Ecological Economics !101Pres

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“How Much Are Our Natural Resources Worth?”

http://www.greenmba.com/

Roberto PiccioniApril 26, 2009

[email protected]

Agenda: Sunday, April 26

“How Much Are Our Natural Resources Worth?”

• Presentation: Ecological Economics, Global Eco-Footprint, Estimating Ecosystems Value, Policy Design

• Evaluating Estimation Methods, – Group Activity, Explanation & Example

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Reduced operating costs

Reduced liability & risks

Enhanced brand image

Improved employee morale

Opportunity for innovation

Revenue growth opportunities

Enhanced supply chain management

Enhanced customer relations

Boost reputation

Mos

t

Admired

Company

Economy

EnvironmentSocialResponsibility

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Sustainability: Definitions & Perceptions

“Development that meets the need of the present without compromising the ability of future generations to meet their own needs” The UN’s Brundtland Commission, 1987

“The business of business is business, not sustainability.”

- Milton Friedman

“Sustainability seems to encompass everything under the sun. It’s just more tree-hugger mumbo jumbo.”

- Mfg VP

“It’s ‘Berkeley-esque’, it’s mushy.”

10 Myths of Sustainability

1. Nobody knows what sustainability really means.

2. Sustainability is all about the environment.

3. “Sustainable” is a synonym for “green.”4. It’s all about recycling.5. Sustainability is too expensive.

10 Myths of Sustainability

6. Sustainability means lowering our standard of living.

7. Consumer choices and grassroots activism, not government intervention, offer the fastest, most efficient routes to sustainability

8. New technology is always the answer.9. Sustainability is ultimately a population

problem.10.Once you understand the concept, living

sustainably is a breeze to figure out.

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Developing Stress…• Rapid population growth in

developing countries puts stress on food, water, and ecosystems, environmental problems are spreading.

• One in five developing countries will face water shortages by 2030. – By 2010, China is expected to

have 90 times the number of cars it had in 1990,

– and it will probably have more cars than America by 2030.

– India faces a similar auto explosion.

13Source: Global Footprint Network

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• Since the mid 1980s, humanity has been in ecological overshoot with annual demand on resources exceeding what Earth can regenerate each year.

• It now takes the Earth one year and four months to regenerate what we use in a year.

• Overshoot results in collapsing fisheries, diminishing forest cover, depletion of fresh water systems, and the build up of pollution and waste, which creates problems like global climate change. These are just a few of the most noticeable effects of overshoot.

Source: Global Footprint Network

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• Global usage exceeds available resources by 30%.

• By 2030, we will need “2 Planets” at current predictions

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Ecological Footprint of Nations

United Arab Emirates 9.6United States

9.5United Kingdom 5.4Japan

5.3Singapore

5.2World

2.7

Malaysia 2.4Brazil

2.6Thailand 2.3China

2.2Iraq

1.5Sri Lanka 1.0India

1.0

Available Global Hectares Per Person Available 2.1

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“Look deep into nature, and then you will understand everything better.”

Albert Einstein

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Economics

• Neoclassical Economics– Traditional view that the

market and laws of supply and demand can determine effective allocation of resources.

• Ecological Economics– Recognizes that certain

resources are not adequately addressed by current market forces

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Millions, Billions, Trillions

1,000,000•A million seconds is 12 days. •April 14 –

1,000,000,000• A billion seconds is 31 years.• 1978 – Were You Born? (Jimmy Carter was Pres in US)

1,000,000,000,000• A trillion seconds is 31,688 years.• Neanderthals stalked the plains of Europe.

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Pavan Sukhdev is a Managing Director at Deutsche Bank

Sound Clip

• $ 2 – 4.5 Trillion• 2050 – 7% of GDP losses

• “Total Capitalist” – Financial & Human & Natural

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• "no one ought to harm another in his life, health, liberty, or possessions”

• John Locke, whose ideas were later reflected in the first article of the Virginia Declaration of Rights on June 12, 1776

• The United States Declaration of Independence, which was primarily written by Thomas Jefferson, was adopted by the Second Continental Congress on July 4, 1776

“We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

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Economic Impacts of a Water Shortage

Source: Dr. Robert Eyler, Chair, Department of Economics and Director, Center for Regional Economic Analysis at Sonoma State University , May 2007

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Highlights of Economic Recovery Plan

2-year Package:• $550 billion in new

spending• $275 billion in tax relief

Education$41 billion Grants to local

school districts$79 billion State fiscal relief

to prevent cuts in state aid$21 billion School

modernization

Health Care$39 billionSubsidies to health

insurance for unemployed; providing coverage through Medicaid

$90 billionHelp to states with Medicaid

$20 billionModernization of health-information technology systems

$4 billion Preventative care

Source: Associated Press Jan 16, 2009

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Highlights of Economic Recovery Plan

Energy $32 billion Funding for

"smart electricity grid" to reduce waste

$20 billion + Renewable energy tax cuts and a tax credit for research and development on energy-related work, and a multiyear extension of renewable energy production tax credit

$6 billion Funding to weatherize modest-income homes

Science and Technology$10 billion Science facilities$6 billion High-speed Internet

access for rural and underserved areas

Infrastructure$32 billion Transportation projects$31 billion Construction and

repair of federal buildings and other public infrastructure

$19 billion Water projects$10 billion Rail and mass transit

projects

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objectives of ecological economic…

• Sustainable Scale– living within the limits of our systems…

• Just Distribution–ensuring that all have access to basic

needs…

• Efficient Allocation–exchanging goods & services effectively…

Source: Herman Daly, Ecological Economics, 2004

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ecological economics objectives

1. Scale2. Allocation3. Distribution

“Requires a social or collective limit on aggregate throughput to keep it within the absorptive and regenerative capacities of the eco-system”

Criteria: Sustainability

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1. Allocation

2. Distribution3. Scale

“Requires some socially limited range of inequality imposed on the market”

Criteria: Justice

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1. Scale2. Distribution

3. Allocation

“the market cannot even attain allocative efficiency unless the distribution and scale questions have been answered”

Criteria: A market consistent with imposed scale and distribution constraints

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“Externality”

Defined: An activity or transaction by

some parties that causes an unintended loss or gain in welfare to another party, and no compensation for the change occurs.

Source: Herman Daly, Ecological Economics, 2004

• Marginal External Cost is the cost to society of the negative externality that results from one more ‘unit’ of activity.

• How define these ‘costs’– Trout?– Frogs?– Wildlife sustaining stream?– Purifying water service?– Natural “Beauty”?

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“Seek policies that set the marginal benefits of production equal to the marginal environmental costs…”

How can we figure this $ out?

Taxes? Subsidies? Tradable Permits?

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3 Generally Accepted Approaches To Estimating Monetary Values Of Ecosystem Services

1. Market Prices – – “Revealed Willingness to

Pay”

2. Circumstantial Evidence – “Imputed Willingness to

Pay”

3. Surveys – – “Expressed Willingness

to Pay”

a. Market Price Method b. Productivity Method c. Hedonic Pricing Method d. Travel Cost Method

e. Damage Cost Avoided,Replacement Cost, Substitute

Cost Methodsf. Benefit Transfer Method

g. Contingent Valuation Method

h. Contingent Choice Methodhttp://www.ecosystemvaluation.org/1-02.htm

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Exploring the Valuation Methods

A. Market Price Method B. Productivity Method C. Hedonic Pricing Method D. Travel Cost MethodE. Damage Cost Avoided,

Replacement Cost, Substitute Cost Methods

F. Benefit Transfer MethodG. Contingent Valuation

Method H. Contingent Choice

Methodhttp://www.ecosystemvaluation.org/1-02.htm

Group Activity• Review the explanations in the

text. • Discuss among yourselves. • Think of a realistic example and

be prepared to describe it in class.

• Prep 15 minutes• Present 5 minutes each.

1 A 2 B3 C , D 4 E5 F 6 G , H

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“Seek policies that set the marginal benefits of production equal to the marginal environmental costs…”

Taxes? Subsidies? Tradable Permits?

What to Do?• Adjust?• Reinvent?• Revolutionalize?• Maintain?• Nothing?

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General Policy Design Principle #1

Economic policy always has more than one goal, and each independent policy goal requires an independent policy instrument.

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Policies should strive to attain the necessary degree of macro-control with the minimum sacrifice of micro-level freedom and variability.

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Policies should leave a margin of error when dealing with the biophysical environment.

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Policies must recognize that we always start from historically given initial conditions.

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Policies must be able to adapt to changed conditions.

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The domain of the policy making unit must be congruent with the domain of the causes and effects of the problem with which the policy deals.

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Command & Control Regulations

Advantages • limit the amount of

pollution/resource harvest to an acceptable level

• Institutions already exist – easy to understand – cheap to monitor

Disadvantages• fail to meet the criteria

for allocative efficiency • No incentive for

surpassing the goal

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Pigouvian Tax

• A method for internalizing environmental externalities

• An attempt to impose a tax equal to the marginal external cost– “Carbon” Taxes – BAAQMD sets 4.2 cents per ton

of GHG in July of 2008. Small, but a precedent…

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Tradable Permits

• Set and allow a maximum “use” right,

• A market instrument• Clean Air Act, SO2• CA – RECLAIM program,

etc• CA AB32• Fisheries

• advantages

• obstacles

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• Tracking 20 Macro Issues • Affecting the Environment (Business)• Source: Joel Makower and the editors of GreenBiz.com, February, 2009

“SWIM” “TREAD” “SINK”

1. Clean Tech Investments

1. Building Energy Efficiency

7 Green Office Space

1. Carbon Intensity

2. Clean Energy patents

2. Carbon Transparency

8. Green Jobs 2. Employee Telecommuting

3. Energy Efficiency 3. Corporate Reporting

9. Green Power Use

3 E-Waste

4. Paper Use & Recycling

4. Employee Commuting

10. Packaging intensity

5. Water Intensity 5. Financial Impacts

11. Toxic Emissions

6. Fleet Impacts 12. Toxicity