Economics and the Global Environment

It is time to draw together the main themes and conclusions of the book and to look ahead toward the next steps in merging environmental and international economics. Our basic thesis has been that the discipline of economics provides powerful and useful tools for understanding environmental degradation and for devising policies to moderate conflict between economic and environmental systems, and that with some modifications economic analysis can perform these roles in an international context. There is little question that over the past 30 years economics has advanced our understanding of the roots of environmental degradation. The related concepts of externalities, public goods, and open-access common property resources, together with the notion of government failure, provide a coherent and durable explanation of pollution and misuse of natural resources. Economics has also made considerable progress in assisting the formulation of policy. Two notable areas are new, innovative techniques for monetizing environmental damages, permitting environmental policies to be analyzed in a cost-benefit framework, and research showing the efficiency advantages of market friendly policy instruments such as tradeable permits. Policy analysis has also been assisted by improved data on the links between economic activity and environmental variables and improved accounting techniques, such as the extension of input-output tables linked to environmental vectors and the “greening” of traditional national income accounting.

The limits to economic analysis are also more clearly seen, and this, too, is progress. One limit is grounded in the inherently political nature of environmental policy.