• Early 1960’s see more interest in conserving and protecting the environment
• A general buildup of concerns on air quality in cities, contaminated water, and pollution (trash)
• Silent Spring - Rachel Carson, published in 1962 about pesticide use
• Cuyahoga River Fire in Ohio
• The Monkey Wrench Gang - Edward Abbey, published in 1975 that encourages eco-terrorism (blowing up dams, sabotaging forestry equipment)

Earthrise by Bill Anders

• EPA is created on December 2, 1970 to protect human health and the environment
• Clean Air Act of 1970: EPA is authorized to set national air quality standards and automobile emissions
• Lead based paint restrictions
• Defines air pollution danger levels
• Begins measuring vehicle fuel efficiency
• Clean Water Act of 1972: EPA is authorized to restore and maintain water ways

• Improvement in Air Quality along with with Economic Growth (Not one or the other)
• Better Air Quality has lead to significant health benefits (reducing risk of premature death and asthma )
• Encouraged environmental technology investment

• Significant improvement in fish and aquatic life in water systems
• Benefits to human health

• In the early 1980’s an Executive Order is issued for EPA to use Benefit-Cost analysis to compare environmental regulations

• Safe Drinking Water Act (SDWA) requires EPA to conduct economic analysis (Benefit-Cost) in the development of new water regulations

When examining environmental regulations or projects it’s necessary to have some decision criteria to determine whether the project should be completed or not.

A common tool in evaluating environmental policies is Benefit-Cost Analysis

• Simple metric to use when determining if a policy should be used or not
• Measure the benefits and costs
• \[ \begin{align*} B & > C \text{ Proceed} \\ B & < C \text{ Discard} \end{align*}\]

• \[ \text{Net Benefits} = B - C\]
  • Shows the magnitude
• \[ \text{Benefit-Cost Ratio} = \frac{B}{C}\]
  • a ratio > 1 indicates a feasible policy, while a ratio < 1 should be rejected
  • Ignores the overall magnitude and net benefit to society

Benefit-Cost Analysis will not always result in the allocative efficient outcome.

• Allocative Efficient = Maximize Net Benefits
• It’s possible that Net Benefits are positive but not allocative efficient.

A general concern about climate change and global warming.

• Observe \(CO_{2}\) concentrations above 400 PPM and rising global temperatures
• Measure the benefits and costs associated with controlling rising temperatures
• Set an optimal warming threshold of 1.5 degrees C as a target

Most environmental problems are dynamic in that they occur over time. We’ll need to compare benefits and costs across time.

The Present Value of Benefits for one particular year at time \(t\) is

\[ \begin{align*} PV(B_{t}) & = \frac{B_{t}-C_{t}}{(1+r)^{t}} \end{align*}\]

In this case we are examining the present value of benefits at a particular point in time.

\[ \begin{align*} NPVB = \sum PV(B_{t}) = \sum \frac{B_{t}-C_{t}}{(1+r)^{t}} \end{align*}\]

For allocative efficiency a policy should maximize the net present value of benefits.

A city wants to examine if it would be feasible to build a new park in town.

• Using an averting expenditure model the city estimates that the park will generate $5,000 in benefits each year for 10 years.
• Initial cost estimates are $12,000 in construction and equipment fees for the first year of production and $3,000 in maintenance and operating costs a year for the next 10 years.
• Assume the Social Discount Rate is 5%

It is important to determine an appropriate discount rate for social policies.

• The social discount rate - The discount factor that should be applied to social policies. This rate should include the opportunity cost of funds that could be used in other public projects.

Carbon Capture Technology

Determining the appropriate discount rate can be somewhat controversial

• Groups that consider climate change to be an issue tend to set a low discount rate suggesting that damages in the future are valued higher
• Groups that consider climate change to not be an issue tend to set a high discount rate suggesting that damages in the future are discounted greater

Clean Air Act

Social Cost of Carbon - A measure of the monetary damages as a result of emitting an additional ton of \(CO_{2}\)

Social Cost of Carbon

Social Cost of Carbon

Future risk from environmental problems requires managing uncertainty

• Uncertainty regarding Benefits and Costs
• Uncertainty regarding social discount rate