9 - Applying Economic Principles to Environmental Policy

Summary

The environment has often been neglected in the early stages of growth, leaving air thick with particulates and water contaminated with effluents. We believe this is a mistake, and one that is extremely expensive to fix in the future.

The Growth Report 2008: Strategies for Sustained Growth and Inclusive Development; Commission on Growth and Development

While it values the environment, the government makes decisions on the basis of stringent analysis as it has to prioritize competing demands in the face of limited resources. The full environmental cost of a certain initiative should be factored into the decision making process in order to arrive at the correct decision. In practice, this is seldom straightforward, due to the inherent complexity of environmental issues, such as quantifying intangibles and externalities, managing subjectivity in the value or cost that different individuals attach to the same outcome, and dealing with long timescales over which future scenarios may be uncertain. However, this does not negate the importance of rigorous analysis. In fact, given the subjectivity, there is a greater need to apply sound economic principles when developing environmental policy, to provide clarity on the choice of economic tools and models, as well as the assumptions and scenarios.

In Singapore, the formulation of environmental policies and legislation has benefited from the judicious use of economic principles. Here, we focus on four key areas in which economics has played a key role in guiding environmental policy: (i) in deciding between which projects or options to implement; (ii) in setting appropriate prices or user fees; (iii) when introducing market competition; and (iv) how market failures should be dealt with. Each of these situations is elaborated in the sections that follow.

GUIDING DECISION MAKING

Long-Term Cost Effectiveness

When decisions have to be made on whether to proceed with specific environment projects, a long-term view has to be taken. This means applying economics to evaluate long-term cost effectiveness. While a project might have higher upfront cost, it needs to be balanced against lower lifetime operating cost, potential savings from other related operations, and lower forgone revenue. Low cost projects that are cost-effective in the short term could compromise longer-term cost effectiveness.

Deep Tunnel Sewerage System

This was the basis upon which Singapore decided to embark on the Deep Tunnel Sewerage System (DTSS) project.