economics and the environment

ECONOMICS AND THE ENVIRONMENT ● ● ● ● How much is clean air worth? Can you charge somebody for damaging your air? How much are you willing to pay for clean air? Should you have to pay for clean air? ● ● ● ● ● Have you ever caught a fish off the UST pier? Is cutting down the rainforests efficient? What market incentives are there for research on the environment? How can the environment be priced and sold? Does Hong Kong have any mechanisms for valuing its environment? Lecture Objectives: ● Review Advantages and Limitations of Market Economics ● Understand how economics is creating new principles and guidelines for business activity Comparing: ● ● Neo-classical Economics Environmental Economics Ecological Economics ● To reveal policy implications ● ● What is an economy supposed to do? ● What is the Neo-classical approach? What is a market? ●A system of exchange What is exchanged? ●Resources: land, labor, capital (ie goods or services in some form) How does the market work? ●Matching demand of supply and Why is the market such a good ● Optimal use of resources: buyers force competition system? ● on suppliers; greatest return for the efforts of suppliers Pareto efficiency: “a situation where it is impossible to make one person better off without making anyone else worse off” – Meaning: allocation of resources to the uses that will bring the greatest overall increase in production and monetary value by matching producers with the highest bidders Policy Guidelines from Environmental Economics: I Benefits of Using the Market (as opposed to CAC) ● ● ● Cost effectiveness: example, emission trading credits Substitution and technological advance: example, green taxes Other institution/market based schemes: deposit refund schemes, environmental bonds, transferable quotas, transfer of development rights Policy Guidelines from Environmental Economics II Better Valuation of Nonmarket Valued Assets ● ● ● ● ● Financial Costs Averting Behavior Travel Cost Method Hedonic Pricing Contingent Evaluation For: Better Cost-Benefit Analysis, regulations, fines Environmental Economics and Ecological Economics Weak vs Strong Sustainability Environmental Economics and Ecological Economics: Weak vs Strong Sustainability ● ● ● ● Efficiency standard vs ecological standard Discount rate (growth) driven vs discount rate (growth) limiting Resources as inputs & outputs of unlimited economic system vs economic system as limited subsystem of ecosystem Substitutability vs complementarity The Environmental Economics Tradeof Neo-classical Empty World Environmental Economics World S Recycle? M Recycle H Economy S M M E E Economy E E Ecosystem Ecosystem S = solar energy M Ecosystem H H = heat M = matter natural capital E = energy man-made capital Figure 1: The Economy as an Open Subsystem of the Ecosystem (Daly 1996:49) Ecological Economics Full World Environmental Economics World S S Recycle Recycle M M M Economy E E E Economy M E Ecosystem H S = solar energy Ecosystem H = heat M = matter natural capital E = energy man-made capital Figure 1: The Economy as an Open Subsystem of the Ecosystem (Daly 1996:49) H Substitutability vs Complementarity ● ● ● ● ● Manufactured and knowledge capital for natural capital Land, labor and capital substitutability Same service by different product Technological fixes Ecosystem resilience ● Manufactured capital depends on natural capital ● Uniqueness, uncertainty and irreversibility Ecosystem services Growth outpaces substitution Ecosystem fragility ● ● ● Policy Influences from Ecological Economics ● ● ● Strict demands for environmental protection reflected in: Environmental impact assessment Natural preservation areas (parks, reserves) Absolute limitations on chemicals Policy Guidelines from Ecological Economics ● Daly Rule ● Index of Sustainable Economic Welfare (ISEW) ● Ecological tariffs on free trade ● Community based sustainability through self-sufficiency and diversification Policy Guidelines from Ecological Economics ● Daly Rule: "Never reduce the stock of natural capital below a level that generates a sustained yield unless good substitutes are available for the services generated." Index of Sustainable Economic Welfare ISEW= total output + unpaid work - environmental destruction and degradation - environmental improvement measures - depreciation of human-made capital +/- welfare distribution effect Free Trade Limitations ● ● ● Regional specialization obscures view of resource exploitation, depresses ecological and social laws, weakens terms of trade and impoverishes landholders Externalities from the shipping of goods around the world Therefore, tariffs to compensate or reduce free trade ● ● ● ● Community Based Development Community rather than corporations or government creates social conditions (wants and needs) that limit impacts Greater self-sufficiency through decentralized control Local synergies for recycling and energy reduction Ethical bonds amongst business community Summing up: ● ● ● ● Market success in exchange efficiency Market failures in: valuation, common access, externalities, and discount rate Environmental economics guidelines: cost effectiveness and market-based incentives Ecological economics guidelines: limiting growth to within global and local ecosystems *therefore reducing throughput of economy within ecological carrying capacity [...]... reduction credits from others who could successfully lower their emissions below the capped level Environmental Economics: From Market Failure to Government Failure ● ● Limited information of how to deal with specific environmental problems (of area or industry) and of firms’ capability to deal with or hide environmental impact Limited resources to regulate, monitor and enforce ➥ Command and Control regulations:... Discounting the future Missing Markets Externalities ● “An unintended cost or benefit of production or consumption that is not reflected in the price of the related transactions Externalities are often borne by people who are not parties to the transactions that create them.” Externalities ● Define the externalities of your company: who are the parties to the monetary transaction and who or what pays for the. .. Policy Guidelines from Environmental Economics II Better Valuation of Nonmarket Valued Assets ● ● ● ● ● 1 Financial Costs 2 Averting Behavior 3 Travel Cost Method 4 Hedonic Pricing 5 Contingent Evaluation For: Better Cost-Benefit Analysis, regulations, fines Environmental Economics and Ecological Economics Weak vs Strong Sustainability Environmental Economics and Ecological Economics: Weak vs Strong... the government says a "cap and trade" method is best for Hong Kong Under this system, the government would set an emissions cap as well as a timetable for this to be lowered The capped quantity of emissions would then be distributed to sources of air pollution, including power plants and large factories, in the form of emission allowances or permits Polluters who fail to meet the requirements of the. .. Command and Control regulations: uniform standards and technologies Policy Guidelines from Environmental Economics: I Benefits of Using the Market (as opposed to CAC) ● ● ● 1 Cost effectiveness: example, emission trading credits 2 Substitution and technological advance: example, green taxes 3 Other institution/market based schemes: deposit refund schemes, environmental bonds, transferable quotas, transfer... of the transaction Discounting the Future with Net Present Value (NPV) NPV = x/(1+.10)nyrs X + your present money value 10 = the discount rate nyrs = the power of how many years down the future you are looking at NPV of 100 dollars in five years with a discount rate of 10% is 100/(1+.10)5 or $62.09 Environmental & Ecological Economics 1 2 3 4 Why should CLP pay for pollution controls in Guangdong rather... view of resource exploitation, depresses ecological and social laws, weakens terms of trade and impoverishes landholders Externalities from the shipping of goods around the world Therefore, tariffs to compensate or reduce free trade ● ● ● ● Community Based Development Community rather than corporations or government creates social conditions (wants and needs) that limit impacts Greater self-sufficiency... = energy man-made capital Figure 1: The Economy as an Open Subsystem of the Ecosystem (Daly 1996:49) Ecological Economics Full World Environmental Economics World S S Recycle Recycle M M M Economy E E E Economy M E Ecosystem H S = solar energy Ecosystem H = heat M = matter natural capital E = energy man-made capital Figure 1: The Economy as an Open Subsystem of the Ecosystem (Daly 1996:49) H Substitutability... Manufactured and knowledge capital for natural capital Land, labor and capital substitutability Same service by different product Technological fixes Ecosystem resilience ● Manufactured capital depends on natural capital ● Uniqueness, uncertainty and irreversibility Ecosystem services Growth outpaces substitution Ecosystem fragility ● ● ● Policy Influences from Ecological Economics ● ● ● Strict demands for environmental... Strong Sustainability ● ● ● ● Efficiency standard vs ecological standard Discount rate (growth) driven vs discount rate (growth) limiting Resources as inputs & outputs of unlimited economic system vs economic system as limited subsystem of ecosystem Substitutability vs complementarity The Environmental Economics Tradeof Neo-classical Empty World Environmental Economics World S Recycle? M Recycle H Economy