Economics and the environment

Readers Question: Is it possible to construct the economic system so that does not rely on expanded growth which as we all know, is damaging the environment? causing pollution e.t.c.

Photo: Takver
Photo: Takver

Could we have a society without economic growth? or as economists might prefer to answer – Can we have environmentally sustainable economic growth?

To promote an economic system without economic growth isn’t necessary. It is possible to have economic growth (increased output and living standards) whilst at the same time improving the environment we live in. But, this requires a much more conscious decision to place the environment as a primary economic objective. If you leave economic growth to the free market, inevitably we will see economic growth leading to environmental problems.

One of the great challenges of modern economics is to protect the environment. Part of the motivation is a simple moral case for being good guardians of the earth. But (fortunately for economics) there is a strong case of intrinsic self-interest. Protecting the environment nearly always makes good economic sense – as long as we look at issues in the long-term and not just from a short-term / selfish perspective.

The environmental costs of economic growth

Rapid economic growth combined with a rapid population growth has placed great stress on the environment. If we are not careful – damage to the environment will threaten future living standards. For example:

  • Air/land/water pollution causes health problems and can damage the productivity of land and seas.
  • Global warming leads to rising sea levels,  volatile weather patterns and could cause significant economic costs
  • Deforestation damages soil and makes areas more prone to draught.
  • Economic growth leads to resource depletion and loss of biodiversity
  • Creation of waste and toxins.


The past 50 years has seen a 60% increase in CO2 emissions – a product of economic growth.

What economic system could help promote environment?

The first essential aspect is for society and governments to recognise all the external costs and external benefits of the environment.

External costs from pollution
External costs from pollution

If we leave it to a free market, consumers and firms will ignore the external costs of their actions and we will get overconsumption, environmental costs – and a decline in economic welfare.


We need to put a monetary value on the cost of pollution / environmental damage and make sure that is reflected in the price people pay (e.g. tax on negative externalities). This will mean the cost of burning fossil fuels will increase – reducing demand. The biggest problem is making sure that we actually include all environmental costs in the price of goods and services we use.

For example, if burning fossil fuels is causing global warming and sea levels to rise. The effect could be devastating to future generations. In this situation, we are underestimating the external cost of this pollution. We are not paying the full social cost, and in the long-term we are failing to correctly price goods.

The long-term view

A difficulty is that we are used to pricing the cost of a good in terms of present value. Many environmental problems are cumulative and the costs are to future generations and people elsewhere in the world. Because we ignore these future costs, we are underestimating the potential social cost of current actions.

Another difficulty in calculating future costs is that we don’t know for certain. There is an element of uncertainty. This means we have to deal with probabilities. However, if we are dealing with the environment, there is a good case for being risk-averse and not gambling on the hope that global warming will be less damaging than some scientists predict. Reducing CO2 emissions can be done with only marginal cost to current consumers. But, damaging the environment in the long-term could lead to a devastating high cost to future consumers.

Positive technology

On the other hand, we need to encourage the production and consumption of technologies which don’t damage the environment.

To give a simplistic example – we could increase tax on petrol (which causes pollution). Then use this tax revenue to subsidise solar powered/electric cars which don’t pollute.

This will ensure that our society seeks to reduce the consumption of goods which are damaging to the environment. We can enjoy the same level of transport, but it will be supported by a different energy source which doesn’t damage the environment.

People often ask how economic growth can help the environment. Technology is the key. If we develop technology which creates a more efficient source of energy, but without pollution – this would enable higher output, and reduce pollution levels.

e.g. a steam train caused high pollution levels. An electric train powered by solar powered energy plants can go much faster and doesn’t create pollution – that is economic growth and less pollution.

Limits of tax and subsidy

However, the use of tax and subsidy is not enough to deal with all environmental problems. For example, if we take the problem of deforestation of land in South America / Africa, a different response is needed.

For example, it may require governments to actually ban the process. It also requires a strong degree of international co-operation. Developing countries may feel a strong economic need to cut down forests or mine precious metals. However, it would be in the interest of the whole world to protect forests. Therefore, there may be a need for transfers to very poor countries in return for adopting less environmental damaging operations. Alternatively, it may just be a case of the need to educate about long-term sustainable practices.

As well as government action, there needs to be a change in consumer behaviour. A willingness to shift consumption patterns and be willing to pay higher prices and/or avoid consumption of certain products. e.g. only buy in season fruit, adopt a vegetarian diet. People want to protect the environment, but are we willing to pay an extra 10% increase in fuel bills?

Global nature of environmental issues

Global warming is something that affects every country, but some more than others – for example, Pacific islands are more vulnerable to rising sea levels. To reduce CO2 emissions requires global commitments. If one small country reduces pollution, it will make little difference unless the biggest polluters make a commitment to change. The danger is that countries will feel there is a free rider problem – wait for other countries to reduce pollution. Unless global agreements can be made, the problems can’t be solved.

list countries CO2

It is also the richest countries which are the highest per capita, polluters. The rich countries can most afford to adopt more environmentally friendly practices. It will be particularly important how China and India respond (a combined population of 2.5 billion)


See: List of CO2 emissions per capita



A big issue is technology.  At the moment we rely on technology which is often damaging to the environment. For example, we still rely on coal energy for power stations. Improvements in the technology of renewable energy, such as solar power will make it more attractive to switch. There is a strong case for governments to subsidise the development of technological alternatives to speed up the process. This would make it more attractive to switch.

Using desalination water plants may enable countries to reduce reliance on natural rivers which could damage the environment.


The good news is that protecting the environment is compatible with economic growth and rising living standards. The challenge is to be willing to see a major increase in prices of energy to create that financial incentive to switch.

The fundamental challenge is adequately valuing environmental costs and benefits. If we can place the correct value on promoting growth which is environmentally sustainable


2 thoughts on “Economics and the environment”

  1. It was very helpful to me as i have understood many of the things concerning he environment and the economy,it is true that when talking about the economy it is important to take into consideraton the environmental sphere because these things are inter-twinned.

  2. Switching to a more environment-friendly economic system is somewhat difficult for a developing country such as the Philippines. Maybe developed countries should apply those environmental protection acts first since they are much capable and they produce more CO2 emissions, use more resources per capita.

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