This is my first of a series of monthly original posts for The Energy Collective. I’m really looking forward to this gig since I think I’ll be able take a broader view of environmental and energy economics, relative to the day-to-day grind of nimble little blog posts. To kick things off I’d like to do some soul searching and examine one of the puzzles I’ve confronted since I’ve been blogging. Why are environmental economists so wildly unpopular with the public (i.e., blog readers … the only “public” I really know)? Next to financial economists, those goofs who don’t know a bubble when it is about to pop in their faces, environmental economists are likely some of the most disliked economists around. Always taking some sort of middle ground, environmental economists are not green enough for environmentalists and too green for business people. Why is that?
Starting at the beginning, economics is the study of the allocation of scarce resources. In this context, scarcity is the problem that human wants are limitless but the ability of society to satisfy all of those wants is limited. For example, every household can’t own three large screen television sets and two luxury sedans. All households don’t have enough income for those or other extravagant purchases.
With limited resources, households, business firms and governments must make choices. If I have a fixed amount of money and I’m choosing between a monthly payment on a luxury sedan or a less expensive but more mundane sedan, I might forgo the big TV set and go with the higher payments on the luxury sedan. Part of the cost of the luxury sedan is the foregone benefit of the TV set. Economists see these so-called “opportunity costs” all over the place and we delight in our ability to do that. It is what makes us special …
… but not so huggable. Finding these costs is what gets us into so much trouble with environmentalists. Environmentalists tend to see only the good, what economists call benefits, in environmental policies. Environmental economists see the good and the bad (i.e., the costs). Since environmental economists and environmentalists essentially agree on the good stuff (but, see below), the only thing left to discuss is the costs. We bring up the costs and environmentalists seem to go ballistic about how evil we are (even when we explicitly state that there are enormous benefits to certain environmental policies).
A recurring example of this back and forth is when we discuss the design of environmental policies. Say that everyone thinks the U.S. should use more renewable energy instead of fossil fuels due to the present day health benefits and future climate change benefits. Environmentalists want to make sure that power plants use more renewable energy sources so they might be likely to support a renewable portfolio standard: a requirement that power plants use, say, 20% renewable energy sources. Environmental economists are more likely to argue to use economic incentive-based policy. For example, a carbon tax would make coal more expensive and renewable energy sources more competitive. A little bit of demand and supply and other basic analysis shows that, most times, economic incentive-based policies can be used to achieve the exact same environmental outcome at lower cost to businesses and consumers, relative to standards. Further, economic incentive based policies can be used to achieve even greater environmental quality at the same cost as standards (note to environmentalists: please read that last line again and add an exclamation).
Environmental economists are sometimes baffled why everyone doesn’t see this as a good thing. The answer lies in the fact that non-economists don’t trust incentives. They don’t think that people’s behavior changes in expected ways to changes in benefits and costs. A vast amount of economic research and less formal observation of behavior (e.g., plummeting SUV sales when gas prices rises) should go a long way towards gaining trust.
On the other hand, one of the talents of environmental economists is the ability to estimate the benefits of environmental policy. If you want an estimate of the benefits to saltwater anglers of climate policy 75 years from now, an environmental economist can give you a hard, cold monetary answer. This talent gets us into trouble with business people and, even, other economists. To other economists our methods seem bogus since we consider behavior that is generally outside the market (where there are no obvious demand or supply curves). For example, we might consider the importance of the response of recreation travel to environmental quality or trust willingness to pay statements about environmental quality to infer benefits about environment policy. Not surprisingly, business people don’t like so much attention paid to the benefits of environmental policy because it might cost them money. So they tend to hire non-environmental economists, who are already queasy about “nonmarket valuation” methods, to discredit the methods of environmental economists (e.g., Google what environmental economists affectionately know as the “contingent valuation debate” that arose after the Exxon Valdez oil spill).
Measuring these benefits can also get us in trouble with environmentalists who either say it is immoral and/or crass to put dollar values on intangible benefits or that these benefits are infinitely valued. I’m not sure what to do with that except to say that people, through their behavior, put finite values on the environment every day. Environmental economists simply report this behavior.
Basically, the trouble is that most environmental economists are economists first and interested in the environment second (at least professionally). Environmental is the adjective that modifies economics. As such, we get grief from both sides of most environmental issues. Or maybe I’m just paranoid.