Lecture # 12 - Sustainability and the Future
|
|
Traditional Approach
|
1. Sustainability - "maintain", "support", or "endure”
- Formal definition
- Brundtland Commission of the United Nations: - “sustainable
development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.”
- Definition is vague
- What are the future generation's needs?
- What are the needs of the current generation?
- UNESCO report: “…every generation should leave water, air, and soil
resources as pure and unpolluted as when it came on earth.”
- “each generation should leave undiminished all the species of
animals it found existing on earth.”
- This definition is extreme - implies we cannot use resources
- Population growth
- World's population is expected to 7 billion by 2012
- More population uses more resources
- Most population growth is in developing countries
- Developing countries want the Western living standard
- Example - China and India are poised to growth
- Thus, humans are going to hit the carrying capacity of their
environment
- Carrying capacity - the maximum population possible given
current resources
- Argue for Green GDP
- GDP does not give a complete picture of
the effect of the environment on the economy
- It ignores the value of
natural resources and impact of environmental damage
- Desired solution - adjust GDP to account for natural resources
- Theory - a country cuts down its timber to sell to the international
markets
- Traditional GDP growth rate may be high at first.
- Once forests are gone, then GDP growth rate is low.
- Green GDP growth rate - would not change as forests are cut
down.
- The gain for selling the timber is offset by the loss of the
forests.
- China has begun to incorporate green GDP into
its decision making.
- Local officials focus on economic
growth, and ignore environmental concerns.
- Problem
- How do you measure this?
- Traditional GDP
- For the whole society in one year, multiply market prices
with market quantities for finished products and services and
add all markets together.
- Environmental damage does not have market prices
- Nobody buys environmental damage
- People pay to clean up environmental damage or people are
negatively impacted by environmental damage
- Natural resources like timber, fish, and petroleum
- Have market prices
- Quantities are not precisely known.
- Uncertain how much is there.
|
Economics Approach
|
1. Solow's definition - “an obligation to conduct ourselves so that we leave
the future the option or the capacity to be as well off as we are.”
- Sustainability is defined as the problem of ensuring future generations
are no worse off than today’s generation
- This is called weak sustainability.
- Weak sustainability – any loss of natural capital should be balanced
out by creation of new capital of at least equal value.
- Assumes natural capital and man-made capital are substitutes.
- Sustainability economics is an equity issue and not an efficiency issue.
- Many neoclassical economists take this approach
- Sustainability - future generations should have at least the same
utility level as humans today
- It implies their welfare is the same or possibly better
- Consumption approach - nondeclining consumption
- Future generations consume the same level of products and
services
- Herman Daly (Beyond Growth 1996)
- Renewable resources should provide a sustainable yield
- The rate of harvest should not exceed the rate of
regeneration
- Fisheries - harvest rate is below the net birth rate
- Thus, fish populations increase
- The rate of depletion for non-renewable resources should create
the same rate of development of renewable substitutes
- Example
- Country extracts petroleum from the ground
- Country creates two streams of money: Income and
Investment
- Society uses income stream for current consumption
- Society uses the investment steam to invest in
alternative technologies that are substitutes
- i.e. Electric cars, ethanol for gasoline, and
biodiesel for diesel fuel
- Degradable pollution levels and waste generation should be
set below the assimilative capacity of the environment
- Assimilative capacity - the environment can absorb some
wastes and pollution with no ill effects
- Some pollution and waste naturally break down
- Ensures pollution and waste levels decrease over time
- Examples
- Burial of household wastes and sulfur dioxide emissions
from burning coal
- If pollution or waste does not degrade, then the emission should
be set close to zero
- Wastes - radioactive substances
- Pollution - greenhouse gases
2. Ecological economists - the
carrying capacity of the environment determines the limit to population growth.
- Economics is driven by scarcity.
- Market prices reflect scarcity
- As resources become more scarce, market prices increase for products
that use the resource
- High market prices
- Law of Demand - people lower their quantity demanded
- i.e. people conserve more
- Firms have an incentive to increase the supply of the resource
- Firms take recycled materials, etc.
- Spurs technological innovation
- Firms get around scarcity by inventing new methods,
technologies, etc.
- The economic measure of the resource is
different from the physical measure.
- The value of economic reserve will change
over time.
- There are alternatives of measuring scarcity.
- Resource
lifetime measure – economic reserve of a resource is divided by its annual consumption
rate.
- Measure ignores technology and rising prices.
- Measuring unit costs,
because the least cost resource will be extracted first.
- Example – when growing
crops, the best land is used first.
- The costs and price would have to rise in
order for people to grow agriculture on less productive land.
- Technology reduces
costs.
- There is uncertain knowledge, which reserve is the lowest costs.
- Discovery of a new deposit.
- Labor and capital may be reducing production costs,
but energy is an input and it has been rising.
- Costs are based on past
experiences and are not forward looking.
- Real prices – Using Hotellling’s
rule, resource prices tend to rise at the interest rate along an optimal
depletion path until the price equals the price of a backstop
resource.
- Ignores the influence of cartels on the price.
- Empirical studies
indicate a U-shaped path for price.
- Governments interfere in the resource
markets, using price controls and other measures.
- Ignores externality costs,
resulting from the pollution damage of extraction or using the resource.
- Which
price deflator should be used?
- Economic rent – defined as the price minus
marginal extraction costs
- Rising rents are an indication of scarcity.
- Empirical data are scarce, however, economists tried to use exploration costs.
- Assumes firms are following their optimal depletion paths.
3. Discounting or present value -future costs and benefits are discounted in
order to determine the equivalent present dollars
- Present value biases consumption towards the
present, because the future receives less weight when discounted.
- The idea is to compare a flow of benefits and costs into a single value.
- Lower discount rate shows a greater preference for future consumption.
- A higher discount rate shows a greater preference for the present.
- Already shown this
- Nuclear wastes cause $50 million in damage exactly in 200 years
- If a discount rate of 10% is chosen,, a value of damage today is
$0.10
- If a discount rate of 1% is chosen, a value of damage today is $6.8
million
- If a discount rate of 0% is chosen, the full value is $50 million now.
- Usually discount rate equals the interest rate
- Some economists argue for a much lower discount rate, called the
social discount rate
- Problems
- Environmental resources and pollution can exist for
generations.
- Radioactive waste, CO2 accumulation, etc.
- Economists are uncertain
which discount rate to use, especially when environmental resources can have
long time spans.
- Economists can do sensitivity analysis and determine how much
influence the discount rate has on the problem.
|
Will Sustainable Development Occur in Market Economies?
|
1. Examples where markets are beginning to appreciate the values provided by
ecosystems
- Panama Canal - deforestation is harming the canal.
- Fresh water supply has been drying up
- Most freshwater is stored upstream in Gatún Lake
- An artificial lake created during
the canal’s construction
- Lake accumulates from rainfall
- Each time a ship travels through the canal, 52 million gallons of
water is released into the ocean.
- Deforested slopes around the lake do not absorb rainwater.
- Thus, rain runs into the lake too quickly, causing it to overflow and run into
the sea.
- If the land were forested, the water would be absorbed and would flow into the
lake more slowly.
- Most deforestation occurred since the 1950s, when a highway made the
land accessible to loggers.
- Rain water washes sediment and nutrients into the canal
- Nutrients lead to growth of weeds
- Leads to expensive dredging
- Leading Panamanian bankers stopped financing cattle ranchers who cut down
forests for pasture.
- Some reductions in deforestation since the 1990s.
- A private insurance firm, ForestRe, has stepped in with a proposal
- The plan would have shipping companies that use the canal underwrite a 25 year
bond to pay for reforestation.
- These companies would ask their big clients, such as WalMart and the Asian auto
companies, to buy the bonds.
- These companies would get discounts on insurance premiums they currently pay to
insure against closure of the canal.
- Threat??? - Pay money or we close the canal???
- Catskill Mountains, NY
- New York City gets its water from the Catskill Mountains watershed.
- In 1997, the city faced building a water filtration plant to clean water from
the watershed.
- This had an up-front cost of $4-6 billion, plus $250 million/year operating
costs.
- Instead, the city made payments to preserve the Catskill watershed
- Spent $250 million to buy land to prevent development
- Spends $100 million/year to farmers to minimize pollution.
- Did New York get cleaner water???
- Costa Rica
- Hydro-electric producers, private customers, and the government contribute $57
million/year to protect a local watershed
- Services provided
- For hydro-electric producers:
- Stream-flow regulation
- Sediment retention
- Erosion control
- For private consumers
- Irrigation
- Government
- Water supply for towns
- Maintain scenic beauty for recreation and ecotourism
2. Pollution Haven Hypothesis - the idea that firms will move from
countries with strong environmental standards to those with weaker standards.
- Does free trade make protecting the environment more difficult?
- Developing countries may even be able to attract industry with low standards.
- Three effects of economic growth on trade:
- Higher incomes => cleaner production processes.
- Higher incomes => preferences for cleaner goods.
- Higher incomes => increased pollution due to greater
consumption.
- Which effect dominates is difficult to say.
- Empirical evidence of the pollution haven hypothesis is weak.
- I believe it occurs
- Many problems in econometrics
- Not all industries are mobile
- Industries are mobile if:
- Low transportation costs and proximity to markets
- Skills of workers
- Political stability
- Availability of materials
- Industries that are mobile are more sensitive to environmental costs
3. International Agreements
- The World Trade Organization (WTO) provides a framework of rules and
procedures to encourage international trade
- The General Agreement on Tariffs and Trade (GATT) was
predecessor
- Aims to reduce barriers of trade.
- Does allow exceptions to protect “human, animal or plant life” and to conserve
natural resources.
- Such import restrictions must be done in a non-discriminatory way.
- Examples:
- GATT upheld the US tax on luxury cars and gas guzzlers because they applied
equally to all autos (Europe protested the taxes).
- In the 1990’s, the U.S. banned imports of tuna caught in nets that kill
dolphins.
- Mexico complained to GATT & won.
- GATT accepted America’s aim of protecting dolphins, but objected to the use of
discriminatory trade sanctions.
- Suggested labeling of dolphin-friendly tuna instead.
- The issue becomes cloudier when we consider pollution from production.
- Consider a firm in a country such as the U.S. that has strong environmental
standards, but has a competitor in a nation with weak standards.
- The competitor has lower costs, so it has an advantage.
- However, it isn’t clear that the U.S. can do anything legally under GATT.
- GATT gives the U.S. the authority to protect the health of its citizens.
- However, imposing stronger environmental restrictions on the second country
affects the health of those citizens, not Americans.
- A World Trade Organization (WTO) report in the fall of 1999 admitted that trade
can harm the environment.
|
|