Environmental economics and management : Theory, Policy, and Applications

ENVIRONMENTAL

ECONOMICS &

MANAGEMENT

Theory, Policy, and Applications

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ENVIRONMENTAL

ECONOMICS &

MANAGEMENT

Theory, Policy, and Applications

Scott J. Callan

Bentley University

Janet M. Thomas

Bentley University

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Environmental Economics &

Management: Theory, Policy, and

Applications, Sixth Edition

Scott J. Callan and Janet M. Thomas

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DEDICATION

To our students.

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Preface

How fascinating it was to learn in 2011 that an earth-like planet was identified

some 600 light-years away as part of NASA’s Kepler project. Called Kepler-22b,

this newly discovered planet orbits a sun similar to our own and has an estimated surface temperature of 72° Fahrenheit.1 The excitement associated with this finding,

however remote, implicitly conveys the value society places on our own planet and its

unique capacity to support life as we know it. Such awareness reminds us of the responsibility to maintain or improve the earth for future generations.

Another vivid reminder came in 2012 with the fiftieth anniversary of the publication

of Rachel Carson’s Silent Spring, the influential best seller that called attention to the

effects of pesticides and other chemicals on the ecology. Although environmental quality

is an ongoing and sometimes elusive objective, most would agree that at least in some

regions of the world, the environment is far cleaner than the one about which Rachel

Carson wrote in the early 1960s.

Still, society must continue to be mindful of its responsibility to preserve and protect the earth, even in the face of twenty-first-century challenges. In the developed

world, the recent decline in economic growth and the European crisis have placed difficult burdens on countries around the world, which in turn constrain public and private

initiatives, including those aimed at the environment. At the same time, high economic

growth rates in developing nations, although moderating of late, stress already depleting

natural resources, threaten water supplies, and add to carbon emissions and other pollution releases. Then too, world population continues to climb, estimated to have reached

7 billion in 2011, adding to production and consumption levels that further stress the

planet’s resources. Beyond these issues are unpredictable events that damage the environment, such as the Deepwater Horizon blowout of 2010, the Australian floods in

2010 and 2011, and the earthquake and tsunami that devastated Japan in 2011. Without

question, achieving a cleaner environment is a tough challenge and remains a work in

progress.

As a world community, we have learned some difficult lessons about the costs and

implications of pollution and the irresponsible use of scarce natural resources, and

some believe that we still have much to learn. In any case, we do seem to be moving in

the right direction. Consider the following. In the United States and other developed

nations, air quality has improved dramatically, thanks to marked reductions in damaging emissions, such as carbon monoxide and sulfur dioxide. Technological advances

and government initiatives have promoted greater use of hybrid and zero-emission vehicles. Nearly 200 nations meet every year at the United Nations Climate Change Convention to seek solutions to rising carbon emissions, which recently involved efforts to

extend the Kyoto Protocol at the 2011 conference in Durbin, South Africa. Countries

around the world are promoting resource conservation and cleaner energy use, and

most have banned lead in gasoline. Along the way, environmentally responsible trends

Potter (2011).

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continue to evolve aimed at sustainable development, pollution prevention, and marketbased solutions. In sum, we are making important strides.

At a micro level, concern for the environment and natural resource depletion has

become part of consumer decision making and has been integrated into virtually every

firm’s business model. Consumers look for products offered with minimal packaging

and those made from recycled materials. They read labels more carefully to avoid goods

with large carbon footprints or those made with damaging contaminants. On the supply

side, producers respond by conserving natural resources, reducing emissions, promoting

product recovery and recycling, and becoming more environmentally responsible in how

they design, manufacture, and market their goods and services. Such socially responsible

activities are part of what is known as corporate social responsibility, or CSR, which has

become an integral element of contemporary business strategy and tactical planning.

Taken together, society has come to recognize that economic activity and the natural

environment are inexorably linked, and this profound relationship is at the core of environmental economics and management.

Few would debate that environmental economics is a dynamic and relevant field.

Hence, as authors, we continue to work diligently to keep the content of this text current and, at the same time, accessible to students. In this sixth edition of our book, we

again have had the opportunity to integrate suggestions offered by survey respondents,

insightful comments made by our adopters, plus some new ideas of our own. We continue to believe that teaching environmental economics is an exciting opportunity to

show students the broad applicability of economic thinking. Students are more environmentally literate and aware than ever before, and most are eager to understand how the

market process can help explain and even solve environmental problems. It is, to say the

least, an energizing challenge to present this evolving field to what typically is a diverse

audience of students.

What hasn’t changed over the years is our underlying purpose in writing this

textbook—to offer undergraduate students and selected graduate students a clear perspective of the relationship between market activity and the environment. Although we

generally assume that students have been exposed to principles of microeconomics, we

offer a good review of basic microeconomic fundamentals in Chapter 2 and the major

concepts of public goods and externality theory in Chapter 3. Together, these two chapters provide students with the necessary foundation for the course.

Common to the previous editions, our overall motivation is to illustrate in a practical manner how economic tools such as market models and benefit-cost analysis can be

used to assess environmental problems and to evaluate policy solutions. Along with traditional discussions, we incorporate contemporary examples of business and consumer

practices that are part of environmental decision making. The presentation does not

compromise economic theoretical concepts. Instead, it complements the theory with

timely, real-world applications. In so doing, even seemingly abstract concepts are given

relevance through actual cases about consumers, industry, and public policy.

Content: A Modular Approach

Without question, it is challenging to organize the vast amount of material that an environmental economics course generally covers. Mindful of the usual time constraint in a

one-semester course and the fact that the student audience can be highly varied, we

Preface vii

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developed a modular structure for the text. This approach not only organizes the presentation by major topic but also provides a format that facilitates customizing the

material to suit a variety of course objectives. At the instructor’s discretion, certain chapters within a given module can be omitted or covered less thoroughly without loss of

continuity in the overall presentation. Likewise, the order in which the modules are covered can be varied to suit instructor preferences or student interests.

The first three modules form the foundation for the course. These are:

● Module 1. Modeling Environmental Problems: A three-chapter module illustrating

how environmental problems are modeled from an economic perspective. Primary

topics are the materials balance model, a review of market theory and price determination in an environmental context, and the market failure of pollution using both a

public goods model and externality theory.

● Module 2. Modeling Solutions to Environmental Problems: A two-chapter module on environmental regulatory approaches—one on the command-and-control

approach and one on the market approach. Allocative efficiency and costeffectiveness are used to analyze these, and models are developed to study various

control instruments such as technology-based standards, pollution charges, deposit/

refund systems, and tradeable pollution permits.

● Module 3. Analytical Tools for Environmental Planning: A four-chapter module

introduced by an in-depth investigation of risk assessment, risk management, and

benefit-cost analysis. Included is a thorough presentation of benefit estimation procedures such as the contingent valuation method and the averting expenditure

approach.

Following these are three media-specific modules, which are actually comprehensive case

studies of major environmental problems and policy solutions. Using economic modeling and analytical tools, each module assesses the associated environmental risk, evaluates the policy response, and presents a benefit-cost analysis of major legislation and

international agreements. These three modules can be covered in any sequence following

the foundational material presented in the first half of the text. Some instructors might

elect to focus on only one or two of these modules.

● Module 4. The Case of Air: A four-chapter module assessing major air pollution

problems and the policy initiatives aimed at controlling them. The first chapter lays

the groundwork by discussing air quality policy in general and the standard-setting

process. The next two chapters cover policy implementation—one aimed at mobile

sources and the other at stationary sources, with accompanying discussions of

urban smog and acid rain. The last chapter in this module deals with global air

quality, specifically ozone depletion and climate change, as well as domestic and

international policies that address these problems.

● Module 5. The Case of Water: A three-chapter module covering the problems of

groundwater and surface water contamination and specific policies aimed at point

and nonpoint polluting sources. Two chapters are devoted to an economic analysis

of controls on point and nonpoint sources under the Clean Water Act, and a third

conducts an analogous investigation of safe drinking water policy.

● Module 6. The Case of Solid Wastes and Toxic Substances: A three-chapter module analyzing the solid waste cycle and the use of pesticides and other toxic

viii Preface

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substances. Among the primary topics discussed are risk management of the hazardous waste stream, the Superfund controversy, market solutions to controlling

municipal solid waste, and risk-benefit analysis in pesticide control.

Each of these media modules utilizes the analytical tools presented in Modules 1

through 3, such as economic models, risk management, and benefit-cost analysis.

The concluding module covers topics in global environmental management.

Although international issues are integrated throughout the text, this module concentrates on environmental objectives, policies, and strategies that involve the global community. We focus here on sustainable development, international trade and

environmental protection, industrial ecology, and pollution prevention.

● Module 7. Global Environmental Management: A two-chapter module examining

sustainable development as a worldwide objective and various efforts underway to

achieve it. The first chapter in the module addresses the effect of economic growth

on environmental quality, international agreements aimed at transboundary pollution, and the effect of environmental protection on international trade. In the

second chapter, the focus is on approaches, specifically industrial ecology and pollution prevention. Beyond explaining these concepts at a fundamental level, we also

illustrate how these ideas are put into practice through various programs and partnerships in nations around the world.

In essence, this module “closes the loop” of the text by revisiting the materials balance model introduced originally in Chapter 1. Here, we use this model to illustrate the

importance of long-run environmental planning and global policy initiatives that go

beyond traditional command-and-control abatement efforts.

Featured in the Sixth Edition

In response to both formal and informal input from our adopters and reviewers, we

have maintained the fundamental organization and modular structure that have become

the hallmark of our text. From a practical perspective, this consistency of style means

that our adopters face minimal adjustment in transitioning from the fifth to sixth edition. For new adopters, it is our sincere hope that the flexibility of this modular structure makes it easy to adapt this text to virtually any course in environmental

economics. Within this time-tested structure is content that supports theory with realworld examples, current data from the private and public sectors, and boxed applications that link theory to reality both domestically and internationally.

Although the basic modular structure remains consistent with the prior edition, we

did revise the text in substantive ways that reflect domestic and international policy

changes, evolving corporate environmentalism, and findings of recent empirical studies.

We also integrated suggestions offered by survey respondents, reviewers, adopters, and

students.

New Topics, New Applications, and Other Updates

To assure that instructors and students have ready access to current science, government

initiatives, and private sector environmentalism, we searched diligently for updates on

public policy, data, applications, and examples. Simply put, we want our text to be not

Preface ix

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only a complementary textbook to a course, but also a reliable resource for any educator

or student interested in environmental economics.

Wherever data are presented in tables or within the text content, we looked for

more recent values to update the presentation. Adopters and students will discover the

most recent emissions data available have been integrated throughout Module 4, The

Case of Air. For example, in Chapter 10, Defining Air Quality: The Standard-Setting Process, the National Ambient Air Quality Standards are current through 2011, as are data

on nonattainment areas. Chapter 12, Improving Air Quality: Controlling Stationary

Sources, includes new information from the most recent annual spot auction for SO2

allowances, including prices through 2011. In Module 5, The Case of Water, usesupport status of water bodies in the United States reflects findings from the latest available National Water Quality Inventory Report to Congress, and construction funding for

publicly owned treatment works is shown through 2009. Similarly, in Module 6, The

Case of Solid Wastes and Toxic Substances, we report data from the most recently available sources. In Chapter 18, Managing Municipal Solid Waste, for example, we report

U.S. waste data through 2010. We also present information on state-level deposit/refund

programs as of 2011.

As part of this updating process, we researched all major environmental policies and

programs to determine if any revisions had been passed or new initiatives launched.

Among the new policies discussed in this edition are: recent NESHAP revisions for

power plants; the Cross–State Air Pollution Rule (CSAPR); President Obama’s Clean

Water Framework; the Integrated Cleanup Initiative (ICI); the Pesticide Registration

Improvement Renewal Act (PRIA 2); and the Border 2020 U.S.‒Mexico Environmental

Program draft document.

We also added new topics and offered expanded coverage of others. Among these

are the following:

● EJ2014, a new U.S. environmental justice strategy

● Obama’s Executive Order 13563, supporting benefit-cost analysis for policy

● Cross–State Air Pollution Rule (CSAPR)

● Proposals to tighten certain National Ambient Air Quality Standards (NAAQS)

● Revisions to the National Emission Standards for Hazardous Air Pollutants

(NESHAP)

● Market assessment of the new greenhouse gas (GHG) controls on motor vehicles

● Analysis of tax incentives for plug-in hybrids

● Carbon tax initiatives, including the EU’s carbon tax proposal

● Conference of the Parties (COP17) in Durbin, South Africa

● National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling

● EPA’s new Drinking Water Strategy (DWS)

● Integrated Cleanup Initiative (ICI) for contaminated sites

● Rio+20 summit for sustainable development

● EU’s Integrated Pollution Prevention and Control (IPPC) Directive

● China’s Cleaner Production Promotion Law

● U.S. Pollution Prevention Program’s five-year (2010–2014) strategic plan

Throughout our text are boxed applications of real-world issues related to environmental economic theory and concepts. These have been well received by adopters and

their students. For this edition, all applications were reviewed, updated, and in some

x Preface

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cases replaced with more current cases. Overall, we added 8 entirely new applications,

completely revised and renamed more than 12, and updated the remainder, for a total

of 60 applications placed throughout the text. The new applications deal with recent

issues that have affected or are continuing to influence policy decisions or business practices. The new titles are:

● The Gulf Oil Spill of 2010

● Command-and-Control Under Fire: Will New Environmental Regulations Hurt the

Economic Recovery?

● Benefit-Cost Analysis of the Clean Air Act Amendments (CAAA): The Second Prospective Study

● The Cross–State Air Pollution Rule (CSAPR): Successor to the CAIR

● Renewable Energy Certificates (RECs): Currency for Renewable Energy Markets

● Abating the Deepwater Horizon Blowout: Benefits and Costs

● Creating Environmental Markets in the Chesapeake Bay Watershed

● Consumer Electronics and the Growth of e-waste

Among the revised and renamed applications are:

● Environmental-Economic Accounting and GDP: A Worldwide Initiative

● Environmentally Driven Demand: A 20-Year Look Back

● An Update on Boston Harbor: Restoring an Environmental Public Good

● Responding to a Negative Externality: From the CD Long Box to the Carbon-Neutral

Digipak™

● Undefined Property Rights to China’s Pearl River Delta (PRD) Region Leads to Environmental Damage

● Costs of Remediating Hazardous Waste and Oil Spills

● A Benefit-Cost Analysis of the UK’s Climate Change Act 2008

● Defining Air Quality Standards in the United Kingdom

● The Car Allowance Rebate System (CARS): Cash for Clunkers Revisited

● Saving the Chesapeake Bay: A Renewed Effort

● The Aircraft Drinking Water Rule (ADWR): Ensuring Safe Drinking Water on

Aircraft

● Kalundborg Symbiosis in the Twenty-First Century

● An Update on Remanufacturing: A Lucrative Approach to Pollution Prevention

A Streamlined, Accessible Presentation

Over the years, many reviewers recommended at least one or two topics to be added to

the text, yet others suggested that we make the content more concise and more accessible to students. Based on our own work in environmental economics, we fully understand the spirit of these comments. Environmental economics is a multidisciplinary,

extensive, and growing field. We, too, want to offer as much as possible to our students,

but we also know that a one-semester course is limiting. Striving to achieve a balance of

these seemingly mutually exclusive ideas, we arrived at what we believed was a workable

solution: a topic-rich text with a streamlined presentation.

With each new edition, we find new policies, initiatives, or events to be added,

which in turn means that we must make careful edits to maintain a clean and concise

presentation. While we continue to believe that these edits have been worthwhile, they

Preface xi

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did not take precedence over the integrity of content and the text’s attention to economic theory and public policy. The result, according to our adopters and students, has

been a success.

We hope that our adopters and their students find this sixth edition to be contemporary, relevant, and accessible, capturing the rich, policy-based content of environmental economics in a way that motivates and informs. We remain dedicated to our goal of

preserving the careful exploration of environmental issues and economic analysis that

has become the hallmark of our text, while integrating revisions that keep the material

accessible to students and accommodative of instructor time constraints. The table of

contents attests to the topic-rich character of the text, but the presentation continues to

be concise and approachable. Where appropriate, we convert values to more current

dollars so that the data can be more easily understood by today’s students. For example,

most data values, such as in the benefit-cost chapters and selected media chapters, have

been restated in 2010 dollars. We also use well-known companies and familiar corporate

practices to illustrate such issues as green markets and corporate social responsibility.

Among the representative business contexts used in this edition are BMW Group, Caterpillar, Inc., McDonald’s Corporation, and The Walt Disney Company.

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