Compendium

Environmental & Resource Economics — Externalities, Pigouvian, Common-Pool, Valuation

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Environmental and Resource Economics — Externalities, Pigouvian Pricing, Common-Pool Resources, Valuation

Environmental and resource economics analyzes problems where the price system fails because the costs and benefits of using natural resources are not fully reflected in market transactions. Pollution imposes costs on third parties not party to the polluting transaction. Climate change is the externality of externalities, summing across every fossil-fuel use across centuries. Fish in the ocean, groundwater in an aquifer, the atmosphere itself — these are common-pool resources where the social benefit of conservation diverges sharply from the private incentive to extract. Biodiversity loss, deforestation, and species extinction destroy assets whose value is real but unpriced. The field’s task is to identify these failures, model their causes, design corrective institutions, and put numbers on the values at stake.

Modern environmental economics traces to two papers: Arthur Pigou’s The Economics of Welfare (1920), which argued that externalities should be internalized through corrective taxes (or subsidies for positive externalities), and Ronald Coase’s “The Problem of Social Cost” (Journal of Law and Economics, 1960), which observed that with well-defined property rights and zero transaction costs, private bargaining among affected parties reaches the efficient outcome regardless of who initially holds the rights. Both have shaped policy ever since.

1. Externalities and the Pigouvian framework

An externality is an unpriced effect of one party’s action on another. Negative externalities — pollution, congestion, noise, secondhand smoke, biodiversity loss — generate marginal social cost (MSC) above marginal private cost (MPC); the unregulated market produces too much. Positive externalities — vaccination, basic research, ecosystem conservation, education — generate marginal social benefit (MSB) above marginal private benefit (MPB); the unregulated market produces too little.

Pigou’s prescription: tax negative externalities at the marginal external damage (MED) at the optimal output. Such a Pigouvian tax raises the private cost to equal the social cost and restores efficiency. The optimal tax equals the marginal damage at the optimal level of activity, not the current level. This distinction matters enormously: optimal carbon pricing depends on damage at the future optimal level of emissions, not at today’s emission levels.

Coase’s theorem (Nobel 1991) provides the alternative perspective: if property rights are well-defined and transaction costs are zero, bargaining between the polluter and the affected party reaches the efficient outcome, regardless of who initially holds the right to pollute or to be free from pollution. Coase cited the 1879 English case Sturges v. Bridgman — a doctor’s consulting rooms backing onto a confectioner’s premises whose machinery generated noise and vibration — as illustrative. The court enjoined the confectioner; Coase’s point was that the efficient outcome (whichever use was more valuable) would emerge from bargaining either way, with the assignment of rights affecting only distribution.

Coase’s deeper contribution was to redirect attention to transaction costs as the central obstacle: when transaction costs are high (many parties, dispersed harm, information asymmetry, holdouts, free riders), bargaining fails and institutions matter. The choice between tax-based approaches, tradable permits, command-and-control regulation, and litigation depends on the transaction-cost landscape.

2. Prices vs. quantities under uncertainty

Martin Weitzman’s “Prices vs. Quantities” (Review of Economic Studies, 1974) addressed a central regulatory question: should the government control the price of an externality (set a tax) or the quantity (set a cap)? Under certainty they are equivalent. Under uncertainty in the marginal abatement cost (MAC), they differ.

Weitzman’s central result: when the MAC curve is steeper than the marginal damage (MD) curve, prices (taxes) dominate — quantity targets risk huge welfare losses if costs turn out higher than expected, while a tax bounds the cost. When the MD curve is steeper than the MAC — typical for threshold pollutants where exceeding a critical concentration causes outsized damage — quantities (caps) dominate because exceeding the safe threshold is catastrophic.

For climate change, where the MD curve is plausibly relatively flat over relevant horizons (cumulative emissions matter more than annual flows for a long-lived stock pollutant), Weitzman’s logic favors carbon taxes. For local pollutants with threshold effects (ground-level ozone, acidic deposition), caps may dominate.

Hybrid instruments — Roberts and Spence’s “Effluent Charges and Licenses Under Uncertainty” (Journal of Public Economics, 1976) — combine a permit cap with a price floor (auction reserve) and a price ceiling (safety valve). The EU ETS Market Stability Reserve and California’s CARB price floor approximate this hybrid structure (see carbon-markets-and-compliance).

3. Carbon pricing in practice

Carbon pricing — by tax, cap-and-trade, or hybrid — is the central tool of modern climate policy. As of 2024, approximately 75 jurisdictions covering roughly 24% of global emissions have implemented carbon pricing of some kind (World Bank State and Trends of Carbon Pricing, 2024).

Major emissions trading systems:

  • EU ETS (launched 2005, the world’s largest) covers approximately 40% of EU emissions across power generation, industry, and aviation; expanded to maritime in 2024; CBAM border adjustment phase from 2026. The 2023 ETS reform tightened the cap and extended coverage. EUA prices ranged from €60-100/tCO2 through 2023-24.
  • California CARB cap-and-trade (linked with Québec) began 2013; covers approximately 80% of state emissions; auction prices around $30-40/tCO2 in 2024.
  • RGGI (Regional Greenhouse Gas Initiative, 12 Northeast/Mid-Atlantic states) began 2009; power sector only; auction prices around $20-25/tCO2 in 2024.
  • China national ETS (launched July 2021, the largest by emissions covered) initially covered the power sector with a rate-based intensity standard; prices have ranged ¥40-90/tCO2 (approximately $5-12) — well below other major systems but expanding coverage planned for 2025+.
  • New Zealand ETS (2008); South Korea K-ETS (2015); UK ETS (2021 after Brexit replacing EU ETS for UK).

Major carbon taxes: Sweden (introduced 1991, now approximately $130/tCO2 — among the highest); Norway (1991, approximately $100/tCO2 for fossil fuels in the ETS sectors); Switzerland (CHF 120/tCO2 in 2024); Finland (1990, approximately €77/tCO2 for transport fuels); France (carbon component of the TICPE energy tax, frozen at €44.6/tCO2 since 2018 after the Yellow Vests protests); Canada (federal backstop at CAD $80/tCO2 in 2024 rising to CAD $170 by 2030); British Columbia (provincial, CAD $80/tCO2 in 2024); Argentina, Chile, Colombia, Singapore ($25/tCO2 since 2024), Uruguay, South Africa.

Detailed cross-reference: carbon-markets-and-compliance.

4. The social cost of carbon

The social cost of carbon (SCC) is the present-value damage from emitting one additional ton of CO2, summed across the global future. It is the conceptually correct Pigouvian tax for greenhouse gases.

Nordhaus’s DICE model (Dynamic Integrated Climate-Economy, first published 1992, periodically updated) is the most influential integrated assessment model (IAM). Nordhaus won the 2018 Nobel Prize jointly with Paul Romer for incorporating climate and innovation into long-run macroeconomic growth. DICE couples a simple economic growth model, a carbon cycle, a temperature model, and a damage function relating temperature to GDP loss. The model has been criticized for damage function calibration that may understate tail risks, simple climate dynamics, and discount rate choices.

US federal SCC estimates have been politically contested. The Obama-era Interagency Working Group (IWG) settled on a central estimate around 5-10/tCO2). The Biden administration reinstated and updated the IWG values, with EPA’s November 2023 final supplementary guidance adopting a central SCC of approximately1,650/tCH4 and nitrous oxide around $54,000/tN2O.

The Rennert et al. “Comprehensive Evidence Implies a Higher Social Cost of CO2” (Nature, September 2022) is the most-cited recent independent estimate, finding a central SCC of approximately 44-413) at a 2% near-term discount rate, with significantly higher values at lower discount rates. The paper synthesized updated socioeconomic projections, climate sensitivities, damages (including mortality, agriculture, energy demand, sea level rise), and Ramsey discounting.

The Stern Review on the Economics of Climate Change (HM Treasury, 2006) used a near-zero pure rate of time preference (justified on intergenerational ethics grounds) and reached SCC estimates of $25-50/tCO2 at the time, much higher than then-mainstream estimates. The Stern-Nordhaus discount rate debate captures most of the apparent disagreement on optimal climate policy intensity.

Robert Pindyck’s “The Use and Misuse of Models for Climate Policy” (Review of Environmental Economics and Policy, 2017) critiqued IAM damage functions as essentially fabricated for the regions of warming that matter most, and argued for direct expert elicitation of catastrophic risks. Tipping points (Amazon dieback, Arctic methane release, ice sheet collapse, AMOC disruption — see climate-tipping-points-and-feedbacks) introduce nonlinearities that low-order IAMs miss.

5. Common-pool resources and Ostrom’s design principles

Garrett Hardin’s “The Tragedy of the Commons” (Science, 1968) argued that resources held in common — pastures, fisheries, atmosphere — face systematic overuse because each user gets the full benefit of additional appropriation while bearing only a fraction of the social cost. Hardin’s prescription was either privatization or government regulation.

Elinor Ostrom (Nobel 2009 — the first woman to win the Economics Nobel) demonstrated that this binary missed a third path. Across decades of field research synthesized in Governing the Commons (1990), Ostrom catalogued community-managed common-pool resources that sustainably operated without either state ownership or full privatization. Her eight design principles for successful CPR management:

  1. Clearly defined boundaries — who can use, what counts as the resource.
  2. Congruent rules — appropriation and provision rules match local conditions.
  3. Collective-choice arrangements — users participate in modifying operational rules.
  4. Monitoring — users or their accountable agents monitor compliance.
  5. Graduated sanctions — escalating penalties for rule violation.
  6. Conflict-resolution mechanisms — accessible, low-cost forums.
  7. Recognition of rights to organize — external governments do not override local rules.
  8. Nested enterprises — for larger systems, organized in multiple layers.

Case studies include Maine lobster fishing harbor gangs, Bali’s subak irrigation societies, the Swiss Alps Toggenburg communal pastures, the Spanish huerta of Valencia water tribunals (operating since the 10th century), and Japanese fisheries cooperatives. Ostrom’s work showed that “the commons” can be governed, but requires institutions matched to the resource and the community.

6. Fisheries economics

Open-access fisheries face textbook tragedy-of-commons dynamics. The Schaefer surplus production model characterizes maximum sustainable yield (MSY) at the population level where dN/dt is maximized (typically near K/2 under logistic growth). The Beverton-Holt age-structured model refines this with cohort-level dynamics.

Without property rights, open-access equilibrium occurs where average revenue equals average cost — substantially below MSY in most fisheries, with rent dissipated through excessive effort, oversized fleets, and biological depletion.

Individual Transferable Quotas (ITQs) create a property right to a share of the annual catch, internalizing the externality across rights-holders. Iceland (1979 for herring, 1991 for cod), New Zealand (1986 across most stocks), Australia (1984 for southern bluefin tuna), Canada (Pacific halibut 1991, BC groundfish trawl 1997), and the US (Alaska halibut and sablefish IFQ 1995, Gulf of Mexico red snapper 2007, Northeast multispecies sectors 2010) have implemented ITQ systems. Outcomes include reduced overcapacity, improved economics, and in many cases stock recovery — though distributional concerns (quota concentration, displacement of small operators, fishing-community disruption) remain contested.

The UN Convention on the Law of the Sea (UNCLOS, 1982) established 200-mile Exclusive Economic Zones that brought most commercial fish stocks into national jurisdiction, enabling rights-based management for the first time. The 2023 BBNJ (Biodiversity Beyond National Jurisdiction) Treaty extends governance to the high seas.

7. Forestry economics

The Faustmann formula (Martin Faustmann, 1849) derives the optimal forest rotation length by maximizing the present value of an infinite series of identical rotations. The first-order condition equates the rate of biological growth at harvest to the interest rate adjusted for land rent — typically yielding rotations substantially shorter than the maximum-sustained-yield age. The Faustmann logic applies to any renewable resource with growing stock value.

Non-timber values (carbon sequestration, biodiversity, watershed services, recreation, cultural value) lengthen optimal rotations when properly priced. Public forests under multiple-use mandates (US Forest Service, BLM, state forestry agencies) have shifted substantially away from timber-maximization since the 1990s spotted owl litigation reshaped Pacific Northwest forestry.

REDD+ (Reducing Emissions from Deforestation and forest Degradation, formalized at UNFCCC COP-13 Bali 2007 and elaborated through Cancun 2010 and Warsaw 2013) created an international framework for paying developing countries to preserve forest carbon stocks. Implementation has been contested — Verra REDD+ credits faced major credibility challenges in 2023 The Guardian and Die Zeit investigations finding that most rainforest credits did not represent genuine emissions reductions, prompting standard revisions.

8. Water, groundwater, and irrigation

Water economics combines common-pool dynamics, network infrastructure, and political-economy obstacles. Groundwater extraction in particular exhibits aquifer-level tragedy of commons: each well-owner gets the full water but bears only a share of the long-run depletion.

The Ogallala Aquifer underlying the US Great Plains has been depleted by approximately 9% since pre-development levels (USGS), with severe localized declines in parts of Kansas, Texas, and Nebraska threatening the long-run viability of irrigation agriculture. Sustainable Groundwater Management Act (California, 2014) requires local groundwater sustainability agencies to bring overdrafted basins into balance by 2040.

Surface water rights operate under the prior appropriation doctrine in the western US (first-in-time, first-in-right) and riparian rights in the eastern US (rights attached to streamside land). Cap-and-trade-style water markets operate in Australia’s Murray-Darling Basin (Basin Plan 2012, water trading volumes exceeding AUD $1 billion annually) and parts of the western US (Colorado-Big Thompson units, Walker River, California water markets). Trading enables efficient reallocation but raises equity concerns about communities losing access.

The 1922 Colorado River Compact allocated 16.5 million acre-feet annually among seven basin states and Mexico, an allocation now exceeding the river’s actual flow — particularly given climate-driven aridification documented in Williams et al. (Nature Climate Change, 2022) on the early-21st-century Southwest megadrought (see regional-climate-and-extremes). Renegotiation of post-2026 operating rules among the Upper Basin, Lower Basin, and Mexico is ongoing.

9. Air pollution regulation and market mechanisms

The Clean Air Act of 1970 (major amendments 1977, 1990) established the framework for US air pollution regulation through National Ambient Air Quality Standards (NAAQS) for criteria pollutants (PM2.5, PM10, ozone, NO2, SO2, CO, lead). State implementation plans (SIPs) translate NAAQS into specific emissions controls.

Title IV of the 1990 CAA Amendments established the Acid Rain Program with cap-and-trade for SO2 emissions from power plants, beginning Phase I in 1995. The program achieved approximately 36% reduction in SO2 emissions below 1990 levels by 2010 at a fraction of pre-program cost estimates — one of the great policy successes of US environmental regulation. The NOx Budget Trading Program (2003-08) and the Cross-State Air Pollution Rule (CSAPR) continued the cap-and-trade approach for nitrogen oxides.

The Clean Water Act (1972) takes a more command-and-control approach with technology-based effluent standards. The Resource Conservation and Recovery Act (RCRA, 1976) governs hazardous waste. Superfund / CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act, 1980) imposes strict, joint, and several liability for hazardous waste site cleanup. The EPA (established December 1970) administers most federal environmental statutes.

The Supreme Court’s West Virginia v. EPA (June 30, 2022) invoked the “major questions doctrine” to limit EPA’s authority under CAA §111(d) for greenhouse gases from power plants, requiring more explicit congressional authorization for major regulations — a constraint shaping the 2024 power plant rule and subsequent climate policy.

Environmental justice — the disproportionate exposure of low-income and minority communities to environmental hazards — has been documented since the 1980s (UCC Commission for Racial Justice 1987; Bullard Dumping in Dixie 1990) and was formalized in federal policy by Executive Order 12898 (1994) and Biden Executive Order 14096 (2023).

10. Non-renewable resources: Hotelling’s rule

Harold Hotelling’s “The Economics of Exhaustible Resources” (Journal of Political Economy, 1931) derived the Hotelling rule: in equilibrium, the price (net of marginal extraction cost) of a non-renewable resource should rise at the rate of interest. Owners are indifferent between extracting now (receiving the current price and earning interest on the proceeds) and extracting later (receiving the higher future price).

The Hotelling rule provides the basic intertemporal model for oil, coal, gas, and mineral resources. Empirical failures of the rule’s simple form abound — actual price paths reflect demand shocks, technological progress in extraction (US shale revolution post-2008), cartel dynamics (OPEC), reserve discoveries, and environmental regulation. The framework remains valuable for thinking about scarcity rents, optimal extraction taxation, and intergenerational equity.

Fossil fuel subsidies are large and pervasive. The IMF’s 2023 update estimated total global fossil fuel subsidies at approximately **1.3 trillion in explicit subsidies (below-cost prices, tax preferences) and $5.7 trillion in implicit subsidies (failure to price externalities including climate, local air pollution, congestion, accidents). The G20 has periodically committed to phase out “inefficient” fossil fuel subsidies (Pittsburgh 2009, repeated since) with limited progress.

11. Discounting and intergenerational equity

How we weight future benefits and costs against present ones is the most consequential parameter in climate economics. The Ramsey rule (Frank Ramsey, “A Mathematical Theory of Saving,” Economic Journal, 1928) decomposes the social discount rate into the pure rate of time preference (δ), the elasticity of marginal utility of consumption (η), and the growth rate of consumption (g):

r = δ + η · g

Stern’s Review on the Economics of Climate Change (2006) used δ = 0.1% (justified on intergenerational ethics — future generations are not lesser people), η = 1, and g around 1.3%, yielding a near-1.4% discount rate. Nordhaus’s DICE uses δ around 1.5%, η around 1.45-2, and similar growth — yielding 4-5% discount rates. The Stern-Nordhaus disagreement on δ explains most of their disagreement on optimal climate policy intensity.

The Weitzman dismal theorem (“On Modeling and Interpreting the Economics of Catastrophic Climate Change,” Review of Economics and Statistics, 2009) showed that under sufficiently fat-tailed uncertainty about climate sensitivity and damage, expected discounted utility can be unbounded, and standard cost-benefit analysis breaks down. Robust decision-making under deep uncertainty becomes the alternative framework.

Declining discount rates (DDR) — Weitzman (Journal of Environmental Economics and Management, 1998) and Gollier Pricing the Planet’s Future (2013) — argue that uncertainty about the future discount rate itself implies declining certainty-equivalent rates for very long horizons. The UK Treasury Green Book has adopted DDR (3.5% short-run, declining to 1% beyond 300 years). France, Norway, and others have followed.

12. Valuation: revealed and stated preference

How to put a dollar value on non-marketed environmental goods (clean air, scenic vistas, endangered species, biodiversity) divides into revealed-preference methods (inferring values from related market behavior) and stated-preference methods (asking people directly).

Revealed-preference methods:

  • Hedonic pricing (Sherwin Rosen 1974) — variation in property prices across locations with different environmental amenities (air quality, school quality, noise, proximity to amenities or hazards) reveals marginal willingness to pay.
  • Travel cost method — variation in visit frequencies with travel cost from origin to a recreation site reveals consumer surplus from access.
  • Averting behavior — expenditures on bottled water, air filters, or other defenses against environmental hazards reveal damages.

Stated-preference methods:

  • Contingent valuation (CV) — survey questions directly asking respondents’ willingness to pay (WTP) for an environmental improvement or willingness to accept (WTA) compensation for a loss. WTP and WTA typically diverge substantially — endowment effect (see behavioral-economics).
  • Discrete choice experiments — respondents choose among alternatives varying on environmental and price attributes; choices reveal trade-offs.

The NOAA Panel on Contingent Valuation (Arrow, Solow, Portney, Leamer, Radner, Schuman, 1993), convened in response to the Exxon Valdez damage case, established methodological guidelines that legitimized CV for legal damage assessment. The panel recommended in-person surveys, dichotomous-choice questions, reminders of substitutes and budget constraints, and other safeguards.

The Environmental Valuation Reference Inventory (EVRI) is a major meta-analysis database, with thousands of catalogued valuation studies enabling benefit transfer to new contexts.

13. Ecosystem services valuation

The concept of ecosystem services — provisioning (food, water, fiber, timber), regulating (climate, water quality, pollination), cultural (recreation, spiritual), and supporting (soil formation, nutrient cycling) — frames natural systems as economic assets generating flows of value.

Costanza et al. “The Value of the World’s Ecosystem Services and Natural Capital” (Nature, 1997) produced an early aggregate estimate of 125-145 trillion per year. The numbers are heroic averages-of-averages and not literal market values, but they made the conceptual point that ecosystem services are economically large relative to GDP.

The TEEB initiative (The Economics of Ecosystems and Biodiversity, 2010) operationalized ecosystem services for policy. The Dasgupta Review on the Economics of Biodiversity (Partha Dasgupta, commissioned by HM Treasury, published February 2021) treated biodiversity as an economic asset with a stock-flow framework and argued that humanity’s demands on nature have far exceeded the biosphere’s regenerative capacity.

The Kunming-Montreal Global Biodiversity Framework (CBD COP-15, December 2022) committed signatories to 30x30 — protecting 30% of land and sea by 2030 — plus $200 billion per year in biodiversity finance by 2030.

Debt-for-nature swaps convert sovereign debt into commitments to spend the freed-up funds on conservation. The Ecuador 2023 swap (May 2023, structured by Credit Suisse before its acquisition) is the largest to date: 656 million in annual marine conservation funding for the Galápagos Marine Reserve over 17 years. Earlier swaps in Belize, Barbados, Seychelles, and elsewhere proved the model.

Biodiversity credits as a tradable instrument analogous to carbon credits are an active frontier (Verra MPI, Biodiversity Credit Alliance, US Endangered Species Act conservation banking).

14. Trade and environment

The pollution haven hypothesis predicts that firms relocate dirty production to jurisdictions with lax environmental regulation, undermining national-level policy. Empirical evidence is mixed: some elasticity exists, particularly for very-emissions-intensive sectors, but the broader hypothesis (large-scale carbon leakage from climate policy) finds modest support — Aichele and Felbermayr 2015 estimate carbon leakage rates of 30-40% from unilateral climate policy.

Border carbon adjustments (BCAs) address leakage by taxing the embedded emissions of imports from non-pricing jurisdictions. The EU Carbon Border Adjustment Mechanism (CBAM), with reporting from October 2023 and financial obligations from January 2026, covers cement, steel, aluminum, fertilizers, electricity, and hydrogen — sectors with high carbon intensity and import vulnerability.

The environmental Kuznets curve (EKC) (Grossman-Krueger “Environmental Impacts of a North American Free Trade Agreement,” 1991) hypothesized an inverted-U relationship between per capita income and pollution: as countries develop, pollution rises until middle-income levels and then falls. The EKC holds reasonably well for some local pollutants (SO2, particulates) but poorly for CO2 — emissions continue to rise with income absent specific decarbonization policy.

15. Renewable energy economics

The economics of renewable energy has been transformed by dramatic cost declines. Solar PV module prices fell from approximately 0.30/W in 2023 — over 99% cost decline. Wright’s Law / Swanson’s Law posits learning rates: solar PV has shown approximately 20-25% cost decline per doubling of cumulative installed capacity (Nemet How Solar Energy Became Cheap, 2019).

IRENA’s Renewable Power Generation Costs annual report tracks global LCOE: utility-scale solar PV global weighted-average LCOE fell from 0.044/kWh in 2023 — an 88% reduction. Onshore wind LCOE fell 70% to 0.075/kWh.

The US Inflation Reduction Act (August 2022) committed approximately 52.7 billion for semiconductor manufacturing including clean-tech components.

The EU Green Deal Industrial Plan (February 2023) and Net Zero Industry Act (2024) marshal European industrial policy support for clean-tech manufacturing in response to IRA competition.

Detailed cross-reference: renewable-energy-and-storage and electricity-markets-and-grids.

16. Climate adaptation economics

Adaptation — adjusting to actual or expected climate change — is the partner to mitigation. Adaptation economics asks: how much should we spend on adaptation, how does adaptive capacity vary across regions, and how do market mechanisms (insurance, migration, technology) substitute for explicit adaptation investment?

Hsiang, Burke, and Miguel’s “Climate and Conflict” (Annual Review of Economics, 2014, building on Hsiang-Meng-Cane 2011 in Nature) documented systematic relationships between climate variables and intergroup conflict. Burke, Hsiang, and Miguel “Global non-linear effect of temperature on economic production” (Nature, 2015) used panel data on 166 countries from 1960-2010 to estimate a nonlinear temperature-GDP relationship peaking around 13°C annual average — implying substantial GDP losses for hot countries from continued warming. The paper’s central estimate of 23% GDP loss by 2100 under high warming has been contested as too large by some (Diaz-Moore 2017) and too small by others.

Kahn et al. “Long-term macroeconomic effects of climate change: A cross-country analysis” (Energy Economics, 2021) found that persistent temperature deviations from historical norms reduce per capita growth, implying that climate change reduces long-run output even after gradual adaptation.

The Loss and Damage Fund was operationalized at UNFCCC COP-28 (Dubai, December 2023) with initial pledges around $700 million — a fraction of estimated needs but a long-fought political milestone for developing countries advocating for climate-vulnerable financing.

17. Behavioral environmental economics

Behavioral environmental economics applies findings from behavioral-economics to environmental policy.

Hunt Allcott and Sendhil Mullainathan’s “Behavior and Energy Policy” (Science, 2010) and Allcott’s “Social norms and energy conservation” (Journal of Public Economics, 2011) evaluated the Opower Home Energy Reports program. The reports compared a household’s electricity use to “similar neighbors” with smiley/frowny face evaluation and energy-saving tips. The treatment generated approximately 2% reduction in electricity use at very low cost — a striking efficacy for a pure information-and-norms intervention. Allcott and Rogers (American Economic Review, 2014) showed the effect persisted and grew when the intervention continued.

Default opt-in for green electricity — Pichert and Katsikopoulos (2008) and replications — shows large effects of changing the default. Switching the default from brown to green electricity raises green-electricity adoption from low single digits to 80%+ in some settings.

Electric vehicle incentives — Allcott, Mullainathan, and Taubinsky (American Economic Review, 2014) and follow-ups analyze the welfare effects of EV subsidies, finding mixed results depending on what externality benchmark is used and how the subsidies interact with markets for inframarginal buyers.

18. Major economists and Nobels

  • Ronald Coase (Nobel 1991) — externalities, transaction costs, the nature of the firm.
  • Gary Becker (Nobel 1992) — non-environmental, but his cost-benefit framework applies.
  • Elinor Ostrom (Nobel 2009) — common-pool resources, the first woman to win the Economics Nobel.
  • William Nordhaus (Nobel 2018) — climate-economy integrated assessment.
  • Esther Duflo, Abhijit Banerjee, Michael Kremer (Nobel 2019) — randomized evaluation; many environmental policy applications.
  • David Card, Joshua Angrist, Guido Imbens (Nobel 2021) — empirical methods used throughout environmental economics.

Other major figures: Martin Weitzman (died 2019), Nicholas Stern, Robert Solow (Nobel 1987, founding contributions to resource economics), Robert Pindyck, Robert Stavins, William Pizer, Lawrence Goulder, Roger Cooke, Maureen Cropper, Catherine Wolfram, Hunt Allcott, Marshall Burke, Solomon Hsiang, Frances Moore.

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