Economics and the Global Environmental Challenge

, D.W. Pearce , A. Markandya and E. Barbier , Blueprint for a Green Economy (London: Earthscan Publications, 1989).

R. Solow , 'On the Intergenerational Allocation of Natural Resources', Scandinavian Journal of Economics (Vol. 88, No. 1, 1986), pp. 141-54; T. Page , Conservation and Economic Efficiency. (Baltimore, MD: Johns Hopkins University Press, 1977); J. Hartwick , 'Intergenerational Equity and the Investing of Rents from Exhaustible Resources', American Economic Review (Vol. 66, 1977), pp. 972-74; and K-G. Maler , 'Theoretical Foundations of the Concept of Sustainable Development', Seminar on The Economics of Environmental Issues (Paris: OECD, October 1989, unpublished).

See World Commission on Environment and Development, Our Common Future (Oxford: Oxford University Press , 1987).

See, for example , D.W. Pearce , E. Barbier and A., Markandya Sustainable Development: Economics and Environment in the Third World (London: Edward Elgar, 1990).

One obvious issue is what measure of capital is being held constant: some 'physical' concept, real prices or real values.

See I. Mintzer , 'Cooling Down a Warming World: Chlorofluorocarbons, the Greenhouse Effect, and the Montreal Protocol', International Environmental Affairs (Vol. 1, No. I. Winter 1989), pp. 12-25.

A very readable introduction to the global warming issue is S. Boyle and J. Ardill. The Greenhouse Effect (London: Hodder and Stoughton , 1989).

Thus, speaking at the White House Conference on Science and Economics Research Related to Global Change, April 1990, Michael Boskin, Chairman of the President's Council of Economic Advisers, compared the cost of greenhouse gas emission reduction to the economic disruption caused by oil price rises in the 1970s and early 1980s. He remarked that 'available studies suggest that it would cost at least I per cent of annual US GNP, or perhaps several times that amount, to meet widely-discussed CO2 reduction targets and that economic growth could slow significantly'. The conference itself was clearly aimed at persuading other countries to adopt more cautious attitudes, coming as it did before the publication of the reports of the UN Intergovernmental Panel on Climate Change (IPCC) and the World Climate Conference of November 1990.

The Noordwijk Declaration on Climate Change (Leidschendam , the Netherlands: Climate Conference Secretariat, 6-7 November 1989).

The Changing Atmosphere: Implications for Global Security, Conference Statement (Toronto, 27-30 June 1988). Paragraph 22 states (emphasis added): An initial global goal should be to reduce CO2 emissions by approximately 20 percent of 1988 levels by the year 2005. Clearly, the industrialized nations have a responsibility to lead the way, both through their national energy policies and their bilateral and multilateral assistance agreements. About one-half of this reduction would be sought from energy efficiency and other conservation measures. The other half should be effected by modifications in supplies.

The limit of 0.1 °C is suggested, for example, by International Project for Sustainable Energy Paths, Energy Policy in the Greenhouse ( El Cerrito, CA: International Project for Sustainable Energy Paths, 1989).

In turn, the constant capital approach has similarities with the idea of adopting 'safe minimum standards' (SMSs). A SMS approach calls for a strong bias to conservation of natural capital unless the opportunity costs of the conservation - i.e., the foregone benefits of developing the resource - are clearly very large. See R. Bishop , 'Endangered Species and Uncertainly: The Economics of a Safe Minimum Standard'. American Journal of Agricultural Economics (February 1978), pp. 11-18.

See E. Barbier and D.W. Pearce , 'Thinking Economically About Climate Change '. Energy Policy (January/February 1990), pp. 11-18.

W. Nordhaus , To Slow or Not to Slow: The Economics of the Greenhouse Effect ( New Haven, CT: Yale University, Department of Economics , mimeo., February 1990). For some modifications of Nordhaus's estimates, see J. Walter and R. Ayres , Global Warning: Damages and Costs (Laxenberg, Austria: International Institute for Applied Systems Analysis, mimeo., 1990); and R. Ayres and J. Walter , Global Warming: Abatement Policies and Costs (Laxenberg , Austria: International Institute for Applied Systems Analysis, mimeo., 1990).

Various studies suggest that there are very low costs of control through energy conservation. See Ayres and Walter , op. cit., in note 14. For the United Kingdom, see Department of Energy , An Evaluation of Energy Related Greenhouse Gas Emissions and Measures to Ameliorate Them, Energy Paper No. 58 (London: HMSO, 1989). How far this observation affects the Nordhaus study is not clear, however, since Nordhaus captures energy saving measures by simulating the effects of a carbon fuel tax.

There is a formal relationship between taxes and the prices of tradeable permits. Both the tax and the permit are aimed at securing a predetermined level of pollution. Under conditions of certainty, it is then the case that the market price of a tradeable permit is equal (per unit of emission) to the tax.

The basic requirement for a minimum cost approach to regulation is that the different polluters' marginal costs of pollution abatement should be equalised. A tax that is the same for all polluters will achieve this result, because each polluter will prefer to abate than pay the tax if abatement costs are lower than the tax and will prefer to pay the tax if it is above abatement costs. A tradeable permit system has the same property. If marginal abatement costs differ, then there are gains to be obtained by having high abatement cost polluters buy pennits from low abatement cost polluters.

See T. Tietenberg , 'Economic Instruments for Environmental Regulation ', Oxford Review of Economic Policy (Vol. 6, No. 1, 1990).

D.W. Jorgensen and P.J. Wilcoxen , Environmental Regulation and US Economic Growth (Cambridge, MA: Harvard University. Department of Economics, mimeo., July 1989).

S. Barratt , On The Nature and Significance of International Environmental Agreements, (London: London Business School, mimeo., May 1989).

The transfer issue is emphasised in M. Grubb , The Greenhouse Effect: Negotiating Targets (London: Royal Institute of International Affairs. 1989).

See A. Markandya , The Costs to Developing Countries of Joining the Montreal Protocol (London: London Environmental Economics Centre, mimeo., 1990).

M. Hoel , Efficient International Agreements for Reducing Emissions of CO2 ( Oslo: University of Oslo, Department of Economics, mimeo., 1990).

The minimum cost theorem occurs again here, since the result will be that each country will determine its combination of tax and abatement measures according to the rule that the tax rate, which is common to all countries, should equal the marginal cost of abatement. In this way, marginal costs are equated across countries, and this is the requirement for cost minimisation.

Unfortunately, it is more complex than this. The assumption here is that the global warming target is set in such a way that global environmental benefits exceed total abatement costs, in other words, that a cost-benefit rule is used. Only then is there a global 'surplus' to be redistributed. As we have seen, this may well not be the case. This raises the prospect that some countries will he net payers of tax and that their individual avoided damage costs will be less than the net payment. In these circumstances they are unlikely to co-operate. For this reason, it is important that some sort of cost-benefit rule is used for setting global targets.

Grubb , op. cit., in note 21.

I.G. Bertram , C. Wallace and R. Stephens , Economic Instruments and the Greenhouse Effect (Wellington. New Zealand: Victoria University of Wellington, Economics Department, mimeo., August 1989).

Hoel , op. cit., in note 23.

J. Whalley and R. Wigle , Cutting CO2 Emissions: The Effects of Alternative Policy Approaches (London, Ontario: University of Western Ontario, Department of Economics and Waterloo, Ontario : Wilfred Laurier University, Department of Economics , mimeo., December 1989).

S. Barratt , London Business School, personal communication.

A. Ingham and A. Ulph , Carbon Taxes and the UK Manufacturing Sector (Southampton : University of Southampton, Department of Economics , mimeo., 1990).

Whalley and Wigle , op. cit., in note 29.

See Hoel , op. cit., in note 23.

Bertram et al., op. cit., in note 27; and Grubb , op. cit., in note 21.

Grubb , op. cit, in note 21.

For further discussion, see D.W. Pearce , Greenhouse Gas Agreements: Part I - Internationally Tradeable Greenhouse Gas Permits (London: London Environmental Economics Centre, mimeo., 1990).