Economic Impacts

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The economic impact of environmental protection can be studied in terms of the direct cost of cleanup, the potential loss of jobs, and the costs associated with monopoly power. Engineering cost estimates of environmental protection in the United States have been steadily increasing from 1% of the GNP in the early 1970s to 2.8% of the GNP ($224 billion) in 2000, much of which is for improving water quality and cleanup of old hazardous solid waste sites. The impact of environmental protection on employment has been minimal at best. Despite what many “pro-business” activists claim, environmental regulations have not resulted in a large number of plant shutdowns and massive job losses. In fact, labor statistics show that although some workers were forced to retrain and change jobs, environmental protection has probably led to a small net gain in US employment (1). In fact, in the past quarter of a century, the majority of US jobs lost have been due to increased competition from newly emerged industrial powerhouses like China, Korea, India, and Brazil, or due to the transfer of much of the US manufacturing capability offshore, where labor is cheaper and taxes are lower. In the few cases that there has been some loss of income due to environmental regulation, the utility derived from a cleaner environment compensated for the drop in utility from additional material goods.

Probably the most direct impact of environmental protection has been the consolidation of major environmental firms and an increase in the monopoly power that these firms exercise. The main reason for these mergers is that the cost of equipment required for cleanup is quite high and cannot be afforded by many small businesses. As we discussed in the Economics of Energy, monopolies may not be as efficient as a competitive market and prices charged are somewhat higher.

Question: The costs for many of new and clean energy technologies such as photovoltaic and wind have already dropped below the social cost of older and polluting technologies such as coal and oil. Why haven’t these technologies been promoted more aggressively or been adopted by the public in great volume? Answer: It is true that renewable energy technologies are the socially preferred option; however, their private costs are still above those of the non-renewable energy sources. Unless they have a substantial profit advantage, no government promotion or subsidy can make clean technologies succeed. It should be noted that being competitive in the market is not enough for public transition to cleaner technologies. For example, in many instances it can be shown that it makes economic sense to switch from electric and gas heating to solar heating and geothermal heat pumps. Nonetheless, many people are reluctant to invest in upfront costs to install new technologies because they lack knowledge about advantages of clean technologies and have a strong perception that oil and coal are well-established, mature, and proven technologies. Clean technologies have another major barrier to overcome. That is, they are offering consumers a service that they already have. Furthermore, unless services are offered by financially secure, well-established firms, they often do not have necessary resources to counteract advertising campaigns by existing firms. In the absence of such incentives it is reasonable to assume that, without government action (regulation and elimination of subsidies to conventional technologies), clean technologies will, for now, serve only niche markets.

References

(1)Goodstein, E., “The Trade-Off Myth: Fact and Fiction about Jobs and the Environment,” Washington, DC: Island Press, 1999.

(2) Toossi Reza, "Energy and the Environment:Sources, technologies, and impacts", Verve Publishers, 2005

Further Reading

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