17THMILLER/SPOOLMAN

LIVING IN THE ENVIRONMENT

Chapter 23Economics, Environment, and Sustainability

23-1 How Are Economic Systems Related to the Biosphere?

• Concept 23-1A Ecological economists and most sustainability experts regard human economic systems as subsystems of the biosphere

• Concept 23-1B Governments intervene in market economies to help correct or prevent market failures such as the failure to protect natural capital, which supports life and all economies.

Economic Systems Are Supported by Three Types of Resources

• An economic systems is a social institution through which goods and services are produced, distributed, and consumed to satisfy people’s need and wants, ideally in the most efficient possible way.

• Economic systems are supported by• Natural capital: includes resources and services produced

by the earth’s natural processes.• Human capital or human resources: includes people’s

physical and mental talents, which provides labor, innovation, culture, and organization.

• Manufactured capital, manufactured resources: are items such as machinery, equipment, and factories made from natural resources with the help of human resources.

Three Types of Resources Are Used to Produce Goods and Services

Fig. 23-2, p. 615

Market Economic Systems Depend on Interactions between Buyers and Sellers (1)• All economic decisions are governed by the competitive

interactions of supply, demand, and price.

• The market price equilibrium point is the point at which the supply and demand curves intersect (where the supplier’s price matches what buyers are willing to pay for some quantity of a good or service).

• Changes in supply and demand can shift one or both curves back and forth.

Supply, Demand, and Market Equilibrium for a Good in a Market Economic System

Fig. 23-3, p. 615

Market Economic Systems Depend on Interactions between Buyers and Sellers (2)• True free market system• No company or group controls prices of a good or service• Market prices include all direct and indirect costs (full-cost

pricing)• Consumers have full information about beneficial and

harmful environmental effects of goods and services• Real world

• Tax breaks• Subsidies • Withholding of negative information about health or environmental

dangers.

• Such advantages create an uneven economic playing field that can undermine true free-market competition.

Governments Intervene to Help Correct Market Failures

• Governments intervene in market systems to provide various public services, to protect open-access resources that cannot privately owned.

• Markets can also fail when they do not value the beneficial effects provided by the earth’s natural capital and the harmful health or environmental effects of some types of economic activity.

• Governments can try to prevent or correct these and other market failures through laws, regulation, taxes, subsides,…

• Public services• Environmental protection• National security and education• Police and fire protection• Safe food and water• Provided by government because private companies can’t or won’t

Economists Disagree over Natural Capital, and whether Economic Growth is Sustainable (1)

• Neoclassical economist view the earth’s natural capital as a subset or part of a human economic system and assume that the potential for economic growth is essentially unlimited.

• High-throughput economies: Most of today’s advanced industrialized countries• Resources flow through and end up in planetary sinks (air, water, soil,

and organisms) where pollutant can be at harmful levels

• Models of ecological economists • Economic systems as subsystems of biosphere• Conventional economic growth unsustainable

Economists Disagree over Natural Capital, and whether Economic Growth is Sustainable

(2)• Ecological models’ three assumptions

1. Resources are limited and shouldn’t be wasted2. Encourage environmentally beneficial and

sustainable forms of economic development3. Full-cost pricing needed to take into account

harmful environmental and health effects of some goods and services

• Environmental economists take middle ground between classical and ecological economists

Economists Disagree over Natural Capital, and whether Economic Growth is Sustainable (3)• Ecological and environmental economists have suggested strategies for

implementing these principles and making the transition to more sustainable eco-economies:• Use and publicize indicators that monitor economic and environmental health.• Use eco-labeling and certification to identify products produced by

environmentally sound methods.• Increasing subsidies and tax breaks for environmentally beneficial good and

services.• Decrease taxes on wages, income, and wealth while increasing taxes on pollution

(tax shifting)• Use laws and regulations to help prevent pollution and resource depletion and

degradation.• Use tradable permits or rights to pollute or to use resources, in order to limit

overall pollution and resource use.• Sell services instead of things.• Reduce poverty (one of the basic causes of environmental degradation, pollution,

poor health, and premature death.

High-Throughput Economies Rely on Ever-Increasing Energy, Matter Flow

Fig. 23-4, p. 617

Ecological Economists: Economies Are Human Subsystems of the Biosphere

Fig. 23-5, p. 617

23-2 How Can We Put Values on Natural Capital and Control Pollution and Resource Use?

• Concept 23-2A Economists have developed several ways to estimate the present and future values of a resource or ecological service, and optimum levels of pollution control and resource use.

• Concept 23-2B Comparing the likely costs and benefits of an environmental action is useful, but it involves many uncertainties.

Practicing Natural Capitalism: Taking Into Account the Monetary Value of Natural Capital

• Estimating the values of the earth’s natural capital: For example, using this approach a team of ecologists and economists estimated that the ecological services provided by the earth’s forests are worth at least $4.7 trillion a year.

• However according to neoclassical economists, a product or a service has no economic value until it is sold in the market-place, and thus because they are not sold in the marketplace, ecological services have no economic value.

Practicing Natural Capitalism: Taking Into Account the Monetary Value of Natural Capital• Estimate nonuse values

• Existence value: a monetary value placed on a resource such an old-growth forest just because it exits, even though we may never see it or use it

• Aesthetic value: a monetary value placed because of its beauty.• Bequest value or option value: is based on the willingness of

people to pay to protect some forms of natural capital for use by future generations.

• Ways to estimate these monetary values:• Estimating a mitigation cost: how much it would take to offset

any environmental damage.• Estimating willingness to pay by surveying public opinion to

determine how much people would pay to maintain natural resources and services.

Estimating the Future Value of a Resource Is Controversial

• Discount rates• Estimate of a resource’s future economic value compared to its present value

• It is based on the idea that having something today may be worth than it will be in the future.

• The size of the discount rate (usually given as a percentage) is a primary factor affecting how a resource such as a forest or fishery is used or managed.

• Proponents of a high discount rate because:• Inflation may reduce the value of their future earnings on a resource.• Innovation or changes in consumer preferences could make a product or

resource obsolete.• Critics of a high discount rate because:

• Encourage rapid exploitation of resources for immediate payoffs• These critics believe that a 0% or negative discount rate should be used to protect unique,

scarce, and irreplaceable resources.• Moderate discount rates of 1-3% would make it profitable to use nonrenewable and

renewable resources more sustainably.• Economic return is not always the determining factor in how resources are used or managed

(ethical concerns)

We Can Estimate Optimum Levels of Pollution Control and Resource Use

• Marginal cost of resource production

• Optimum level of resource use

• Optimum level for pollution cleanup

Optimum Resource Use

Fig. 23-6, p. 620

Fig. 23-6, p. 620

High

Marginal cost of resource productionMarginal benefit

of resource use

Cost

Optimum level of resource use

Low

0 25

Coal removed (%)

75 10050

Cost-Benefit Analysis Is a Useful but Crude Tool

• Cost-benefit analysis follows guidelines• State all assumptions used• Include estimates of the ecological services• Estimate short-and long-term benefits and costs• Compare the costs and benefits of alternative courses

of action

• Always uncertainties

Economic Growth and Economic Development

• Economic growth• Increased capacity to supply goods and services• Requires increased production and consumption• Requires more consumers

• Economic development• Improvement of living standards

• Environmentally sustainable economic development

Gross World Product, 1970-2008

Figure 1, Supplement 9

Gross World Product per Person, 1970-2008

Figure 2, Supplement 9

23-3 How Can We Use Economic Tools to Deal with Environmental Problems?

• Concept 23-3 We can use resources more sustainably by including their harmful environmental and health costs in the market prices of goods and services (full-cost pricing); by subsidizing environmentally beneficial goods and services; and by taxing pollution and waste instead of wages and profits.

Most Things Cost a Lot More Than We Might Think

• Market price, direct price

• Indirect, external, or hidden costs

• Direct and indirect costs of a car

• Should indirect costs be part of the price of goods?• Economists differ in their opinions

Environmental Economic Indicators Could Help Us Reduce Our Environmental Impact

• Measurement and comparison of the economic output of nations• Gross domestic product (GDP) • Per capita GDP

• Newer methods of comparison• Genuine progress indicator (GPI) • Gross National Happiness (GNH)

Monitoring Environmental Progress: Comparing U.S. Per Capita GDP and GPI

Fig. 23-7, p. 622

Fig. 23-7, p. 622

35,000

30,000

25,000

20,000

Per capita gross domestic product (GDP)15,000

1996

Dol

lars

per

per

son

10,000

5,000Per capita genuine progress indicator (GPI)

0

1950 1960 1970 1980 1990 2000Year

We Can Include Harmful Environmental Costs in the Prices of Goods, Services

• Environmentally honest market system

• Why isn’t full-cost pricing more widely used?1. Many businesses would have to raise prices and

would go out of business2. Difficult to estimate environmental and health costs3. Businesses have strong influence on government –

preferential regulations, tax breaks, subsidies

Label Environmentally Beneficial Goods and Services

• Product eco-labeling

• Certification programs

• Greenwashing

Reward Environmentally Sustainable Businesses

• Phase out environmentally harmful subsidies and tax breaks

• Phase in environmentally beneficial subsidies and tax breaks for pollution prevention

• Political difficulties

Tax Pollution and Wastes Instead of Wages and Profits

• Green taxes, ecotaxes • So that harmful products and services are at true cost

• Steps for successful implementation of green taxes

• Success stories in Europe

Trade-Offs: Environmental Taxes and Fees

Fig. 23-8, p. 624

Fig. 23-8, p. 624

Trade-Offs

Environmental Taxes and Fees

Help bring about full-cost pricing

Low-income groups are penalized unless safety nets are provided

Encourage businesses to develop environmentally beneficial technologies and goods to save money

Hard to determine optimal level for taxes and fees

Governments may use money as general revenue instead of improving environmental quality and reducing taxes on income, payroll, and profits

Easily administered by existing tax agencies

DisadvantagesAdvantages

Environmental Laws and Regulations Can Discourage or Encourage Innovation

• Environmental regulation

• Command and control approach

• Incentive-based environmental regulations

• Innovation-friendly regulations

We Can Use the Marketplace to Reduce Pollution and Resource Waste

• Incentive-based regulation example• Tradable pollution or resource-use permits

• Cap-and-trade approach used to reduce SO2

• Advantages

• Disadvantages

Trade-Offs: Tradable Environmental Permits

Fig. 23-9, p. 625

Fig. 23-9, p. 625

Tradable Environmental Permits

Advantages Disadvantages

Big polluters and resource wasters can buy their way out

Flexible

Easy to administerMay not reduce pollution at dirtiest plantsEncourage pollution

prevention and waste reduction Caps can be too high

and not regularly reduced to promote progress

Permit prices determined by market transactions

Self-monitoring of emissions can allow cheating

Trade-Offs

Reduce Pollution and Resource Waste by Selling Services Instead of Things

• 1980s: Braungart and Stahl• New economic model

• Service-flow economy, eco-lease (rent) services• Xerox• Carrier• Ray Anderson: lease carpets in the future

Individuals Matter: Ray Anderson

• CEO of Interface, largest commercial manufacturer of carpet tiles

• Goals• Zero waste• Greatly reduce energy use• Reduce fossil fuel use• Rely on solar energy• Copying nature

• How’s it working?

Ray Anderson

Fig. 23-A, p. 626

23-4 How Can Reducing Poverty Help Us to Deal with Environmental Problems?

• Concept 23-4 Reducing poverty can help us to reduce population growth, resource use, and environmental degradation.

The Gap between the Rich and the Poor Is Getting Wider

• Poverty• 1.4 billion people live on less than $1.25 per day

• Trickle-down effect

• Flooding up

• Wealth gap

Poor Family Members Struggling to Live in Mumbai, India

Fig. 23-10, p. 627

We Can Reduce Poverty (1)

• South Korea and Singapore reduced poverty by• Education• Hard work• Discipline• Attracted investment capital

We Can Reduce Poverty (2)

• Important measures• Combat malnutrition and infectious diseases• Universal primary school education• Stabilize population growth• Reduce total and per-capita ecological footprints• Large investments in small-scale infrastructure

Revisiting Microlending

• Microloans give hope to the poor

• Microloans help more than direct aid

• Spreading around the world

• Kiva.org

Solar Panel Purchased with Microloan in India

Fig. 23-11, p. 629

Achieve the World’s Millennium Development Goals

• 2000: Millennium Development Goals• Sharply reduce hunger and poverty• Improve health care• Empower women• Environmental sustainability by 2015• Developed countries: spend 0.7% of national budget

toward these goals

• How is it working?

What Should Our Priorities Be?

Fig. 23-12, p. 629

Fig. 23-12, p. 629

Expenditures per year needed to

Expenditures per year (2008)

Reforest the earth $6 billion World military $1.4 trillion

Protect tropical forests $8 billion U. S. military $734 billion

Restore rangelands $9 billionU. S. dog food $39 billion

U. S. highways $29 billionStabilize water tables $10 billion

U. S. foreign aid $27 billionDeal with global

HIV/AIDS $10 billionU. S. potato chips and similar snacks $22 billion

Restore fisheries $13 billion U. S. cosmetics $8 billionProvide universal primary

education and eliminate illiteracy

$14 billion U. S. EPA $7.2 billion

Protect topsoil on cropland

$24 billion

Protect biodiversity $31 billionProvide basic health

care for all $33 billionProvide clean drinking

water and sewage treatment for all

$37 billion

Eliminate hunger and malnutrition

$48 billion

Total Earth Restoration and Social Budget

$245 billion

23-5 Making the Transition to More Environmentally Sustainable Economics

• Concept 23-5 We can use the three principles of sustainability as well as various economic and environmental strategies to develop more environmentally sustainable economies.

We Are Living Unsustainably

• Depleting natural capital

• Environmental alarm bells going off

• Matter recycling and reuse economies• Mimic nature

Use Lessons from Nature to Shift to More Sustainable Economies

• Donella Meadows: contrasts the views of neoclassical economists and ecological economists

• Best long-term solution is a shift to• Low-throughput low-waste, economy

Solutions: Lessons from Nature: A Low Throughput Economy

Fig. 23-13, p. 631

Fig. 23-13, p. 631

Inputs (from environment)

Outputs (into environment)

System throughputs

High-quality energy

Energy conservation

Low-quality energy (heat)

Low-waste economyWaste and

pollution prevention

Pollution control Waste and pollution

High-quality matter

Recycle and reuse

Make Money and Create Jobs by Shifting to an Eco-Economy

• Hawken, Brown, and other environmental business leaders• Transition to environmentally sustainable economies• Some companies will disappear• New jobs will be created• Economic succession• Green jobs

Solutions: Principles for Shifting to a More Environmentally Sustainable Economy

Fig. 23-14, p. 631

Fig. 23-14, p. 631

Environmentally Sustainable Economy (Eco-Economy)

EconomicsReward (subsidize) environmentally sustainable economic developmentPenalize (tax and do not subsidize) environmentally harmful economic growthShift taxes from wages and profits to pollution and wasteUse full-cost pricingSell more services instead of more thingsDo not deplete or degrade natural capital

Live off income from natural capitalReduce povertyUse environmental indicators to measure progress

Certify sustainable practices and productsUse eco-labels on products

Resource Use and PollutionCut resource use and waste by reducing, reusing, and recyclingImprove energy efficiencyRely more on renewable solar, wind and geothermal energyShift from a nonrenewable carbon-based (fossil fuel) economy to a non-carbon renewable energy economy

Ecology and PopulationMimic naturePreserve biodiversityRepair ecological damageStabilize human population

Fig. 23-14, p. 630

Environmentally Sustainable Economy (Eco-Economy)

EconomicsReward (subsidize) environmentally sustainable economic development

Penalize (tax and do not subsidize) environmentally harmful economic growthShift taxes from wages and profits to pollution and waste

Use full-cost pricingSell more services instead of more things

Do not deplete or degrade natural capital

Live off income from natural capitalReduce poverty

Use environmental indicators to measure progressCertify sustainable practices and productsUse eco-labels on products

Stepped Art

Resource Use and PollutionCut resource use and waste by reducing, reusing, and recyclingImprove energy efficiencyRely more on renewable solar and geothermal energy

Shift from a nonrenewable carbon-based (fossil fuel) economy to a non-carbon renewable energy economy

Ecology and Population

Mimic nature

Preserve biodiversity

Repair ecological damage

Stabilize human population

Solutions: Environmentally Sustainable Development

Fig. 23-15, p. 632

Fig. 23-15, p. 632

No-till cultivationProduction of energy-efficient electric cars recharged by wind and solar energy

Forest conservation

Sustainable fishing and aquaculture

Sustainable organic

agriculture and drip-irrigation

High-speed trains

Solar-cell fields

Ecovillage

Wind farms

BicyclingWater conservation

Communities of passive solar homes (ecovillage)

Recycling, reuse, and composting

Recycling facility

Green Careers

Fig. 23-16, p. 633

Fig. 23-16, p. 633

Environmentally Sustainable Businesses and Careers

Aquaculture Environmental law

Biodiversity protection

Environmental nanotechnology

Biofuels Fuel cell technology

Climate change research

Geographic information systems (GIS)

Conservation biology Hydrogen energy

Geothermal geologistEcotourism management

HydrologistEnergy-efficient product design Marine science

Pollution preventionEnvironmental chemistry

Selling services in place of products

Environmental design and architecture

Recycling and reuse

Sustainable agriculture

Environmental economics

Solar cell technology

Sustainable forestryEnvironmental education

Urban gardeningEnvironmental engineering

Waste reductionUrban planning

Environmental entrepreneur Watershed

hydrologist

Environmental healthWind energyWater conservation

Green Career: Installing Solar Cells

Fig. 23-17, p. 633

Three Big Ideas

1. Making a transition to more sustainable economies will require finding ways to estimate and include the harmful environmental and health costs of producing goods and services in their market prices.

2. Making this economic transition will also mean phasing out environmentally harmful subsidies and tax breaks, and replacing them with environmentally beneficial subsidies and tax breaks.

3. Other tools to use in this transition are to tax pollution and wastes instead of wages and profits, and to use most of the revenues from these taxes to promote environmental sustainability and to reduce poverty.

Three Big Ideas