Environmental economics

Important for the discourse of economics is the law of supply and demand. The law of supply and demand seeks for the equilibrium between price and quantity in the process of production, consumption and distribution. This established system of supply and demand, however, lacks in taking into consideration the effects of the production, consumption and distribution on the environment. For this reason, often price tags are not fair, as externalities, like for instance the pollution of the production process is being disregarded. Also, when evaluating economy, we often evaluate a country’s wealth based on the gross domestic product (GDP). Just like the law of supply and demand, also the GDP does not take into consideration the externalities.

As economics seems to be at the center of our decision making, solutions can perhaps be found in environmental economics. Environmental economics regards the global economy and includes the value of ecosystem services. Ecosystem services are the things the planet is basically contributing for free. Examples of ecosystem services are the filtering of our water, the capturing of carbon and the provision of energy. In 2005 the millennium ecosystem assessment was the first document in which the value of ecosystem services, the value of nature to society, was declared. It brought forward the idea that any development on the planet should be made with the consideration of sustaining the quality of life for future generations to come.

With this in mind, environmental economics focusses on assigning money value to both resources being harvested from the environment but also resources that have to be maintained in order to maintain the climate or the hydrological or the carbon cycle and the value of this maintenance. In order to evaluate this improved way of economics, the focus lies with the genuine progress indicator (GPI) instead of the GDP. GPI includes the externalities like pollution and resource depletion but also health and education, into the evaluation of the wealth of a nation and this shows we’re not actually doing so great. In order to make sure that both the GPI and the GDP continue growing, environmental economics pushes for regulations capable of decreasing pollution for example by making use of reward systems, caps, taxes or the compensation of emissions or other ways of paying for externalities.