unit 2, gre401

© Jeremy B Williams 2012

Introduction to Ecological Economic Efficiency

Sustainable Development and Competitive Advantage

Unit 2, Part 1:


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Outline

1) Limitations of the neoclassical model2) EEE and the steady state economy3) ‘Cowboy world’ vs ‘Spaceman world’4) Reworking the circular model (Circular

flow in a steady state economy)


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1. LIMITATIONS OF NEOCLASSICAL MODEL

• Neo-classical economics views the economy as an isolated system in which neither matter nor energy enters or exits – like an animal with no digestive tract

• This vision might be useful for analysing exchange between producers and consumers, and related questions of price and income determination

• It is quite useless for studying the relation of the economy to the environment.


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The economy as a closed system

• If the economy is the total system, the implication is that growth is unconstrained by anything

• Nature may be finite, but it is just a sector of the economy, for which other sectors can substitute

• Some people are quite content with this notion; e.g. to trade off the Great Barrier Reef for access to the Internet


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The economy as a subsystem of a finite and non-growing ecosystem

• Ecological economists see the economy as a subsystem

• Beyond some point, it must approximate a steady state in its physical dimensions

• According to this notion of the economy, it is possible to develop qualitatively without growing quantitatively

• The key is ecological economic efficiency (EEE)


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2. EEE AND THE STEADY STATE ECONOMY

• EEE focuses on throughput use – what flows through a system, entering as input and exiting as output

• More specifically, the efficiency with which capital (MMK and NK) is used to provide life support and life-enhancing services.


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[A note on stocks and flows]

• Stock is the accumulation of capital (MMK as well as NK), that yields a flow of services.

• This flow of services are satisfactions of wants yielded by the stock

• But the capital stock is an intermediary that, on the one hand, yields services, and on the other requires throughput for its maintenance and replacement.


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Defining the steady state

• EEE is consistent with the notion of the steady state economy

• This is where throughput remains constant at a level that neither depletes the environment beyond its regenerative capacity, nor pollutes it beyond its absorptive capacity.


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SD = development without growth

• In summary, a steady-state economy may continue to develop greater capacity to satisfy human wants by increasing the efficiency of resource use, but not by increasing the resource throughput


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3. ‘COWBOY WORLD’ vs ‘SPACEMAN WORLD’

• The Economics of the Coming Spaceship EarthBy Kenneth E. Boulding, 1966


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• In an empty (‘cowboy’) world increasing throughput implies no sacrifice of ecosystem services

• In a full (‘spaceman’) world it could be at the sacrifice of ecosystem services required to maintain the natural capital stock.


12Examples of ecosystem services (Costanza et al 1997)

Ecosystem service Examples

Climate regulation Greenhouse gas regulation, dimethyl sulfide production affecting cloud formation.

Disturbance regulation Storm protection, flood control, drought recovery and other aspects of habitat response to environmental variability mainly controlled by vegetation structure.

Water regulation Provisioning of water for agriculture (e.g. irrigation) or industrial (e.g. milling) processes or transportation.

Water supply Provision of water by watersheds, reservoirs and aquifers.

Soil formation Weathering of rock and the accumulation of organic material.

Nutrient cycling Nitrogen fixation, nitrogen, phosphorous and other elemental or nutrient cycles.

Waste treatment Waste treatment, pollution control, and detoxification.

Pollination Provision of pollinators for the reproduction of plant populations.

Biological control Keystone predator control of prey species, reduction of herbivory (plant eating by insects) by top predators.

Food production Production of fish, game, crops, nuts, fruits etc. by hunting, gathering, subsistence farming or fishing.

Raw materials Production of lumber, fuel or fodder.

Genetic resources Medicine, products for materials science, genes for resistance to plant pathogens and crop pests, ornamental species (pets and horticultural varieties of plants).

Recreation Eco-tourism, sport fishing and other outdoor recreational activities.

Cultural Aesthetic, artistic, education, spiritual and/or scientific values of ecosystems.


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Source: Daly, H.E. (2005) ‘Economics in a full world’, Scientific American, September, p. 102.

Chinese proverb: “Better to give a man a rod than a fish”

… the supply of fishing rods is no longer the problem


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• It is a shortage of trees, not chainsaws, that threatens timber production

15 football pitches per day

Image source: nationalgeographic.com


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• Water itself has become scarce relative to the powerful pumping technologies used to access it


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The economy as an open subsystem of the biosphere

Economy Economy

EcosystemEcosystem

HH

S S

M MMM

E EEE

‘Cowboy’ economy ‘Spaceman’ economy

Man-made capital

Natural capital

SSolar energy

HHeat

MMatter

EEnergyLegend

Recycle Recycle


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4. A RE-WORKING OF THE CIRCULAR MODEL (CIRCULAR FLOW IN A STEADY STATE ECONOMY)

Ecosystem Economy (stocks)

H

S

Throughput

Depletion-Production

Pollution-Depreciation

ServiceEconomic services

Ecosystem services

Must be within the regenerative and absorptive capacities of the

ecosystem if steady state economy is to be maintained


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Ecological Economic Efficiency defined• It follows that the efficiency with which humankind

satisfies its wants depends on the amount of service generated per unit of MMK, and the amount of service sacrificed per unit of NK lost as a result of its conversion into manmade capital

• This conception of ecological economic efficiency may be expressed thus:

EEE = MMK services gained NK services sacrificed


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Sustainable Development and Ecological Economic Efficiency

Sustainable Development and Competitive Advantage

Module Unit 2, Part 2:


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Outline

1) The Comprehensive Efficiency Ratio2) Service efficiency3) Throughput efficiency4) Growth efficiency5) Eco-system efficiency6) Optimal macroeconomic scale7) The three principles of sustainability


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1) THE COMPREHENSIVE EFFICIENCY RATIO (CER)

• The efficiency with which humankind satisfies its wants depends on the amount of service generated per unit of MMK, and the amount of service sacrificed per unit of NK lost as a result of its conversion into manmade capital

• This conception of ecological economic efficiency may be expressed thus:

CER = MMK services gained NK services sacrificed


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The four components of the CER

• The CER can be disaggregated into four components by means of an identity

• Each element of the identity represents a dimension of efficiency that might be improved by increased investment in knowledge or technique.


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The 4 factors of overall efficiency

MMK services gainedNK services sacrificed =

MMK services gainedMMK stock

(1)

XMMK stockThroughput

(2)

XThroughput

NK stock

(3)

XNK stock

NK services sacrificed

(4)


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2) SERVICE EFFICIENCY• Ratio (1) is the service efficiency of the MMK stock• It depends upon:

i. the technical design efficiency of the product itselfii. the economic efficiency of resource allocation among the

different product uses according to individual preferences and ability to pay

iii. the distributive efficiency among individuals

(Mainstream economists refer to this as allocative efficiency)


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… the nature and quality of the service

• An iPod that malfunctions shortly after purchase is not service efficient

• A bridge that collapses under the weight of the vehicles using it, is not service efficient

• A café offering only full cream milk coffees is probably not service efficient.


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Improving service efficiency

1. Is it possible to get more service from a product using the same amount of MMK?

or…2. Is it possible to get the same amount of

service by using up less product (i.e. by using up less MMK)?


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(The ‘good juice of utility’)

• ‘So much of the good juice of utility is allowed to evaporate out of commodities by distributing them unequally’

Joan Robinson (1962) Economic Philosophy, London: C.A. Watts.

Joan Robinson 1903-83Source: http://cepa.newschool.edu/~het/profiles/robinson.htm

http://cepa.newschool.edu/~het/profiles/robinson.htm


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3) THROUGHPUT EFFICIENCY

• Ratio (2) reflects the throughput efficiency or durability of the MMK stock

1. Is it possible to get more man-made capital (cars, refrigerators, iPods etc.) from a given amount of throughput?

or…2. Is it possible to get the same amount of man-

made capital using less throughput?


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Generating throughput efficiency

• A slower rate of throughput, means reduced depletion and pollution

• Throughput efficiency is increased by designing commodities to be durable, repairable, and recyclable

• Eliminating planned obsolescence and excessive model changes would improve this ratio.


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4) GROWTH EFFICIENCY• Ratio (3) is the growth efficiency of natural capital

in yielding an increment available for throughput1. Is it possible to get more throughput per unit of

natural capital stock used up?or…

2. Is it possible to get the same amount of throughput but use up less natural capital to get it?


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Factors affecting growth efficiency

• It is determined by the biological growth rate of the population or ecosystem being exploited

• For example, paulownia trees grow faster than silky oak, so in cases where either will do, paulownia is more efficient


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(A distorted picture of growth efficiency)

• In the short run this ratio can be driven very high by the non-sustainable practice of exceeding renewable rates of harvest and the conversion of permanent stock into one-time throughput

• This appears as an increase in growth efficiency due to the standard national accounting practice of counting natural capital depletion as current income.


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5) ECO-SYSTEM EFFICIENCY• Ratio (4) measures eco-system service efficiency

– the amount of natural capital stock that can be exploited for throughput (either as source or sink), per unit of other natural capital services sacrificed

• e.g. exploitation of a forest to get maximum sustainable yield of timber will be at the opportunity cost of other eco-system services such as wildlife habitat, erosion control, and water catchment


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Improving ecosystem efficiency

1. Is it possible to obtain or extract the natural capital resource input in a less harmful way?

or2. Is it possible to use (or dispose of) a natural

resource, or choose an alternative resource, such that less damage is done to the assimilative capacity of the earth’s ecosystems?


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Undermining ecosystem efficiency

• Harmful fishing technologies which ‘strip-mine’ ocean ecosystems not only catch many non-target species, but also lay waste to the sea-floor. The habitat of remaining species is therefore also destroyed

• Use of natural resources that leave toxic residues in landfill or waterways or release harmful emissions into the atmosphere (e.g. from burning fossil fuels).


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6) OPTIMAL MACROECONOMIC SCALE

• In a ‘full world’, the maximisation of EEE will produce a theoretical optimum for an economy; its optimal macroeconomic scale

• This optimum position will be consistent with the notion of the steady-state economy

• Operationally, arriving at this point and staying there – even with a sound understanding of the science – is most unlikely in a complex and increasingly dynamic world


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Operational objectives• In practical terms, therefore, a workable goal is to

stay below known thresholds and aim to keep ‘shocks’ small and local, (rather than large and global)

• It is evident that the health of many of the world’s ecosystems are already at (or close to) critical points

• An apt ‘operational’ rule would be to attempt to preserve and (where possible) restore the integrity of all natural capital so as to protect its vital ecosystem services … raw material inputs, waste assimilation services, life-supporting functions, etc


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Managing depletion

• How can we make non-renewable natural capital last (e.g. oil and other minerals), if so much of our expanding MMK is made from it and the resource is finite and exhaustible?

• Rapid depletion of important mineral resources is a threat to intergenerational equity


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Business continuity

• Ecological enomists have suggested that one way to manage the transition is to pair a non-renewable mining project with a renewable project

• A part of the net receipts from liquidation of the non-renewable resource can be dedicated to finance investments in renewable natural capital


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Cross-subsidisation

• The net receipts from the exploitation a non-renewable resource need to be divided into two components– an income component – a capital to be set-aside component

• The capital set-aside is invested in a renewable substitute so that, by the time the non-renewable resource is depleted, the stocks of the renewable resource will have the capacity to replace the non-renewable resource


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7) THE THREE PRINCIPLES OF SUSTAINABILITY

1. Limit use of all resources to rates that ultimately result in levels of waste that can be absorbed by the ecosystem

2. Exploit renewable resources at rates that do not exceed the ability of the ecosystem to regenerate the resources

3. Deplete non-renewable resources at rates that, as far as possible, do not exceed the rate of development of renewable substitutes


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Case Study 2:

Life enhancing services and life support services: Finding the balance


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Think


Centre for Science and Environment

• Established in 1980, CSE is an NGO committed to development that is both sustainable and equitable

• It conducts research, lobbies government and business, and communicates and educates to raise awareness

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Anil Agarwal, Founder-Director


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The challenge

• According to Agarwal, there are two dimensions to the challenge:

• First, millions live within a subsistence economy, at the margins of survival, where the environment is their only natural asset. A degraded environment means stress on land, water and forest resources for survival, which means increasing destitution and poverty

• Second, rapid industrialisation is throwing up new problems: growing toxicity and a costly disease burden.


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India's Ecological Footprint 1961-2002


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Minister for the Environment and Forests

• Ms Natarajan took office in July 2011 (having previously been minister of state in the civil aviation and parliamentary affairs ministries)

• Agarwal has been quite impressed with her contributions to date, but feels she has yet to grasp the concept of ecological economic efficiency

Ms Jayanthi Natarajan


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Read


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• Web-based data on India relating to economy and ecology

• PowerPoint Slides for Unit 2• Study Guide for Unit 2

– particularly Topics 2.2 and 2.3


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Discuss


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Life-enhancing services and life-support services in India

• Consider the life-enhancing services generated through MMK

• Consider the sacrifice of life-support services as a result of the reduction in NK

• Consider the dynamics of this relationship and how it is changing within the Indian context


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Deliver


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Your consultancy company has been contracted by CSE

• With a growing reputation in South Asia for your expertise in ecological economics, CSE would like you to produce a Situation Analysis which it can then present to the Minister for the Environment and Forests

• The brief from Agarwal is that the Situation Analysis need only be a broad overview at this stage, and that your primary focus should be on the current health of ecosystem services


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Prepare for a 10 minute presentation to Anil Agarwal …

• Drawing on the resources you have at your disposal, critically evaluate the current state of life-enhancing and life-supporting services in India, and the prospects for development that is sustainable and equitable

unit 2, gre401

Education

internet jeremy b williams

problem jeremy b williams

steadystate economy

steady state economy

steady state eee

steadystate economy

flow of services

water supplyprovision