This article investigates environmental economics and ecological economics.  Debates between these two branches of economics lay at the heart of the sustainability equation.

This article will investigate what their commonalities are, what their differences are and what the future holds. But first, a quick explanation of each of these economic niches is in order.

Environmental economics

Environmental economics is a subset of economics that is based on a modified neoclassical economic model. This is a model where the environment is integrated into the economic system, as the image below shows.

It borrows a worldview and terminology from existing theories of economic growth and development. It fully integrates concepts such as welfare and capital from existing theories but applies them to environmental ends.

Environmental economics evaluates development as an accumulation of social capital and economic capital minus the reduction in environmental capital. With this understanding, development can be deemed to be sustainable where total capital stocks do not decline. This assumes a high level of substitutability and complementarity between these different forms of capital. In certain situations, when placed under the microscope, these assumptions can be called into question.

However, environmental economics has done much to raise the profile of the environment. It includes within it, workable out of the box solutions such as market based mechanisms to solve environmental problems.

Ecological economics

Ecological economics is a subset of economics that is based on seeing the human economy as a subsystem of the global ecological system.  As the image below shows, the economy and society are seen to be within the environmental sphere.

It boldly aims to insert the environment into economics and prioritise its management, in an area where it has been traditionally neglected.

One of the strengths of ecological economics is that it doesn’t try and integrate society and the environment into an economic framework where these aspects can be uncomfortable. Instead, ecological economics views material and income flows within an economy as part of the larger transfer of materials and energy within the biosphere.

This can be seen as ecological economics’ greatest strength but is also the source of its greatest vulnerabilities. By choosing to deviate so far from the norm and not make use of the current economic lexicon, ecological economics makes itself prone to isolation from influential decision makers.

Ecological economics evaluates sustainable development as being a condition where the scale of the economy doesn’t exceed the ultimate carrying capacity of the planet. As the recent news broke of Earth Overshoot Day 2017 falling earlier than it ever has, we are clearly a long way from this goal. For more information on Earth Overshoot Day, please visit the link below.

Earth Overshoot Day: Nature’s Budget For The Year Already Used, Study Says

This strong sustainability condition within ecological economics requires that there is no decline in natural capital. Societies can make use of non-renewable resources for economic purposes, provided that other renewable resource stocks rise to compensate for this loss. This is a simple story to convey.

Ecological economics does not regard economic, social and environmental capital as substitutable. Therefore a fall in environmental capital cannot be offset by rises in capital in other areas.

As we can see, ecological economics offers a bold and rigorous vision for what sustainability is and how it can be achieved.

What their commonalities are

Environmental economics and ecological economics try to show where economics and the environment can complement one another. This is evident in areas such as the the use of market based mechanisms and in the management of natural resources.

They can also be used to look for ways in which economic activity conflicts with the environment such as pollution for which the polluter pays no cost.

Environmental economics and ecological economics both provide a framework for identifying pathways that lead to environmental and social problems. They both also provide ways of looking for solutions to these problems.

Both environmental economics and ecological economics make clear the importance of incentives when designing solutions to environmental problems.

What their differences are

Taking a critical approach, it can be argued that ecological economics is more pluralist whereas environmental economics is based predominately on the thinking of neoclassical economics.

There are significant differences between the values that underpin these two schools of thought.

Ecological economics makes the environmental side of the equation more of a priority. It states that if the economy is to be integrated into the natural economy, it must obey the natural laws that govern the biosphere.

Environmental economics has a tendency to prioritise economic health in decision making. It assumes that if the economy is to be integrated into the natural economy, that the natural economy must be governed by the laws of the market system.

Both have their virtues and they make excellent critiques of one another.

What the future holds

Future societies will be faced with many problems. They will be confronted with high and possibly rising levels of pollutants. They will be confronted by resource scarcity as renewable and non-renewable resources are depleted and the world’s population expands. In light of this, environmental and ecological economics are set to grow in importance, possibly even becoming mainstream.

Economic analysis provides a valuable way of understanding human behaviour in the face of scarcity. The future of both of these branches of economics is bright, as societies look towards market based mechanisms to modify economic activity.

By harnessing the power of market forces and looking for the ways in which business interests and environmental interests align, business can play a leading role in the sustainability transition.

What you need to know

This article investigated environmental economics and ecological economics.  The debates between these two branches of economics can be seen as a fault line within sustainability.

Environmental economics and ecological economics both try to illuminate where economics and the environment can work together to solve common problems. They both share similar goals, but are based upon different methodologies and frameworks.

These economic niches differ in the value judgements that they make when integrating the environment into economic decision making.

Both of these ideologies can look forward to a bright future and both have played intrinsic roles in shaping the sustainability debate.

The advantage that environmental economics has is that it is able to convey meaning in monetary terms. Money talks, it is the language of influential decision makers. This is a very considerable advantage.

However, one weakness that environmental economics has is that it is based on the neoclassical framework. It could be argued that it is this framework that is the source of many social, economic and environmental problems.  Is this type of neoclassical thinking likely to be the fountain of solutions? This is an important critique.

The advantage of ecological economics is that it contains within it a simple and easy to understand story. That is, that a society can deplete non-renewable resources, provided they compensate for this loss with rises in other renewable resource stocks.

One weakness of ecological economics is its difficulty in passing on information using usual economic parlance. The language of ecological economics is markedly different from conventional economics.

Overall, deciding which framework is best comes down to personal preferences. Both make valuable contributions to building a better world, both offer better hope for the future than doing nothing or business as usual and both frameworks offer valuable critiques of one another.

Thank you for reading,

By Barnaby Nash

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