Macroeconomics and the environment

Environmental economics has traditionally treated the environment as primarily a problem in microeconomics. Concepts such as property rights, externalities and public goods have been used to explain environmental degradation. This has led to proposals for privatization, Pigovian taxes, and cap and trade, and to decision-making aids such as benefit-cost analysis. All are manifestations of microeconomics in which environmental problems are understood as problems of efficiency. This chapter proposes that future research in environmental economics should recognize that environmental degradation is also a problem for macroeconomics. It is a problem of scale not just efficiency, and has ethical dimensions not well captured in microeconomics. It is not sufficient to apply standard macroeconomics to environmental issues as, for example, in integrated assessment models or some of the studies on green growth. It requires additional considerations that are not well captured in most macroeconomic theory and empirical work. These include: biophysical constraints imposed by planetary boundaries; compliance with the laws of thermodynamics; appreciation of emergent phenomena in complex systems; recognition of the prevalence of disequilibrium in economic and natural systems; and integration of money and finance through the requirement that macroeconomic models be stock-flow consistent. In addition, there are non-monetary metrics and performance indicators such as energy return on energy invested (EROI), which the chapter discusses in detail. Such metrics can be incorporated in more suitable macroeconomic frameworks for environmental analysis. These considerations for macroeconomics and the environment lead to a rich research agenda which is described in detail in this chapter.