Sustainability Language

Sustainability theory & policy

Environmental economics

The economic study of environmental problems — externalities, valuation and incentive-based policy instruments.

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Definition

Environmental economics is the branch of economics that analyses the causes of environmental degradation and the design of policy responses, centred on externalities — unpriced effects of economic activity on third parties — and on instruments such as taxes, charges and tradable permits that internalise those costs. It traces to A.C. Pigou's analysis of divergences between private and social costs.

References

NBER

Pigou lineage, externality concept, development of pollution pricing and tradable permits

Overview

What it means

The field supplies the theory behind carbon pricing, pollution taxes and emissions trading (developed through work by Kneese, Crocker and Dales on pollution pricing and tradable rights), as well as non-market valuation of environmental goods and cost-benefit analysis of regulation. It contrasts with ecological economics, which embeds the economy within biophysical limits.

How it is used

Used in policy appraisal, carbon-price design, natural-damage assessment and academic research on environment–economy interactions.

Why it matters

Most market-based environmental policy — including carbon taxes and ETS design — rests on environmental-economics reasoning.

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