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Lecture 10: Topics on environment and economy

Theories of Ecological EconomicsM.Sc. EnviNatResEcon.

Sem 1/200728 August 2007

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topics

• Pollution and economic development– The environmental Kuznets Curve (EKC)

• Trade and environment– Pollution Haven Thesis– Environment as non-tariff trade barrier

• Accounting for Nature in the economy– green accounting etc.

• Environment and the Firm– Triple Bottom Line

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Pollution and development

• Development=more output, more consumption

• And more waste

• Or not, because of regulation, production structure, abatement technology etc.

• So, what are the facts and what are the explanations?

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facts

• Stylised facts: as shown in World Bank Annual report 1992

• See chart:

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Explanations?

• Theoretical model

• Stern: simple curve fitting, but not explanation

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Models?

• Simple analytics:

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And it looks like this..

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Revisionist- empirical critique

• Stern: review

• Econometric critique

• Lack of theory-

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A go at theorising-

• Decomposition of EKC into components

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Trade and Environment

• An issue at the WTO trade talks• Extensive literature has developed• Main issues:

– Pollution Haven Thesis– Environment as non-tariff barrier– Trade in environmental products

• Environmental services• Trade in endangered species (CITES)• The carbon trade• Biotech products

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Pollution Haven Thesis

• Connects to location of production• Do companies look for location with low

environmental standards?• So far, not proven• With outsourcing, may not be so important any

more --• Convergence of national standards may not

happen, but international voluntary standards may apply – ISO 14000, green supply chain, etc.

• China Toy recall case as example!

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Environment as NTB

• Importer country sets standard, compliance with WTO – Most Favoured Nation(MFN), national Treatment (NT) rules

• Can increase cost for exporter, checking, quality certification,

• But usually not negotiable, because rule is applied with non-discrimination between national and foreign suppliers-

• Example: WEEE, REACH of the EU

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Trade in environmental products

• Endangered species-CITES– Orchids, animals, ivories etc.– Control and reporting

• Environmental services-– Under GATS, as part of trade in service– Related to mode 3: commercial presence, FDI

by foreign companies with advanced technologies

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The carbon trade

• Under the Kyoto Protocol

• Emission commitment (CAP) and Flexibility Mechanisms (TRADE) system

• See next slide

• EU directives – Emission trading and Linking Directives

• Voluntary Market in non-Kyoto countries , US and Australia?

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emission

year

KP target

Actual emission

17Emission Reduction

P

Demand

DomesticAction

Joint Implentation

CDM

C-ET

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RGGI: a RegionalCO2 Program for Power Sector

Sonia HamelOffice for Commonwealth Development

Presentation to the

Electricity Restructuring Roundtable

June 17, 2005

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Overview• Overview of the RGGI Process

• Quick Cap-and-Trade Primer

• Status of the Work to Date

• Observations on the Process

• Next Steps

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GoalDesign a Regional

Cap-and-Trade Program Initially Covering CO2

Emissions from Power Plants

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Statistics3rd Largest

World Economy

14% US GHG Emissions

3.2% of World GHG Emissions

( Germany)

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Context: Early Movers on Climate Change

• History of Regional Cooperation on Air Quality -- Ozone Transport Commission

• NJ First to Take Official Target

• New England Governors/ E. Canadian Premiers Plan (2001) (sets a target)

• NY Greenhouse Gas Task Force (2001)

• Now state plans in CT/RI/MA and ME (also set targets)

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Cap-and-Trade Program

Goal: Achieve a Reduction in Emissions through a Flexible, Market-based Approach

Identify Sources to be Covered

Determine Total Emissions from Covered Sources

Set Cap

Issue Allowances (1 per ton) & Allocate Allowances to Sources

Trade

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Why Cap-and-Trade?

• Have Proven to Provide Benefits at Lowest Cost

• Simple compared to Alternatives• Flexible, Market-Based• Incentive to Reduce at Source of

Emissions Leads to New Innovation

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Regional Cap-and-Trade Program

• Each State:– receives a budget (as agreed in MOU)– distributes allowances to its sources– agrees to accept allowances originating in other states

• State to State Reciprocity Allows Trading• Key: Ensure Uniform “Currency” and

Free Flow of Allowances across State Lines

Regional Cap

Individual State

Budgets

Each State Allocates

AllowancesTrade

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Why a Regional Program?

• Moving together provides economy of scale• Greater reductions possible• More options for lower cost reductions• Larger the market, the larger the incentives

for innovation• More states = greater influence on future

policies

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RGGI Design Principles

• Build on Past Success of NOx Budget Program• Maintain Electricity Affordability, Fuel Diversity

& Reliability• Make RGGI Expandable to Other States • Achieve Least Cost Reductions• Stimulate Innovation w/ Clear Market Signals

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Stakeholder Process

Technical Groundwork

Data Assembly and Analysis

Energy and Economic Modeling

Resource Panel

Website contains materials at: www.rggi.org

RGGI Progress to Date

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• Stakeholders: 24 organizations and companies at the table and over 30 more observing

• Electric generators (from across the geographic area, includes all fuel types)

• Electric distribution companies• Energy efficiency & renewable energy interests• Energy users (industrial, commercial)• Consumer interest organizations • Environmental organizations

Stakeholder Group

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0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Connecticut Delaw are Maine Massachusetts NewHampshire

New Jersey New York Rhode Island Vermont

Sh

are

of

9-S

tate

Cap

2000 CO2 Tons - All Plants > 25MW (E-GRID) **

2000 Generation - All Plants > 25MW (E-GRID) **

2000 Generation - Fossil Plants > 25MW (E-GRID) **

2001 Electricity Consumption **

2000 Population **

Emissions Data by State

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• Carbon emissions• Other emissions• Electricity prices• Total electricity system costs• Fuel use and diversity• Reliability• Imports and exports of electricity

Quantitative Impacts of a Regional Carbon Cap

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Policy Consultation and Decision Making

Stringency of the Cap

How to set state budgets

Flexibility mechanisms for companies

Offset Credits (External to Cap)

Regional Greenhouse Gas Registry

RGGI Progress to Date

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• Agreed on Model Reference Case (base case)• Considered factors in setting cap levels to

model and, ultimately, to recommend• Seek to minimize implementation costs• Decide which reductions from external sources

(not covered by the cap) could qualify for credit? – How to guarantee that these offsets are real

reductions?

Key Issues

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• Stringency: looking at 10% below current levels and stabilization at current levels by 2024.

• Offsets: Would reduce costs and expand benefits. Decisions to be made about what geographic area to include.

• Simplicity of design: Inspire others to follow, strict accountability and flexibility

Essential Components

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Complete Modeling and Evaluate Reasonable Cap Level from what we have learned.

Complete a draft Model Rule

Determine Cap Size and Mechanics

Determine State Emissions Caps

Begin State-by-State Decision making and Implementation

Plan ongoing Cooperation between states

RGGI Next Steps

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Add Additional States to Emissions Market

Add Offset Categories to Program Over Time

Possible Expansion to Major Stationary Sources in Other Sectors

DEMONSTRATE SUCCESS

RGGI Future Goals

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Accounting for environment

• Green accounting for the macro-economy

• What to count?

• Changes in stock of Natural capital

• UN methodology for national income accounting, environment as satellite account, physical account, but not yet valuation

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The environment and the firm

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The issues

• More stringent environmental requirements for company operation

• Regulations, taxation, environmental markets

• Green consumerism

• Impact on company strategy and competitiveness

• Triple bottom line

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Impact on company operation

• Higher cost due to :-

• Product requirement

• Labelling requirement

• Higher Standards to meet

• Increased competition-loss of competitiveness

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Examples?

• Green products

• Green companies

• Green wash ?

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Examples again………….

Measures: compliance

ISO certification

WEEE

REACH

Advantage:?

Share price

Image

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Triple bottom line

• Financial

• Social

• Environmental

• Corporate Social responsibility

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Conservation Finance

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The Issues

• Benefit of conservation is external to the firm

• So no action on conservation

• How to capture the benefit is the key

• How to pay for conservation? PES example-are incentives perverse?

• Green Investment – do they make money?

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