Lecture 7 Ecological

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Lecture 7Ecological Environmental Economics
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Overview

• Terminology
• Conflicting views of the economys relationship
  to nature
• No-Limits versus Limits to the economy views
• Problems with current economic theory reality
• Changing signals to the economy and
  internalization
• Economy behaving like an ecosystem
• Alternatives to measuring welfare by GDP
• Globalization
• Dow Jones Sustainability Index
• Summary and Conclusions

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Economics Terminology

• Economics the study of the allocation of scarce
  means among competing ends. (Daly)
• Capital wealth of property that is used or
  invested to produce more wealth the money with
  which an enterprise is started. Set of all
  physical things capable of satisfying human wants
  and subject to ownership. Fisher (1906)
• natural, human, manmade, critical natural
• Wealth Riches, possession of these.
• Riches a great quantity of money or property or
  valuable possessions.
• Money portable pieces that can be used as a
  medium of exchange. Banknotes or coins.

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More...

• Technology mechanical arts and applied
  sciences.
• Growth increasing in size by accretion or
  assimilation of material. A quantitative
  increase in physical dimensions or size.
• Economic Growth rising aggregate consumption
  (C) or output (Q).
• Development bring to a fuller, greater, or
  better state.

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Empty World View Herman Daly
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Full World View
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Physical Limits to Economy

• Malthus absolute limits or scarcity
• Ricardo relative limits
• Marx limits due to social and political unrest

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Malthus Diagram
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Closed Economic System
Source Pezzey
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Economy with Environmental Considerations
Source Pezzey
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Prevailing Economic System

• Private ownership of material resources
• Public ownership of sinks
• Perfect functioning of the market
• Infinite subsitutability of resources
• Subsidized disposal, energy, water

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Mainstream economics FALLACIES

• Marie Antoinette Economics
• let agriculture fall, consume other 97 of GNP
• Technological cavalry will save us
• we can substitute for soil, air, water,
  forests...
• Not Beating the Wife As Much As Before
• false complacency for partial success

Source Davidson, E.A., You cant eat GNP,
Perseus, Cambridge MA 2000.
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Main problems with current economic theory

• Externalities
• - costs not borne by those who create them

Badly defined property rights - environmental
goods perceived as commons
The environment is not subject of rights - the
environments interests are not legally
represented in the economic system
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Externalities

• Are equal to expenses on the elimination of a
  problem.
• Distort the economic rationality by influencing
  decisions on the allocation of means.
• Are reflected in the revenues of the whole social
  or consumer groups (e.g. by making other economic
  actors pay for the pollution caused by them, some
  companies are subsidized by those who incur
  those costs)
• May lead to exploitation of some geographical
  regions by others when regional distribution of
  labor is taken into account (e.g. migration of
  polluting industries)

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Problems with Current Economic Theory

• Assumes market prices reflect consumer
  willingness to pay.
• Assumes that consumers are the best judge of
  value and that community considerations are
  irrelevant.
• Assumes consumers understand the value of
  ecological resources provided by many biological
  resources. Assumes consumer, aided by the market
  place, knows which species are unnecessary for
  ecosystem maintenance.
• Assessment of economic value ignores many equity
  and moral considerations.
• General failure to recognize that market prices
  are highly distorted.

M.D. Young, Sustainable Investment and Resource
Use, Parthenon Publishing Group, 1992, 24-25.
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• Socialism collapsed because it did not allow
  prices to tell the economic truth.
• Capitalism may collapse because it does not
  allow prices to tell the ecological truth.

Source Dahle, 2001.
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Worth of Ecosystem

• Costanza et al 1997, The value of the worlds
  ecosytem goods and services, Nature,
  387253-260.
• Pollination, Raw Materials Production, Water
  Supply, Waste Recycling Pollution Control,
  Recreation Education, Climate and Atmosphere
  Regulation, Soil Formation and Erosion Control,
  Control of Pests Diseases
• Value of services US16 to US54 trillion
• World GNP US18 trillion
• Ecosystem-to-GNP ratio 1.8

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Changing the Signals to the Economy

• Currently taxes are applied to positive aspects
  of behavior wages, productivity, profit
• It would be better to tax aspects that are
  negative waste, inefficiency, pollution
• Possible mechanisms
• Pollution taxes
• Tradable pollution permits
• Deposit fees
• Shifting impacts of production to producers is
  called internalization

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Internalization

• Benefits of Internalization Processes
• Transparency
• Across All Sectors
• Flexibility
• Stimulates Innovation
• Polluter Pays
• Caveat must be transnational
• Cooperation between sectors
• Another example of interconnectedness

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Government Use of Internalization Processes

• Regulations
• Performance Standards
• Manufacturer Responsibility
• Subsidies
• Permits
• Taxes Tax pollution, not production
  -Pollution, excise, severance, tax credits
• Alternative National Accounting Systems
• Government as Purchaser and Facilitator (Recycled
  Content Products/EPA Green Lights

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Tax shifts from work investment to
environmental damage
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Sustainable Economic System

• Understands primary role of natural systems in
  the economy
• Integrates functions of industrial and natural
  ecologies
• Accounts for true costs of waste and disposal
• Cradle-to-Grave responsibility for products
• Penalizes waste, rewards efficiency
• Provides for fair, just, meaningful, and
  fulfilling employment of human resources

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Ecological Economics

• A new transdisciplinary field addressing the
  relationship between ecosystems and economic
  systems in the broadest sense.
• Uses the tools of conventional economics and
  ecology as appropriate.
• Need to establish institutions that take the long
  term view, a la biology.
• Economics as an ecological system.

R. Costanza, Ed. Ecological Economics, The
Science and Management of Sustainability,
Columbia University Press, 1991, 3-7.
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Relationships of Economic Schools
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Some Ecological Environmental EconomicsTerms

• Hicksian Income income that does not forego
  future opportunities for others living off
  natures interest not its capital
• Pigous Externalities a Pigouvian Tax is on paid
  by polluters equal to the marginal external cost
  borne by the pollutees. The polluter is thus
  informed about the full social costs of his
  operations and the victims can be fairly
  reimbursed (1920).
• Solow Criterion Solow stated that
  substitutability would allow man to get along
  without natural resources (1974).
• The Hartwick-Solow Rule Manufactured capital can
  substitute for natural capital

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Hicksian Income
...income that can be consumed without reducing
future consumption possiblities
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Hartwick-Solow Rule
Value of savings gt Value of Manufactured
Capital Deterioration Value of
natural Capital Depletion/ Degradation The
amount a society must save and reinvest to
maintain capital intact. The total capital stock
(natural plus manufactured must be nondeclining.
D. Pearce et al. The Economics of Sustainable
Development, Ann. Rev. of Energy Environ. 1994.
19 457-474.
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The Ecological Economists

• Kenneth Boulding (1910-1992) The Economics of
  the Coming Spaceship Earth (1966)
• Nicholas Georgescu-Roegen (1906-1994) The
  Entropy Law and Economic Progress- the economy is
  not a reversible mechanical systems but subject
  to the 2nd Law
• Herman Daly student of N. G-R., steady state
  economy

Gowdy, J. and Sabine OHara, Economic Theory for
Environmentalists, St Lucie Press, 1995, 129-132.
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Biological Basis for the Economy

• A.J. Lotka The Earth Machine or the Mill
  Wheel of Life
• J.A. Hobson organic test as the test of welfare
• N. Georgescu-Roegen thermodynamic limits,
  biophysical foundations of the economy
• M.K. Hubbert biophysical constraints to economic
  growth
• H.T. Odum economy as an ecosystem
• G. Hardin institutional conditions for
  overexploitation
• M. Rothschild Bionomics - genetic material of
  the economy is technology

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Economy like ecosystem?

• Eugene Odum
• young ecosystems production, growth, quantity
• mature ecosystems protection, stability, quality
• Todays economy is like a young ecosystem
• How do we create an economy that is like a mature
  ecosystem?

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The metabolic analogy
Metabolism
Anabolism Catabolism
Degraded matter Degraded energy
Useful matter Useful Energy
Distribution
Economics
Anabolism Catabolism
Totally degraded matter Totally degraded energy
Useful matter Useful Energy
Distribution
Time
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• Bionomics
• The economy behaves like a biological system
• Behavior of biological systems applied to
  economics
• Excellent forecasting tool (e.g. ATT demand for
  telephone service)

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Alternative Measures of Welfare(Examples)

• Index of Sustainable Economic Welfare (ISEW)
• Genuine Progress Indicator (GPI)
• Human Development Index (HDI)

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Human Development Index

• Created by the United Nations Development Program
  (UNDP)
• A composite of three indicators
• Longevity life expectancy
• Knowledge literacy, years of schooling
• Standard of Living purchasing power based on
  GDP/capita

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Genuine Progress Indicator

• Developed by non-profit Redefining Progress
• Starts with real personal consumption, adjusts
  for income distribution
• Subtracts
• Crime Divorce
• Resource depletion
• Environmental Damage
• Income Distribution
• Pollution
• Lifespan of durable goods public infrastructure
• Dependence on foreign assets
• Adds
• Value of household work and parenting
• Value of volunteer work

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Globalization

• The World Trade Organization (WTO) (1995)
• Established by final act of Uruguay Round of
  Multilateral Trade Negotiations in Marrakech in
  April 1994
• Goal is to remove all obstacles to trade
• How a product is made
• By whom
• What happens when it is made
• Result Countries and regions cannot set
  standards, express values, or determine what they
  do or do not support
• Outcomes Child labor, prison labor, forced
  labor, substandard working conditions and wages,
  environmental destruction, habitat loss, toxic
  waste production, synthetic hormones, genetically
  engineered materials
• Membership 135 countries (but no plebiscite was
  held!)
• Violates Agenda 21 and the Universal Declaration
  of Human Rights

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Case Study Chiquita Brands International

• Chiquita Brands International is a 2 billion
  company
• Main product is bananas from Central America
• History of labor abuses, heavy pesticide use
  (dichloropropane), resulting in birth defects and
  infertility
• European countries biased import policy for
  bananas to small family farmers using fewer
  chemicals
• U.S. sued and in WTO arbitrated case and won,
  forcing European countries to eliminate their
  bias
• Other cases Countries must allow McDonalds,
  Blockbuster, Pizza Hut, etc. to operate within
  their borders

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Dow Jones Sustainability Index
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Dow Jones Trend
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Dow Jones Sustainability Index vs SP 500
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Leading DJ Sustainability Firms

• Consumer
• BMW AG, Germany
• Fuji Photo, Japan
• Unilever Plc., Netherlands
• Bristol-Myers Squibb, US
• Energy
• Suncor Energy, Canada
• Enbridge Inc., Canada
• Utilities
• Deutsche Telekom AG, Germany
• TransAlta Corp., Canada

• Financial
• Credit Suisse Group, CH
• Skandia Forsakrings AB, SW
• Industrial
• Honeywell Inc., US
• Tomra Systems ASA, Norway
• Technology
• Fugitsu Ltd., Japan
• ST Microelectronics, France

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BP Sustainable profits?

• Worlds largest supplier of solar modules
• 200 million/yr
• 1 billion/yr by 2007
• Solar-powered H2O electrolysis hydrogen buses

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WBCSD, US Members

• 3M Company
• Alcoa
• ATT
• Arthur D. Little
• The Boston Consulting Group
• Cargill Incorporated
• CEMEX
• CH2M Hill
• Conoco
• Dow Chemical Company
• DuPont
• Eastman Kodak Company
• Ford Motor Company
• General Motors Corporation
• Interface
• International Paper

• Monsanto Company
• Johnson Johnson
• Phelps Dodge
• Procter Gamble Company
• Rohm and Haas
• S.C. Johnson Son
• Suncor Energy Inc
• Texaco
• Time Warner
• Unocal
• Westvaco Corporation
• Weyerhaeuser Company
• Xerox Corporation

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Main Points

• Everything is connected
• The result is there are feedback loops between
  all elements of the system
• Maldistribution of wealth is prevalent but not
  sustainable
• GDP and GNP do not really represent welfare
  just economic throughput
• The economy responds to signals it is sent
• Cheap waste disposal
• Low costs for emissions (air, water, land)
• Low cost for environmental impacts
• Cheap and subsidized resources
• Tax benefits for resource depletion
• How do you change the signals to the economy?

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Summary and Conclusions

• The current economic system is not sustainable
• Depends on the scale of material/energy
  throughput
• Subsidizes resource extraction and pollution
• Taxes productive activities
• Does not measure welfare
• A system based on Ecological Economics would
• Shift taxes to waste, inefficiency, and
  pollution, away from wages, profits,
  productivity, and investment
• Focus on dematerialization, deenergization,
  decarbonization, and detoxification
• Measure welfare instead of absolute monetary
  transactions
• Support an EcoIndustrial revolution