Environmental Economy

Introductory Remarks

P.Capros Chairman
School of Electrical and Computing Engineering
Division of Electrical Power
National Technical University of Athens

Evaluation of policies in the domain of the protection of the environment needs to be make use of consistent and rather sophisticated methodological approaches, just as in other areas of general impact such as energy and transport.

Since the pioneering work carried out in the late 60's and early 70's, for example in the IAASA institute in Austria up to the present, the assessment of policies affecting the environment has posed a challenge for the research community, particularly in respect of quantitative economics and operations research.

To achieve the required consistency and to study the complex and interrelated links between the environment and the economy, it was necessary for researchers to put in place complex structures consisting of large databases, large numerical models solved by means of computers and decision-oriented analysis tools.

Because of the complexity of the problems, researchers have adopted the term "integrated assessment" to indicate that their applied tools do indeed address the whole spectrum of links between the environment and the economy and their feedback loops.

In terms of economic theory, the methodologies are based on the theory of economic growth and the market equilibrium representing multiple interacting economic sectors. The same methodology needs to represent the behaviour of the agents involved in the interrelations between the economy and the environment, in particular in terms of their willingness and optimality to consume or pay or invest so as to modify the impacts on the environment. The applied analysis also evaluated policy tools, such as taxes and incentives, market mechanisms, financing and subsidising, command and control and technology change support.

All these policy tools have a specific aim, i.e., to internalise the external costs from environmental degradation in the economic markets. To carry out applied analyses in this domain, complex information and data are needed, for instance, to approximate external costs in terms of numerical valuation. This topic is addressed in the first presentation by Prof. Markandya who has been very active in a series of DG Research projects concerned with externalities valuation, such as the pioneering EXTERNE project led in the '90 by Pierre Valette of the European Commission (Co-Chairman of the session).

The main policy issue has always centred on the role of innovation and technological progress in addressing environmental objectives. Static analyses which did not consider the dynamics of future technological progress overestimated the cost of environmental mitigation policies and thus frequently sent the wrong message to policy makers. Environmental protection objectives and the economic resources mobilised to deal with mitigation act to promote the acceleration of technological progress, which can, furthermore, alleviate the costs of compliance and could probably allow economic growth to take place that would be sustainable both in terms of standard economic-social criteria as well as environmental criteria.

This is exactly the aim of endogenous growth economic models or models with endogenous technological progress and learning. Supported by DG Research, this domain of research has been very active and productive. There are now full-scale applied economic models with such endogenous R&D and technology progress features. The lessons from these analyses have been particularly important for the European Union as they indicate that because of its economic structure, net gains might be obtained from accelerated technological progress. One example of this could be found in the sector of equipment goods which might be enabled by ambitious environmental objectives in the domain of climate change mitigation.

These topics are addressed by Prof. Paul Zagamé, also very active through DG Research in economic modelling for environmental and research policies. Dr.N. Kouvaritakis, has also been heavily involved in the same research field. He has recently made some progress in incorporating uncertainty factors into the analyses in order to evaluate policies, especially R&D priorities, in a more accurate manner. His research involves large-scale numerical models of economy-energy and environment and he is now developing research along the concepts of integrated assessment. The last two speakers address decision and evaluation support issues applied to Mediterranean problems.

A fundamental issue for the economy-environment analysis is to assess policy that is realised within competitive liberalised markets. This is how the economy works and can effectively internalise the environmental externalities. The analysis also shows that such policy issues are most effectively addressed within a broader integrated market rather across segmented country-based markets. This is the example provided by the single European market. I believe that the same project, towards market unification will also facilitate effectiveness for environmental problem solving in the area of Mediterranean and Black Sea.