Plenary Session

Saturday 30 June 2012, 11:30 - 12:30

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V. Kerry Smith, Arizona State University, USA

Chaired by Bengt Kriström, Centre for Environmental & Resource Economics, Umeå University
Room VENCOVSKEHO AULA, video transmitted to RB 101
VALUING NATURE IN A GENERAL EQUILIBRIUM

Economic analysis of environmental policies emerged about fifty years ago. Research in this area was regarded as narrow and specialized, with limited relevance to other fields in economics. No one could make that claim today. While the progress in non-market valuation methods, the design of policy instruments, and a host of other research areas in environmental economics has been dramatic, the analysis of environmental problems remains detached from main stream economics. It is assumed that analyses undertaken can be separated from the rest of the economy, especially in macro-economic analyses. Economic conditions affect the state of environmental resources but there is limited recognition of feedback effects at the scale of aggregate economies.

Changing this perspective poses significant challenges. This presentation uses a simple general equilibrium analysis of the effects of air pollution on ecosystem services to identify three areas confounding progress in integrating environmental economics with mainstream economic analysis. First, we do not know how to measure environmental services. Crude proxy variables are norm. This is important because they can be manipulated in ways that change the tradeoff measures used to evaluate their economic importance. Second, the spatial scales for ecosystems and economic systems are not aligned. This disparity implies that the decisions to model one system consistently run a risk of misrepresenting the other. Moreover the implications of discrepancies in these types of scale decisions, as influences to the results from linked ecological and economic models, have not been systematically evaluated. Finally, we don't know how to include environmental services in the primitives used to define fundamental economic relationships. Differences between substitution versus complementarity relationships between different ecosystem services as well as with market goods in contributing to these relationships create large differences in outcomes. This finding is especially relevant to general equilibrium modeling of the welfare effects of major policies that impact environmental resources. Addressing these issues requires that a general equilibrium perspective guide research on non-market valuation, policy evaluation, and the design of instruments for policy.

To develop the motivation for the analysis results from different approaches to developing general equilibrium analyses will be discussed. Specific focus is given to the effects of changes in the characterization of ecosystem services for assessments of the economic implications of policies that are responsible for enhancing these environmental services. The empirical findings are derived primarily from considering alternative modeling assumptions within a linked computable general equilibrium model with three different types of ecosystem services affected by two types of air pollution.
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