Ecological EconomicsLecture 07

6th May 2010

Tiago DomingosAssistant Professor

Environment and Energy SectionDepartment of Mechanical Engineering

Collaboration: Rui Pedro Mota

What is Sustainable Development?

• Brundtland report (1987) – “Development that meets the needs of the present without compromising the ability of future generations to meet their own need.”

– Intra- and inter-generational equity– Anthropocentric

• Sustainability of what?– non-declining aggregate output or consumption,– non-declining utility,– non-declining aggregate resources (productive base),– non-increasing pollution, …

• Weak vs. Strong Sustainability

• We choose non-declining utility as the criterion for sustainable development– some call this Weak Sustainability, but we don’t agree – this still misses the intra-generational component

• What is green net national income (GNNI) and what does it measure?

• What is genuine saving and what does it measure?

• World Bank’s Adjusted Net Savings (Genuine Savings)

• ANS measure the true rate of savings in an economy after taking into account investment in human capital, depletion of natural resources and damage caused by pollution. ANS time series can be downloaded for 140 countries. (http://go.worldbank.org/VLJHBLZP71)

• Beyond GDP, European Comission (http://www.beyond-gdp.eu/)

• Which indices are most appropriate to measure progress, and how these can best be integrated into the decision-making process and taken up by public debate.

• “We cannot face the challenges of the future with the tools of the past. It's time to go beyond GDP.” Durão Barroso

• Extending European National Accounts to environmental and social issues

• OECD work on alternative measures of welfare (www.oecd.org/dataoecd/13/38/36165332.pdf)

• Extending GDP to include leisure time and inequality.

• Stiglitz Commission (http://www.stiglitz-sen-fitoussi.fr)

• Identify the limits of GDP as an indicator of economic performance and social progress.

• SEEA 2003, United Nations (http://unstats.un.org/unsd/envaccounting/seea.asp)

• Satellite system of the System of National Accounts that brings together economic and environmental information in a common framework to measure the contribution of the environment to the economy and vice-versa.

Alternative measures of well-being

World Bank’s Genuine Savings

World Bank’s Genuine Savings

World Bank’s Genuine Savings

World Bank’s Genuine Savings

World Bank’s Genuine Savings

World Bank’s Genuine Savings

• Resource Curse: Countries dependent on natural resources tend to depict unsustainable development (negative GS).

World Bank’s Wealth Estimates

Multisector Optimal Growth

• m-dimensional consumption bundle, including everything that influences well-being.

– Includes all non-market commodities, e.g, produced at home, environmental services, …

• n-dimensional capital vector:

– Includes man-made capital, natural resources, human capital (education and knowledge) and foreign capital. Time is included as a capital, to depict technological progress in production.

• Attainable production possibilities

• The model

0max ( ( )) t

cU C t e dt

C( ),I( ) (K( ), )t t S t t

s.t.K

Id

dt

C( ),I( ) (K( ), )t t S t t

Criteria for Sustainability, Pezzey (2004) EDE

• An economy is sustainable at time t if and only if the representative agent’s current utility does not exceed the maximum level of utility which can be sustained forever from t onwards.

• One-sided sustainability test:

un-sustainable development.

• Multisector results in real terms.

– Real Net Income,

– Genuine Saving,

–

0 0dY

QI ordt

P C Q IY

dY R dWR

dt dt Q I

Q IConsumption Investment

Variation in Real Net Income

Variation in Welfare

Welfare Relationships

• Both Genuine Savings and Green NNI are related to future consumption.

• These relationships can be used to empirically check the theory.

• If genuine saving is negative (or green NNI deacreases) then current consumption will decrease in the future.

Small Open Economy

• Include – stocks of commercial forests,

– welfare costs of air emissions,

• The capital stocks are :

– Domestic man-made capital,

– Net foreign capital held privately or by the government,

– Stock of commercial natural resources

• Production

K : ( , ,S)fK K

dKI CFC

dt

ff R X MdK

rK X Mdt

Q (R R )

d XdS

dt G(S) R R

d M d XI F K M X C a f ( , R R ) (R R ,S)

r – interest rate

Small Open Economy

• Households’ utility function depends on material consumption rate and (negatively) on the flow of emissions

• The vector of emissions depends on production and abatement expenditure.

• Maximize welfare subject to the above relations and having as controls consumption, , all forms of extraction, , abatement expenditure and trade balance .

• Conventional (SNA) NNI:

• Green Net National Income:

• Genuine Saving (Adjusted Net Saving):

(C) : ( ,E)U U C

E( ( ),a)F

( )C t R ( ), R ( ), R ( )d X Mt t ta( )t ( ) ( )M t X t

: fNNI C K K

R(Q f ) S e ER tY NNI Q

R(Q f ) St R tQK Q NNI C Q

Small Open Economy – Table of symbols( )C t Consumption rate at time t

( )U Utility

E( ) Rate of emissions of air pollutants

( )F Production function

a Abatement expenditure

, , ,iR i d X M Extraction of natural resources for domestic use, exports and from imports.

M X Imports - Exports

r Constant nominal interest rate

S Stock of resources

K Man-made capital,

RQ Resource price

R Constant real interest rate

(R R ,S)d Xf Cost of extraction of resource

e Marginal cost of abatement = Marginal damage cost

Rf Marginal cost of abatement

fK Net foreign capital

Small Open Economy

• Starting from conventional SNA aggregates:

– Deduct the damage from flow pollution emissions,

– Deduct (add) the value of rents from resource depletion (or not),

e E

R(Q f ) SR

-20000

0

20000

40000

60000

80000

100000

120000

140000

1990 1995 2000 2005

Mill

ion

€

GNI

CFC

Air emissions

Forest Depl.

Tech. Progress

GNNI

Pot GNNI

GNNI, T=100

GNNI and GS in Portugal – Air Emissions

• How to value a unit of emissions?– Marginal benefit of avoided emission,

– Marginal cost of emission (MDC), or

– Marginal abatement costs?

• Marginal cost of emission per emitted pollutant [€2000/ton]:

[€2000/t] Best Low High

SO2 6872 3472 9972

NH3 7399 3699 10999

NOx 2040 1140 3040

VOC 1150 450 1550

PM2,5 44000 22000 64000

GNNI and GS in Portugal – Air Emissions

0

10

20

30

40

50

60

70

1990 1995 2000 2005

% o

f to

tal c

ost

SO2

NH3

NOx

VOC

PM2,5

GNNI and GS in Portugal – Forests

• National Forest Inventory 2005/06

• Average Volumes:

Conifers

Eucalyptus

95/98 05/06[m3/ha]

88.5

55 55

82.5

0

200

400

600

800

1000

1200

1400

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

10^3

ha

Conifers

Eucalyptus

GNNI and GS in Portugal – Forests

-200

-150

-100

-50

0

50

100

1990 1995 2000 2005

mill

ion

€ConiferousEucalyptus

The depreciation of commercial forests in Portugal is on average 10% of the contribution of forestry to national product (around 4%).

GS in Portugal

• Without the value of time – Decreasing tendency throughout the period and negative GS after 2002.

• With the value of time – Decreasing tendency until 2001, but GS are always positive.

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

40000

1990 1995 2000 2005

Mill

ion

€GS, no Qt

GS

GS, T=100

Potential GS

What’s Missing?

• The depletion of water resources.

• The depletion of biodiversity.

• Depletion of stocks of fish.

• Inclusion of the value of ecosystem services.

• Soil quality.

• Distributional issues (intragenerational concerns).

• ...