Economic Effect of Environmental Degradation - Case Study Example

Economic Effect of Environmental Degradation Case Study Environmental degradation has motivated environmental regulations. However, these environmental regulations are both an advantage and disadvantage to the economy. Some are claiming that environmental regulation weakens economic development, according to the findings of studies indicating that environment protection programs slow down GDP growth rates. Based on traditional statistical significance test, there is no significant correlation between state economic growth and state environmental regulation in either booming or recessive economic periods. In view of this, environmental nonintervention cannot be presumed to generate quantifiable economic gains at the state level. On the one hand tough environmental regulation appears to be related to greater economic growth during times of national economic boom. Tough environmental regulation, on the other hand, appears to be related to poorer economic performance during times of depression. This case study discusses the economic impact of environmental regulations in relation to the Californian case, which is a state known for its rigid environmental policies. Introduction Environmental regulation is the immediate outcome of environmental degradation. And, today, environmental regulation has played a major role in protecting the environment. However, some are claiming that environmental regulation weakens economic development, according to the findings of studies indicating that environment protection programs slow down GDP growth rates. A thorough examination of the Clean Air Act, for instance, showed that the GNP of the United States in 1990 lowered to 1% because of the environmental policy (Hussen, 2012, 111). Similarly, studies on the economic effect of key environmental regulations in Europe shows a combined GDP drop of roughly 0.2 percent. The aggregate macroeconomic effects of environmental policies are calculated by means of computable general equilibrium (CGE) approaches (Hussen, 2012, 111-2). This case study discusses the economic impact of environmental regulations in relation to the Californian case. Environmental Regulations: Boon or Bane to Economic Performance? Approaches like CGE enable economists to identify how effects in a particular economic sector extend to income and employment in other sectors. The approaches comprise feedback loops to structure longer-range effects, especially the way capital investments behave in response to changes in supply and demand in various sectors. Yet, the outcomes of CGE approaches should be analyzed with care (Hussen, 2012, 110): CGE models have to predict reduced economic growth because of environmental compliance. After all, pollution control costs in these models are treated as extra expenditures necessary to produce the same level of valued output… The outcome is implicit in how the model is constructed. So this finding isn’t necessarily a complete picture for what people and policymakers want to know about real world regulation, where a pollution control sector emerges as part of the economy, and helps to produce environmental protection, which is also an ‘output’ with value. CGE approaches do not calculate the gains from regulation, especially those that do not surface in markets. CGE approaches are also unable to represent positive feedback loops like the rise in the rate of productivity as detrimental health effects decrease with higher water and air quality (Yan & Carr, 2013). Hence, although there seems to be a slight adverse effect of environmental regulation on economic development as usually assessed, there is a need for a more thorough calculation and assessment to find out its impact on social welfare (Spatareanu, 2007). Based on traditional statistical significance test, there is no significant correlation between state economic growth and state environmental regulation in either booming or recessive economic periods. In view of this, environmental nonintervention cannot be presumed to generate quantifiable economic gains at the state level. Although individual industries, businesses, and companies may acquire particular gains, the general effect on the economy at the state level will not be obvious. This finding is in line with earlier studies by other researchers (Bennett, 1999). On the one hand tough environmental regulation appears to be related to greater economic growth during times of national economic boom. Tough environmental regulation, on the other hand, appears to be related to poorer economic performance during times of depression. Hence, there are three factors that must be taken into consideration (Thomas, 2009). First, it is essential to mention that the lack of balance between employment and the environment at the state or national level does not imply that environmental policies do not bring about reduction in rates of employment and shutting down of businesses at local levels. Leading cases of such are in small communities in the U.S. that depend on jobs in the paper, mining, and textile businesses for their means of support. The media coverage of business closures and the consequent increase in the number of jobless in these communities tell the public that environmental policies can have severe unfavorable effects on the quality of life and livelihoods of the people (Thomas, 2009). Occurrences of this kind, depending on how the events are covered by the media, have the ability to create psychological blemishes on the public’s thought about the economic disadvantages of environmental regulation. Second, environmental policies involve forcing private businesses to implement steps that they would have habitually refuse to do. Moreover, environmental policies, irrespective of their economic values, have the consequence of broadening the influence of government in the private sector. These alleged characteristics of environmental policies are frequently raised by certain interest groups, like think tanks, lobbyists, or industries, to bolster and promote the adverse public view of environmental policies, irrespective of their values (Konisky, 2008). Third, in the U.S. there is considerable distrust in the capacity of the government to make steps that would really enhance economic development. Hence, it is not unimaginable to think that, in the mind of the public, the issue of economic failure—the actual bases of environmental policies—could be overshadowed by a similarly vital concern for the unsuccessful governmental measures (Yan & Carr, 2013). Hence, considering all of these three factors, it is easy to understand why the story that environmental regulation involves job loss is still manifested in public opinion. This is still factual in spite of the reformative and generally favorable effects of environmental policy on the larger society. A good case in point of these diverse attitude toward environmental policies is California, which is a state recognized for its huge expenditures on environmental regulations and plentiful liberal environmental programs (Thomas, 2009). California is not only in the midst of an economic depression, but also a serious problem in government funding. The expenditure of the state is persistently 20% beyond its revenue (Hussen, 2012, 112). However, despite these problems, one sector of the Californian government has progressed continuously—the state is consistently developing more and more rigid environmental policies. At present, California is putting into effect one of the most forceful climate change policies in the world—an attempt that may basically change the quality of life of its people. The state is improving the quality of its air and water through rigorous regulations that require sizeable amount of funding (Thomas, 2009). Still, despite the massive cost to the economy, California keeps on moving forward on different environmental domains, from everglades to species in danger of extinction to coastal management. The issue that springs from these factors is not about living standards or environmental regulation; it is an issue about economic growth. For many years, environmentalists and leftists have claimed that California’s rigid environmental policies have in fact raised economic development, and such claims has become more popular and more widely accepted in the recent years. At times this has been called ‘technology-forcing regulation’ (Hussen, 2012, 112) or policies that forces the private economic sector to develop new, greener technologies that will not merely protect or enhance the environment, but also produce entirely new industries and enterprises that will restore the economy. Over time, environmental policies have reformed the economy of California in numerous ways, yet it is not consistently definite that the outcome has been favorable. For instance, regulations on oil drilling have resulted in reduced drilling and more environmentally responsible drilling when it takes place—yet the decrease in the production of oil has furthered the continuous dependence of the United States on foreign oil (Thomas, 2009). Likewise, policies against air pollution have improved the quality of air, yet they have accomplished this by pushing environmentally unfriendly companies to Mexico, Nevada, and Arizona (Thomas, 2009). The quality of air in California is higher, yet it is not definite that this has a net gain either for the economy of California or the global environment. Still, it cannot be refuted that regulation-motivated reforms encourage more environmentally friendly and advanced economy (Hussen, 2012). Even though environmental regulation is generally publicized as issues of pressuring companies to be more environmentally responsible or making various individual decisions, the disheartening reality is that it is largely an issue of capital investment. Conclusions The impact of environmental regulations, which are an immediate response to growing environmental degradation, on economic performance remains uncertain. According to empirical evidence, as discussed in the paper, especially with regard to GDP, environmental regulations are adverse to economic performance. But there are also contrary findings that show how environmental policies encourage more environmentally responsible businesses and industries, such as in California. However, there are two areas that still require greater attention from academics and other experts. First is the economic models used in quantifying economic gains from environmental regulations. For instance, the CGE approaches are not able to measure the benefits of environmental policies for the economy. Second is the development of environmental policies that are suitable to the specific economic condition of an area. The case of California is a good starting point. References Bennett, P. (1999). Governing environmental risk: regulation, insurance and moral economy. Progress in Human Geography, 23(2), 189-208. Hussen, A. (2012). Principles of Environmental Economics and Sustainability: An Integrated Economic and Ecological Approach. UK: Routledge. Konisky, D. (2008). Bureaucratic and Public Attitudes toward Environmental Regulation and the Economy. State and Local Government Review, 40(3), 139-149. Spatareanu, M. (2007). Searching for Pollution Havens: The Impact of Environmental Regulations on Foreign Direct Investment. The Journal of Environment & Development, 16(2), 161-182. Thomas, W. (2009). Do Environmental Regulations Impede Economic Growth? A Case Study of the Metal Finishing Industry in the South Coast Basin of Southern California. Economic Development Quarterly, 23(4), 329-341. Yan, W. & Carr, D. (2013). Federal Environmental Regulation Impacts on Local Economic Growth and Stability. Economic Development Quarterly, 27(3), 179-192. Read More