Why do we use economics in environment policy?

The main reason is that in our society the environment has become a scarce resource. Since economics is about how to deal with scarce resources, it can often be useful when tackling environmental problems.

One way of using economics is to ensure that the costs and the benefits of environmental measures are well balanced. Although it is difficult to estimate costs and benefits, there is an increasing demand that this is done before environmental policy is decided on a European level. With the use of market-based instruments, environmental goals can sometimes be reached more efficiently than with traditional command and control regulations.

Economic and environmental objectives are often perceived as being contradictory. It is believed that a choice must be made between one and the other and that both cannot be achieved concurrently. However, this perception is wrong and economy and environment can go together.

What is Environmental Economics?

  • Economics is the study of the allocation of scarce resources.
    • Note that the theories of economics can be applied to any scarce resource, not just traditional commodities.
    • Economics is not simply about profits or money.  It applies anywhere constraints are faced, so that choices must be made.
    • Economists study how incentives affect people’s behavior.
  • Environmental and natural resource economics is the application of the principles of economics to the study of how environmental and natural resources are developed and managed.
    • Natural resources – resources provided by nature that can be divided into increasingly smaller units and allocated at the margin.
    • Environmental resources – resources provided by nature that are indivisible.
    • Natural resources serve as inputs to the economic system.  Environmental resources are affected by the system (e.g. pollution).

EU environment-related indicators

The European Commission’s annual Environment Policy Review is a report designed to monitor recent environmental trends and policy developments at EU and national level and the progress towards the EU’s key environmental goals as set out in the 6th Environment Action Programme. The latest edition – 2008 Environment Policy Review – contains 30 key environmental indicators for EU environment policy and includes environmental data tables for each Member State.

The European Commission also annually publishes a leaflet on ten environment-related indicators that highlight EU trends relevant to the Sixth Environment Action Programme’s priority areas: Climate Change, Nature and Biodiversity, Environment and Health and Quality of Life, and Natural Resources and Waste. The trends of the indicators show areas where improvements have been made and  others where further action may be needed.

Beyond GDP

Gross Domestic Product (GDP) is the best known measure of macro-economic activity. It has also come to be regarded as a proxy indicator for overall societal development and progress in general. However, GDP does not measure environmental sustainability or social inclusion and these limitations need to be taken into account when using it in policy analysis and debates. The need to strengthen data and indicators which would complement GDP has been increasingly recognised and a number of international initiatives have been launched to advance on these issues.

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