sustaining natural capital big ideas on sustainable prosperity ottawa april 2014 geoffrey heal

Sustaining Natural Capital

Big Ideas on Sustainable ProsperityOttawa April 2014

Geoffrey Heal

Geoffrey Heal Columbia Business School 2

Capital and Progress

Distinguish physical capital from human capital, intellectual capital and natural capital

Note intangible capital of growing importance in modern economics – Apple, Google, etc

Vast majority of the value of these companies is not in its physical capital – Apple’s market cap is $505bn, value of tangible assets <25%

Capital and ProgressDevelopment has been a process of destroying

natural capital – forests, fisheries, biodiversity – and building up physical, intellectual and human capital

We destroy forests and fisheries, species and landscapes, but develop antibiotics, the internet, air travel, mobile phones, etc



But today there are more people, they all have more impact, and technologies are more powerful

So far the gains from more physical, intellectual and human capital have more than offset the losses from the destruction of natural capital and we are better off


But will this continue? Are we reaching a point where we are destroying natural capital that really is essential to our living standards?


Market Failure

In an ideal world markets induce us to use Earth’s resources efficiently

But often things go wrong ……….

In the environmental area, most common problem is external costs


External Costs

Costs that a transaction imposes on people who are not parties to it I buy gasoline from Exxon and burn it in my car.

Exxon and I are the parties to this transactionBut we impose external costs on others by

Emitting greenhouse gases and changing climateEmitting other pollutants and damaging human

health


External CostsAre costs of an activity that the parties to it

neglect because they don’t pay them.

Lead to a breakdown of the economic system

Most environmental problems, most unsustainable behaviors, are associated with external costs

Destruction of natural capital is associated with external costs


Responses

Make sure the parties to a transaction pay the full costs of that transaction, including the external costs. Full cost pricing – a big simple idea!

Do this via taxes or via cap-and-trade –or several other alternatives

Or via liability or even consumer/investor activism


Illustration

Electricity from wind costs about $0.04-0.06 per kWh, from gas about $0.05-0.08, from solar $0.10 to $0.20, from coal $0.4 to $0.8

So coal is a competitive fuel in the power market.

But these figures only reflect private costs – those paid by the parties to the transaction


Illustration

Including the external costs of coal use would put the cost of power from coal up above $0.15 per kWh, pricing it out of the power market.

Half the world’s emissions of GHGs come from burning coal – so full cost pricing of electric power could go a long way to solving the climate problem & preserving important item of natural capital

SCC – a digressionComputing external costs is sometimes easy –

and sometimes hard

Obama admin uses $37 as SCC – output of interagency task force

SCC is the PDV of damages from the emission of 1 ton of CO2 over its lifetime

Computing SCC involves two difficult tasks

SCC – a digressionEvaluating impact of CO2 on the economy

Discounting this back to present

Current computations use IAMs, and impact depends on Effect of CO2 on temperature – ECSEffect of temperature on economy – damage

function

Current IAMs involve poor choices of ECS and damage functions

Uncertainty, Decision & Climate Change 14

SCC – a digressionDamage functions are generally arbitrary and

involve at best casual empiricism

“These models have crucial flaws that make them close to useless as tools for policy analysis …… ; the models’ descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation.”

Research that provides a solid empirical basis for damage functions becoming available but not yet built into these models

SCC – a digressionDiscounting is also complex: what discount rate?

Or should we use a declining discount rate?

$37 figure used a constant discount rate and in fact the task force used several and showed sensitivity

Strong argument for declining rate in a world with disagreements over the correct rate – efficient allocation in a world of different discount rates requires a non-constant rate

SCC – a digressionRight now. We probably can’t compute a useful

SCC.

BUT we can compute a lower bound We have estimates of some of the damages but

not allAnd we can use discount rates that are in the

upper part of the possible range

Lower bound is actually very useful – if coal not competitive at a lower bound then it’s certainly not competitive at the real figure


Can we be sustainable?

Is the technology ready?


Can we be sustainable?

If we priced coal out of the power market by full cost pricing, would we go without energy? What are the alternatives?

The US, China are richly endowed with wind and solar energy and could produce a lot of their electricity from these

But they are intermittent


Renewables alone?

Could we use 100% wind and solar?

No – outputs are too variable and there would be power shortages

Need a backup, currently natural gas – gas power stations are the most flexible in terms of changing outputs to offset sudden variations in wind, sun

Locks in a fossil fuel


100% Renewables?

To go 100% renewable we need to store electricity from wind and sun

Current technologies – batteries, pumped storage, compressed air energy storage, flywheels – are all costly and inefficient

San Diego utility recently bought 40 mWh battery for $50m to try to store some renewable energy40 mWh is about 120 hours of a big wind turbine


100% Renewables?

Battery technology has to improve, costs have to fall, before we can go even 60% renewable. In process right now

Over a dozen start-ups claim they will more than halve battery prices will more than doubling energy density

Or clean energy sources that are not intermittent – like nuclear


Nuclear power

Clean – no greenhouse gases, no pollution of other types unless there is a meltdown and a containment failure, as at Chernobyl and Fukushima

And of course operates 24/7

Nuclear to date has killed far far fewer people than coal!


Sustainable Transportation?

Oil use in vehicles another major source of GHG emissions

Can we move away from this?

Options are Electric vehicles –using clean electric powerBiofuels


Big Ideas

Probably the biggest technological obstacle to sustainability is our inability to store electricity cheaply and efficiently

It’s a bottleneck for renewable power and for electric vehicles

And solving this problem is a priority

Big Ideas

External costs need to be brought home to those who generate them

This single change could lead to massive strides toward sustainability, probably the most important change we could make in our economic system from perspective of sustainability

Would rapidly lead to reductions in use of coal, oil and eventually gas


Problem is PoliticalTechnology is not the biggest obstacle to

sustainability – the technology is largely there and will almost surely be there fully 10 years from now

Obstacles are political -Getting people to recognize the seriousness of the

problemOvercoming vested interests in the status quo Persuading developing countries this is consistent

with growthMaking progress on climate

Recognizing the ProblemA big idea is needed here, and I don’t know what

it will be

Surveys show people are aware of the issues of climate and sustainability, see them as serious but not urgent

18% alarmed, 33% concerned, 25% cautious about climate change

All accept the reality but only alarmed see need for action now – though all support renewable energy

CoalCoal industry is vocal and influential – but it has

to go

Buy it out and close it down! Market cap of US coal industry < $40bn.

Carbon tax could easily raise this much

GrowthA good illustration is Brazil – rates highly for use

of carbon-free energy and still is economically successfulExtensive use of sugar biofuels in vehiclesExtensive use of biomass and hydro in electricity

generationMost of its CO2 comes from deforestation

ClimateUNFCCC has not worked

Time to use a smaller group of main emitters

More from targets & timetables to development and implementation of technologiesA positive rather than negative goalCan be seen as having commercial potentialMore widespread support for renewable energy

than for emissions reductions!

Bottom LineFull cost pricing – polluter pays

Store energy – better batteries

Recognize problem

Buy out opponents

Convince developing world that sustainability consistent with growth

Do better on climate negotiations

sustaining natural capital big ideas on sustainable prosperity ottawa april 2014 geoffrey heal

Documents

intellectual capital

human capital

natural capitalbig ideas

value of tangible assets

modern economics apple

sustainable prosperityottawa

etcvast majority