Environmental economics can be an important tool in urban planning.  It can also inform discussion of the place of cities in a sustainable world.

When I first studied environmental economics, cities seemed to make only the occasional guest appearance in support of other topics.  In the context of pollution control, cities featured as locations at which polluters and polluted might be close together.  In land economics, they played the role of central points from which rents fell and transport costs rose with increasing distance.  In the economics of water, cities competed with farmers for water from surrounding regions.  Cities also provided the setting for hedonic price studies estimating the value of environmental amenities from their impact on house prices.   But that was about all.  The existence and characteristics of cities were not seen as part of the subject matter of environmental economics.

More recently, I have come to see issues relating to cities as a key topic within environmental economics.  Consider some of the trade-offs involved in urban planning.  Given cities with the same population, one can occupy less land than another if it has less industry or green space, or more of its infrastructure underground, or taller residential buildings, or less floor space per resident.  The outcome of such trade-offs has many environmental implications.  A more spacious city impinges more on surrounding areas, with greater loss of the ecosystem services of farmland, woodland or wetlands.  By spreading residents and employers more thinly, it also raises average intra-city journey distances, increasing energy use for transport and associated pollutant emissions.  A more spatially concentrated city on the other hand may have any or all of the following:  more crowded living conditions; more tower blocks and subways; less separation between residential and industrial districts; less of the ecosystem services provided by urban green space and trees; and more pollution ‘hot-spots’.

Finding the best trade-offs for a particular city in particular circumstances requires input from various specialisms.  Environmental economics can contribute in two main ways.  Firstly, it offers non-market valuation techniques that can put approximate monetary values on many of the environmental costs and benefits associated with cities.  Monetary value can then be a common unit for comparing different kinds of environmental costs and benefits with each other and with market goods.  Where planning decisions are informed by cost-benefit analyses, non-market valuation techniques enable environmental consequences to be given due weight.

Secondly, environmental economics can help evaluate policies to address not only actual but also potential environmental externalities.  Discussions of the classic example of smoke from a factory causing harm to neighbouring residents often assume that both factory and residents are already present (1).  Suppose however that the factory is at the proposal stage. In that case the best outcome is most likely to be obtained if consideration of whether to permit the factory to be built is combined with consideration of how, if it is built, the resulting smoke problem can best be addressed.  Environmental economics offers methods to assess whether the best approach would be direct regulation, or a market-based instrument such as a per-unit tax on emissions.  The planning decision can then be informed by comparison of the costs and benefits of refusing permission and those of granting permission but also applying the best emissions reduction approach.  Similar considerations apply to proposals with positive externalities.  Provision of green space within a private housing development, for example, might offer environmental benefits in any case, but environmental economics could help identify the best approach to maximise the benefits for the wider community.

A fundamental issue is whether the very existence of large cities is advantageous in terms of long-term environmental sustainability.  For the question to make sense it is important to define the counterfactual.  Some may have a romantic vision of a simpler, rural life.   But the interesting comparison, to my mind, is with a world with the same population and living standards as now, and the same prospects of raising living standards in future, but with the population spread much more evenly over the habitable land area, with many more villages and towns and perhaps small cities, but no large conurbations.  So the villages and towns would have their industries and public services, and few of their inhabitants would work in agriculture.  They would be plugged in, via the internet, to the world’s knowledge, cultures, social networks and trading opportunities.  Their people would travel – on business, to visit family and friends, or for holidays – but with the difference that their destinations would never be large cities.

A world in which both people and industries were more evenly dispersed would have some important advantages for sustainability.  Although international trade in food would continue, domestically-produced food could be grown closer on average to where people live, reducing food miles and use of energy for food transport.  The water requirements of smaller communities could often be met from nearby sources, reducing the costs of transporting water.  Local air pollution from industrial sources would be less likely to reach dangerous levels.  Avoidance of the urban heat island effect (2) would be a benefit in many regions, reducing the need to use energy for air-conditioning.  The risk of very large numbers of people being affected by a single natural disaster (as when a city is hit by an earthquake) would be reduced.

A dispersed world would also have disadvantages.  There would be no room for large wilderness areas such as national parks, important providers of ecosystem services.  Although the risk of a natural disaster affecting ten million people would be less, the frequency of disasters affecting ten thousand people would be much higher.  Industries subject to economies of scale in production would not fit readily into such a world.  But the biggest problem could be transport.  Although the costs of transporting some food and water might be lower, those of transporting people would probably be much higher.  With people concentrated in cities, many travellers make similar inter-city journeys, enabling planes and trains to be filled with passengers and reducing the cost per person.  By contrast, journeys between dispersed communities would be much more varied, with much less scope for cost reduction, and as a consequence higher overall energy consumption and pollutant emissions.  With factories also dispersed, the same would apply to the transport of raw materials and of intermediate and finished manufactured goods.

My sense is that at present the disadvantages of the dispersed world outweigh its advantages.  But this could change.  One factor could be climate change.  In his Climatopolis, Matthew Kahn has shown how cities might adapt to a hotter climate (3).  But where rising general temperatures aggravate the effects of urban heat islands, people may increasingly prefer not to live in cities.  Another factor could be technological development.  The internet has already facilitated the remote delivery of many kinds of services, and weakened the argument that city-based business clusters are an essential ingredient in economic growth.  Continuing improvements in vehicle fuel-efficiency could reduce the energy needs of transport in a dispersed world.  More speculatively, the need to transport manufactured goods could be greatly reduced if the technology of digital manufacturing were to develop to a point at which it offered an economic method of producing many kinds of goods close to the consumer from local materials.

Even if we were to conclude that the dispersed model was or will become the more sustainable, we could not simply abandon the huge investments that have been made in building cities.   Given the long life of much infrastructure and housing development, however, it is important to consider whether proposed developments take us toward or away from the sort of model that is likely to be most sustainable in 50 or 100 years’ time.  China, for example, a country which already has many large cities, some with severe air pollution (4), proposes further major urbanization over the next decade.  Michael Pettis has an interesting discussion of the short-term macroeconomic implications of this urbanization (5).  But whether such rapid urbanization, in China and other countries, tends to promote or hinder long-term sustainability is I think an open question.

Notes and References

1. See for example Baumol W J & Oates W E (2nd edn 1988) The Theory of Environmental Policy  Cambridge University Press  p 21

2. NASA (2010) Satellites Pinpoint Drivers of Urban Heat Islands in the Northeast  http://www.nasa.gov/topics/earth/features/heat-island-sprawl.html

3. Kahn M E (2010) Climatopolis: How Our Cities will Thrive in the Hotter Future Basic Books  288pp

4. CNN International Edition (19/9/2013) China to shame worst-polluting cities over and over in push for green action  http://edition.cnn.com/2013/09/19/business/china-shame-worst-air-polluting-cities/index.html

5. Pettis M (16/8/2013) The urbanization fallacy  http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comments