Sustainable Economics
Ethics of Sustainability
Class 8
Charles J. Kibert, Ph.D., P.E.
Powell Center for Construction & Environment
Rinker School of Building Construction
University of Florida
CK Assignment 2
Find an example of a company that is
considering how best to minimize its
externalities and describe how they are
accomplishing this.
Overview
• Problems with current economic theory
• Ecological economics as an alternative
theory
• Externalities and internalization
• Alternative measures of welfare
The Five Forms of Capital
• Human Capital – physical, intellectual,
emotional and spiritual capacities of any
individual.
• Manufactured Capital – the built environment,
infrastructure, tools, equipment, machinery and
technology
• Social Capital – social networks of family and
community, the “social glue” that holds society
together
• Financial Capital – monetary assets (really a
form of social capital)
• Natural Capital – any part of the natural world
that humans make use of or benefit from,
including resources, waste sinks and ecosystem
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.
The 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
Business
Household
Business
Household
• Ecological economics movement
• Laws of thermodynamics
• Principles of ecology
Herman Daly
Natural
Natural
Capital
Capital
Pollutants
Heat
Natural
Natural
Capital
Capital
Pollutants
Heat
What is Ecological Economics?
• Ecological economics is a transdisciplinary
field of academic research that addresses the
interdependence between human economies
and natural ecosystems. Ecological
economics connects different disciplines
within the natural and social sciences.
• Fundamental focus is on the concept of
NATURAL CAPITAL.
• Economic definition of capital: A STOCK of
something that yields a FLOW of valuable
goods and services.
Ecology and Economics
• From same Greek word oikos, house
• Ecology is the study of the house
• Economics is the management of the
house
Relationships of Economic Schools
Natural Capital
• Capital is a stock that yields a flow of goods
and services into the future
• Natural capital = raw materials and services
provided by nature
– Source, service, sink and site
• Essential inputs into:
– Economic output
– Life support functions
Worth of Ecosystem
• Costanza et al 1997, “The value of the world’s
ecosytem goods and services,” Nature, 387:253-260.
– 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: US$16 to $US54 trillion
• World GNP: US$18 trillion
• Ecosystem-to-GNP ratio 1.8
Strong sustainability
• Strong sustainability rejects the idea that MMK
adequately compensates future generations for
ecological depreciation
• Regardless of price, MMK cannot replace the
unique services and amenities provided by nature
– most notably life-support services
• Strong sustainability advocates the precautionary
principle – where there are threats of serious or
irreversible damage, one should not wait for full
scientific consensus.
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Weak sustainability vs strong
sustainability
• Weak sustainability acknowledges the concept
of Hicksian income* – limiting consumption to
the ‘interest’ or flow of services produced by
the capital stock
• But, it is assumes maintenance of total capital
stock (MMK + NK) without regard to
proportions
• Each kind of capital is treated as being
substitutable for another.
John Hicks
* Hicks, John R. (1939). Value and Capital: An Inquiry Into Some Fundamental Principles of
Economic Theory, Oxford: Clarendon Press.
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The ‘everything-has-a-price’ view
of neoclassical economics
• Weak sustainability is achieved so long as
investment > the combined depreciation
of MMK and NK
• Robert Solow (1974)*: ‘If it is easy to
substitute other factors for natural
resources … then... the world can, in
effect, get along without natural
resources, so exhaustion is just an event,
not a catastrophe.’
*Solow, R. (1974). ‘The economics of resources or the resources of
economics?’ American Economics Review, 64 (2), pp.1-14.
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Ayres (1993)
• The most important ‘scarcities’ (clean air,
clean water, climatic stability, biological
diversity, the absorption of waste by
natural systems, etc) lie outside the
market mechanism and outside the realm
of plausible technological substitution.
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Hicksian Income
...income that can be consumed without
reducing future consumption possibilities
Externalities
- Are equal to cost of eliminating the 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)
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
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.
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”
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

Alternative Measures of Welfare
(Examples)
• Index of Sustainable Economic Welfare
(ISEW)
• Genuine Progress Indicator (GPI)
• Human Development Index (HDI)
• The Happy Planet Index (HPI)
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
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
INDEX OF SUSTAINABLE ECONOMIC WELFARE – U.S., 1990 (Constant billion $ of 1972
Personal income adjusted for income
distribution
$1,164
+services for household labor
+520
+services of consumer durable goods
+225
+services of highways and streets
+18
+consumption public spending on
health/education
+45
-consumer spending on durable goods
-225
-defensive private spending on health and
education
-63
-cost of commuting and auto accidents
-67
-cost of personal pollution control
-5
-cost of air, water, and noise pollution
-39
-lost of wetlands and farmland
-58
-depletion of natural resources
-313
-long term damage from nuclear wastes,
ozone depletion, and greenhouse gases
-371
+net capital growth
+29
+/- net international investment position
-34
INDEX OF SUSTAINABLE ECONOMIC
WELFARE
$818
The Happy Planet Index (HPI)
• Product of the New Economics Foundation
• Similar to UN HDI
Corporate Social Responsibility
• Change lies in the hands of corporate managers
Reside in a role of leadership
Can therefore can help create a more just and environmentally
sustainably world
• As a manager, what steps would you take to change
the following companies to create Corporate Social
Responsibility:
(Small) Locally owned restaurant
(Large) Wal-Mart
(Extra Large) British Petroleum