Sustainability theory & policy
Environmental economics
Definition
Environmental economics is the branch of economics that analyses the causes of environmental degradation and the design of policy responses, centred on externalities — unpriced effects of economic activity on third parties — and on instruments such as taxes, charges and tradable permits that internalise those costs. It traces to A.C. Pigou's analysis of divergences between private and social costs.
References
Pigou lineage, externality concept, development of pollution pricing and tradable permits
Overview
What it means
The field supplies the theory behind carbon pricing, pollution taxes and emissions trading (developed through work by Kneese, Crocker and Dales on pollution pricing and tradable rights), as well as non-market valuation of environmental goods and cost-benefit analysis of regulation. It contrasts with ecological economics, which embeds the economy within biophysical limits.
How it is used
Used in policy appraisal, carbon-price design, natural-damage assessment and academic research on environment–economy interactions.
Why it matters
Most market-based environmental policy — including carbon taxes and ETS design — rests on environmental-economics reasoning.