Valuation 10: Ecological Footprints

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Valuation 10Ecological Footprints

• The critique
• The alternative
• Critique on the alternative
• Avoidance costs

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Last weeks we looked at

• The neo-classical approach to the monetary
  valuation of environmental goods and services
  that are not traded on the market
• We will look at two alternatives (ecological
  footprints avoidance costs)
• The second is ducking the issue, the first
  challenges economic theory

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The Critique

• The neo-classical theory of value is built on two
  premises
• Supply versus demand or relative scarcity
• Human preferences or what people want
• The implications are, of course, that absolute
  scarcity is irrelevant, as long as people do not
  care and that, if it does not matter to people,
  it does not matter
• There are, of course, also operational
  objections, and misinterpretations

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The Critique -2

• Nordhaus once said As agriculture has a share of
  only 3 of GDP, the impact of climate change on
  agriculture in unlike to exceed 3 of GDP
• Obviously, prices are a linear approximation
  around the current situation, and should only be
  used to evaluate relatively small policy
  interventions
• Of course, policy is always tinkering at the
  margin

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The Critique -3

• Wackernagel and Rees raise the interesting point
  that if a resource stock falls, its price will
  increase, so that the total value stays the same,
  so that nothing is the matter apparently
• The math apart, WR clearly confuse stocks and
  flows if a resource price rises, further
  degradation is valued more, not less

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The Alternative

• So, what do WR propose to do instead?
• The Ecological Footprint!
• Since its inception in 1995, the EF has become
  tremendously popular, partly because of the
  energy of WR and partly because it is a really
  simple indicator
• There a number of similar indices that are less
  popular but try do the same thing, that is,
  derive a superindicator measured in physical terms

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Il Orma Ecologica

• 57 mln Italians drink some 15 mln tonnes of milk
  per year an hectare yields some 500 kg milk, so
  thats 0.5 ha/cap
• They eat 26 mln tonnes of cereals, for which they
  need 0.2 ha/cap the energy this takes comes
  later, the pesticides and nutrients are omitted
• They eat about 5 mln tonne of meat per year this
  takes 0.8 ha/cap this is not just an average
  over space, but also over time what about
  eating diary cows?

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Il Orma Ecologica -2

• 57 mln Italians use 29 mln tonne of timber, 26 of
  which is imported with 2 kg/ha, this take 0.25
  ha/cap
• Wool .3 mln tonne, 15 kg/ha, so 0.3 ha/cap
• (Note that math is really not their strongest
  point)
• Italians consume 12 GJ of coal absorbing the
  emitted carbon at 55 GJ/ha would take 0.2 ha/cap
• Finally, Italians have about 0.1 ha/cap of
  build-up area

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Il Orma Ecologica -3

• So, now we have ha/cap for agriculture, forestry,
  energy and living
• We cannot just add these up, because agricultural
  land is biologically more productive than are
  forests (never mind that this is because of human
  disturbance and fertilizers)
• Multiplying space with the appropriate
  indicators, Italians use 4.2 ha/cap
• But, they have only 1.3 ha/cap!

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Il Orma Ecologica -4

• Italians use 4.2 ha/cap
• But, they have only 1.3 ha/cap!
• Note that the ecological footprint implicitly
  condemns international trade it states that
  Italy uses 3 times its allocated space, which is
  possible only because Italy forcibly uses other
  countries room
• This point becomes even more pugnant if one
  calculates the EF for cities e.g., Londons
  footprint is 200 times the size of the city

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Ecological Footprints (ha/cap)
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Ecological Footprint

• World consumption takes up about 2.8 ha/cap,
  whereas the world has only 2.1 ha/cap available
• This is only possible because we are using up
  fossil resources which is true for energy, soil
  and water
• This is a recipe for disaster, unless one
  considers that resource stock are being replaced
  with capital and knowledge stocks

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Tols Footprint

• My footprint is about 20.4 (34.5) hectare if
  everyone were to live like me, we would need 11.3
  (19.1) Earths
• Although I am a vegetarian and generate little
  waste, I do live in a big house far away,
  commuting by car I also fly a lot
• See the test on http//www.earthday.net/footprint.
  stm
• This test may surprise you, shock you, or make
  you think, please remain calm ... But not too
  calm!!

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Critique

• The used weights are presumably physical and
  ecological and therefore have little relation
  to social or political priorities this may
  reflect a higher truth, but is not handy for a
  decision analytic tool
• What to make of an assessment that praises
  Iceland and Indonesia, while condemning
  Bangladesh and Singapore?
• Part of this comes from using world average
  productivity figures

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Critique -2

• Why are crop land and roads equally productive?
• Why are all forests equal, regardless of how they
  are managed?
• A large share of the ecological footprint is
  energy use which is converted to land by
  absorbing carbon in tree plantations why not
  biomass energy, or solar power? both would lead
  to substantially lower numbers

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Critique -3

• Ecological footprints are as arbitrary as the
  region to which they are applied
• Computing an EF for a locality implicitly
  condemns trade and the good things that trade
  does for the economy and the environment
• Most problematic, however, the EF has an absolute
  measure of value much like the classical labour
  theory of value

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Critique -4

• Most problematic, however, the EF has an absolute
  measure of value much like the classical labour
  theory of value
• The labour theory of value found its grave, in
  theory as well as in practice
• Absolute value theories may work as long as the
  anchor is indeed dominant, but get increasingly
  complex if that is no longer the case
• Whether land dominates at present is, at best,
  questionable

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The Use of Valuation

• Valuation serves three purposes
• First, we want to determine the optimal level of
  policy intervention
• Second, we want to value the total amount of
  environmental pollution and degradation, e.g.,
  for inclusion in the national accounts
• Third, we want to calculate the compensation
  polluters need to pay to victims
• Some require marginal costs, others consumer
  surpluses (well, CV or EV)

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Avoidance Costs

• The avoidance cost method turns the first purpose
  optimal policy on its head
• We know the (marginal) costs of emission
  reduction
• We assume that the actual policy intervention is
  optimal
• Therefore, we know the marginal benefit of the
  optimal policy
• But, obviously, not the welfare change

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Avoidance Costs -2

• With a marginal benefit point estimate, we can
  meet the second and third purpose of valuation
  (national accounts, compensation)
• But, not the first (optimal policy) the
  implicit assumption is that, even though the
  valuation specialist is incapable of estimating
  the marginal benefit curve, the policy maker is
  able to, although apparently unable to express
  this

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Avoidance Costs -3

• Note the difference with travel costs and hedonic
  pricing
• In both methods, we assume that the consumer
  makes a trade-off between environmental amenities
  and marketed goods and optimizes that trade-off
• However, we look at many consumers, so that we
  not only can estimate the marginal price curve
  but also average out randomness and errors
• Avoidance costs is based on one decision