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Environmental Summaries.doc

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University of Toronto Mississauga

Environmental Economics Albert Van Der Merwe 16 OCT • Growth NB BUT: is this possible considering the effect of the economy? - global warming (mainly due to energy which is needed to produce goods and services which are in turn needed for economic growth) Course Outline 1. Economic activity and the environment: a closed (?) circular system? 2. From “the limits of growth” to sustainable growth and development: economic grwoth vs (?) the environment? - Is there a trade off btw economic growth and the environment?  2 views: pessimistic – cannot grow at 6%!!! Environment cannot handle this 3. Developing countries, poverty and the environment • poverty causes harm to environment? • how does this affect policy making? 4. Accounting for the environment at different levels of economic decision making • how does one quantify effect on environment in macroeconomic policy? 5. Economic decision-making and the environment in South Africa • why are environmental issues important especially in the case of South Africa?  discussion under 1-4 very general – applicable to all countries.  to be green doesn’t mean one has to be radical.  any good economist should be “green” - actually all about good economic decisions. ENVIRONMENTAL STATISTICS. • use of energy is NB contribution to global warming  energy use per capita is more than world average  South Africa is much more energy intensive than many other countries. • SA one of biggest contributors to CO2 emission.  Reason: energy is still very (too?) cheap in SA.  most of our electricity is supplied by burning coal (lots of coal in SA)  the low price = wrong incentive to use a lot • if we can get input prices right, can be more competitive on international level – do this by keeping energy prices low  BUT: energy prices should go up to balance externalities! • SA has very limited water available. Copyright: Sanja Lutzeyer  need water for agriculture manufacturing etc. • contribution of agriculture to GDP has decreased. • soil has degraded – can do less with it. • Although SA very famous for national parks, still have very small protected area with respect to the rest of the world. WWF LIVING PLANET REPORT • SA & world use more than we actually have –living above sustainable level of resources.  not sustainable over the long term. • how reliable is data given the complexity of measurement?  less important if measurement is absolutely correct (there is no absolutely correct statistic) What is really important is the trend. Is it increasing or decreasing?  are there solutions or should we stop growing? • main contributors are the Americans. Least are the Africans THUS: developing countries often expect America to address the problems they cause. INSTRUMENTAL VS INSTRINSIC VALUE • we look at environment from an economic perspective  in this sense, environment only has instrumental value • if we could survive without environment, it would have no “value” (instrumental) • further, intrinsic value cannot be measured.  different disciplines - different ethics & so different values they attach to environment. • if you feel very strongly that nature has intrinsic value, you would believe that no human can merely decide to exploit it. Environment: biosphere (thin skin on earth’s surface on which life exists), the atmosphere, the geosphere (part of earth below biosphere) and all flora and fauna.  definition includes life forms, energy & material resources, the stratosphere (high atmosphere) and the troposphere (low atmosphere)  these constituent parts interact with one another 1. ECONOMY-ENVIRONMENT LINKAGES (Hanley et al.1997) (not all detail NB from readings)  renewable – eco-systems  non-renewable – minerals, coal etc. ‘Economics 178 relationship’ • 4 production factors: land, labour, capital, entrepreneur • land (nature) NB input into production. • aim of production process: to manufacture goods and services for us as consumers to use. Copyright: Sanja Lutzeyer  there is only production due to us! (consumers)  when start blaming people, don’t blame companies etc, blame consumers (idea: can’t really say this!!! Industries create demand – then satisfy it – they are really to blame) Copyright: Sanja Lutzeyer 17 Oct FOUR FUNCTIONS • relationship btw environment and economic productivity is quite complex  see p. 3 of Hanley – illustration - in first year only did energy and materials (E1) into production 1. Energy and materials are used as inputs into production process 2. Waste Sink • in consumption and production process, waste gets generated  eg. polluted air, waste water  gets put into environment • not necessarily a problem, as the environment has natural ability to deal with waste – micro- organisms which break down waste & chemical processes (eg. oxidation) BUT: limited assimilative capacity for waste!  problem originates when TOO MUCH waste is put into environment  pollution THUS: waste is not necessarily pollution. Only becomes pollution if too much Cumulative / conservative pollutants  inputs to environment for which no natural process exists to transform into harmless, or less harmless substances  these will build up in environment or become part of organisms (‘bioaccumulation’) 3. Amenity • leisure or educational or spiritual value.  this is of economic use as it provides utility – consumers willing to pay for this. 4. Global life-support services • Maintenance of atmospheric composition suitable for life (we cannot live without oxygen) • maintenance of temperature and climate(green-house effect) • recycling water & nutrients  this function encompasses all others. What precisely ‘counts’ for economists? - current dominant economic paradigm: neoclassical model  judges eco value as being dependent on social value  sum of individuals’ well-being  measured by utility  sum of individual utilities  no space for separate ‘collective good’ ST ND 1 AND 2 LAWS OF THERMODYNAMICS - both laws hold true in strictly closed system LAW 1: materials balance principle Cannot create or destroy energy and matter • can convert one into other, but cannot ↑ stock of energy-matter • points to closed system  can use these up without replenishing them  not 100% true – get energy from outside through Sun (and sometimes matte from meteorites), but this is almost negligible – can view as closed system BUT: depending on technology, can make better use of sun energy in future & maybe exploit other planets Copyright: Sanja Lutzeyer Implication of above law: 1. there will be waste  as more matter extracted in production process, more waste is generated • one can decrease the amount of waste – 3R’s (or clean technology): - reduce (use less inputs through technology – to produce same output – best option) - re-use - recycle  unfortunately can’t recycle and re-use everything 2. limits on degree to which resources can be substituted for each other in production LAW 2: Entropy Law  in a closed system, use of matter-energy causes one-way flow from low entropy resources to high entropy resources; from order to disorder. Useful (low entropy – high degree of order) matter / energy changes to less useful (high entropy – degree of disorder in system) matter / energy  As energy resource is used, amount of work that energy can do ↓  as we use our energy, it becomes less useful  ps. High entropy = waste (less useful than low entropy) Implications: limit as to what we can achieve with recycling  energy cannot be recycled in such a way that we get back all capacity of original energy source to do useful work (some energy will be lost as heat) THUS: if earth is closed system, with limited stock of low entropy energy resources, then that system is unsustainable, since eco activity inevitable degrades the energy resource so that, eventually, no capacity for useful work will remain BUT: earth not closed system. While entropy law useful in understanding limits of matter & energy recycling, not necessarily bringer of doom it once appeared to be PLUS: technological progress can lead to significant ↓ of use of material resources  more likely that first law, with implications of ↑ residual output, will set limits to growth • these laws play NB role in relationship of functions in economy  if too much waste, this affects the amenity function Trade-off btw the above functions of environment! – using environment for 1 purpose can reduce its ability to supply us with other services! – this is why circles on figure are overlapping – conflicts in resource use! • amenity can also affect E1 and E4 – want to transform Paradyskloof into golf track – want to use it for amenity, but this will influence the nature – people won’t be able to get spiritual value out of this any more. • Eerste Rivier – polluted – can use as amenity, but poor use it as input –pollute it.  these conflicting demands point to problem of relative scarcity Absolute Scarcity Vs. Relative Scarcity • in general, the demand is larger than supply for most goods  thus: problem of relative scarcity – have to CHOOSE what use environment for. • market solves this problem through relative (shadow) prices Absolute scarcity – all demands on environmental services are simultaneously increasing! Copyright: Sanja Lutzeyer  major cause: eco growth – implies ↑ demand for materials & energy, ↑ waste outputs & ↑ demands for environmental quality as input to recreational, educational & scientific values  if environmental resources fixed, then absolute scarcity will ↑ with eco. growth  don’t have enough resources as to produce all these goods and services – there is a limit  implies that there is limit to economic growth While relative scarcity is about WHERE to use resources • do we have a problem of absolute or relative scarcity? Problem: eco system ( = market system) works very poorly in allocating environmental resources  imperfect specification o f property rights results in set of prices which send wrong signals to consumers, producers & gov PLUS individual benefits of preserving environment understate collective benefits of preservation • see box 1.2 Hanley p.9 Uncertainty & precautionary principle • in many cases of environmental management, uncertainty over effects of actions on environment & impact on humans subsequent to environmental ∆  environmentalists: society should take action before uncertainty resolved, as costs of not taking action may well be > costs of preventative action taken now (especially when absence of action today leads to irreversible undesirable environmental consequences) Precautionary principle  policy stance of taking action before uncertainty about possible environmental damage is resolved  acceptance of PP could either mean total elimination of activities where uncertain environmental damages involved, or just minimisation of inputs BUT: economist often worry that opportunity cost of prohibition or minimization too large 2. ECONOMIC GROWTH AND THE ENVIRONMENT (trade-off?) (COLE 1999 EN GLOVER 1999:609-615) two distinctions: 1. optimists – emphasise relative scarcity 2. pessimists – emphasise absolute scarcity  need to cut down on scale of growth “Pessimists” – different arguments: 1. Limits to growth (Meadows et al 1972) – non-renewable resources are limited (eg. coal) - builds on law 2 – cannot continually re-use energy  we are using up non-renewable resources!!!  if this is true, it means that we are using up our energy  this puts further limits on economic growth (finally collapse of economic system!) Resources = matter & energy in fixed supply in 2 ways: 1. fixed stock of matter – some of which consumed or transformed into energy. But once transformed, less useful – often harmful waste 2. fixed flow of energy from sun – only way to use more energy than we receive from sun, is to eat into stock of raw materials – including accumulated solar energy photosynthesized by plants in past  stock is limited & we’re in danger of depleting it 2. Overexploitation of renewable resources Copyright: Sanja Lutzeyer • absolute scarcity which will limit economic growth  problem is not so much with non-reusable, but rather with over-use of re-usable resources!!! (ecological footprint argument)  endangers our survival • rate of depletion of renewable resources causes great concern for number of reasons - resource interconnectedness - depletion of any one impacts on availability of others - damage to regenerative capacity  rates of depletion ↓ ability of resources to renew themselves - directness of impact - resources directly consumed! Directly dependent on them!  especially relevant to developing countries: developed countries are further removed from dependency due to tech. etc  pessimists in general believe there is a trade-off btw economic growth and environment. “When we compare the current EF with the capacity of the earths life-supportin ecosystems, we must conclude that we no longer live within the sustainable limit of the planet.” … path of unsustainable consumption of exploitation… 3. puts stress on life supporting functions of the environment • constraints more NB than raw material shortages are starting to appear! • All four functions (E1-E4) under own degree of stress BUT: most NB: function of providing life-support is affected by both resource depletion & pollution  stress on this function that has renewed concerns about limitstho growth 18 Oct 4. Daly / Georgescu- Roegen - 2 law of thermodynamics: we are busy depleting our useable energy (non-re-usable)  fixed nature of terrestrial stock which is ultimate regulator of economic growth  “Growth in physical production and throughput that is not based on solar energy must ↑ entropy and make environmental problems worse, implying eventual limits to growth Daly: unrestrained econ growth should be replaced with steady state  a constant stock of physical wealth (capital) and a constant stock of ppl (population) But: tech & knowledge ∆ in steady state, thus economy will grow qualitatively, not quantitatively. 5. There are other arguments to why we should limit economic growth • social-ethical argument  wealth does not bring happiness  thus, economic growth won’t necessarily lead to greater happiness  decline of moral capital is nature of free-market system (everyone fights for themselves)  about issue of how one measures development in world? How does one measure welfare? Other broad argument: there is optimistic view • we do have problem of relative scarcity • through price incentives and technology can overcome this pay-off btw economic growth and environment Daly. 1987. The economic growth debate… Journal of environ. eco and management. Vol 14 no4  can read for interests sake. Copyright: Sanja Lutzeyer Copyright: Sanja Lutzeyer OPTIMISTS – RELATIVE SCARCITY Emphasise a number of issues 1. Substitution  eg. can substitute oil with hydro-electricity – within production structure, can substitute btw goods. – inventiveness of humankind. 2. Technology – use less and can substitute more 3. Price incentives – makes use more efficient.  use technology to use less of the more expensive goods. 4. Consumer preferences ∆ over time (future ∆ in composition of output)  consumption patterns will lead to change in productive changes  environment is luxury good – as income rises, greater demand for healthier environment.  environmental consciousness - “green products”  through the above 4 aspects we can ‘overcome’ the scarcity problem. Some (‘pessimists’) stress that this is logically conceivable, but not certain, probable ore ven possible in practice of growth growing indefinitely • There is more to carrying capacity than just population an consumption! Impact = Population x Affluence x Technology • Impact can be decreased through technological improvements and ↓ population growth • believe that adjustments needed to achieve sustainable development are less painful than pessimist often believe (eg. win-win situation of abolishing subsidies) EXTREME OPTIMISM VS REALISM EXTREME OPTIMISTS  some economists argue that you should just leave everything to market – relative prices change and thus provide incentives for substitution, technology etc.  no reason to intervene to protect environment REALISTS – there are market failures, thus need environmental inventions. • there are no markets for some NB goods (eg. clean air etc.)  further, can be no market for wetlands – how do you put price on this? Thus market cannot solve these issues  need intervention. NOW QUESTION IS: to what extent can and should the state intervene? SUSTAINABILITY Vagueness of term – Campbell (94) “attempts to define sustainability miss the point that, like beauty, sustainability is in the eye of the beholder”  due to ambiguity, impossible to state precise relationship btw sustainable development & eco growth  ambiguity is often used as ammunition by opponent – vague concept is meaningless  ‘watered down’ interpretation often used by political mainstream – little scope for environ. imporval World Conservation Strategy (IUCN 1980): ‘Defined’ sustainability in ecological terms: “… maintaining ecological processes, preserving genetic diversity and utilizing species and ecosystems in a sustainable fashion”  critique against this definition  anti-development Copyright: Sanja Lutzeyer  economist don’t prohibit use of resources – must merely measure costs against benefits. Brundlandt Report 1987: “Development that meets the needs of the present without compromising the ability of future generations to meet their needs”  very clear development focus  does not limit further growth BUT: addresses how we should grow or develop  emphasises satisfaction of basic needs of people  focuses on future (justice in decisions) – must always think about influence on future BUT: problem: how do you measure this? Key characteristic of all definitions: principle of equity  includes not only providing for needs of least adv. in today’s society (intragenerational equity), but also extends to needs of next generation (intergenerational equity)  most appropriate way to ensure well-being of future generations is to ensure they have access to capital stock at least as large as current stock. ∴ Economic definition: Non-declining capital stock  if develop without ↓ capital stock, future generations will have same amount of capital  total capital stock = man made capital (means of production, infrastructure, human capital) PLUS natural capital (fossil fuels, habitat, clean water)  influences production capacity • two viewpoints emerge, depending on how capital stock is interpreted STRONG VS WEAK SUSTAINABILITY WEAK: • sustainable development simply requires that aggregate capital stock be maintained  ↓ in natural capital can be compensated by ↑ in man-made capital • sustainable if TOTAL capital stock does not decrease – sum of physical infrastructure – includes all types of capital – natural etc.  this means that substitution is possible within capital (eg. can reduce environment if become more technological and so make the same from this different combination of capital) • often believe that economic growth and environmental health are complementary  Def of Brundland reports falls into this category (since called for more eco growth)  Most governments also place great faith in future technological advance & ability to find substitutes for scarce resources STRONG: • you have sustainability if your natural capital does not decline. • questions substitutability btw these two forms of capital - insufficient to simply maintain aggregate capital stock, irrespective of relative size of constituents Graph: saving is equal to investment  developing countries are not sustainable while developed ones are.  must remember that the developed world often depletes the resources of developing ones Table 7.1  In terms of strong definition, not one is sustainable.  Weak def: some are sustainable  Doesn’t take in account the importing of natural resources Copyright: Sanja Lutzeyer Table 2.1  All areas sustainable, except Middle East (oil depreciation)  BUT: we all consume that oil ENVIRONMENTAL KUZNETS CURVE (EKC) • Inverted-U shaped relationship btw income (production) & pollution (environ. degradation) • Environmental damagbe ↑ in early stages of development, peaks at middle income level when country has lot of dirty manufacturing, and then ↓ as country shifts to service / information  early stages of eco. development see pos. relationship btw eco growth & pollution other reasons for shifts as country develops (and so income ↑) - ↑ availability of public funds for environmental investment  development ↑ resources with which to tackle environmental problems (often regulation)  ↑ power of state to regulate - ↑ demand for environmental quality as ppl become wealthier - wealth ppl even willing to pay for environ. Amenities enjoyed by others (eg. charities) - capacity to devise technology to deal with environmental problems ↑ ‘strong’ sustainability: only way to achieve ↓ in scale of damage is to ↓ scale of eco output  point to risk of irreversibility associated with damage to natural environment Does the EKC imply that policy makers don’t have to worry about the environment? Don’t worry, be happy: implies that growth will solve all our problems! Source: empirical studies, relationship btw industrial production and pollution ∴can make policy considerations. Why EKC Is Not Automatic Process? 1. No, or high projected turning points a. Indirect indicators  Not valid to all pollutions: TP doesn’t exist or is extremely high Eg. household waste / municipal waste – no TP – expected to ↑ with income • Problem: lack of direct local impact  eg. landfill sights – apart from causing possible amenity loss, municipal waste only indirectly harms environment, by representing ↑ use of resources and generating methane BUT: methane = global air pollutant b. Local(Domestic) vs global pollution • Pollutants like emissions of local air & water pollutants have detrimental impact on the area in which they are emitted – gov finds inactivity politically difficult  further: in most cases, technology to tackle local pollutants already exist ∴ Domestic  low TP because state has interest to combat it • however, when examining eg. CO2, TP are estimated at income levels far beyond those currently experienced, indicating that emissions still ↑ for all countries BUT: CO2 lacks direct local impact  problem more global in nature ∴ governments have little incentive to unilaterally tackle CO2 emissions – lack of incentives  fear to suffer from competitive disadvantage  all nations have interest to free-ride, benefiting from abatement efforts of other nations Copyright: Sanja Lutzeyer ∴ multilateral action necessary to tackle global pollutants  international cooperation only way forward  role of internationally funded environmental organizations vital Global  global impact (CO2)  high TP  free rider problem? c. Impact of transport sector • From 2 sources: pollution from transport industry & pollution from vehicles • Large role in pollution  TPs estimated for transport generated emissions per capita of local air pollutants are notable higher than those estimated for total emissions per capita for same pollutants!  Emissions in transport sector more difficult to control than emissions from other sectors  ↑ traffic volumes have hampered efforts to ↓ pollution through ↑ fuel efficiency  transport related environmental indicators worsening with economic growth 2. Emissions vs concentration levels • TP for per capita emissions likely to be higher levels of per capita income than those of urban air [] since, easier to reduce latter than former  distribute pollution wider  ↓ concentration (but emissions don’t really ↓)  low TP for pollution [] does not necessarily mean that emissions of the pollutant ↓ • also conversely: Quantity ↓, but not ↓ real effect, because concentration ↑ 3. Impact per capita vs. total effect • Low TP per capita emissions does not mean that total emissions are ↓ at global level!  largely due to skewed nature of global income distribution  total pollution still ↑! Only pollution / GDP which ↓ due to more efficient production (less input needed for given level of output)  economic development may simply cause movement of pollution from developed world to developing world 4. Reflect structural changes (as country develops) • Emphasis moving from industrial to service sector (emphasised when GDP ↑ (country richer)) BUT: still dependent on industry from poorer countries  need to look at pollution in terms of global picture! • Pollution haven hypothesis: move to less regulatory areas where allowed to ↑ pollution ∴ pollution does not really ↓ with economic growth, but simply passed elsewhere  impli
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