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June 2003
2002-2003
Student Essay Contest
For the 15th consecutive year, the Federal Reserve Bank
of Minneapolis held its Student Essay Contest, open to all high school
juniors and seniors in the Ninth Federal Reserve District. Nearly 200
essays, split evenly between submissions from standard and advanced
economics classes, were received from four district states. The essay
selected as the overall winner is published here.
Fifteen finalists in each division received a $100 U.S. savings bond.
In addition, first- and second-place winners from each division were
selected; the two second-place winners each received an additional $200
savings bond, and the two first-place winners an additional $400 savings
bond. The overall winner also was awarded a paid summer internship at
the Minneapolis Fed.
Essay Topic
Select a major problem concerning the ecological environment.
Using economic analysis, show how this problem could be addressed.
Throughout history, people have improved their standard of living by
consuming natural resources. Producers transform materials like timber,
minerals and oil into products that increase human efficiency and comfort.
However, the benefits of production are not without a price, for the
consumption of natural resources also imposes costs on the ecological
environment. These costs—whether they be the loss of animal habitat,
the rapid erosion of hillsides or the pollution of our land, air and
water—create a trade-off with the benefits of production.
Using Economics to Cool Down the
Environment
Marissa Benson
Bloomington Jefferson High School
Bloomington, Minn.
“Global climate change needs global action now. The
alarm bells ought to be ringing in every capital of the world”
(Greenslade). This quotation from British Environment Secretary John
Gummer in 1996 demonstrates the importance of the environmental problem
of global warming. Over the past century, the surface of the earth has
been getting warmer and this climate change has been accelerating (Watson).
Models have suggested that temperatures will rise between 2.5 and 10.4
degrees Fahrenheit over the next century (Heller). Since not everyone
agrees with these models, it is important for our leaders and the public
to be educated on this subject so they can get the facts and recognize
the urgency and extent of the changes which are needed (“Issues”).
Experts say global warming has caused thinning of the earth's polar
ice caps, retreating glaciers, rising sea levels and changing growing
seasons (“Melting”). These changes will impact the world's
population and have serious consequences for the world's economies.
To decide what to do to reduce the effects of global warming, it is
necessary to analyze the benefits of policies that may be enacted and
the costs of such actions, and then balance these costs and benefits.
Global warming will have varying effects on different countries' economies,
depending upon the extent of the rise in temperature, and the original
climate and development stage of each country (Moore). Much of the harmful
impact will take place in the tropics and subtropics and be borne by
the rural poor (Heller). In these regions, rising temperatures will
lower agricultural productivity (due to many factors, including more
floods and more extreme weather), which will increase the devastation
from malnutrition and create a higher likelihood of disease (Heller).
In addition, the lower productivity in the agricultural sector of developing
countries will have a devastating impact on their economies, which rely
on agriculture for about one-third of their gross domestic product and
employ about 70 percent of these countries' populations (Amacher, p.
428).
While many countries would be negatively affected, others may actually
benefit from slight increases in temperature. Some studies show that
the United States would benefit from modest increases in temperature
caused by global warning (Moore). Health costs would fall an estimated
$21.7 billion in 1994 dollars from a 4.5 degree Fahrenheit warmer climate,
mainly due to fewer cold-related illnesses (Moore). Other benefits would
include a longer growing season, lower heating bills, fewer accidents
from driving on icy roads and less money spent on clothes (Moore). However,
these benefits would only occur at modest temperature increases and
apply only to the United States, as well as other middle-latitude industrial
countries (Moore). Despite these benefits, problems in other countries
would very likely carry over and negatively impact the United States
and other countries through the world market.
Due to the international problems of global warming, an agreement, the
Kyoto Protocol, was enacted by the industrial nations in 1997 to limit
the emission of greenhouse gases to the level in 1990 (Heller). However,
not all of the nations have adhered to the agreement and the United
States never ratified it, so there is a lot of work left to be done
(“Bush”). According to the Kyoto Protocol, the United States
would have to emit 550 million metric tons less of carbon dioxide by
the year 2010 ("Issues"). Most of these emissions are inherent
in the creation of energy by burning fossil fuels (“Issues”).
Therefore, these cuts mean changes in the energy sector, which would
have many ramifications throughout the economy (“Issues”).
One possible way of cutting emissions is by creating a tax on fossil
fuels. In the United States, it is projected that a carbon tax of $150
per ton would be needed to meet the goal in the Kyoto agreement (“Issues”).
This tax would constitute a 40 percent increase in gas and electricity
prices, which would have detrimental economic impacts and would ultimately
be paid for by consumers (“Issues”). This would be very difficult
to implement politically.
Another method of reducing greenhouse emissions is a national commitment
to conserving energy and developing energy-efficient technology (“Issues”).
A study by the Energy Department declares that this option could reduce
emissions to the 1990 level within 13 years (“Issues”). However,
for firms and households to comply with such standards, a tax or an
economic incentive would be necessary. Policies such as a conversion
to natural gas would not be plausible without these incentives because
business leaders would disapprove of them on the basis of short-term
costs (“Issues”).
Tradable permits are another proposed method of reducing greenhouse
emissions. This would establish a limit on emissions and allot reasonable
emission amounts to manufacturers (O'Brien). These firms may buy or
sell their permits if there is an economic incentive to do so (O'Brien).
Studies have shown this method to be successful in reducing the emissions
and doing so cost-effectively, by each firm comparing their own marginal
costs and marginal benefits when making decisions regarding their greenhouse
emissions and tradable permits (O'Brien).
While the short-term costs of reducing greenhouse emissions may be high,
the long-term costs of doing nothing may be even higher. Alan Blinder,
an economics professor at Princeton University, said, “[Reducing
reliance on fossil fuels] is an insurance policy against climatic disruptions
that could severely damage the world's economies” (“Issues”).
Policies to combat the greenhouse effect are necessary, but how far
should they be carried and when should they begin? The answer will most
likely be different in every country.
When deciding how each nation should deal with the greenhouse effect,
policymakers must have accurate data and look at the potential vulnerability
of their country. Countries that depend on agriculture, livestock and
forestry will be the hardest hit and must take a different stand on
the issue than developed countries, such as the United States (Heller).
Every country should look at the marginal cost of reducing their emissions
and compare that with the marginal benefit of such policies. The marginal
benefit is preserving the social and economic aspects of the country
and avoiding the estimated costs of not taking any action. In the comparison,
it is important to factor in the costs and benefits in terms of lives
saved by pursuing these policies and the overall effect on people. Wherever
the marginal costs and benefits are equal, the greatest benefit will
occur at the least cost. This is the extent to which each country should
deal with global warming.
Developing countries must not only create a cushion for future problems
by limiting their debt or creating contingency funds, but must also
help in the long-term process of limiting greenhouse emissions (Heller).
While the reliance on agriculture must be decreased in these countries,
their governments must also create incentives to reduce greenhouse emissions
as the nations become industrialized. Since the developing countries
do not currently contribute much to the greenhouse emissions, about
18.5 percent in 1992, their greatest contribution to ending this problem
will be seen in the long run as they become industrialized (Gordon).
This will affect the fiscal policies enacted by such countries, possibly
causing less of their budget to be used for public investment and resulting
in less short-term economic growth.
Because global warming will affect the world economy, it is essential
that industrialized nations and the international community help with
this problem. Each country should contribute to the point where the
marginal costs and marginal benefits are equal. Once this is determined,
it is up to the governments to create the correct economic incentives
for the industries within their nation. People with the power to make
changes to reduce greenhouse emissions must act quickly and effectively
to escape the devastating impact of global warming on the world economy
and keep the environment from becoming permanently damaged.
Read other winning essays
and learn more about the essay contest
and other economic education programs.
Bibliography
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