Environmental Economics

Updated on February 16, 2024
Article byNanditha Saravanakumar
Reviewed byDheeraj Vaidya, CFA, FRM

What is the Environmental Economics?

Environmental economics is an economic subdiscipline that deals with the economic and financial implications of environmental policies. It is an evolving and widely studies disciplinary area of economics. The study of the macro-economic impacts of environmental policies helps governments make the best decisions for the larger good of society.

The concept of environmental economics focuses on sustainable development, market failure and externalities, valuation of the environment, and strategies for environmental issues. It involves theoretical and empirical approaches to study these areas. Thus, it gives due emphasis to both environment and economy and their correlation with each other.

Key Takeaways

  • Environmental economics is defined as the “field of economics which is concerned with the financial and economic impact of the environmental policies on the economy.”
  • It is no longer restricted to domestic or national boundaries and requires global cooperation for efficient functioning.
  • Environmental economics promotes sustainable development, economic valuation of natural resources, and strategies for stability by addressing issues like externalities and other environmental concerns.
  • Its objective is to balance the sustainability of the environment and economic development for the benefit of society.

Environmental Economics Explained

Environmental Economics

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Environmental economics originated in the 1950s and 60s in the West. It became popular due to the increased concerns and awareness about environmental pollution which resulted from the nineteenth-century industrial revolution.

Its key objective was to understand the correlation between environment and economy. This would help make better decisions that are beneficial to the economy and have a minimal negative environmental impact.

For example, consider the example of highway construction. It will help the logistics and supply chain in the region but leads to habitat loss, pollution, etc. However, if the government could provide another habitat for the wildlife which resembles the existing one, it would cause little damage. Also, the government can plan to lay the roads using plastic waste collected around the country.

It sounds like an attractive proposition. But, of course, some would claim that an artificial habitat for the wildlife would not really compensate for the original one. Yet, it would be better than just claiming the land and letting the animals wander. Hence, it is a strategy that generates minimal impact in the long run.

However, many of the strategies used currently to compensate for the adverse global environmental impacts are considered ineffective by most. These strategies include carbon offsetting, cap and trade, and carbon tax. Let’s look at these in detail:

Current strategies

#1 – Carbon offsetting – The goal here is to offset or compensate for the carbon emissions. Most factories and consumers offset their carbon footprint by planting trees or taking up small-scale farming. A carbon offset credit helps us to measure the magnitude and effectiveness of this trade.

#2 – Cap and trade – In this method, the companies have permission to emit carbon up to a certain limit, after which they need to pay tax for the same. For example, in some countries, companies have permission to emit a maximum of one-ton carbon. However, it does not provide certainty in controlling carbon emissions, and some even worry that it allows big companies to keep polluting the environment.

#3 – Carbon tax – The government taxes the companies based on the amount of carbon produced, in an effort to protect the environment. But unfortunately, the additional price passes on to the consumers, who end up paying for it. Thus, the companies do not usually take the burden.

These measures are mere compensation methods, and the harm is still done. Producing tons of carbon and planting saplings elsewhere or paying an insignificant amount is not the solution. The key is to reduce the production of harmful substances.

Using alternative sources of renewable energy, proper waste management, efficient resource allocation, and conservation of energy and other resources are the need of the hour. As a result, natural resource and environmental economics is an area gaining momentum today.

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Here is the latest news on the Cheniere LNG plant in Texas, the largest exporter of Liquified Natural Gas (LNG) in the United States. It was established in 2018 and has exceeded the permitted emission limits many times. Reuters has recently reported that the Texas Commission on Environmental Quality (TCEQ) has granted extensions in the permissible limit. Reportedly, the plant now emits 353 tons of volatile organic compounds per year, double its original limit. Also, the TCEQ has raised limits on other pollutants by more than 40%.

Scope of Environmental Economics

Environmental economics extends not just domestically but also internationally because issues like global warming, climate change, etc., are not just the problem of a few but affect the world population as a whole. Therefore, attention to these five areas is essential to deal with the issue:

Scope of Environmental Economics

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  1. Sustainable development – It is the development strategy that meets the needs of the present without compromising the needs of the future. Thus, growth is important, but so is the sustainability of the environment.
  2. Externalities – It refers to the benefits and costs arising from commercial activities for which the price is unknown. Hence, they go unnoticed in society but have huge impacts. For example, the natural resources we use for free and the pollution we cause to the environment have no association with a market price.
  3. Market failure – Externalities lead to market failure, which arises when the market doesn’t represent the true cost of a good or resource. This happens because, more often, people take environment and its resources for granted.
  4. Valuation of the environment – The valuation helps assess the worth of natural resources and many aspects of environmental policies before implementing them. This will help in making better decisions in the best interests of all.
  5. Strategies – By considering all the relevant factors, environmental economists try to find solutions for the bigger problem – environmental protection. Some strategies include taxing parties responsible for the pollution, offsetting, etc. But still, there’s a long way to go.


The relevance and importance of environmental economics are obvious today. As technology is fast-moving, the footprint left behind is massive. As the famous principle goes, “We do not inherit the Earth from our ancestors; we borrow it from our descendants” we should not exploit the resources at our disposal.

The significance of environmental economics corresponds to the conservation and preservation of nature and its resources. To ensure the continued existence of life on earth and to guarantee the health and safety of living beings, we need to measure the consequences of our actions.

It is no news that the number of species becoming extinct is increasing at an alarming rate. However, it is important to remember that we are all part of the same system, and it is not until late that there will be no life on earth one day- just poor air, water, and barren land. Realizing this hard truth, the concept of environmental economics is more important than ever. It is a subject of extensive study and research in the present world.

Frequently Asked Questions (FAQs)

What is environmental economics?

Environmental economics definition can be referred to as the study of environmental policies’ economic and financial effects. It evaluates resources and strategies to help implement the best decisions.

What is market failure in environmental economics?

Market failure occurs when an unfair representation of benefits or costs related to the environment and other natural resources arises. For instance, plants, water, air, etc., are given to us for free, and we do not pay nature for these goods.

What are externalities in environmental economics?

Externalities are the cost or benefit of the economic activities which affect other parties and are not represented in the final consumption price. For example, resources like air, water, etc., and damages like pollution are unaccounted for economically.

How ecological economics differs from environmental economics?

Ecological economics is a subdiscipline of ecology which examines the interaction of humans with nature. Environmental economics, on the other hand, is a subdiscipline of economics that studies the environmental impacts of economic decisions.

This has been a guide to Environmental Economics and its definition. We explain its objectives, examples, scope, importance and current strategies. You can learn more from the following articles –

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