Do Now…

Should we maximize economic growth by producing and consuming more and more economic goods and services and, if not, what could the alternatives be?

Economics, Environment, and

SustainabilityPart Two

September 16, 2014

Neoclassical economists vs. Ecological economists

View natural resources as important but not indispensable due to our ability to find substitutes

Earth’s natural capital is a part of a human economic system and the potential for growth is unlimited

High-throughput economies boost economic growth by increasing the flow of matter/resources through their economic system

Resources end up in planetary sinks where some pollutants and wastes can accumulate to harmful levels

A product or service has no economic value until it is sold in the marketplace

No substitutes for many vital resources

Human economics systems are subsystems of the biosphere

Conventional economic growth is unsustainable b/c it can deplete/degrade natural capital and exceed limits for pollution, waste

People are getting rich in the short term by depleting and degrading natural capital that sustains all life and economies in the long run

HIGH-THROUGHPUT ECONOMY

ECOLOGICAL ECONOMISTS MODEL

Ecological Economies are built on the following assumptions:

1.Resources are limited and we should not waste them, and there are no substitutes for most types of natural capital.

2.We should encourage environmentally beneficial and sustainable forms of economic development, and discourage environmentally harmful and unsustainable forms of economic growth.

3.The harmful environmental and health effects of producing economic goods and services should be included in their market prices so that consumers will have more accurate information about the harmful environmental and health effects of the goods and services they buy.

How can we put values on natural capital and control pollution and resource use?Economists have developed ways to estimate the present and future value of a resource or ecological service, and optimum levels of pollution control and resource use.

Comparing the likely costs and benefits of an environmental action is useful, but it involves many uncertainties.

TEEB Study (The Economics of Ecosystems and Biodiversity)

1. Integrate economic and ecological knowledge in order to estimate the economic and ecological values of ecosystem services.

2. Evaluate the costs and benefits of actions that could be taken to prevent the decline of these services.

3. Develop toolkits to help policy makers promote more sustainable development that conserves ecosystems and biodiversity.

Underpricing of ecological services

Until corrected, unsustainable use of forests, oceans, the atmosphere, and other forms of natural capital will continue.

Ecological and Environmental Economists

Developed methods of estimating nonuse values Existence value

A monetary value placed on a resource such as an old-growth forest or endangered species just because it exists

Aesthetic value

A monetary value placed on a forest, species, or a part of nature because of its beauty

Bequest or option value

Based on willingness of people to pay to protect some forms of natural capital for use by future generations

Discount Rate

An estimate of a resource’s future economic value compared to its present value

Today’s value of a resource may be higher than its value in the future, therefore its future value should be discounted

Size of the discount rate is a key factor affecting how a resource is used or managed

Redwood Timber Example

Year Value of Redwood Trees Discount Rate

2014 $1 million 0%

2064 $1 million

Year Value of Redwood Trees Discount Rate

2014 $1 million 10%

2064 $10,000

This analysis does not take into account the immense economic value of all the ecological services provided by forests…absorption of precipitation, gradual release of water within ecosystems, flood reduction, water and air purification, prevention of soil erosion, removal and storage of atmospheric carbon, diversity of habitats for various forms of life, aesthetics

Problems with this…Statement Problem

High discount rate without full cost Owner of resource will cut trees down as quickly as possible and invest the money in something else

Include ecological values Do not provide the owner with any monetary return, if resource is maintained and sustained

High discount rates Encourage rapid exploitation of resources for immediate payoffs…long-term sustainable use chances decline tremendously

Lower discount rates Make it profitable to use nonrenewable and renewable resources more slowly and in more sustainable ways

Innovation or changes in consumer preference

Could make a product or resource obsolete

Write!

If you owned a forested area, would you want the discount rate for resources such as trees from the forest to be high, moderate, or zero? Explain.

Fig. 23-6, p. 620

Optimum Resource Use (applies to Pollution Control too)

The cost of extracting coal (blue) from a mine rises with each additional unit removed. At some point, the marginal cost of removing the coal exceeds the monetary benefits (red) unless a factor (like scarcity) raises the value of the extracted coal.

How would the location of the optimum level of resource use shift if the price of coal doubled?

Cost-Benefit Analysis

• Comparing estimated costs and benefits for actions such as implementing a pollution control regulation, building a dam on a river, or preserving an open area of forest.

• Can involve estimating the optimum level of resource use and/or pollution cleanup

• Costs involved• Direct costs

• Land, labor, materials, pollution-control technologies• Indirect costs

• Clean air, clean water, a human life, good health, natural capital, endangered species, a forest, biodiversity

• Lots of room for error and controversy!• Can be used as an economic and/or political ploy to

prevent, weaken, or delay compliance with pollution standards

Cost-Benefit Analysis

To minimize abuse and error, use the following guidelines Clearly state all assumptions used Include estimates of ecological services provided

by the resources used Estimate short- and long-term benefits and costs

for all affected population groups Compare the costs and benefits of alternative

courses of action

Discuss!Briar Woods High School is considering replacing its energy source with solar panels and wind turbines. (Not really…)

Brainstorm some items that would be found on the cost-benefit analysis for this project, while keeping in mind the guidelines for minimizing possible abuses and errors.

How can we use economic tools to deal with environmental problems?We can use resources more sustainably by including their harmful environmental and health costs in the market prices of goods and services; by subsidizing environmentally beneficial goods and services; and by taxing pollution and waste instead of wages and profits.

Prices and Costs

Market price

Does not include hidden or indirect costs

Car example:

Direct price we pay includes: raw materials, labor, shipping, markup for dealer profit

Usage costs include: gas, maintenance, repair, insurance

Do not pay external, indirect costs: extraction of resources to provide raw materials, solid and hazardous waste production during manufacturing, air and water pollution during manufacturing and use, greenhouse gas emissions during manufacturing and use

True Free-Market System reminder

Information to consumer AND full-cost pricing

Excluding the harmful environmental costs hides them from consumers

Consumers are not informed, therefore they are less likely to demand environmentally beneficial goods and services.

SO, hiding these costs ultimately promotes pollution, resource waste, and environmental degradation.

What do you think?

GDP vs. GPI GDP: annual market value of all goods and

services produced by all firms and organizations, foreign and domestic, operating within a country.

Provides a useful method for measuring economic output of nations

GPI (genuine progress indicator): environmental indicator that takes GDP plus the estimated value of beneficial transactions that meet basic needs but in which no money changes hands, minus the estimated harmful environmental, health, and social costs of all transactions.

Beneficial transactions: unpaid volunteer work, health care and child care provided by family members, housework.

Harmful transactions: costs of pollution, resource depletion, degradation, crime

Full-Cost Pricing So what, exactly, could it do?

Reduce resource waste, pollution, and environmental degradation

Improve human health by encouraging producers to invent more resource-efficient and less-polluting methods of construction

Consumers make more informed decisions

Job loss, but job gain

How do we do it?

Phase it in…20 year period in order to allow transformation

Why don’t we?

Producers of harmful and wasteful products would have to charge more for them, and then some would go out of business due to lack of sales.

It is difficult to estimate many environmental and health costs

Many environmentally harmful businesses have used their political and economic power to obtain environmentally harmful government subsidies and tax breaks, and they fight hard to keep them

Working toward full-cost pricing

LABEL ENVIRONMENTALLY BENEFICIAL GOODS AND SERVICES And expose and reduce greenwashing (a

deceptive practice used to spin environmentally harmful products/services as green, clean, or environmentally beneficial

Ever heard the expression “clean coal?”

Greenwashing ad in relation to disposable water bottle

Working toward full-cost pricing

REWARD ENVIRONMENTALLY SUSTAINABLE BUSINESSES Phase out environmentally harmful subsidies and tax

breaks for destructive activities such as: Burning fossil fuels, clear-cutting forests, overfishing, and over

pumping aquifers (subsidies and breaks can total $2 trillion annually)

Phase in environmentally beneficial subsidies and tax breaks for pollution prevention, Eco city development, sustainable forestry and agriculture, sustainable water use, energy conservation, renewable energy use, and measures to slow projected climate change

Working toward full-cost pricing

TAX POLLUTION AND WASTES INSTEAD OF WAGES AND PROFITS Green taxes (ecotaxes)

Taxes actually work backwards…discourages what we want more of (jobs, income, profit-driven innovation) and encourages pollution, resource waste, and environmental degradation

More sustainable—lower taxes on labor, income, and wealth AND raise taxes on harmful activities that produce pollution, wastes, and degradation

HOW?

1. Phase in over 10-20 years to allow planning for future

2. Income, payroll, and other taxes would have to be reduced by same amount as green tax, resulting in no net increase

3. Poor and lower-middle class would need a safety net to reduce regressive nature of any new taxes on essentials like food and fuel

Write!

Which single advantage and which single disadvantage do you think are the most important? Why?

Working toward full-cost pricing

ENVIRONMENTAL LAWS AND REGULATIONS

Command-and-control approach (concentrating on enforcement of cleanup instead of prevention, and require use of specific technologies)

Unnecessarily increase costs and discourage innovation

Compliance deadlines that are too short to allow for innovative solutions/alternatives

Incentive-based regulations

Encourage businesses to be innovative in reducing pollution and resource waste

Sets goals, frees industries to meet them in any way that works, and allows enough time for innovation

Allows businesses to realize that there are competitive advantages to making environmental improvements…save money, boost profits, create more jobs

Working toward full-cost pricing MORE ABOUT INCENTIVE-

BASED REGULATIONS

Using the marketplace to reduce pollution and resource waste

Cap-and-trade approach

Government decides on acceptable levels of pollution/resource use, sets limits, and then gives or sells companies a certain number of permits

A permit holder that won’t use all of its permits can then save for future use, use them in other parts of their operation, or sell them

How can reducing poverty help us to deal with environmental problems?Reducing poverty can help us to reduce population growth, resource use, and environmental degradation.

The ever-increasing gap

Neoclassical economists say… A growing economy can

help the poor by creating more jobs and providing greater tax revenues, which can be used to help the poor help themselves

Trickle-down effect…but, over last 50 years, more of a flooding up effect

Figure 23.10: This mother and her child live in poverty on the edges of Mumbai (formerly Bombay), India, a thriving urban center.

How to narrow the gap? Emphasize education to develop a trained workforce

Massive global effort to combat malnutrition and infectious disease

Provide universal primary education for the world’s 800 million illiterate adults

Provide assistance to stabilize population growth in LDCs by investing in family planning, reducing poverty, and elevating social and economic status of women

Focus on reducing the total and per capita ecological footprints at home as well as those of rapidly-growing LDCs (read: China, India, Brazil)

Large investments in 1) small-scale infrastructure like solar-cell power facilities in villages, 2) sustainable agriculture projects in LDCs

Encourage more microloans from larger lending agencies

Millennium Development Goals• Sharply reducing hunger &

poverty, improving health care, achieving universal primary education, empowering women, moving toward environmental sustainability by 2015.

• MDCs pledged to donate 0.7% of their annual national income to LDCs

• By 2009: only Denmark, Luxembourg, Sweden, Norway, and the Netherlands

• USA: 0.16%, Japan: 0.18%, Sweden: 0.9%

• Becomes an ethical issue requiring evaluation of priorities

Commandments of Economics vs. Commandments of the EarthEconomics Grow. Grow forever.

Compete.

Use it up fast. Don’t bother with repair; the sooner something wears out, the sooner you’ll buy another. Throw things out when you get tired of them; get the oil out of the ground and burn it now.

Discount the future. Take your profits now.

Do whatever makes sense in monetary terms.

Earth Enough. Just so much and no more.

Compete, yes, but keep your competition in bounds. Don’t annihilate. Take only what you need. Leave your competitor enough to live. Don’t compete, cooperate.

What’s the hurry? When something wears out, don’t discard it, turn it into food for something else.

Give to the future. Never take more in your generation than you give back to the next.

Money measures nothing more than the relative power of some humans over other humans, and that power is puny compared with things like the climate, the oceans, and single-celled organisms.

What are three ways in which the US could decrease its unsustainable economic and environmental practices, and three ways that it could promote more sustainable economic and environmental practices?

LOW-THROUGHPUT ECONOMY

SOLUTIONS

Which five are the most important, in your opinion? Explain.

What are three new types of jobs that could be generated or created by an economy like this one?

CONGRATULATIONS!

You are now in charge of the world! List your five

most important strategies for shifting to eco-economies over the

next 50 years.