An introduction to applications of Environmental Economics with illustrations from global CO2 emissions

  • Motivation and understanding of the Marginal Abatement Cost Curve for global Greenhouse Gas emissions, first by the (McKinsey 2009) curve for CO2, and then an application for Methane its data science application.

  • A discussion of the Marginal Abatement Curve’s limitations with the concept of Capital Intensity and static vs dynamic costs.

  • An understanding of the Environmental Kuznets Curve Hypothesis and its data science applications