Ecological Economics
and Sustainable
Business
Joshua Farley, PhD
University of Vermont
Community Development and Applied Economics &
Gund Institute for Ecological Economics
Introductions
 Background
 What
do you hope to get out of this
course?
 What is the unsustainable activity
described in your newspaper article?
What is Economics?
 The
allocation of scarce (available)
resources among alternative desirable
ends
 Alternative: How people transform
nature to meet their needs
Sequence of 3 questions:
 What
are the desirable ends?
 What are the scarce resources?
 How do we allocate?

What else do we need to know before we
can decide how to allocate?
Today’s Goal
 Provide
brief general answers to the three
questions, from perspectives of:



Neoclassical economics
Ecological economics
This group
 Examine
the role and limitations of
business in allocating resources towards
those ends.
Where do you Stand?
Desirable Ends
 The
desirable ends for our economic
system is continuous growth (i.e. growth in
GNP).
 The purpose of business is to make
money
 In my professional life, the most important
desirable end for me is salary
Desirable Ends

Growth







Profit



Is this the dominant economic goal in the world today?
Should it be?
Are people insatiable?
Can capitalism survive an end to growth?
What are the drawbacks to this goal?
How big should the economy be?
Is this the dominant goal in your business? Is growth?
Contrast this to assumptions of neoclassical economics
Salary



What about working conditions? Status?
Most desirable job: operating a hedge fund
Goal for college students: 1975 “develop a meaningful philosophy of
life” to 2005 “make a lot of money”
Scarce Resources
 Technology
and ingenuity will solve all our
environmental problems


What resources are required for economic
production?
What drives solutions? Profits? If not, where
will the resources come from?
Allocation
 The
private sector is almost always more
efficient than the public sector.
 “Few trends could so thoroughly
undermine the very foundation 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”
Nobel laureate Milton Friedman
Allocation
 There
is a fundamental conflict between
economic growth and environmental
quality
What is Ecological
Economics?
Same basic questions…
 What
are the desirable ends?
 What are the scarce resources?
 How do we allocate?
…with changing answers:
Coevolutionary economics

Hunter-gatherer economics


Economics of early agricultural societies



Depended on technological advance
Advent of property rights
Industrial market economics


Accumulation = death
Use of non-renewable resources: FOSSIL FUELS
Ecological economics

Driven by the growing scarcity of natural capital
What are the
Desirable Ends?
“If you don’t know where
you’re going, you might
end up somewhere else”
Desirable Ends

A high quality of life for this and future generations.
Where are we going?
What ends does our society currently pursue?
 Endless
economic growth, more material
consumption


Why has the US failed to sign on to the Kyoto
Protocol?
Why can’t women and children eat fish from
Vermont?
 We
consume more than we produce
 How long does it take to double
consumption?
Subjective Well Being:
What makes people happy/satisfied?
 Money?

(Not very, and only relative wealth once basic
needs are met)
 Friends
 Desiring
less
 Marriage
 Religion/community
 Helping others
The Smile Factor
 Are Americans
the happiest/most satisfied
people in the world?
 Are Americans getting happier over time?
 If we’re not deliriously happy, what’s the
justification for consuming 25% of the
Earth’s resources?
What makes people unhappy?
 Pursuit
of material gain
“young adults who focus on money, image
and fame tend to be more depressed,
have less enthusiasm for life and suffer
more physical symptoms such as
headaches and sore throats than others.”
 Comparing yourself with others

Status is a never-ending tread-mill
Quality of life = fulfillment of human
needs
 Much
more than
consumption
 Market goods only
one of many
human needs
 Satiation occurs

pseudosatisfiers
 Needs
the same
across time and
culture, how we
satisfy them differs
Where does our current vision of
the desirable ends come from?
Three necessary intermediate
ends, in order of importance:
 Ecologically
sustainable scale
 Socially just distribution of
resources within and between
generations
 Economically efficient allocation
What are the
scarce resources?
First law of thermodynamics
 Matter
energy cannot be created or
destroyed



We cannot create something from nothing,
nor nothing from something
All economic production requires raw
materials provided by nature
Continuous physical growth of the economy is
impossible
Second law of thermodynamics

Entropy never decreases in an isolated system



It is impossible to do work or recycle waste
without low-entropy energy: no economic
production without energy



Things fall apart, wear out, become useless
All economic activity generates waste
There is only a finite stock of accumulated low
entropy matter/energy
There is only a finite flow of solar energy
The ultimate limit to the physical size of the
economic system is our ability to capture low
entropy provided by solar energy
Three Specific Scarce Resources
 Energy
 Ecosystem
goods
 Ecosystem services
Energy







Patent on steam engine 1769
Wealth Nations 1776
Finite stock of fossil fuels (finite flow of solar
energy, which is a service)
Use = depletion; completely non-renewable
Use = pollution
1 barrel of oil = 20,000-25,000 hours of human
labor
Substitution very difficult
What’s the state of the stock?
The Hubbert curve-discovery
The Hubbert curve-production
Unconventional Fossil Fuels
 Alberta
tar sands
 Orinoco heavy crude
 Shale oil
 Liquid coal
 Energy return on energy invested very low
 Waste emissions extremely high
Waste Emissions
What Level of CO2 Reductions are
Required?
 Kyoto
 Schwarzenegger
 Germany’s
G8 proposal
 Stern Report
Ecosystem Goods: Biotic Raw
Materials

We can use them
up as fast as we like
 If I use it, you can't


Competition for use
Private property rights
common
 Market goods
 Scarcity  price increase  innovation of
substitutes
 Ecosystem structure, building blocks of
ecosystems
Ecosystem Services
 Structure
generates function, ecosystem
functions of value to humans=ecosystem
services
 Climate regulation, water regulation,
disturbance regulation, etc.
 Waste absorption capacity
 Capacity for ecosystem structure to reproduc
itself
 Habitat for biodiversity, nutrient cycling, witho
which other services cannot exist.
Ecosystem Services

Provided at a given rate
over time
 If I use it, you still can
(except waste absorption)
 Cooperative in use

Can't be owned: no
property rights (except
waste absorption)
 Non-market goods—no
price signal

Scarcity  price increase 
innovation
The Special Case of Waste
Absorption Capacity
 Competitive

E.g. If the global climate absorbs US CO2
emissions, it can no longer absorb China’s
 Can



in use
be assigned property rights
Government level regulations determine supply
and ownership
We’ve done it in the US for SO2 emissions
Kyoto seeks to do this for CO2
 Can
be made into a market good through
regulation
The Laws of Ecology
•
•
The raw materials converted into economic
products are elements of ecosystem structure
Ecosystem services are provided by a special
configuration of ecosystem structure
Ecosystem Services, uncertainty
and Ignorance






We often don't know what
services are until they're
gone
The ozone layer
Sardines and global climate
change
Time lags: the passenger
pigeon
Sample size of one:
uncertainty is unavoidable
How much risk do we accept
with life support functions?
What does this
mean for the
economy?
The Economic Problem

Micro-allocation : how do we allocate resources
provided by nature among different economic
products?


Macro-allocation: How do we allocate ecosystem
structure between:



Markets are favored approach
Economic production, essential to our survival
Planetary life support functions, essential to our
survival
Life support functions have no price; markets
alone cannot solve this allocation problem
Current Status
Currents status
•Human made
capital has
grown more
abundant, and
natural capital
more scarce
•How big
should the
economy be?
Earth, Inc.
 If
the Earth were a business, how well
would you assess the performance of its
CEOs?
 We are disinvesting in natural capital
 How do you feel about this as a
shareholder in Earth, Inc.?
 Can a business survive if it continually
disinvests in essential capital?
 Can an economy?
What caused the problems in your
newspaper articles?
 Government?
 Business?
 Individuals?
 Nature?
Supply Chain

Y=f (K, L)
 Trace the chain of production from means to
ends
 Ultimate means  product
 By-products

What are the relevant inputs?
Product  desirable ends
 Does the firm pay the full cost of production?
Does the consumer?
 Y=f (K, L, N; r) + w


Pencil -Timber -Rubber -Metal -Graphite Coal -Sunlight -CO2 -Depleted forest services
-Mine tailings -Mining jobs -Logging jobs -Soil
-Landfill waste -Dirty water -Dirty air -Water Paint -Chemistry jobs -Pencil making jobs
-Mining machinery -Saws and sawmills Minerals Oil -Garbage trucks -Landfill land
-Watershed degradation -Subsidies
-Communication -Roads -Ships -Knowledge
-Agriculture -Rubber trees -Managerial skills Pencil making machinery
Sustainability,
Justice and
Efficiency
What Resources are Critical to
Sustainability?
 Must
be essential with no good substitutes
 Water
 Energy
 Food
 Ecosystem services (which includes the
ability for ecosystem goods to reproduce)
 Information
What are the Rules for
Sustainability?

Cannot deplete critical natural capital



Must maintain life support functions
Must retain ability to renew itself
Cannot use up renewable resources faster than
they can renew themselves
 Cannot spew waste into the environment faster
than it can be absorbed
 Cannot use up critical non-renewable resources
faster than we develop renewable substitutes
What are the Principles of a Just
Distribution?
 Each
person is entitled to the products of
their own labor
 No one is entitled to take something away
from someone else against their will
 Values created by nature or by society as
a whole belong to society as a whole
 Whoever takes values created by nature
or society should compensate society
 What about future generations?
Why is the value
of Natural Capital
Increasing?
The laws of
economics
What are the limiting factors ?

Of production?



For human well-being?





If we want more seafood, do we need more boats and
factories, or larger wild stocks?
If we want more timber, do we need more chainsaws
or more forests?
Material consumption doubles every generation.
Do you want your grand-kids to have more airconditioning or more ozone layer?
More cars or more climate stability?
More consumer goods or more ecosystem services?
We need to invest in the limiting factors
The Demand Curve for Natural Capital
value
Marginal
Marginal Value
(and other Essential, Non-substitutable Resources)
Critical:
Perfectly
inelastic demand
Important:
inelastic
demand
Valuable:
elastic demand
Demand curve
for natural capital
Natural
Capital Stocks
Natural
Capital
stocks
value
Marginal
Marginal Value
The Total Value of Natural Capital
Critical:
Perfectly
inelastic demand
Important:
inelastic
demand
Valuable:
elastic demand
Demand curve
for natural capital
Natural
Capital Stocks
Natural
Capital
stocks
Conventional Economists:
Missing the point….
 Schelling
(Nobel Memorial Prize in
2005):
“Agriculture and Forestry are less than 3%
of total output, and little else is much
affected. Even if agricultural productivity
declined by a third over the next half
century, the per capita GNP we might have
achieved by 2050 we would still achieve in
2051.”
Market relevant
characteristics of
resources
Excludability

Excludable resource regime





Non-excludable




One person/group can prevent another from using the
resource
Necessary for markets to exist
Ecosystem goods can generally be made excludable
Patents make information excludable
No enforceable property rights
Can’t charge for use
Some resources non-excludable by nature, including
most ecosystem services
Policy variable
Rivalness
 Rival


resources
My use leaves less for you to use
All ecosystem goods are rival
 Non-rival


My use does not leave less for you to use
Inefficient to ration through prices; leads to
under-consumption

Most ecosystem services are non-rival

Information is perfectly non-rival
 Non-rival
but congestible
Public Goods Game






Part of class grade
Each of you begins with 60 points (a D-). Points
are rival and excludable.
Can be donated to public good, made non-rival
and non-excludable
N = number of students
Conversion rate of private good:public good =
1.5/N:1
If everyone donates all their points, you each get
a 90 (B+)

Round 1: Write down the number of points you
want to donate. The remainder are yours. No
one will know what you do but me.
 Round 2: Write down the number of points you
want to donate. Everyone will know.
 Round 3: Same as round two, but you can also
donate points to punish those who contribute
less than average. Conversion rate of private
good:punishment = 1:N/3 (punishment is also
private good)
Lessons?
 Does
greedy self interest generate the
greatest good for the greatest number?
 Bell curve of pro-social behavior
 Role of altruistic punishment
How do We Allocate?
Allocation Matrix
Excludable
Rival
Non-rival
Non-rival,
congestible
Non-Excludable
Market Good:
Ecosystem structure,
Fossil fuels, Waste
absorption capacity
(e.g. SO2)
Open Access Regime:
Unowned ecosystem
structure, waste absorption
capacity (e.g. CO2)
Tragedy of the noncommons:
patented information,
e.g. Tamiflu, ozone
safe refrigerants
Club or Toll Good
Pure Public Good:
Street lights, national
defense, most ecosystem
services, non-patented
information
Supply Chain and the Allocation
Matrix

Where does each part of the supply chain fit into the
matrix?

stock flow resources such as ecosystem goods:




Use = depletion
We control rate of use, can be stockpiled
Transformed into what it produces
Fund service resources such as ecosystem services




Particular configuration of stock flows
Not transformed through use
Can’t be stockpiled
We don’t control rate of use
Open access regimes
 Businesses/individuals
gain all benefits
from over-exploitation, share costs with
everyone
 Leads to lower yields and higher costs for
most species
 Generally unsustainable, unfair and
inefficient
Fish: “Tragedy of the commons”
Pollution: “Tragedy of the commons”
Public Goods
 View
sunset, $10
 Non-excludable so markets don’t provide
(underproduction)
 Non-rival so markets shouldn’t provide
(underconsumption)
 What are options?
Information: The Tragedy of the
Non-commons

Production



How do we produce the right things?
Eflornithine
How do we produce them efficiently?
Medicine, ‘anti-commons’
Consumption



How do we ensure people consume the appropriate
amount?
Alternatives to ozone depleting compounds, carbon
based fuels
Avian flu, HIV drugs
Are patents just?




Samuel Slater,
“Father of American
Industry”
Developed countries
own 97% of all
patents
Raises costs for
research that meets
the needs of the poor
“Standing on the
shoulders of giants”
Efficient
Allocation: The
Role of Business
and Government
How are we addressing
macro-allocation?
 For
better or worse, government regulation
is the main mechanism


Limits to waste emissions
Limits to resource extraction (mostly fisheries
so far)
 Voluntary
personal measures: negligible
 Voluntary business measures


Often done to pre-empt regulations, or get a
jump on competition
e.g. Wal-Mart
What do you Think of Wall-Marts
efforts?
 What
was their motivation?
 How will they contribute to sustainability?
 Is it enough?
What is the impact of regulations
and other government
interventions on Business?
Sinks

Regulation of waste sector creates markets
 No regulation  no waste industry
 More regulation  growth in waste industry




E.g. carbon markets: converting methane to
energy could give triple dividend
Benefits those who anticipate it, may harm those
who don’t
But also compensation for damages
Yet more regulation  no-waste industry


Closing the loops
Waste outputs from one industry become
resource inputs into another
Future of Business: Sinks

Emphasis must shift from managing waste
outflows to handling materials
 Landfills become source, not sink
 Industrial ecology and closed loop systems
 Increased reliance on ecosystem services


Living machines, bacterial digesters, nutrient
cycling
Increased reliance on renewable energy
 Ecological processes are solar powered
 Energy from waste
Energy
 Regulations
to curb global warming
 Subsidies for alternative fuels
 Mandated efficiency
 Rationing?

California vs. Brazil
 Claims
Alaska
for just distribution, e.g. Louisiana,
Future of Business: Energy
 Can’t
do work without energy
 Skyrocketing prices
 Efficiency
 Markets for new technologies?

Is this good?
 Return
to the local
 Economic instability?
Sources
 Limits
to extraction: biotic
 Limits to extraction: abiotic
 Mandated compensation for damages
Future of Business: sources

Limits to extraction: biotic



Limits to extraction: abiotic



Efficiency
Markets for substitutes?
Compensation for damages


Leads to increase in output, reduced costs of harvest
Changing terms of trade (ag)
Internalizing costs of externalities
Terms of trade: Agriculture
Market Mechanisms
 Taxes
 Cap,
distribute and trade
 Payments for ecosystem services
 Financial assurance bonds
Common Asset Trusts
 Democratic
decision-making, informed by
scientific expertise and precautionary
principle
 Sustainable quotas
 Easier on sources, but possibly more
feasible for sinks
Information?
 What
is role of business in solving the
problems described in your newspaper
articles?
 Will your business take these steps
voluntary, from fear of regulation, or after
regulation?
Conclusions

Natural capital has become the limiting factor in
economic production
 Economy must move towards less waste and
greater regulation of waste emissions to protect
natural capital
 Less resource extraction
 Greater investments in knowledge
Conclusions

Threat and Opportunity
 Reactive



Regulations forced upon you, no control.
Tough to catch up with the leaders. Other countries
well ahead of us.
Proactive


Can become leaders in a booming sector
regulations modeled on industry’s innovations