Environmental Science

A Study of Interrelationships
Twelfth Edition

Enger & Smith

Chapter 3
Environmental Risk:
Economics, Assessment, and Management
Copyright The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Environmental Risk:
Economics, Assessment, and
Management

Outline
Characterizing Risk
Risk and Economics
Environmental Economics
Using Economic Tools to Address Environmental
Issues
Economics and Sustainable Development
Economics, Environment, and Developing Nations

Characterizing Risk

Risk is the probability that a condition or action

will lead to an injury, damage, or loss.
Risk incorporates three main considerations:
1. Probability of a bad outcome.
Probability is a mathematical statement about how
likely it is that something will happen.
2. Consequences of a bad outcome.
3. Cost of dealing with a bad outcome.

Risk and Economics

Most decisions in life involve an analysis of two
factors:
Risk
Cost

Most environmental decisions involve finding a

balance between the perceived cost of enduring
the risk and the economic cost of eliminating the
conditions that pose the risk.

Risk and Economics

Decision-making process

Risk Assessment
Environmental risk assessment uses facts and
assumptions to estimate probability of harm to
human health or the environment that may result
from particular management decisions.
The assessment process provides an orderly, clearly
stated, and consistent way to deal with scientific
issues when evaluating whether a risk exists, the
magnitude of the risk, and the consequences of the
negative outcome of accepting the risk.

Risk Assessment
If a situation is well-known, scientists use
probabilities based on past experience to estimate
risks.
Models are used to estimate risks for situations with
no known history.
Most risk assessments are statistical statements that are
estimates of the probability of negative effects.
These estimates are modified to ensure that a lack of
complete knowledge does not result in an
underestimation of risk.

Risk Assessment
Because of uncertainties, government
regulators have decided to err on the side
of safety to protect the public health.
Many of the most important threats to human
health and the environment are highly
uncertain.

Risk Management
Risk management is a decision-making plan
that weighs policy alternatives and selects the
most appropriate regulatory action by integrating
risk assessment results with engineering data,
and with social, economic, and political
concerns.
The purpose is to reduce the probability or magnitude
of a negative outcome.

Risk Management
A risk management plan includes:
Evaluating the scientific information regarding various
kinds of risks.
Deciding how much risk is acceptable.
Deciding which risks should be given highest priority.
Deciding where the greatest benefit would be realized by
spending limited funds.
Deciding how the plan will be enforced and monitored.

Risk Management
From a risk management standpoint, whether
one is dealing with a site-specific situation or a
national standard, the deciding question is:
What degree of risk is acceptable?
Negligible risk is the point at which there is no
significant health or environmental risk.
At what point is there an adequate safety margin to
protect public health and the environment ?

Risk Tolerance
Business and industry must have management
policies or risk tolerance programs, either formal
or understood.
Each entity has some level of risk it is willing to
accept.
Depending on the situation, policies and/or
tolerance for environmental health and safety
risks can vary greatly.
The more familiar or well understood the issues
are, the greater the level of risk that is
acceptable.

True and Perceived Risks

People often overestimate frequency and
seriousness of sensational causes of death, and
underestimate risks from familiar causes that
claim lives one by one.
The public generally perceives involuntary risks as
greater than voluntary risks, and perceives newer
technologies as greater risks than old, familiar
technologies.

True and Perceived Risks

Perception of risks

True and Perceived Risks

One of the most profound dilemmas facing
decision makers is how to address the
discrepancy between the scientific and the
public perceptions of environmental risks.
Should the government focus available resources and
technology where they can have with the greatest
impact, or on problems about which the public is most
upset?

Environmental Economics
Economics is the study of how people
choose to use resources to produce
goods and services, and how those goods
and services are distributed to the public.

Resources
Economists look at resources as the available
supply of something that can be used.
There are three categories of resources:
Labor (human resources)
Capital (technology and knowledge)
Land (natural resources)

Resources
Natural resources are structures and
processes humans can use for their own
purposes but cannot create.
Renewable resources can be formed or regenerated
by natural processes.
Nonrenewable resources are not replaced by
natural processes, or the rate of replacement is so
slow as to be ineffective.

Supply and Demand

Supply is the amount of a good or service
people are willing to sell at a given price.
Demand is the amount of a good or service that
consumers are willing and able to buy at a given
price.
The relationship between supply and demand is
often illustrated by a supply/demand curve.
Price reflects the strength of demand for and
availability of the commodity.
Demand > Supply: Price Rises
Demand < Supply: Price Lowers

Supply and Demand

Supply and demand for old corrugated cardboard.

Assigning Value to Natural Resources

We assign value to natural resources based on
our perception of their relative scarcity.
If a natural resource has always been rare, it is
expensive.
If the supply is very large and the demand is low, the
resource is often perceived to be free.
Even renewable resources can be overexploited.

Contingent Valuation Method (CVM)

The economic value of common resources can
be measured by the maximum amount of other
goods and services people are willing to give up
to obtain a good or service.
It is possible to weight the benefits from an
activity such as dam construction, against its
negative impacts on fishing, livelihoods of
nearby communities, and changes to aesthetic
values.

Contingent Valuation Method (CVM)

National and local measures are used to
estimate the economic values of tangible and
intangible services provided by the environment.
Valuation work has begun on non-timber forest
products, forestry, and health impacts of air
pollution and water-borne diseases.
Data on water purification, prevention of natural
disasters, recreational, aesthetic, and cultural
services has been difficult to obtain.

Environmental Costs
Pollution, species extinction, resource depletion,
and loss of scenic quality are all examples of the
environmental costs of resource exploitation.
Deferred costs are those that may not be
immediately recognized and must be paid at a
later date.
Agricultural soil erosion

External costs are those that are borne by

someone other than the individuals using the
resource.
Cleanup of hazardous waste sites

Environmental Costs
Pollution costs are expenditures to correct
pollution damage once pollution has already
occurred.
Pollution prevention costs are those incurred
to prevent pollution that would otherwise result
from some production or consumption activity.

Examples of Pollution

Cost-Benefit Analysis
Cost-benefit analysis is a formal quantitative
method of assessing costs and benefits of
competing uses of a resource, or solutions to a
problem, and deciding which is most effective.

Cost-Benefit Analysis
It is used to determine whether a policy
generates more social costs than social benefits
and, if benefits outweigh costs, how much
activity would obtain optimal results.
There are four steps in a cost-benefit analysis:

Identification of the project.

Determination of all impacts.
Determination of the value of impacts.
Calculation of net benefit.

Concerns About the Use

of Cost-Benefit Analysis
Not everything can be analyzed from an
economic point of view, or can be assigned an
economic value.
Analyst must decide which preferences have
standing in the analysis.

Comparing Economic
and Ecological Systems
Matching economic processes with
environmental resources is difficult because of
the great differences in the way economic
systems and ecological systems function.
There is a great difference in the timeframes in
which ecosystems and markets operate.
Ecosystem processes take place over tens of
thousands to millions of years.
Market processes take from a few minutes to a few
years.

Comparing Economic
and Ecological Systems
For ecosystems, place/space is critical and the
capacities of a given location are not
transferable.
Economics and ecology are measured in
different units.

Common Property Resource Problems

The Tragedy of the Commons
Economists have stated that when everybody
shares ownership of a resource, there is a
strong tendency to overexploit and misuse that
resource.
The problems inherent in common ownership of
resources were outlined by biologist Garrett
Hardin in his essay The Tragedy of the
Commons (1968).

Common Property Resource Problems

The Tragedy of the Commons
The Commons were pasturelands in England
provided free by the king to anyone wishing to
graze cattle.
There are no problems on the commons as long
as the number of animals is small in relation to
the size of the pasture.
However, the optimal individual strategy is to
enlarge ones personal herd as much as
possible.

Common Property Resource Problems

The Tragedy of the Commons
As each herder pursues the optimal strategy:

Each herd increases in size.

Commons becomes overgrazed.
Everyone loses as the animals die of starvation.
Even though the eventual result is clear, no one acts
to avert disaster.

Common Property Resource Problems

The Tragedy of the Commons
The ecosphere is a large commons.
The U.S. and other industrialized nations consume more
than their fair share of resources.
Harvesting of marine organisms.
Common ownership of parks and streets.

Tragedy of the Commons also operates on an

individual scale.

Green Economics
The world has seen three economic
transformations in the past century.
Industrial Revolution
Technology Revolution
Modern Era of Globalization

The world is at the threshold of another

great change:
The age of green economics.

Green Economics
Brazil is a leader, drawing 44% of its energy
from renewable fuels.
The world average is 13%.
China is the worlds largest emitter of
greenhouse gases.
Growth in global energy demand could be cut in
half over the next 15 years using existing
technologies.
The U.S. could create 300,000 jobs if 20% of
electricity were produced by renewable means.

Using Economic Tools to Address

Environmental Issues
A subsidy is a gift from the government to
individuals or private enterprise to encourage
actions considered important to the public interest.
Subsidies are useful when they have a clear purpose and
are used for short transition periods.
When used inappropriately, subsidies can lead to
economic distortions.
Keeps price of a good or service below true market value.
May encourage activities detrimental to the environment.
Once subsidies become part of the economic fabric of a
country, they are very difficult to eliminate.

Liability Protection and

Grants for Small Business
On Jan. 11, 2002, President George W. Bush
signed into law the Small Business Liability
Relief and Brownfield Revitalization Act
(SBLRBRA).
This law provides incentives for small
businesses and other entities to develop brown
fields (areas perceived to have environmental
liabilities), most of which are in urban areas.

Liability Protection and

Grants for Small Business
These areas were previously considered too
risky to purchase and develop since purchasers
could potentially acquire the environmental
liabilities associated with the property.
The program has resulted in many successful
projects that have brought business back to
where it once was, minimizing impact on green
belts outside urban areas.

Market-Based Instruments
Market-based instruments use economic forces
and the ingenuity of entrepreneurs to achieve a
high degree of environmental protection at a low
cost.
Because of subsidies and external costs, many
environmental resources are underpriced.
These instruments can be used to determine fair
prices for environmental resources.

Market-Based Instruments
Instruments currently in use:
Information Programs provide consumers with
information about environmental consequences of
purchasing decisions.
Tradable emissions permits give companies the
right to emit specified amounts of pollutants.
Permits can be sold or banked for future use.

Market-Based Instruments
Emission fees and taxes provide incentives for
environmental improvement by making damaging
activities and products more expensive.
Deposit-refund programs place a surcharge on the
price of a product which is refunded upon return for
reuse or recycling.
Performance bonds are fees collected to ensure
proper care is taken to protect environmental
resources.

Life Cycle Analysis and

Extended Product Responsibility
Life-cycle analysis is the process of assessing
environmental effects associated with production,
reuse, and disposal of a product over its entire
useful life.
This process can identify changes in product design and
process technology that would reduce the ultimate
environmental impact of the product.

Life Cycle Analysis and

Extended Product Responsibility
Extended product responsibility is the
concept that the producer of a product is
responsible for all negative effects involved in its
production, including the ultimate disposal of the
product.
The logic is that if manufacturers pay for postconsumer impacts, they will alter designs in order to
reduce waste.

Life Cycle Analysis and

Extended Product Responsibility
Benefits of extended product responsibility:
Cost savings
Increased design efficiency
More efficient environmental protections

Obstacles

Cost of instituting programs

Lack of assessment tools and information
Difficulty in building working relationships
Hazardous waste regulations
Antitrust laws

Green Marketing Principles

Successful green products have three marketing
principles in common:
Consumer Value Positioning
Calibration of Consumer Knowledge
Credibility of Product Claims

Consumer Value Positioning

Design environmental products to perform as
well as (or better than) alternatives.
Promote and deliver the consumer desired value
of environmental products, and target relevant
consumer market segments.
i.e., market health benefits to health conscious
consumers

Calibration of Consumer Knowledge

Educate consumers with marketing messages
that connect the environmental attributes with
the desired consumer value.
i.e., Pesticide free produce is healthier.

Frame environmental products attributes as

solutions for consumer needs.
i.e., Rechargeable batteries offer longer performance.

Create engaging and educational Internet sites

about the product.
i.e., Tide Coldwater's site calculates annual savings.

Credibility of Product Claims

Use environmental product and consumer
benefit claims that are specific, meaningful,
unpretentious, and qualified.
Obtain product endorsements or ecocertification from reliable third parties.
Encourage consumer evangelism with
interesting and entertaining information about
environmental products. i.e., Tides Coldwater
Challenge Website

Economics and Sustainable Development

Sustainable development has become an
important policy priority for the world.
Sustainable development is development that
meets present needs without compromising the
ability of future generations to meet their own
needs.
Most definitions refer to the viability of natural
resources and ecosystems over time, and to
maintenance of human living standards and economic
growth.

Campus Sustainability Initiative

In 2008 Chevron Energy Solutions and Contra
Costa Community College District completed
phase 1 of a $35 million energy efficiency and
solar program expected to save more than $70
million over 25 years.
Photovoltaic panels were mounted on parking lot
canopies.
High-efficiency lighting and energy management
systems were installed.
The system offsets 5.6 million lbs. of CO2 annually
Equivalent to removing 629 cars or planting 400
hectares of trees

Economics and Sustainable Development

Characteristics that define sustainability:

Renewability
Substitution
Interdependence
Adaptability
Institutional commitment

Economics and Sustainable Development

Schools of thought:
Economic growth finances the investments necessary
to prevent pollution and to improve the environment
by a better allocation of resources.
Science and technological advances can solve many
environmental problems.
Economic and environmental well-being are mutually
reinforcing, and must be simultaneously pursued if
either is to be reached.

Economics and Sustainable Development

For sustainable development to be a viable
concept, modern, environmentally sound
technology must be transferred to developing
nations.
Another major obstacle to sustainable
development in many countries is a social
structure that gives majority of wealth to a tiny
minority of the population.

Economics and Sustainable Development

Sustainable development requires choices
based on values.
High-income developed nations with high
education levels are in a position to promote
sustainable development.
They have the resources to invest in research and the
technologies to implement their findings.
Some believe the world should not impose
environmental protection standards on poorer nations
without also helping them to move into the economic
mainstream.

Economics, Environment,
and Developing Nations
Many countries in the developing world have
resources that they wish to develop in order to
improve the economic conditions of their
inhabitants.
To pay for development projects, many
economically poor nations must borrow money
from developed nations.
This debt creates a perverse incentive to
overexploit their resources.

Economics, Environment,
and Developing Nations
Debt-for-nature exchanges are an innovative
mechanism for addressing the debt issue while
encouraging investment in conservation and
sustainable development.
The conservation organization buys the debt from the
creditor at a discount.
Although the creditor receives only partial payment of
the initial loan, some return is better than a total loss.

Economics, Environment,
and Developing Nations
The debtor country has the debt removed and is
relieved of the huge burden of paying interest on the
debt.
In exchange, the conservation organization requires
the debtor country to spend money on appropriate
conservation and sustainable development projects.

The primary goal of debt-for-nature exchanges

has not been debt reduction but the funding of
natural-resource management investment.

Summary
Risk is the probability that a condition or action will
lead to an injury, damage, or loss.
Risk assessment is the use of facts and
assumptions to estimate the probability of harm to
human health or the environment that may result
from exposures to pollutants or toxic agents.
Cost-benefit analysis is concerned with whether a
policy generates more social benefits than social
costs.

Summary
Criticism of cost-benefit analysis is based on the
question of whether everything has an economic
value.
There is a strong tendency to overexploit and
misuse resources that are shared by all.
Economic policies and concepts, such as supply
and demand and subsidies, play important roles
in environmental decision making.
Recently, several kinds of market-based
approaches have been developed to deal with
the economic costs of environmental problems.

Summary
Sustainable development has been defined as
actions that address the needs of the present
without compromising the ability of future
generations to meet their own needs.
Sustainable development requires choices
based on values.
Economic concepts are also being applied to
debt-laden developing countries.