Introduction to Ecological Economics
Greentax
Sep. 7, 2004
Gary Flomenhoft-Gund Institute
CIRCULAR FLOW MODEL OF ECONOMY
“EXTERNALITIES”
SOCIETY
?
ECONOMY
ENVIRONMENT
?
Environment as subset of ECONOMY
NEO-CLASSICAL ECONOMICS 1890No Ingredients, only labor and capital
P = f(L,K)= ALa . BKb
(Cobb-Douglas multiplication)
Labor
(Chef )
=
x
X
Capital (Mixing bowl)
Capital (oven)
Bread?
NEO-CLASSICAL ECONOMICS
INFINITE SUBSTITUTABILITY:
2P = f(L,K)= 2ALa . 2BKb
More Chefs
x
or Bigger Mixing bowl
=
More
Bread?
Quotable Quotes
• “There is no reason we can’t have a perfectly
healthy economy with virtually no resources
whatsoever” Robert Solow
• “We can do without agriculture because it’s
only 2% of the economy.”
Norgaard?
• “neo-classical economics is a form of brain
damage” -- Hazel Henderson
ECOLOGICAL ECONOMY
NO “EXTERNALITIES”
Intro to Ecological Economics
Throughput-open system
1st Law: Conservation of mass
(some)
ECONOMY
(waste)
GREEN TAX SOURCES
(some)
ECONOMY
(waste)
3 Ss:
Sources
Sites
Sinks
Sub-surface
Resources
Surface locations:
ie: land
Absorbtion
of waste
Intro to Ecological Economics
Entropy=disorder, randomness
2nd Law: entropy always increases
(waste)
ECONOMY
LOW ENTROPY
(dissipated)
HIGH ENTROPY
Intro to Ecological Economics
WHAT IS ANTI-ENTROPIC? (SYNTROPIC)
(waste)
ECONOMY
LOW ENTROPY
HIGH ENTROPY
Intro to Ecological Economics
Throughput-closed system
earth
ECONOMY
SCALE-Full World or Empty World?
Source:
Ecological
Economics
Principles &
Applications,
Farley and
Daly
Marginal disutility
Differences
Sky-Trust model
(some)
ECONOMY
(waste)
Sources
Sub-surface
Resources
GO UPSTREAM!
Sky-Trust model
Appendix : Key Features of U.S. Sky Trust
Here are the key features of the proposed U.S. Sky Trust.
o Carbon emissions cap set initially at 1.346 billion tons, the 1990
level
o Tradable carbon emission permits sold annually to energy
companies at the top of the carbon chain.
o All revenue from permit sales goes into a nationwide trust.
o Trust pays equal annual dividends to all U.S. citizens (like the Alaska
Permanent Fund).
o Dividends can be placed tax-free in Individual Retirement Accounts
or Individual Development Accounts for children.
o Initial price ceiling on carbon emission permits of $25 a ton; ceiling
rises 7 percent a year for four years.
o Transition Fund to help those most adversely affected by higher
carbon prices. Fund starts at 25 percent of permit revenue, declines
2.5 percent per year.
Governance
Governance
“Golden Rule of Publicly held companies:
“Maximization of Shareholder Value”
Rational behavior:
Externalize costs
Influence politics to
Seek subsidies and favors
“Invisible boot”
Quotable Quotes
“Altruism is evil and selfishness is a
virtue.”
-Ayn Rand
“Few trends could so thoroughly undermine the
very foundations of our free society as the
acceptance by corporate officials of a social
responsibility other than to make as much money
for their stockholders as possible.”
-Milton Friedman 1962
Enron, World Com, Tyco????
Cost of regulations-OMB report
Annual Cost: $37-43 billion
EPA conservative approach, Consistently
overestimates costs, not considering least
cost approach and technical innovation
Annual Benefits: $121-193
EPA consistently underestimates benefits
USING ACTUAL NOT THEORETICAL
CASES BENEFITS OUTWEIGH COSTS
5:1
CONSILIENCE
“~Resources are infinite and the economy can
grow forever”
-Julian Simon
“Anyone who thinks you can have infinite growth
on a finite planet is either a madman or an
economist”
Kenneth Boulding
Intro to Ecological Economics
Throughput-isolated system
Universe
Intro to Ecological Economics-human dev
Growth=increase in throughput-quantitative
Growth
Development
Development=qualitative improvement
Intro to Ecological Economics-population
Demographic transition Theory
Growth
Development
Intro to Ecological Economics-population
Intro to Ecological Economics-forest succession
Growth
Development
Reorganization Aggredation Transition Steady-state (mature)
We hear:
“There is no conflict between economic
growth and environmental protection!”
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$10,000
$1,000
330
World GDP
CO2 level
310
$100
290
$10
270
$1
250
ATMOSPHERIC CO2
World GDP and CO2
$100,000
370
350
GDP 1825: ~$200 BILLION
2000: $41,000 B ILLION OR $41
TRILLION
ATM CO2 CONCENTRATION parts per million(ppm)
=205X 1825 level.
CO2 vs WORLD GDP
370
350
330
310
290
270
$1
$10
$100
$1,000
$10,000
WORLD GDP Billions of 1990 Intl $$ Log scale (source: De Long)
$100,000
60 Million yrs
of CO2
CLIMATE DAMAGE
CLIMATE DAMAGE
Europe in August 2003
COUNTRY
France
DEATHS
14,802
DETAILS
Germany
7000
High temperatures of up to 105.4 degrees
Fahrenheit, the hottest since records began in 1901, raised
mortality some 10 percent above average.
4230
High temperatures coupled with elevated ground-level
ozone concentrations exceeding the European Union's
health-risk threshold.
4175
2045
1400
1316
150
35,118
Temperatures in parts of the country averaged 16 degrees
Fahrenheit higher than previous year.
Spain
Italy
UK
Neth
Portugal
Belgium
TOTAL
Temperatures soared to 104 degrees Fahrenheit in parts of
the country; temperatures in Paris were the highest since
record-keeping began in 1873.
The first triple digit (Fahrenheit) temperatures were
recorded in London.
Temperatures ranged some 14 degrees warmer than
normal.
Temperatures were above 104 degrees Fahrenheit
throughout much of the country.
Temperatures exceeded any in the Royal Meteorological
Society's records dating back to 1833.
ESA Listings and GDP
1400
$10
1200
$9
1000
$8
800
$7
600
$6
400
$5
R2 = 98.4
200
0
1973
$4
$3
1980
1990
2001
Source: The Wildlife Society Technical Review 2003-1.
Endangerment Causes
Urbanization
Agriculture
Water diversions (e.g., reservoirs)
Recreation, tourism development
Pollution
Domestic livestock, ranching
247
205
160
148
143
136
Czech et al. 2000. Bioscience 50(7):593-601.
Causes (cont.)
Mineral, gas, oil extraction
Non-native species
Harvest
Modified fire regimes
Road construction/maintenance
Industrial development
134
115
101
83
83
81
Czech et al. 2000. Bioscience 50(7):593-601.
Carrying Capacity Scenarios
K
K-selection
r-selection
Time
K and r-selected Species
GNP
K
Natural capital
allocated to
wildlife
Natural capital
allocated to
human economy
Time
Czech, B. 2000. Economic growth as the limiting factor for wildlife
conservation. Wildlife Society Bulletin 28(1):4-14.
Natural Capital
“We treat the earth like a business
in liquidation.”
Herman Daly
Opportunity cost. Loss is not counted.
(OVERSHOOT)
Economic Carrying Capacity
(“Plimsoll line”)
K
K-selection
r-selection
Time
K and r-selected Economies
We Might Ask
GGP
K
Economy of
nature
Human
economy
19
29
19
32
19
35
19
38
19
41
19
44
19
47
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
American GNP, 1929-1997
8000
7000
6000
K or r-selected?
5000
4000
3000
2000
1000
0
Natural Capital Allocation Revisited
GNP
X natural capital allocable
Natural capital
allocated
to non-human
economy
KU
KT
Natural capital allocated
to human economy
Time
Distribution-Grow out of poverty?
Poverty rate vs. GDP per Capita (1996$)
$35,000
20%
18%
$30,000
16%
$25,000
14%
$20,000
12%
$15,000
10%
8%
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0
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1
$10,000
per capita GDP (1996$)
poverty rate
ALLOCATION
Adam Smith
Rivalness and Excludability
• rival
– My use leaves less for you to use
• Excludable (property rights)
– One person can keep another from
using the good
– Consumer must pay, market will
supply
Must have a price to work in the free market!
Rivalness and Excludability
• Non-rival
– My use does not leave less for you
to use
– Market sells for a price,
discouraging use, but social cost of
use = 0, therefore market should not
supply
• Non-excludable
– One person can’t keep another from
using the good
– Consumer will not pay, market will
not supply
Must have a price to work in the free market!
Excludable
Non-Excludable
Market Good:
Food, clothes, cars,
land, timber, fish once
captured, farmed fish,
regulated pollution
Open Access Regime:
(misnamed: Tragedy of the
commons)
Oceanic fisheries, timber
etc. from unprotected
forests, air pollution, waste
absorption capacity
Potential market good
Non-rival} (Tragedy of the “noncommons”)but inefficient:
patented information,
Pond, roads (congestible),
streetlights
Private beaches, private
Non-rival,
gardens, toll roads,
congestible zoos, movies
Pure Public Good:
climate stability, ozone
layer, clean air/water/land,
Biodiversity, information,
habitat, life support
functions, etc.
Rival}
Public beaches, gardens,
roads, etc.