EC138 Term 2 Flashcards
3 central questions in environmental economics
If environmental protection is costly, how much should we spend on pollution control? Is it worth reducing pollution to zero, or is there any optimal level of pollution?
In making these decisions, how can we measure the benefits of reducing pollution
What sort of environmental measure should the Government adopt? Should we adopt market-based instruments or command-and-control instruments?
Why does market failure occur with the enviornment?
The environment does not have a market. Does clean air have a market, hold monetary value?
What is a Pareto optimal point?
There is no other point on the diagram that would offer a more efficient point.
What is static efficiency
Maximising the social benefits from the use of resources
Net benefits = total benefits - total costs
MB = MC = q* (in which q* is pareto optimal)
What is dynamic efficiency?
Maximising the present value of net social benefits over time (taking account of the timing of benefits accrued and costs incurred)
Present value of net benefits over time = sum PV in all periods considered
What is the present value?
What something received in the future would be worth today
1st efficiency theorem (welfare theorem)
In a competitive economy, a market equilibrium is Pareto optimal
2nd efficiency theorem
In a competitive economy, any Pareto optimum can be achieved by market forces, provided the resources of the economy are appropriately distributed before the market operates.
Four efficiency theorem assumptions
Atomistic participants (consumers and producers take prices as given)
Symmetric information (consumers and producers know about current and future prices, and know the quality of the good or service being traded)
No transaction costs (costless to attach prices to goods and services traded)
Complete property rights (all costs and benefits are borne by participants)
____ When any of these assumptions are not met -> ‘market failure’
Externality
An externality exists when the consumption or production choices of one person or firm enter the utility or production function of another entity without that entity’s permission or compensation
Negative externality
Imposes external costs on society, e.g. my neighbour blasts Ed Sheeran on repeat, air pollution
Positive externality
Imposes external benefits on society, e.g. my neighbour plants a beautiful flower garden, immunisation
Two different enviornmental externality types
Global externalities
Local externalities (affects people more the closer they are to the activity)
Public goods fundamental characteristics
Non-rival
Non-excludable
Non-rivalrous goods
One agent’s consumption of a unit does not preclude or impinge on another agent’s consumption of that same unit.
Non-excludable goods
Once units are provided to one agent no other agent can be excluded from consuming those same units.
A non-exludable, but rivalrous good
Open-access resources
“Tragedy of the commons” (e.g. collective action problems, fish stock)
An excludable, but non-rivalrous good
Club goods
e.g. gym, swimming pool, car-sharing service, cable TV, private Wi-fi
Two conditions of Tragedy of the commons
Access to the resource must be unrestricted
Diminishing marginal returns
Two key assumptions for the Coase Theorem
Property rights are clearly defined
Transaction costs of bargaining are low
Total GHGs stock equation
Total GHGs stock = Man-made GHGs - Natural Removal GHGs (e.g. ocean, plants)
What happens in the absence of govt policy for negative externalities?
No economic valuation - implicitly assign a value of zero
Private firms impose negative externalities on other members of society and will fail to provide efficient amounts of public goods
Market outcome not efficient: social marginal cost (includes marginal damage (MD) of pollution) > private marginal cost
Firms rationally ignore the MD in the absence of incentives since damage is external (i.e. externality)
Pigou vs Coase theorem
Pigou - Let the polluter pay (i.e. make the polluting party liable for damages)
Coase - Don’t bother (i.e. private bargaining will reach the efficient outcome)
Types of regulation
Information provision (ecolabelling, certification programs, right-to-know laws)
Command-and-control (prescriptive) - Technology standard, emissions (performance) standard
Market (incentive) based - price incentives (e.g. taxes, charges, subsidies, fees) and quantity limits (e.g. cap-and-trade system)
Incentivising the efficient quantity of pollution control - incentivising pollution abatement
Perfect competition
Complete information
MC (abatement supply) = MB (abatement demand)
Incentivising the efficient quantity of pollution control - Abatement demand doesn’t exist
Public good / free-riding -> price for abatement falls to zero
What is the role of Gov then?
What is a cap-and-trade system?
Tradeable allowances effectively convert a nonrival, nonexcludable public good (clean air) into a collection of (excludable) private goods (allowances)
The authorities specify the total level of allowable emissions, it assigns permits (a specific amount of emissions per permit) and then distributes the permits to the parties involved.
They can also sell allowances instead of issuing them for free, raising revenue.
From an economic perspective the revenue could be used to correct distortionary taxes e.g. income tax (Double dividend!)
Two main challenges with carbon targets in the buildings sector
Decarbonising heating and hot water
Energy efficiency ‘win-win’ - Easy installation done (loft and cavity wall insulation), left costly measures (solid wall insulation, solar thermal energy and other forms of renewable resources)
Examples of pricing policies in developing countries
Two-part tariff (CBB) - Energy price reform in China
An example subsidy: Payment for Ecosystem Services - (PES) in Uganda
International environmental pricing policy: pollution offset programs - Clean Development Mechanisms (CDM) in India
Example of regulations in developing countries
1) Air and water regulation in India
2) When regulation fails -> measuring cheating: Vehicle pollution monitoring in Mexico
3) Getting regulation right -> monitoring and enforcement (India)
Reasons why the differences in WTP and WTA are likely large
When there are no close substitutes
Loss aversion: losses could be valued more than equivalent gains
Sureness of preferences: do we know what our preferences are?
Types of values
Use values (Direct - ‘consumptive’ - e.g. fishing, water extracted from irrigation)
Option value (preserving the environment for the future use)
Non-use values (existence and/or intrinsic values/bequest values/altruistic values)
- Passive or Non-consumptive, like preserving the environment we shall never use; existence and/or intrisic value/bequest value/altruistic value; difficult to quantify - estimates typically controversial!
WTP equation
Total Willingness to Pay (WTP) = Use value + option value + non-use value
Intrinsic value
Value independent from human interests
Instrumental value
Dervied from its usefulness in satisfying human wants
Why are benefits (of environmental goods) not easy to quantify?
Many environmental goods and services do not have markets (i.e. prices)
What is an Endowment effect?
Willingness to accept WTA > WTP
The psychological value of something you own > the value of something you do not…Losses loom larger than gains!
VS. substitution effects, type of good/service, context, timing
What is energy intensity measured as?
The amount of energy consumed given a unit of GDP. It is a measure of energy efficiency in a country; the lower the energy intensity, the less energy consumed and the less climate is affected.
What is carbon intensity measured as?
The amount of CO2 emitted per unit of energy. It practically reveals the change in CO2 emissions when a country switches from high-intensity energy sources (oil, coal, lignite) to low-intensity sources (solar energy, hydropower, nuclear).
What is Mitigation?
The process of reducing the sources of GHG emissions or enhancing the “sinks” of GHG (which accumulate GHG: oceans, forests, soil)
Nudge theory
Possible to ‘nudge’ people to decisions that are better for their health/wealth/happiness (paternalistic)
Without restricting their choices (libertarian) simply by changing the framework in which they are made (choice framework)
Incentives, feedback and information
Nudges exploit bahvioural biases to correct human behaviour
An example of a framing effect
If you use energy conservation methods, you will SAVE $350 per year
Energy efficiency labelling
What is transboundary pollution?
Pollution that originates in one country but, by crossing the border through pathways of water or air, is able to cause damage to the environment in another country.
Dimensions of transboundary problems
SPATIAL:
Local: the damage is confined close to the emission source.
Regional: the damage could be far from the emission source e.g. acid rain.
Global: the pollutant can spread globally (CO2) and the problem has a global character (climate change).
TEMPORAL: the stock of the pollutant can spread globally (CO2) and the problem has a global character (climate change).
POLITICAL, SOCIAL, CULTURAL
Things to consider in transboundary problems
UNIFORMITY OF DAMAGES (not all places experience the same damages, not all have same absorptive capacity)
UNIFORMITY OF MIXING (extent to which each unit of emission from different countries contributes to overall pollution potential) - The UK production of SO2 contributes less acid rain in England than in Scandinavia (due to prevailing westerly winds)
Unidirectional externality
One country (or group of countries) is the polluter and another country (or group of countries) is the victim.
Regional reciprocal externality
A group of countries is both the source and victim of the pollution.
Global externality
Some countries (one or a group of countries) is the source of the pollution, and all other countries are affected by the pollution.
Protocol
An agreement that diplomatic negotiators formulate and sign as the basis for a final convention or treaty. The treaty itself may not be completed for many years.
Treaty
An agreement where the parties to it negotiate to reach common ground and avoid further conflict or disagreement. It is normally ratified by the lawmaking authority of the govt whose representative has signed it.
Convention
Begins as an international meeting of representatives from many nations that results in general agreement about procedures or actions, they will take on specific topics.
Examples of International Environmental Agreements (IEAs)?
Agreements like the Montreal Protocol for ozone-depleting substances and the Kyoto Protocol for GHGs.
Numerous problems that could arise when negotiating an IEA
The degree of co-operation: full/partial/no co-operation on the problems?
Co-ordination: plans and resources are unified?
Compliance/Defection
Free-riding (some countries might benefit from an agreement without however paying a price for the agreement)
Enforcement or self-enforcement? What will be legally binding? Will sanctions be on the table?
Basic principles for something like an IEA
Non-discrimination (all parties equal)
Reciprocity (no unilateral action)
Transparency
Reasons why the Montreal protocol (an IEA) was successful?
Abatement costs for CFC gases were low since alternative solutions were available.
Damages from ozone depletion were high and the mitigation costs lower.
The number of countries producing CFCs was relatively small (46 signatories), so potential transaction costs were lower and international co-operation more likely.
The impacts from ozone depletion were expected to be felt rather soon and the burden would not be felt mainly by future generations.
What is a ‘social dilemma’
A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals.
Common pool resources characteristics
They are non-excludable i.e. individuals cannot be excluded from using the resource.
However, this could cause free-riding.
These resources are rivalrous i.e., one person’s use of the resource, reduces the available amount for the other individuals who use the common property. This implies that the availability of the resource is finite.
Tragedy of the commons with examples
Common resources being used more than is socially desirable (cosnumed at the expense of other individuals and could lead to the depletion of the resource).
It is when private incentives outweigh social incentives.
Land/Land use
Fishing
Forests/Timber
3 general groups of solutions to the tragedy of the commons
Creating and selling property rights of scarce resources, which allows for a change in incentives and for exclusion of others from the use of said resources.
Top-down regulations of the right to enter areas endowed with such resources.
Bottom-up institutions. There are examples that show under the right conditions, some communities were able to establish rules that allowed for a long-term and sustainable use of shared resources. Contrary to what has been implied by Hardin’s work, people using a common resource are not necessarily condemned to repeat the tragedy of the commons. They can talk things through and create adequate institutions.
Descriptive norms
People’s perceptions of how other people typically behave and act (often without much deeper thought)
Non-renewable resources
Mostly materials and energy-related stock (fossil fuels, minerals, metal ores) which are created very slowly in a natural way; they exist in fixed quantities and once extracted they can be replaced very slowly according to natural procedures.
Renewable natural resources
Stock can change across time (it can be replaced), so in practice, it cannot easily be completely depleted.
What is biodiversity?
Biodiversity is all the different kinds of life you’ll find in one area - the variety of animals, plants, fungi, and even microorganisms like bacteria that make up our natural world.
Two related concepts:
1) The amount of genetic variability among individuals within a single species
2) The number of species within a community of organisms.
What were the three main concepts in The Economics of Ecosystems and Biodiveristy (TEEB)?
Natural resources should be considered economic assets given their contributions to the economy.
The loss of ecosystems services tends to be ignored given the difficulties in measuring since they are viewed as public goods.
Subsidisation to industries that affect negatively ecosystem services (fisheries, fossil fuel industries) should be reported and potential perverse components should be eliminated.
What did Hanley et al. (2019) say about ecosystems valuation?
“The total economic value of all biodiversity is the sum of all human welfare for current and all future generations.”
The nice diagram in the ecosystem slides
Built and human capital are embedded in society which in embedded in the rest of nature. Ecosystem services are the relative contribution of natural capital to human well-being, they do not flow directly.
It is therefore essential to adopt a broad, transdisciplinary perspective in order to address ecosystem services.
Difference betweem the two methodological approaches of ecosystems valuation (preferences)
The revealed preference methodology (observing people’s choices in the real world).
The stated preferences approach (hypothetical question through which one can determine the WTP for a product/service).
Using discrete choice experiments (the 2nd) seems to be better and most prefered.
You could also separate these approaches into market-based methodologies (using data for marketed products like timber, fish, etc.) and cost-based methdologies (using costs as an assessment of WTP for an ecosystem service, like for water filtration)
The benefits that people derive from ecosystems
Provisioning services (direct benefits like water, food, fuel, fiber)
Regulating services (flood control, climate regulation, water quality)
Cultural services (recreational, aesthetic, spiritual services).
Supporting services (photosynthesis, soil formation).
What is ecotourism?
Responsible travel to natural areas that conserves the environment, sustains the well-being of the local people, and involves interpretation and education.
TIES definition
Reasons why economists (who measure and identify, establishing causal relationships) can help us think about solutions to climate change
Tracking changes in temperature and sea levels over time
What are the potential damages as a result of changes in these variables?
How much would it cost to avoid these damages?
How changes in climate affect humans and ecosystems?
For what goods do the tragedy of the commons apply to?
Non-excludable, but rival goods.
How does climate change work?
Normal times: sunlight on Earth is absorbed then re-radiated to space.
Climate change: GHG in atmosphere block some of the re-radiation.
We need some blocking, but right now we have way too much.
Climate change: temperatures and sea level rise, extreme weather
events ⇒ more likely.
Climate change: effect on planets (un)livability likely exponential ⇒ need to keep temperature below 1.5◦C to make it manageable.
Below 1.5◦C since pre-industrial period: 1.2◦C has already happened.
How would a pigouvian tax internalise an externality?
A tax on pollution equal to the marginal damage at the socially efficient level of pollution will achieve the socially efficient outcome
It forces the producers and consumers to incorporate the full costs of their actions into their decisions
This tax is corrective, not distortionary i.e. eliminates the DWL, not cause it
Two ways of reaching carbon targets with consumers
Building (decarbonising heating and hot water, insulation/solar panels)
Transportation (electric vehicles)
Types of signalling for costs of energy
Low cost signals
● Display past energy bills
● Energy performance certificates
High cost signal – Include bills in rent
*MCE = 0 ∴ consume more energy
*Inefficient housing unlikely to include bills
* Empirical research supports theory
Minimum energy efficiency standards (MEES)
‘Soft’ loans: Green Deal
* Monthly repayment + r ≤ monthly savings
* Actual savings too low and r too high
* Green deal scrapped! Costs > Benefits
Environmental goods
Inputs of which individuals prefer more to less (e.g. air quality, rainforests)
Environmental bads
Wastes that decrease utility as they increase (e.g. noise, water pollution)
Things that WTP can depend on
Income
Preferences
Willingess to pay vs Willingness to accept
Willigness to pay - maximum of how much an individual wants to pay for an environmental issue to be solved.
Willingness to accept - minimum of how much an individual wants to be compensated for an environmental issue that is not solved.
Ways to quantify benefits of environmental goods
Revealed preferences (value is observable)
Stated preference (value is unobservable)
Examples of direct, revealed preferences
Market prices and stimulated markets
Examples of indirect, revealed preferences
Travel cost methods
Hedonic property values and hedonic wages values
Avoidance of expenditures
Examples of direct, stated preferences
Contingent valuation
Examples of indirect, stated preferences
Choice experiments: attribute-based models / vignettes
Contingent ranking
Conjoint analysis
Contingent valuation
A survey-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of externalities like pollution.
Types of biases with contingent valuation
Strategic bias (and social desirability, i.e. “warm glow effect”)
Information bias
Starting point bias (status quo bias)
Hypothetical bias
Protest bids (payment vehicle bias)
Interviewer bias
Endowment effects
Status quo bias
Bias to sticking to the original plan/decision rather than changing the previous state
Hypothetical bias
When individuals report unrealistic behaviours or values to researchers in surveys. It’s not what they would do in reality.
Payment vehicle bias
Where the payment vehicle is either mispreceived or is itself valued in a way not intended by the researcher
X marks the spot - choice experiment
Choose a bundle from several alternatives
Each bundle contains several attributes with two or more values
E.g. 3 attributes (2 with 3 levels; 1 with 2 levels), hence 54=(3^3)x2 combinations - randomly allocated to participants
Derive marginal willingness to pay for the attributes contained within a bundle
Methodological issues with choice experiments such as X marks the spot
Which attributes to include? And how many levels?
Range of prices/costs?
Hypothetical bias, status quo bias etc. could apply
Travel costs method
Observable and indirect
How much do visitors spend in getting to the natural resource? How many trips do visitors make?
Construct a travel cost demand function
Issues with the travel costs method
What about people who live close to the site? What about the opportunity cost of time?
Hedonic property value
Property values are lower in places of:
Pollution
Proximity to waste sites/plants
Noise pollution
Visibility of nearby construction/development projects
Presence of mold/damp/rot
Energy inefficient white goods
Hedonic valuation limitations
- Many environmental goods (and bads) that affect property prices are not observable
- Assumes markets are in equilibrium
- Assumes perfect information regarding environmental attributes
- Assumes we can control for all the observed (and unobserved) variables that impact house prices
The implied value of statistical life
WTP for reduction in death risk / ∆ Death risk
Bystander effect
Individuals are less likely to offer help when others are present
Prospect Theory/Loss aversion
People are risk averse in gains (concave)
People are risk seeking in losses (convex)
$1 lost feels worse than the satisfaction of gaining $1 (Reflection effect)
Nudge theory - Libertarian Paternalism
- Possible to ‘nudge’ people to decisions that are better for their health/wealth/happiness (paternalistic)
- Without restricting their choices (libertarian) simply by changing the framework in which they are made (choice framework)
- Can “choice architecture” help the environment?
- Incentives, feedback and information
- Nudges exploit behavioural biases to correct human behaviour
Nudge theory - Framing effects
- If you use energy conservation methods, you will save $350 per year
- If you use energy conservation methods, you will lose $350 per year
It’s a way to increase the likelihood that people make these decisions without explicitly telling them to do so
Social norms - 4 examples of energy conservation
Price-based policy instruments (Cap-and-trade, taxes, subsidies)
Non-price energy conservation programs (psychological cues, OPOWER Home Energy Report Letters, comparing household energy use of neighbours)
Treatment effects
Welfare effects (economic cost of behaving like your neighbours, psychological cost of performing worse than neigbours)
What is rational inattention?
Consumers do not always pay attention as it is costly to do so (in terms of time and effort)
Generally, if the cost of attention exceeds the benefits of being attentive thne humans have an incentive to switch off.
Sallee (2015) - consumers rationally inattentive if:
Search costs (collecting and processing information) > Benefits
Allcot (2011) on inattention
Consumers devote little cognitive effort to calculating fuels costs when choosing between vehicles
Consumers under (over) estimate low (high) energy efficiency vehicles
Consumers slightly overestimate prices
What is the main culprit behind the rise in global warming?
CO2 (carbon dioxide)
What is the Keeling curve?
It shows carbon dioxide concentration (at Mauna Loa Observatory) rising over time
Main greenhouse gases
Carbon Dioxide
Methane
Nitrous Oxide
Impact of climate change on the economy
Agriculture - crop yield affected, more floods.
Tourism - more extreme whether may discourage
The poor are most likely to be hit by climate changes
Impact of climate change on health
Malaria regions getting bigger
More malnutrition (little available money)
Diarrheal diseases (poor sanitation)
Examples of mitigation
Carbon taxes
Climate Change Levy (UK)
REDD+ (reducing emissions from deforestation and forest degradation in developing countries)
Fankhauser (2017) on Adaptation
Adapting to climate change should be a process that should be seen as complementary to mitigation efforts, not a substitute one and ideally there should be a co-ordination in policies in these two directions.
What is adaptation?
What can humanity do to change their behaviour to better adapt to a changing environment to minimise the damage as much as possible?
Examples of adaptation by private agents
-increasing energy efficiency (better insulation, less use of gas/oil)
-farmers using less labour, better technology for crop
Examples of adaption by authorities
-better water management
-better recycling strategies
-more biodiversity protection and conservation
-protecting/expanding green belts and planting small trees
-peatlands restoration
Examples of adaptation at sectoral level of the economy
Health sector (preparation for extreme events)
The energy sector
Agriculture (adoption of a more efficient technology, crop choices)
Water management
Forestry (changing planting strategies)
Discounting - general definition
A discounting process refers to the devaluation of a quantity - a lower weight is put on an action taken place in the future than to the same action in the present
Discounting formula
y = T(t) x Y
T(t) is the discounting factor
Exponential discounting vs hyperbolic discounting
Exponential discounting assumes a constant discount rate over time.
Hyperbolic discounting implies that the discount rate declines over time at a specific rate. In that way, future generations can have a larger stake in decision-making (LESS COMMON IN CLIMATE CHANGE PROBLEMS)
The Stern Review - problems
It chose a single and very low discount rate (approx. 1.4%)
William Nordhaus (2007) claims that a near-zero time discount rrate does not contribute to our understanding about global warming.
Martin Weitzman (2007) points out that we are not really sure how to discount climate change.
Precautionary Principle (many authorities have adopted it)
It means precautionary regulations can be viewed as legitimate if there are incomplete scientific evidence for an important environmental question.
It might not always be possible to provide definite answers through science.
A way to dela with intergenerational equity issues
Adopt a very low discount rate so that these concerns are “spread” to present and future generations.
Schelling conjecture
Development (like helping the poor’s quality of life) could be a more important tool to adapt ourselves against climate change, rather than heavy spending to fight climate change
Valid concern regarding equity “within generations” and not across generations
IPCC (Intergovernmental Panel on Climate Change)
IPCC is a key body in the fight against climate change - they have produced various scientific reports to support climate change negotiations at the international level.
Paris Agreement
It establishes country specific targets and implementation policies through the Nationally Determined Contributions (NDCs). It requires all countries to regularly report their emissions and corresponding efforts.
Makes sure countries are matching their efforts to their capacities.
What is the Committe for Climate Change (CCC)?
An independent body that produces articles and publications about assessing the climate change risks (the UK’s independent adviser on tackling climate change).
It offers advice on the Carbon Budget
CCC proposals - report in the light of the pandemic
1) Green buildings
2) Safe places for walking/cycling, enocurage home-working
3) Embrace a circular economy (better waste management)
4) Green infrastructure (tree planting, wetland restoration)
5) Focus on net-zero energy transformation (support electric vehicles and the necessary infrastructure, carbon capture infrastructure)
COP26 agreements
1) Phase down on coal use
2) Meet again to reach further agreements on emissions reduction plans
3) Pledge to stop deforestation by 2030 by more than 100 countries
4) A pledge to reduce methane emissions by 30% by 2030 (compared to 2020 levels, 105 signatories)
5) Launch of Glasgow Financial Alliance for Net-Zero (GFANZ), a scheme of $130tn to support green technological solutions
Examples of transboundary problems
Water pollution (marine litter)
Acid rain: when acidic substances (SO2) are deposited through rain or moist air, which could lead to dying plants/soil
What would happen when we have multiple countries on the negotiating table for an IEA?
An IEA may enjoy a high degree of cooperation but only if the difference between global net benefits under the full cooperative and non-cooperative solutions is small; when this difference is large, a self-enforcing IEA cannot support a large number of countries.
When the number of countries is very large, treaties can achieve very little.
What are Ostrom’s principles?
They are 8 core design principles to avoid a tragedy of the commons without top-down regulation (Ostrom, 1990)
Specifics are on pg36 of lecture 7
4 categories of range/scale of impact from marine litter
ENVIRONMENTAL
-entanglements
-ingestion
-blockage of filter feeding mechanisms
-physical damage of reefs
-attracting marine pests
SOCIAL
-loss of aesthetics
-indigenous values
-antagonism against perceived pollutors
-risks to health and safety
ECONOMIC
-cost to touism
-cost to vessel operators
-losses to fishery
-costs for cleanup, animal rescue, disposal
PUBLIC SAFETY
-navigational hazards
-hazards to swimmers and divers
-cuts, abrasion and stick injuries
-leaching of poisonous chemicals
-explosive risk
Solutions to marine litter
Banning plastic bags
Increasing price of plastic through tax
Incentivising fishing vessels for returning waste and gear to the shore
Consumers to obtain a “positive” behaviour against the fight of marine litter
Better information provision for consumers
Injuctive norms
People’s perceptions of what type of behaviour is considered to be right or wrong (socially acceptable or not)
Factors affecting scarcity
Degree of availability
Marginal extraction cost
Price of the resource people are willing to pay
Substitutability of the resource
Hotelling rule
Hotelling’s rule describes the connection between scarcity rent and market interest rate in a dynamic setting for the extraction of non-renewable resources.
In practice, it is an equilibrium where the net price of the resource grows at a proportionate rate to the market interest rate of 0.1 (that is, 10%)
Formula is on personal notes
Why does the hotelling rule not hold well?
Scarcity is not the only factor that drives the prices; other factors:
-technological change
-the expectations from investors about the resource deposits
-the market structure
…could affect resource prices
Effects of monopoly power in the resource market/scarcity
Higher prices, lower quantities - welfare is not maximised
Monopoly becomes an ally of the conservationist - price increases and time until complete depletion is further deferred.
Also, higher prices may be the impetus for some countries to search for alternative sources to substitute this resource.
Issues with non-renewable resources
Scarcity
Uncertainty -> increasing demand rapidly -> increase in price
Risk -> rise in discount rate for owner of the resource -> depletion accelerated
What is the purpose of the Schaefer model?
It describes the relationship between fish population growth and fish population size
Yield-effort function
Y(E) = 10E-E^2
Steady-state harvest (equilibrium in the long run)
Growth rate is equal to the harvest of the fish stock
A population size (smaller than K) can serve as a solution to this problem.
Tragedy of the commons in overfishing
In the Yield-effort function, E* is where the vertical distance of net benefits is maximised.
After E*, there is overfishing - total costs increase relative to total benefits.
In reality, profits will continue to exist beyond E* and up to E^oa - the depletion of the fish is not considered, hence tragedy of the commons.
Two policy instruments used to stop overfishing
Command-and-control instruments
-Regulations on fishing equipment (boat, net size)
-effort restrictions
Incentive-based instruments
-ITQs and territorial use rights
What are bycatches?
The unintended capture of other intended fish.
An externality of fishing
What are Individual Transferable Quotas (ITQs)?
Policy instruments (similar to cap-and-trade schemes for pollution reduction) which are used in order to mitigate common property problems in fisheries.
They assign rights to fishermen/vessels to catch fish in specific quantities for a given time period.
Conditions for ITQs to succeed
Monitoring, compliance and enforcement
Impose hefty fines to deter cheaters.
Could introduce at-sea monitoring through electronic monitoring
Aquaculture
The controlled raising and harvesting of fish - it is the fastest-growing animal food production sector
The main drivers of biodiversity loss (according to Diaz, 2006)
Climate change
Biological invasions
Habitat change/Changing land use
Cost of restoration vs Cost of conservation
Restoration cost curve is steeper than the conservation curve - it is more costly to conserve than reinstate
What are ecosystems services
Ecological functions and services are not only supplied by natural processes, but nature charges nothing for their use.
Benefits people derive from ecosystems
Provision services (water, food, fuel, fiber)
Regulating services (flood control, climate regulation, water quality)
Cultural services (recreational, aesthetic, spiritual services)
Supporting services (photosynthesis, soil formation)
4 things mentioned in the Milennium Ecosystem Assessment report (2005)
1) Ecosystems have undergone rapid change in the last 50 years, and this has led to a largely irreversible loss of life diversity on Earth.
2) Although changes to ecosystems have affected positively the human well-being, this is accompanied by a negative effect to the overall health of ecosystems.
3) If further degredation continues it would be a challenge to achieve the Millenium Development Goals.
4) Reversing the degradation of ecosystems is not an easy task and requires appropriate policies and practices.
What do the Intergovernmental Platform on Biodiversity and Ecosystem Services (IPBES) do?
It produces reports and assessments about policies, methodologies, data and knowledge regarding biodiversity and Ecosystem Services
What is conservation banking?
A conservation bank (a piece of land with natural values) is managed for endangered species, counterbalancing the threats they face.
Then, the managers are allocated credits which they can sell to people whose projects have an adversary effect on species of concern.
Two ways of protecting endagered species
Conservation banking
Protecting endagered species from invasive species
What is westland mitigation banking?
The negative impact on wetlands (due to development, drainage, logging) can be offset by investing in the conservation of other sites.
Waht is the REDD+ program?
It focuses on reduing GHG emissions by expanding forests. Agents who achieve this, get credits which can be sole to other agents offesetting thus the GHG emissions.
Biophillia hypothesis
Our relationship with nature if fundamental for maintaining health so people value environment with more income
Environmental Kuznets curve, basics
As income increases, environmental income impact per unit of income increases then decreases.
What explains the upwards slope in the EKC?
There is economic growth which leads to environmental degredation - more waste, more climate change. (Scale effect)
Moreover, as the transition from agriculture to manufacturing takes place, economic activity increases, and emissions increase as well. (Structual effect)
What explains the downwards slope in the EKC?
As income further increases, the environmental degredation starts to decline. This happens due to the larger demand for environmental quality (income effect).
Furthermore, technology improvement leads to “clear” output (technique effect). Other reasons include the transition to a service-oriented economy and the adoption of more positive environmental attitudes (realisation of importance of “environmental quality”).
Porter Hypothesis
It claims that properly-designed environmental regulations could lead to innovations making these firms more productive and competitive.
PH essentially claims that there is no trade-off between economic growth and environmental regulations and that the latter could make both society and firms better off. So, firms might have no reason to oppose regulations.
What are pollution havens
Free trade can lead to pollution hotspots if strict environmental regulations in one country force domestic production facilities to move to other countries where less strict regulation.
Not reliable model - pollution control costs are relatively low compared to total production costs.
Meadows et al. (1972) initial opinions on environmental impacts on economic growth
There were environmental limitations (scarcity of resources) which made the continuation of economic growth not feasible in the long run.
It even predicted the world economy could face a downturn in the mid-21st century.
Meadows et al. (1972) main conclusions
1) If current trends in world population, industrialisation, pollution, food production, resource depletion remained unchanged, the limits to growth will be found in 100 years, sharp economic decline.
2) Possible to alter this - make sure every human has basic material needs to have an equal oppportunity to realise his or her individual human potential.
3) If the world’s people decide to strive for 2), the sooner, the greater the chances of success.
Effect of scarcity on economic growth
Economists generally believe that the scarcity of non-renewable resources will not affect adversarially the levels of economic growth.
Examples of economic development
Poverty and inequality
Population well-being improvements (health, education, gender empowerment).
Environmental factors (air pollution, energy use, loss of forests)
A possible definition for sustainable development
“Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
UN’s Brundtland Commission (1987)
Weak vs strong sustainability views
Weak - it implies that total capital stock does not decline over time. (environmental economists are in favour of this)
Strong - the level of natural capital is non-declining.
Hartwick rule
For an economy that includes, as an input, a non-renewable resource, the consumption can be maintained if all resource rents are re-inveted in the capital produced.
That kind of investment would ensure that the total capital stock would not decline across time.
Since the rule says that an economy’s stock of reproducible capital along with the stock of non-renewable resources is constant over time, then this implies a degree of substitutability between produced and natural capital.
Discounting with intergenerational equity
Excessive discounting implies that future generations could be at a disadvantage
How to measure sustainable development
Green Net National Product (NNP)
or
Genuine Progress Indicator (GPI)
Human development index (HDI) - 3 parameters
Income (measured by GDP)
Health (measured by life expectancy)
Education levels (measured by expected and mean years of schooling)
Does not account for environmental degredation
An important consequence of ecological economists’ view on growth
Their definition of growth - an increase in throughput which is the flow of raw materials and energy from the global ecosystem to the economy and back to the environment as a waste.
Since the earth’s resources are finite, growth cannot continue forever.
As sustainable development is development without growth - that is, qualitative improvement in satisfying needs and desires but without a quantitative increase in throughput beyond environmental carrying capacity. Ultimately, “Limits to growth do not necessarily imply limits to development” (Daly and Farley, 2004)
Steady-state economy (SSE)
“A steady-state economy is incompatible with continuous growth – either positive or negative growth. The goal of a steady state is to sustain a constant, sufficient stock of real wealth and people for a long time.”
Herman Daly, “From uneconomic growth to a steady state economy”.
Daly’s proposals to maintain a steady-state economy
Cap-auction-trade sytems for basic resources: the idea is that there should be a limit on the rate of pollution and depletion the economy imposes on ecoystsems.
Stabilise population: advocates a population balance where births equals deaths (this includes migration)
3 criticisms of steady-state economy
Growth, zero-growth (SSE) and even de-growth (declining) might not exist forever in a finite world.
What will be the optimum levels of population and man-made capital (built capital)?
SSE does not offer any guidance in order to determine the appropriate stock of capital for people to enjoy a “good life”.
Sustainable Development goals (SDGs)
Constitute a “to-do list for people and the planet and a blueprint for success” - 17 goals set out to reach by UN
3 Ways to minimise marine damage
Continuation of marine litter monitoring programs
Do not fall back on any agreements on marine litters and plastic
Promote effective recycling schemes and waste management programs.
