Paper Example on Environmental Economics

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Wesleyan University
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Since time immemorial, economists have been continuously extolling the virtues of the market-based or economic-incentive approaches regarding the environmental protection. For example, Pigou (1920) emphasized on corrective taxes for the discouragement of activities that produce externalities. Furthermore, in the year 1968, Dales also demonstrated how the introduction of the transferable property would eventually promote the protection of the environment at comparatively lower aggregate costs than the conventionally accepted standards (Kelman, 1981). Recently, there have been enormous researches which have been carried out to determine whether such ideas are significant regarding the quality of the environment and also whether such ideas would be practically viable or they are just theoretically-based (Kelman, 1981). In the current policy arena, both the marketable permits and the environmental taxes are coming of age. For example, in the United States of America, there has been the introduction of marketable permits which are aimed at reducing the leaded content of gasoline. Furthermore, the policy also aims at regulating the production and use of the chlorofluorocarbons and eventually limit the emission of the sulfur dioxide (SO2). This has been as a significant precursor of the acid rain. Furthermore, the changes that have been introduced have limited the water and rain pollution which some of the people argue that it is a significant strategy for ensuring quality environment (Stocking & United States, 2010). According to environmental economists, these are incentives which are necessary for the protection of the environment. However, some environmental economists like Steven Kelman suggest that the economic incentives which include the emissions trading and emission charges are environmental policies which are undesirable. He argues that such moves have detrimental effects both on our attitude and the environment as well. Furthermore, he argues that through the application of environmental policy, it cheapens and weakens the traditional societal values.

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However, despite the Steven Kelmans arguments, the economic incentives such as emission charges or emissions trading are more ethically justifiable than the traditional regulatory approach. The financial incentives are morally justifiable because they reduce the pollution or lessen the environmental degradation by making all the environmental stakeholders responsible for the contamination of the environment. Thus, people will tend to become keener when handling activities that pollute or degrade the environment. As more and more countries embrace the capitalistic economic system, demand and supply play a significant role in spearheading the economics of such countries (In Grubb & In Neuhoff, 2006). Thus, if the environment is not protected through incentives, such countries may engage in activities which degrade the environment and eventually affect the quality of life globally. Many researchers have argued that country's economy is interlinked with the environment. Thus, when a state maintains a quality environment, it will be in the position to realize the huge growth of its economy. However, if such countries live the economic players without regulating them, they will end up exploiting the natural resources and eventually degrade the environment (Stocking & United States, 2010). Thus, it is argued that it is good if the environmental economics can provide the remedy through the economic incentives to the environmental protection. Unlike the traditional approaches that did not provide incentives, the financial incentives to the environmental protection are ethically justifiable. They are the environmental protection approaches that reduce environmental degradation or environmental protection and thus are considered to be morally right.

Furthermore, as the globe becomes more and more materialistic the human mental image about the planet earth at large has undergone a massive change, and currently, everything has been proportioned with regards to the economic incentives that are attained from them. Thus, the current society is full of people who are not ethically concerned; it is important to introduce financial incentives to the environmental protection rather than introduction the traditional approaches as the economic incentives work in the midst of such unconcerned people. For instances, it has been witnessed that emissions charges compel the firms to take control of the pollutions of the firm benefits by reducing the emissions until when the marginal costs spend in emissions reduction equals the emission charge (Kolstad, 2000). Accordingly, it will lower the cost of the firm which in turn allow the firm to realize maximum profits. Ideally, the economic incentives compel the companies to come up with new, efficient and cheap technology that can easily control the emissions. All these factors are ethically justifiable because they lead to the reduction of the environmental degradation and pollution in a justifiable manner.

Additionally, since the firms would be required to remit levy to the government through the principle of emission charges, such companies would try their level best to control the environmental pollution at some costs that are lower to the emission charges. Therefore, it is important for the environmental authorities to implement the emission charges to ensure that the expenses incurred by all the firms are minimized (In Grubb & In Neuhoff, 2006). However, for economic incentives to become ethically justifiable in the control of the environment, it is important for the authorities to establish a charge that caters for both the environmental actors and the stakeholders at large.

Even though the price paid by the poor, on employment and the speed of compliance with pollution control laws might be high, such prices act a motivation to them to control the environmental pollution. It is known that under the emission permit system, all polluting sources are provided with limits regarding the fees they paid as far as emissions are concerned (Stocking & United States, 2010). In fact, they can be allocated a limit up to the point where they can emit. The limits cater the needs of such people since the allowances, and the limits are provided to the firm free of the cost or even through the actions. Basically, in the emissions permit system, free trade of allowances keeps the allowance market in equilibrium and eventually achieve an allocation regarding the costs that will be paid by the economic actors. Additionally, the system is also flexible concerning the free trade of allowances, and this helps in achieving the objectives that are desired to achieve the lowest standard costs to be paid (Kolstad, 2000). Thus, allowances in this system offer a great deal of certainty regarding the marginal cost of control.

The emissions reductions and emissions charges systems have advantages that enable them to be effective in controlling the environmental degradation and pollution. Emissions allowances is a market-based and government mandated approach which is beneficial in protecting the environment through the provisions of the economic incentives, and this eventually reduces the emissions of the pollutants into the environment (United States, 2007). Both the emissions allowances and emissions charges are flexible environmental regulations. These regulations enable the organizations to decide how to meet the target policies in the best way possible. Therefore, various countries, states and different groups of companies have used these trading systems as strategies for mitigating the climate change. The other advantage of the two systems is that they permit the discharge of specific quantities of pollutants at a particular period. It is because the polluters are required to hold permits which are equal to the pollutants that they will be discharging (In Grubb & In Neuhoff, 2006). Therefore, the systems require the polluters to acquire permits whenever they want to increase the emissions, and they will, in turn, reduce the number of emissions to the environment. However, one advantage that the emissions allowance has over the emissions charge is that it is cheaper at can thus achieve the emissions reduction at the lowest cost in most societies on a global perspective.

On the other hand, both the systems are disadvantages to the companies in that the companies might view them as a burden especially when they disposing of the waste. Companies might be required to the part which huge sums of money during such processes. However, the emissions charge system enable the coming up with innovative technologies while the emissions allowance system might discourage innovative technologies. Kelman's believe of the emissions allowances that it automatically prevents the environmental degradation is significant and justifiable (United States, 2007). It is because the system requires the companies to come up with strategies on how best to reduce environmental degradation by meeting policy targets. It is important because, it requires that polluters who would like to increase emissions must buy an additional permit, something that might be a burden to them. This, in turn, is advantageous to the environment as it reduces the environmental emissions.

If the government would like the private market to reduce the emissions and bring an efficient outcome that the society desires, it has to come up with environmental regulatory policies which cater all the actors. This will enable the true market to benefit and eventually enable the costs to be reflected efficiently. It is because the central authority which in most cases is the government has limited number of permits, and thus some companies might not effectively purchase them. Furthermore, it also allows the cap and trade to provide the private sector with the flexibility it requires and eventually reduce the emissions by emissions through the stimulation of the economic and technological growth (Kolstad, 2000). An example is the Californian Carbon Allowances that reduces greenhouse gasses emissions through carbon credit strategy.


In Grubb, M., & In Neuhoff, K. (2006). Emissions trading & competitiveness: Allocations, incentives and industrial competitiveness under the EU emissions trading scheme. London: Earthscan.

Kelman, S. (1981). What price incentives?: Economists and the environment. Boston, MA: Auburn House.

Kolstad, C. D. (2000). Environmental economics. New York: Oxford University Press.

Stocking, A., & United States. (2010). Evaluating limits on participation and transactions in markets for emissions allowances. Washington, DC: Congress of the United States, Congressional Budget Office.

United States. (2007). Trade-offs in allocating allowances for co2 emissions. Washington, D.C.: Congressional Budget Office.

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