Chapter 08: The Sustainability Standard Flashcards
Stock vs. Flow variables:
Stock vs. Flow Variables:
(1) Stock - point in time
- How much x-resource are left today?
(2) Flow - how does variable change over time
- How much x-resource did we extract/make last y-time
Can take stock of evolution of a flow
Stock and Flow Pollutants
And relation to sources and sinks:
- Stock Pollutant: Pollutant has long-term consequences
- Flow Pollutants: Do damage relatively quickly and either diluted or harmless levels/transformed into harmless substances
♻️ Source and Sinks: stock value is the sources and process of going to sinks is flow
Ways modify the Environment:
- Use of natural resources (sources)
- Exhaustion of sinks
Resources and sinks (non)renewable
As long as rate of extraction of renewable resource stocks balanced by regeneration - use will not reduce future availability.
Use of nonrenewable resources reduce stock
Natural Resources (Natural Capital):
Natural Resources (Natural Capital):
- Nonrenewable: Always less as time goes on (diminishes)
- Renewable: Capacity for stock to regenerate (capacity to go back up if it has gone down)
How does the use of natural capital rise questions about sustainability?
How to ensure leave future generations a sufficient stock of renewable and non-renewable resources and pollution sinks (natural capital) insure well-being? How to be sustainable?
Two Answers: Neoclassical (weak) and Ecological (strong) sustainability
What is included in “capital?”
How does this relate to the sustainability-debate?
“Natural” capital - one type of capital
Other: human capital (skills), physical capital (factory, machienery, equiptment), social capital (legal system, culture, language)
Are these sources of capital substitutable?
Is it a problem if natural capital is brought down?
- If substitutable - then could use other forms of capital as substitutes for natural capital
- Answer = subjective (Degree substitutability infulence how we view sustainability)
What is the common definition of sustainability?
Development meets need of the present without compromising ability of future generations to meet own needs
Weak vs. Strong - two groups: Neoclassical vs. Ecological
Define Weak Sustainability?
Requires that the overall capital stock needed to support high quality of life (manufactured, human, social, and natural capital) is maintained
Weak Sustainability can be achieved even with loss of natural capital as long as other forms of capital are adequate substitutes
- Not care about individual capital stock level only total stock levels
Short Run: Not easily substitutable
Long Run: More substitutable (However, takes time)
Define Strong Sustainability:
Requires maintaining total stock of each form of capital separately (*natural, manufactured, human, and social)
- Focuses measuring natural capital
- Individual basis
- Not view as substitutable
Neoclassical vs. Ecological
What is the Neoclassical Economical view?
View natural and other forms of capital generally as substitutes in production
- Naturally flow together w natural capital
- View nature as highly resilient
- Globalization (if promotes development) = lead sustainable future
Sustainability Achieved: Well-functioning and properly regulated market system
Most people somewhere in between - not binary camps
- NE = propably right in the long run
- EE = propably right in the short run
Neoclassical vs. Ecological
What is the Ecological Economical view?
Other forms of capital cannot generally be used to substitute for natural capital
- More concered strong substutionability
- Global ecosystems which economy is embedded fragile
- Tend to be tech pessimists
- See need role expanded governemnt in aggressively protecting out dwindling stock natural capital
Most people somewhere in between - not binary camps
- NE = propably right in the long run
- EE = propably right in the short run
How do impliment Weak Susainability:
Use (1) Cost-Benefit and (2) Discount
How is Cost-benefit analysis used to impliment Weak Sustainability?
Implimenting Weak Sustainability: Use Cost-Benefit and Discounting
- Assumption: (Generally) sub human made for natural capitalBut, natural capital produces goods and services over long period of time
How to value services natural capital in future?
Use Cost-Benefit Analysis
- assess if it is more efficient to protect or use it up today
-
Environmental Bond: Put money in bank account to compensate future generations for pollution damage or depletion of natural capital
- Potential positing environmental bond = rationale spending less on prevention today than full value of damage we inflict
How is Discounting used to impliment Weak Sustainability?
Discounted:
(1) Future benefits not weighted as heavily as current benefits
(2)Taking future flow and stock and putting it into today’s terms
- Change to calculate inverse: benefit today and future cost
- Ex: Norway setting aside money today for consequences of oil extraction of the future (consequences)
- Ex. Security deposit when leasing an appartment (paying possible future damage). Pay now outweighed future benefit of having somewhere to live
Changing r small amount = change answer dramatically
Avoid (ex. Howard-Stern debate): Assume there is an average number r that makes cost-benefit analysis equal to zero
Value of “Hurdle” Rate of IRR
Discounting:
Ex: Lightbulbs
Which better? Depends discount rate
- Needs 1,000 new light bulbds
- LED costs $40,000 buy up front and $500 each years for electricity
- Incandesence cost $10,000/year to buy $3,000 electricity
What determines an interest rate or market discount rate?
Suppy and demand in the market for “loanable funds”
- Supply determined by bank deposits - money in individual and business savings accounts that form the basis for loans by banks
- Banks middle-person to match lenders (supply) and borrowers (demand)
US savings rate 5% or less. Why so low?
Positive rate of time preference: well-known desire to consume today, regardless of the consequences tomorrow
- Demand curve Loanable funds reflects opportunities for productive investment projects in economy
Define Positive rate of time preference:
Positive rate of time preference: well-known desire to consume today, regardless of the consequences tomorrow
What does the quantity loan supplied and demanded depend on?
Quantity loan supplied and demanded depend on interest rate:
- Higher rates lead to desire for more savings, less desire for borrowing
- Reduction overall supply loanable functions (increase demand) raise market rates and lead greater discounting of the future
How does r effect the investment rate?
- When r increases: want to invest more
- More expensive to borrow/ prever to invest
- When r approximately 0: future and present value same
Price determines quantity!
Bais for Present Consumption - not like delayed gradification
What is the Bais for Present Consumption?
Bais for Present Consumption - not like delayed gradification
How does the private and economic anaylsis of discounting and benefit-cost differ?
- For private managers seeking maximize profits - use risk-adjusted rate of interest
- For economist using benefit-cost analysis (see efficient outcome society) - what discount rate to use?
♻️ With long period (ie Climate Change) choice of discount rate very important
What is the Ramsey Eqation?
(Frank) Ramsey Equation
Governments have a different sort of exercise.
r = 𝛿+ƞg
r base on:
- 𝛿- rate of time preference (measuring how short/far sighted we are)Encourage to take a long-term approach as r increasesAccepted value - based on inflation of 2% (therefore, 2% more money = good) [Economics and pscyology]
- ƞg
- g = growth rate economy
-
ƞ = (eta) Elasticity of the Marginal Utility of Consumption
- If you change your consumption by 1%, how much extra utility do you get in percent?
Quantify: How much happier are you (%)?
What is the Ransay Equation about?
- Loanable funds market only care about 𝛿 (time preference)
- Value market = too low (externality not taken into account)
Gr≥Mr
- Governments SHOULD care - should factor it in ng
- If extra spending then zero then only time preference should be considered
- If increase government spending - should benefit future society (happiness)
The Ransay equation and discounting climate change?
- Nicholas Stern’s projections: r = 𝛿 + ƞg = 0.1/100 + 1*1.3/100=1.4% (Assumed low discount rate = future damages play large role)
- William Nordhaus called allowing global emissions grow 40%. 5.5% discount rate - future damages almost discounted to zero
What is Strong sustainability?
- Premise: Not guided by only the market
Precautionary Principle: Never reduce stock of natural capital below level generates sustained yield of services unless good substitutes currently available for servces generated (conserve)
- Doing the calcululations: discount benefits excessively & use conservative r value & understate value
- Could be “inefficient” (efficiency standard)
Basis of Precausationary Principle:
-
Uniqueness: No close (adequate) substitutes
a. Endowment Effect: sentimental value -
(Ir)reversibility: Influences the importance of an action.
Are the actions we take (sustainable-wise) reversibile - (Un)certainty How to know what r is?
