Besides the inherent environmental problems underdeveloped societies face due to poverty; as countries become more industrialized, shifts in production techniques and levels of output often cause degradation of the surrounding environment. Environmental pollution has existed for centuries but only started to be significant following the industrial revolution in the 19th century. As global GDP has multiplied 21-fold over the last 100 years(1), levels of pollution have subsequently increased along with this. Global carbon emissions have increased more than 16 fold the emissions of the 1900. Since 1970, CO2 emissions have increased by about 90%, with emissions from fossil fuel combustion and industrial processes contributing about 78% of the total greenhouse gas emissions increase from 1970 to 2011(2). Economic growth is therefore strongly correlated with environmental pollution for newly industrialised countries. The challenge facing policymakers worldwide is to set policies which manage the provision and use of environmental resources in a way that promotes constant improvements in prosperity and wellbeing, for current and future generations.
This essay will investigate the policy instruments that are available to policy makers to manage environmental risks, assessing the relative effectiveness of each policy.
Environmental damage and degradation occurs due to the characteristics of naturally occurring resources. Many environmental goods and services are either public goods or partial public goods, and that is a key reason for their under-provision. The non-rival and non-excludable characteristics of public goods mean that markets alone will not be able to provide the socially optimal level. Externalities occur where the use of a resource by one party imposes costs or benefits on others, the impact of which is not factored into the economic decisions of the party. As a result, individuals, firms or governments do not face the full costs/benefits of their actions on society. Externalities that are not counted for in the free market allow for market failure to occur because consumers can free-ride and providers are not able to capture or charge for all the benefits provided by the good. Without an owner of the resource, there is no incentive for any individual to protect it, or for polluters to consider the social cost of their actions. In addition, since efforts to maintain a clean environment benefit even those who do not help fund them, each individual faces a strong temptation to avoid contributing to the conservation of their surroundings. The social costs of polluting exceed the private costs and so the act of polluting contains a negative externality.
The relationship between a country’s GDP and environmental quality can be modelled by the environmental Kuznets curve. The The implied inverted- U relationship between environmental degradation and economic growth can be explained as follows. At low levels of income, individuals are better off using their limited income to meet their basic consumption needs. As agriculture and resource extraction intensify and industrialization takes off, both resource depletion and waste generation accelerate. Therefore, as GDP per capita rises, so does environmental degradation. However, beyond a certain point, increases in GDP per capita lead to reductions in environmental damage. At higher levels of development, structural change towards information-based industries and services, more efficient technologies, and increased demand for environmental quality result in leveling-off and a steady decline of environmental degradation (Panayotou 1993). Recent evaluations estimate the turning point at $34,000. According to these studies, most moderately developed countries can expect to reach their pollution peak by the middle of this century however only 10% are approaching that point now and moderately developed countries’ emissions will not return to current levels before the end of the 21st century (Dutt (2009), among others). The degree of Environmental degradation considering income per capita can be observed on figure 1 below.