Spatial environmental economics

Clare Balboni ^a, Joseph S. Shapiro ^bc

Abstract

How do environmental goods and policies shape spatial patterns of economic activity? How will climate change modify these impacts over the coming decades? How do agglomeration, commuting, and other spatial forces and policies affect environmental quality? We distill theoretical and empirical research linking urban, regional, and spatial economics to the environment. We present stylized facts on spatial environmental economics, describe insights from canonical environmental models and spatial models, and discuss the building blocks for papers and the research frontier in enviro-spatial economics. Most enviro-spatial research remains bifurcated into either primarily environmental or spatial papers. Research is only beginning to realize potential insights from more closely combining spatial and environmental approaches.

Introduction

How can environmental and spatial economics jointly provide insight on research and policy? In other words, how can accounting for spatial economics change answers to environmental questions, and how can accounting for environmental economics change answers to spatial questions? We argue that environmental and spatial economics have enormous potential synergies. Research exploiting these interactions is in its infancy, and this chapter discusses this emerging subfield. At the same time, the combination of spatial and environmental economics has burgeoning high-quality work, and we forecast expansion in this area.

What is spatial environmental economics? Defining the boundaries of our discussion clarifies our purpose. We cover environmental settings where geography matters and spatial settings where the environment matters. We interpret environmental economics to include analysis of environmental, energy, and natural resource goods. Our interpretation of spatial economics focuses primarily on economic links across regions within a country, such as the movement of people, ideas, goods and services, and externalities like pollution, across provinces or neighborhoods of a city. Research on regional policies with no interactions across space – or using a binary concept of space distinguishing local from “somewhere else” – is not the subfield’s primary focus, though we discuss papers with this type of setting. International research making comparisons across countries is also not the core of this subfield, but again we discuss environmental research where geography across countries matters.

The emergence of this subfield reflects a few forces—the increasing use of trade-related methods in economic geography; the broadening availability of high-resolution spatial and environmental data, often derived from remote sensing, business records, or administrative sources; growing recognition that the damages of environmental externalities differ enormously across space; and rising public and academic concern about the intensely spatial challenges of climate change. At the same time, barriers to entry may help explain the limited realization to date of potential synergies between environmental and spatial economics—conducting research at this intersection requires an understanding of methods, institutions, and data in each field. We aim for this chapter to give readers motivation, methods, and references to help understand and contribute to research connecting these fields. It is intended as a resource for environmental and resource economists with limited experience in spatial economics; spatial economists with limited experience in environmental topics; and those considering entering this subfield of research.

Two general examples help illustrate the potential importance of spatial environmental economics to scholars in both fields. The first example describes how ignoring space may provide the wrong answer to important questions in environmental economics. Space plays a central role in adaptation to environmental externalities. When a region experiences an adverse climate shock like a heat wave, reallocating agricultural production across fields accounts for a critical component of the country’s adaptive response (Costinot et al., 2016). Similarly, when vulnerable low-lying areas experience flooding, migration and production reallocation can provide important forms of adaptation (Deryugina et al., 2018; Desmet et al., 2021). Accounting for spatial heterogeneity and links is therefore crucial in understanding the aggregate costs of environmental shocks and climate change.

The second example describes how environmental economics can provide insights for spatial economics. Many spatial models describe regional amenities and productivity that benefit households and firms, though are often silent on which features of a region generate these local characteristics. Environmental goods including air pollution, water availability, land quality, climate, and energy resources can help to understand these patterns. Underlying the distribution of productivity across space, Ellison and Glaeser (1999) conjecture that at least half of the concentration of industries across US states reflects natural advantage, including environmental forces, and Hornbeck (2012) finds that natural advantage has large and persistent spatial contributions to agriculture. In terms of amenities, Heblich et al. (2021) also find that pollution transport influences the location of populations within cities. Environmental forces and resources can therefore help explain the distribution of economic activity and agglomeration across space.

Motivated by these complementarities, this chapter considers several broad research questions. First, how do environmental goods shape spatial patterns of economic outcomes? For example, climate differs enormously between countries (e.g., Mali versus Canada), regions within a country (Chile’s Tierra del Fuego versus its Atacama desert), and neighborhoods within a city (Santa Monica versus the Inland Empire around Los Angeles). Understanding the amenity and productivity value of climate can help explain divergent economic outcomes across these regions and how the spatial impact of environmental goods may change as climate change intensifies. Understanding spatial patterns of environmental impacts can also shed light on the distribution across different groups of damages from changes in environmental quality, since in many settings, the neighborhood where a person lives provides a proxy for their income, race or ethnicity, and other demographics. We study both exogenous amenities that nature has provided (for example, a location’s climate, which is largely exogenous) and endogenous amenities arising from human choices (such as local air pollution, which is primarily endogenous).¹ We discuss both global pollutants such as carbon dioxide (CO₂), which affect global health and welfare equally regardless of where they are emitted, and local pollutants such as particulate matter smaller than 2.5 micrometers (PM_2.5), which primarily affect health and welfare in the region where they are emitted.

Second, how does the spatial distribution of economic activity and spatial economic forces shape environmental quality? Agglomeration, congestion, commuting, migration, goods transportation, and the flow of ideas all affect the distribution of pollution, natural resource degradation and other environmental goods across space. For example, roads, centers of economic activity, and regional timber prices all drive concentrations of deforestation in the tropics, where rural economic development and valuable services that forests provide (such as flood mitigation and water purification) may be complements in some regions and substitutes in others. Residential growth in many cities around the world is expanding into the wildland-urban interface, where existing population density is low but increased urbanization can result in ecological damage and wildfire risks can increase insurance and property costs.

Third, how do and how should governments design and implement policy in spatial environmental settings? We consider how spatial policies affect the environment, how environmental policies affect spatial patterns of economic outcomes, and how accounting for enviro-spatial interactions affects optimal policy design. This includes, for example, the environmental consequences of zoning, transportation investment, and building restrictions; and the impact of renewable energy subsidies, regional environmental regulations, and regional natural resource protections for both environmental goods and economic activity. Several themes that this chapter discusses can guide optimal environmental policy rules that vary over space, as well as how urban or regional policies should account for air pollution emissions, forest or wetland degradation, and changes in other environmental goods.

Where possible, we draw on data and examples from many different locations and environmental goods. The discussion of existing literature, however, inevitably reflects its geographic focus on the US and, increasingly, China; and its topical focus on particulate matter air pollution and climate change.

This chapter builds on previous reviews. Cherniwchan et al. (2017) and Copeland et al. (2022) discuss trade, globalization, and the environment. Relative to these studies, this review focuses on the relationship between the environment and space within countries, where factors are typically more mobile, though we also discuss spatial forces across countries where relevant. Our conclusions highlight several issues that differ between research and policy involving international versus intra-national spatial economics and the environment. Our chapter also complements recent discussions of the emerging literature on environmental and spatial issues—Desmet and Rossi-Hansberg (2024) review spatial climate change research with an emphasis on spatial integrated assessment models, and Dominguez-Iino (2023) focuses on the implications of spatial factors for environmental policies, for instance regarding leakage and adaptation. We also build on chapters in earlier volumes of this Handbook focused more on interactions of environmental and urban issues (Bartik and Smith, 1987; Glaeser and Kahn, 2004; Gyourko et al., 1999; Kahn and Walsh, 2015; Lakshmanan and Bolton, 1987).

Overviewing the chapter may help the reader identify the most useful parts. Section 2 describes stylized facts about the links between spatial and environmental forces—how spatial forces affect polluting activity; how spatial geophysical forces separate the locations where pollution is emitted versus creates damages; and how spatial variation in damage functions influences the welfare impacts of environmental quality. Section 3 discusses insights from, and limitations of, canonical models for understanding interactions between the environment and space. We discuss partial equilibrium models of pollution regulation and natural resource extraction, hedonic models, classic spatial equilibrium models, and richer multi-dimensional equilibrium models. Sections 4 and 5 discuss building blocks underpinning papers at the frontier of spatial environmental economics, with references to relevant literature and open questions. Section 4 discusses broad analysis choices; spatial aspects of household preferences and the environment; and spatial components of interactions between firms and the environment. Section 5 discusses spatial links and policy—connections between environmental goods; agglomeration and dispersion forces; spatial links, including goods transport and migration; and specific policy design challenges at the intersection of environmental and spatial economics. Section 6 summarizes topics for future research. Section 7 concludes.

Section snippets

Motivating facts on enviro-spatial links

This section discusses motivating facts about the environment and space.² The organization of subsections follows a natural progression from spatial forces that drive polluting activity, to spatial drivers of ambient environmental quality, to spatial variation in environmental damages and contributions to social welfare. This sequence also corresponds to the structure underpinning integrated assessment models, which typically combine modules

Canonical environmental and spatial models

The previous section discusses stylized facts describing how enviro-spatial links affect environmental and economic outcomes. This section considers the insights that canonical environmental economics models and canonical spatial economics models provide on these links. For each model, we provide a brief summary, refer readers to other references, and describe a relevant application. These canonical frameworks provide important insights on several interactions between spatial and environmental

Building blocks in enviro-spatial analysis

This section discusses building blocks for theoretical and empirical papers at the frontier of spatial environmental economics. Existing reviews discuss choices in writing an environmental paper, or choices in writing a spatial paper. While it is challenging to specify which components of environmental research should be spatial, and which components of spatial research should be environmental, we focus this and the next section on issues missing from many papers where we think spatial

Spatial links in environmental analysis and policy

This section moves from the core building blocks discussed in the last section to discuss agglomeration and dispersion, geography and inter-regional links, and policy design.

Summary of topics for future research

This section summarizes productive topics for future research, by bringing together topics from the chapter. While far from exhaustive, this list highlights areas where methodological advances and expansions of topical focus might offer exciting avenues for further progress.

Conclusions

This chapter highlights complementarities between spatial and environmental economics, and opportunities to advance an emerging literature at the intersection of these two growing fields. Substantial policy challenges from worsening climate change and environmental damages, together with rapid changes in spatial patterns of growth, trade and migration, underscore the importance of this form of intellectual arbitrage.

New methods, alongside the availability of detailed, geographically resolved

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