ECONOMICS AND THE
URBAN ENVIRONMENT
Sabina L. Shaikh, Ph.D.
University of Chicago
Introduction
University of Chicago
 Program on Global Environment, Public Policy
 Environment, Agriculture and Food Group
Current Research
 Mekong River Ecosystem Services
 Markets for Urban Sustainability
 Green Hospitality (restaurants, sporting
events)
Topics for Economics and the Urban
Environment
1. Human impact on the urban environment
2. How humans value the environment
3. How governments determine environmental
objectives
4. How citizens “demand” environmental
protection
5. How businesses engage in environmental
protection
6. How countries and cities induce environmental
protection
7. Case Study: Stormwater and Green
Infrastructure
HUMAN IMPACT ON
THE URBAN
ENVIRONMENT
Projections for Urban Population Growth
Cities and the Environment
 55% of the world’s population live in Cities
 Projected to increase to 70% by 2050 (World
Bank)
 Urban population expected to increase by
2.5 billion in 2050
 Challenges
 Opportunities
Ecosystem Services
 Ecosystem Services are the benefits humans
receive from nature
 Types of Ecosystem Services
 Provisioning: Water, Fish, Timber, Biomass Fuels,
Agriculture
 Regulating: Air & water purification, flood & drought
mitigation, erosion control, pollination of crops,
climate control, biodiversity
 Cultural: Recreation, Ecotourism, Views, Educational,
Religious
Urban Ecosystem
Services
Example: Wetland Ecosystem Services
Source: Greenplanetethics.com
HOW HUMANS VALUE
THE ENVIRONMENT
Value of Ecosystem Services
 Consumptive value
 Agricultural output including food, fish, timber
 Water for consumptive use
 Tourism
 Environmental quality and human health
 Clean air
 Potable water
 Disturbance prevention
 Recreational use
 Fishing, hunting, camping
 Beaches, swimming, scuba diving
 Views, aesthetics
GOVERNMENTS AND
ENVIRONMENTAL
OBJECTIVES
Setting Environmental Objectives
 Governmental control versus voluntary action
 Economic rationale for government
intervention: Market failure
 Basis for setting environmental targets
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Human health
Existing environmental laws
Political will
Benefits and Costs, Demand and Supply
Question: Is economics a basis for setting environmental targets or a
tool for evaluating methods to achieve targets?
Benefits and Costs of Environmental
Action
 Benefit-Cost Analysis (BCA) is widely used in
U.S. Environmental Policy
 Steps to BCA
1. Identifying changes in environmental quality
2. Measuring effect of change in environmental quality
3. Identifying relationship of environment to human
activity
4. Quantifying human value of changes in environment
5. Monetizing value
6. Considering the distribution of benefits and costs
Measuring Benefits and Costs
1. Market Values
 Purchases related to environmental quality
 Activity related to environmental quality
e.g. School closings, highway closures
2. Valuation of Human Health Effects
 Productivity
 Costs of illness
 Lives Saved = Value of a “statistical life”
3. Valuation of Changes in Ecosystem Services
 Value of ecosystem services
− Market value of crops, fishery catch rates, timber harvests
− Avoided costs, replacement costs of ecosystem services such as
water filtration, climate regulation, disturbance prevention
Source: U.S. EPA
HOW CITIZENS
DEMAND
ENVIRONMENTAL
PROTECTION
Demand for Environmental Protection
 Observed Behavior
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Purchases of mitigating goods and services
Property purchases
Recreation activity
Environmental activity (e.g. recycling, hybrid cars)
Boycotts, protests?
 Stated Preference
 Experiments
 What affects the demand for environmental
protection?
HOW BUSINESSES
ENGAGE IN
ENVIRONMENTAL
PROTECTION
Business Leadership in Environmental
Protection
 Corporate Social Responsibility
 Global Reporting Initiative
 Corporate Ecosystem Services Review (World Resources
Institute)
 Rationale



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Attract talent, employees
Customers, shareholders, reputation
Less environmental and financial risk
Cost savings and business opportunity
Get ahead and influence regulation
“Fortune 500 companies take center stage at U.N. climate
summit” Forbes Magazine 2014
HOW TO INDUCE
ENVIRONMENTAL
PROTECTION
Designing Effective Environmental Policy
How to get people to protect the environment and provide
ecosystem services?
“Sticks” and “Carrots”
 Stick: Mandate Pollution Levels and Natural Resource Use
 Can be effective in achieving environmental protection
 Can prohibit economic growth and activity
 Political opposition
 Carrot: Incentives and Markets for Environmental
Protection
 Goal is to lower cost, not necessarily to induce action
 Need a pollution requirement in place (property rights)
 Benefits must outweigh costs
 Need ways to capture benefits
Incentive and Market-based Environmental Policy
Examples
 Pollution Trading Markets
 Energy Efficiency Rebates
 Renewable Energy Grants
 Fuel Taxes
 Hybrid Car Tax Credits
 Carpool Lanes
 Car trade ins
 Conservation Reserve Program
 Payments for Ecosystem Services: Ranchlands
 Water Rights Trading
 Carbon Markets/Taxes
Not all of these have been successful
Creating Environmental Markets
 Creating a vested interest
 Privatization and Property Rights
 Incentives and Opportunities
 Creating a structure for mutually-beneficial
trades
 Uncovering value in the market
 Generating new revenue streams
 Creating viable, sustainable mechanisms
 Progress and Challenges
CASE STUDY:
STORMWATER
MANAGEMENT AND
GREEN
INFRASTRUCTURE
Urban
Pollution
Problem:
Stormwater
Runoff
Source: longwoodfl.org
Economics of Stormwater
Management
 Great Lakes
− 84% of North America's surface fresh water
− 21% of the world's supply of surface fresh water
 Combined Sewer System
 Manages Stormwater and Wastewater
 Flooding and Urban run off as economic
problems
Chicago Area
Waterway
System



Combined Sewer
Overflows
Metropolitan Water
Reclamation District
(MWRD) of Greater
Chicago
EPA “Consent
Decree” requires
greater stormwater
capacity and green
infrastructure
City of Chicago
Green Infrastructure as an Ecosystem
Service
Source: Montgomery County, MD
Case Study: Economics of Stormwater
Management
 Is stormwater management a public good?
 Can incentives and markets be used to
induce individual action?
 Can individual action make a difference?
 Can incentives and markets be designed to
induce community-based management?
 Should stormwater management be
mandated?
QUESTIONS?
Thank you!
sabina@uchicago.edu
eaf.uchicago.edu