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What does economics have to do with the environment?

To what extent are environmental problems economic problems? And if so, how can economic instruments be used to tackle these problems? To answer this, one must understand the nature of an economic problem.

An economic problem is one that has the characteristic of scarcity, and because of it, one has to make choices. Such choices involve trade-offs. These, in turn, depend on what the opportunity costs or, conversely, the foregone gains in making, or not making, a choice are.

One commonly encountered trade-off is when society needs to make a choice between developing a piece of land for commercial use - such as a new shopping mall, housing development project or office space - keeping it in its pristine condition and converting it for recreational and leisure use.

There are costs and benefits in each choice. So there is scarcity in that we have only this piece of land, a resource, and there are many competing uses for it. Society has to make a choice in such a way as to minimise opportunity costs in choosing one option versus another, and maximise the net gains in that choice.

Also, there are many alternative choices that could be made that involve the environment. Land could be used as a landfill, as a source of raw materials for buildings and roads, or retained for those who enjoy hiking, fishing, walks and camping. Here is where economics can greatly assist informed decision-making.


One tool is the use of cost-benefit analysis in weighing up alternatives. This provides a framework involving questions on the merits and demerits of a proposal.

Questions would include topics such as whose benefits and whose costs it accrues to, how we measure these costs and benefits, what the timeframe for the project is, how we treat uncertainty, what the constraints are, and the choice of decision criteria. Such an analysis allows the proposal to be evaluated thoroughly and transparently.

It provides a good dose of rationality in making informed decisions by providing some measure of monetary value to all benefits and costs even if seemingly difficult to measure - like time savings, human lives saved, historical and cultural preservation, clean air and water, aesthetic values and greenery.

By establishing these so-called non-market values, economists create a common denominator for valuing costs and benefits in the same way as when market values are compared. While some benefits and costs are difficult to measure, they are not impossible to measure. All things have their values, and some would be valued more by others, and some less valued.

The job of a cost-benefit analyst is to discover these values, so that both market and non-market items can be compared, such as in saving a historical building versus converting it into a shopping mall.

Today, cost-benefit studies are very much a part of environmental policy assessments and public policy.

Some people, of course, deny the idea that environmental values can be put in monetary terms. But it would be an unwise stance, because such values may tend to get ignored or under-appreciated in making decisions.

Why would decisions arising from a committee be better than a systematic derivation of measured benefits and costs, whether market or non-market? If the environment is to be included in making public choices, then it needs to be measured and valued. Measuring such costs and benefits does not necessarily require a precise value, but a range of estimates is important, and the process transparent.


Take the decision on whether to tunnel the Cross Island MRT line under the Central Catchment Nature Reserve to save costs on construction and reduce travel time, or skirt the nature reserve to reduce potential environmental pollution.

In such a scenario, cost-benefit analysis could be used to evaluate the desirability of the alternatives, by comparing their costs and benefits in social welfare terms.

Although building the MRT line directly across the nature reserve would mean saving about $2 billion, it is necessary to find out if it is worth the impact cost to society.

Therefore, other than the more tangible benefits, it will be helpful to put a value on intangibles like flora, fauna and water contamination.

However, it is not the final decision that is important, but the process of making people think about the trade-offs between economic development and environmental conservation.

Due to the scarcity of resources, it is fundamental to incorporate such analysis in governmental decisions, such as whether a project or programme is worthwhile, and its optimal scale and constraints.


Singapore is often faced with the twin challenges of protecting the environment while strengthening its economy. Air quality has become a major concern. Urbanisation and economic growth have had a negative impact on the environment in terms of particulate air pollution.

Economists address this concern by estimating the economic costs of particulate air pollution (PM10 and PM2.5) on health. They calculate the mortality and morbidity effects of particulate air pollution on health, as well as losses in productivity as a result of ill health.

A 2003 study found that the cost of particulate air pollution in Singapore was estimated at close to 5 per cent of gross domestic product in 1999.

So it would seem that air pollution damage is substantial, and highlights the importance of not ignoring the environment in pursuing economic progress.

Possible policy initiatives include energy conservation and vehicle traffic control. The present World Health Organisation (WHO) guidelines on air quality are much more stringent than before. While the WHO has provided interim levels on air quality for governments to follow, countries including Singapore have to think about additional stringent measures to improve air quality.

This entails more costs in terms of adherence and enforcement. But at the same time, Singapore has to worry about the loss of international competitiveness, as business costs would rise. Ultimately, these costs have to be compared against the benefits of improved health through better air quality.


There are other economic instruments that are helpful in making informed decisions. The recent Budget announcement of a carbon tax to be implemented from next year is another example of economics used to control pollution - in this case, carbon emissions, which contribute to global warming and climate change.

Such carbon pricing incentivises firms to compare their cost of reducing carbon emissions versus paying tax.

Carbon pricing is therefore an efficient economic instrument to change society's behaviour, and to make the fouling of clean air a price to pay.

And yet, to most people, environmental economics seems like a contradiction in terms. This is because environmental damage has, in the past, often been caused by industrialisation and economic growth.

But this has changed over the years so that, increasingly, it is not a zero-sum game, and the use of effective economic tools helps as well.

Take water shortages, which are a constant threat to Asia. If environmental economics were used to factor in the full cost of extracting water and supplying it, then governments can fully cover their costs by charging higher prices.

Such higher prices would discourage waste and further incentivise water conservation technologies. The increased revenues could also be used for water infrastructure.

Designing policy instruments often requires an interdisciplinary effort. Natural sciences, engineering and biology are important to understanding environmental impact and options.

Environmental economists can play their part. Monetary estimates of environmental benefits such as improved health and productivity can be weighed against the costs incurred as a result of improvements, conservation and protection; and alternative options can be compared.

Environmental economics is not a silver bullet that will solve all environmental problems - but it goes a long way to helping us understand the trade-offs as well as the benefits and costs in pursuing a decision.

• Professor Euston Quah is head of economics and professor of environmental economics and cost-benefit analysis at Nanyang Technological University. He is also president of the Economic Society of Singapore.