Lecture E
Ecological & Environmental Economics
Overview
• Terminology
• Conflicting views of the economy’s relationship to
nature
• No-Limits versus Limits to the economy views
• Problems with current economic theory & reality
• Changing signals to the economy and
internalization
• Economy behaving like an ecosystem
• Alternatives to measuring welfare by GDP
• Globalization
• Dow Jones Sustainability Index
• Summary and Conclusions
Economics Terminology
• Economics: the study of the allocation of scarce
means among competing ends. (Daly)
• Capital: wealth of property that is used or invested to
produce more wealth; the money with which an
enterprise is started. Set of all physical things capable
of satisfying human wants and subject to ownership.
Fisher (1906)
– natural, human, manmade, critical natural
• Wealth: Riches, possession of these.
• Riches: a great quantity of money or property or
valuable possessions.
• Money: portable pieces that can be used as a medium
of exchange. Banknotes or coins.
More...
• Technology: mechanical arts and applied
sciences.
• Growth: increasing in size by accretion or
assimilation of material. A quantitative increase in
physical dimensions or size.
• Economic Growth: rising aggregate
consumption (C) or output (Q).
• Development: bring to a fuller, greater, or better
state.
Empty World View – Herman Daly
Full World View
Physical Limits to Economy
• Malthus: absolute limits or scarcity
• Ricardo: relative limits
• Marx: limits due to social and political
unrest
Malthus Diagram
Closed Economic System
Capital
Stock
Technology
Stock
Production
Labor
Output
Consumption
Households
Capital Investment
Technology Investment
Source: Pezzey
Economy with Environmental Considerations
Environmental
Productivity
Capital
Stock
Environmental Quality
Natural Resource Stocks
Renewable
NonPollution
Resources Renewable
Stock
Resources
Technology
Stock
Production
Labor
Output
Waste Flows
Households
Capital Investment
Consumption
Utility
Environmental Amenity
Technology Investment
Clean Up Expenditure
Source: Pezzey
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
Mainstream economics
FALLACIES
• Marie Antoinette Economics
let agriculture fall, consume other 97% of GNP
• Technological cavalry will save us
we can substitute for soil, air, water, forests...
• “Not Beating the Wife As Much As Before”
false complacency for partial success
Source: Davidson, E.A., You can’t eat GNP, Perseus, Cambridge MA 2000.
Main problems with current economic theory
Externalities
- costs not borne by those who
create them
Badly defined property rights
- environmental goods perceived as commons
The environment is not subject of rights
- the environment’s interests are not legally represented in
the economic system
Externalities
- Are equal to expenses on the elimination of a 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)
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.
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.
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
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”
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
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

Tax Base
Productive
A ctivities
Examples
Effects
Taxes on sales, Distortionary: Discourages
income,
what it taxes, reducing
pay roll,
employ ment and earnings
corporate
profits
Excess Profits
Taxes on
Neutral: Shares with society the
from Natural
logging in
excess profits that are generated
Resource Use
virgin forests, by rising prices from natural
fishing
resources, which are caused by
global demand and dwindling
supplies. Neither encourages or
discourages what it taxes, since
resource users still earn a fair
profit.
Environmental Taxes on
Corrective: Makes polluters
Destruction
water and air
experience the full costs of what
pollutants
they do, encouraging them to
such as
reduce the economic toll on this
fertilizer runand future generations.
off and lead
Table 2 Global taxing priorities (Roodman 1 995)
How Common
Very common - the
source of most revenue
in industrial countries
Rare
Becoming more
common, but except
for energy taxes not
major revenue sources.
Tax shifts from work & investment to environmental damage
Country, year
initiated
Taxes Cut On
Taxes Raised On
Revenue
Shifted (%)
Sweden, 1991
Personal Income Carbon and Sulfur
Emissions
Denmark, 1994
Personal Income Motor fuel, coal, electricity, 2.5
water sales
Spain, 1995
Wages
Motor fuel sales
0.2
Denmark, 1996
Wages,
agricultrual
property
Carbon emissions;
pesticide, chlorinated
solvents, battery sales
0.5
Netherlands, 1996
Personal income Natural gas and electricity
& wages
sales
0.8
United Kingdom,
1996-7
Wages
0.2
Finland, 1996-7
Personal income Energy sales; landfilling
& wages
Landfilling
1.9
0.5
Current Global Tax Revenues
4% 3%
Work and Investment
Resource Windfalls
Environmental Damage
93%
Full Reform of Global Tax Revenues
15%
Work and Investment
Subsidy Cuts
Resource Windfalls
Environmental Damage
12%
8%
65%
Sustainable Economic System
• Understands primary role of natural systems in the
economy
• Integrates functions of industrial and natural
“ecologies”
• Accounts for true costs of waste and disposal
• Cradle-to-Grave responsibility for products
• Penalizes waste, rewards efficiency
• Provides for fair, just, meaningful, and fulfilling
employment of human resources
Ecological Economics
• A new transdisciplinary field addressing the
relationship between ecosystems and economic
systems in the broadest sense.
• Uses the tools of conventional economics and
ecology as appropriate.
• Need to establish institutions that take the long term
view, a la biology.
• Economics as an ecological system.
R. Costanza, Ed. Ecological Economics, The Science and Management of Sustainability,
Columbia University Press, 1991, 3-7.
Relationships of Economic Schools
Some Ecological & Environmental
EconomicsTerms
• Hicksian Income: income that does not forego future
opportunities for others; living off nature’s interest not its
capital
• Pigou’s Externalities a Pigouvian Tax is on paid by
polluters equal to the marginal external cost borne by the
pollutees. The polluter is thus informed about the full
social costs of his operations and the victims can be fairly
reimbursed (1920).
• Solow Criterion: Solow stated that substitutability would
allow man to get along without natural resources (1974).
• The Hartwick-Solow Rule: Manufactured capital can
substitute for natural capital
Hicksian Income
...income that can be consumed without reducing
future consumption possiblities
Hartwick-Solow Rule
Value of savings >= Value of Manufactured Capital
Deterioration +
Value of natural Capital Depletion/
Degradation
The amount a society must save and reinvest to maintain
capital intact. The total capital stock (natural plus
manufactured must be nondeclining.
D. Pearce et al. The Economics of Sustainable Development, Ann. Rev. of
Energy Environ. 1994. 19: 457-474.
The Ecological Economists
• Kenneth Boulding (1910-1992): The Economics of
the Coming Spaceship Earth (1966)
• Nicholas Georgescu-Roegen (1906-1994): The
Entropy Law and Economic Progress- the economy is
not a reversible mechanical systems but subject to the
2nd Law
• Herman Daly: student of N. G-R., steady state
economy
Gowdy, J. and Sabine O’Hara, Economic Theory for Environmentalists,
St Lucie Press, 1995, 129-132.
Biological Basis for the Economy
• A.J. Lotka: “The Earth Machine” or the “Mill Wheel of Life”
• J.A. Hobson : organic test as the test of welfare
• N. Georgescu-Roegen: thermodynamic limits, biophysical
foundations of the economy
• M.K. Hubbert: biophysical constraints to economic growth
• H.T. Odum: economy as an ecosystem
• G. Hardin: institutional conditions for overexploitation
• M. Rothschild: Bionomics - genetic material of the
economy is technology
Economy like ecosystem?
• Eugene Odum:
– young ecosystems: production, growth, quantity
– mature ecosystems: protection, stability, quality
• Today’s economy is like a young ecosystem
• How do we create an economy that is like a
mature ecosystem?
The metabolic analogy
Metabolism
Anabolism Catabolism
Useful
matter
Distribution
Useful
Energy
Degraded
matter
Degraded
energy
Economics
Anabolism Catabolism
Useful
matter
Distribution
Useful
Energy
Time
Totally
degraded
matter
Totally
degraded
energy
Bionomics
• The economy behaves like a biological
system
• Behavior of biological systems applied to
economics
• Excellent forecasting tool (e.g. AT&T
demand for telephone service)
Alternative Measures of Welfare
(Examples)
• Index of Sustainable Economic Welfare
(ISEW)
• Genuine Progress Indicator (GPI)
• Human Development Index (HDI)
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
Globalization
• The World Trade Organization (WTO) (1995)
• Established by final act of Uruguay Round of Multilateral
Trade Negotiations in Marrakech in April 1994
– Goal is to remove all obstacles to trade
• How a product is made
• By whom
• What happens when it is made
– Result: Countries and regions cannot set standards, express
values, or determine what they do or do not support
– Outcomes: Child labor, prison labor, forced labor, substandard
working conditions and wages, environmental destruction, habitat
loss, toxic waste production, synthetic hormones, genetically
engineered materials
• Membership: 135 countries (but no plebiscite was held!)
• Violates Agenda 21 and the Universal Declaration of
Human Rights
Case Study: Chiquita Brands International
• Chiquita Brands International is a $2 billion company
• Main product is bananas from Central America
• History of labor abuses, heavy pesticide use
(dichloropropane), resulting in birth defects and
infertility
• European countries biased import policy for bananas to
small family farmers using fewer chemicals
• U.S. sued and in WTO arbitrated case and won, forcing
European countries to eliminate their bias
• Other cases: Countries must allow McDonald’s,
Blockbuster, Pizza Hut, etc. to operate within their
borders
Dow Jones Sustainability Index
Dow Jones Trend
Dow Jones Sustainability Index vs S&P 500
Leading DJ Sustainability Firms
• Consumer
–
–
–
–
BMW AG, Germany
Fuji Photo, Japan
Unilever Plc., Netherlands
Bristol-Myers Squibb, US
• Energy
– Suncor Energy, Canada
– Enbridge Inc., Canada
• Utilities
– Deutsche Telekom AG,
Germany
– TransAlta Corp., Canada
• Financial
– Credit Suisse Group, CH
– Skandia Forsakrings AB,
SW
• Industrial
– Honeywell Inc., US
– Tomra Systems ASA,
Norway
• Technology
– Fugitsu Ltd., Japan
– ST Microelectronics,
France
BP: Sustainable profits?
World’s largest supplier of
solar modules
$200 million/yr
$1 billion/yr by 2007
Solar-powered H2O
electrolysis: hydrogen buses
WBCSD, US Members
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
3M Company
Alcoa
AT&T
Arthur D. Little
The Boston Consulting Group
Cargill Incorporated
CEMEX
CH2M Hill
Conoco
Dow Chemical Company
DuPont
Eastman Kodak Company
Ford Motor Company
General Motors Corporation
Interface
International Paper
Monsanto Company
Johnson & Johnson
Phelps Dodge
Procter & Gamble Company
Rohm and Haas
S.C. Johnson & Son
Suncor Energy Inc
Texaco
Time Warner
Unocal
Westvaco Corporation
Weyerhaeuser Company
Xerox Corporation
Main Points
• Everything is connected
• The result is there are feedback loops between all elements
of the system
• Maldistribution of wealth is prevalent but not sustainable
• GDP and GNP do not really represent ‘welfare’ just
economic throughput
• The economy responds to signals it is sent
–
–
–
–
–
Cheap waste disposal
Low costs for emissions (air, water, land)
Low cost for environmental impacts
Cheap and subsidized resources
Tax benefits for resource depletion
• How do you change the signals to the economy?
Summary and Conclusions
• The current economic system is not sustainable
–
–
–
–
Depends on the scale of material/energy throughput
Subsidizes resource extraction and pollution
Taxes productive activities
Does not measure ‘welfare’
• A system based on Ecological Economics would:
– Shift taxes to waste, inefficiency, and pollution, away
from wages, profits, productivity, and investment
– Focus on dematerialization, deenergization,
decarbonization, and detoxification
– Measure welfare instead of absolute monetary
transactions
– Support an EcoIndustrial revolution