Monday, May 25, 2009

Econ principles in action

From the World Business Council for Sustainable Development, we learn that fossil fuel emissions have declined for the first time in nearly 3 decades.

Despite a marginally increasing GDP last year, emissions are down due to a combination of forces: high fuel prices causing a decrease in quantity demanded, and lower incomes causing a decrease in demand for just about everything. (note that the priciples lesson"changes/shifts in demand vs. changes in quantity demanded" is a bit blurred by the author of the above piece).

At the start of the economic downturn, especially during all the election hype, I was not optimistic about the prospects for environmental improvements given the state of the economy. From an investment and spending standpoint, when people and governments are concerned about their budgets and incomes, they tend to put environmental concerns on the backburner. Basic discount rate and time value of money theory can be applied here: Lower incomes mean higher discount rates and less spending on goods and services that yield benefits in the future.

A recent Gallup poll backs up this assertion, showing that people are more concerned about the economy (and other issues like healthcare) than they are about the environment, and most people are not making major changes in the way they live despite increased attention to climate change.

But, even if people and governments are not intentionally doing more for the environment, it seems that curtailed market activity handles a good bit of it anyway. Note the obvious tradeoffs here: we buy fewer market goods due to an income effect and as a result can indirectly enjoy more environmental goods. When the economy is booming, people are more apt to want to spend on environmental concerns, but are also consuming more goods and services that harm the environment.

How long will the current trend last?

It depends on a lot of factors of course. The speed of economic recovery, changes in gas prices and the passage (and details) of carbon legislation are the biggies that I can think of. What else?

Given that gas prices are not projected to exceed $2.50 in the short run, if congress does not pass a carbon bill, will consumers be motivated to increase their energy efficiency?


Kendyll Goeman said...

In the introduction to these articles, Dr. Schuhmann states that “when people and governments are concerned about their budget and incomes, they tend to put environmental concerns on the backburner.” Rewinding to lecture 1, we learned about the factors that increase demand. One of those factors is if the commodity is fashionable. In the past few years, being “green” has become fashionable. Reusable grocery bags are a trendy accessory and “It’s not easy being green” slogans are painted across t-shirts in expensive boutiques. The gallop poll reports that 55% of Americans have made minor changes to become “green”. Minor changes undertaken by the majority of society can have exponential effects on the environment and the economy. The USA Government reports that the total consumption of fossil fuels has declined. Congress must pass the carbon bill while consumers are not stressing about prices at the pump. Once incomes increase, the risk of demand increase for fossil fuels is a possibility. Optimistically, as incomes increase, there is also more revenue to spend on slightly more expensive environmentally friendly products. Despite the predictions, only time will tell what Americans decide to spend their paychecks on.

James Marshall said...

Well when income goes down, people will not spend as much. This as we know is basic econ. The affect of social trends like "being green" etc. truely illistrates the streagth of media. If more marketing and "green" propoganda was in the media who knows what could happen. But the second basic part of econ is income will go back up, people will spend again, thus leading to higher emissions, which is why we need to deal with the problems now.