Introduction to Ecological Economics

Greentax

Sep. 7, 2004

Gary Flomenhoft-Gund Institute

CIRCULAR FLOW MODEL OF ECONOMY

ECONOMY

“EXTERNALITIES”

SOCIETY

ENVIRONMENT

? ?

Environment as subset of ECONOMY

=

NEO-CLASSICAL ECONOMICS 1890-

No Ingredients, only labor and capital

P = f(L,K)= ALa . BKb (Cobb-Douglas multiplication)

Labor (Chef )

Capital (Mixing bowl)

xBread?Capital (oven)X

=

NEO-CLASSICAL ECONOMICSINFINITE SUBSTITUTABILITY:

2P = f(L,K)= 2ALa . 2BKb

More Chefs

or Bigger Mixing bowl

x

More Bread?

Quotable Quotes

• “There is no reason we can’t have a perfectly healthy economy with virtually no resources whatsoever” Robert Solow

• “We can do without agriculture because it’s only 2% of the economy.”Norgaard?

• “neo-classical economics is a form of brain damage” -- Hazel Henderson

ECOLOGICAL ECONOMY

NO “EXTERNALITIES”

Intro to Ecological Economics

Throughput-open system

1st Law: Conservation of mass

ECONOMY (waste)

(some)

ECONOMY

(waste)

(some)

SourcesSub-surface Resources

SitesSurface locations: ie: land

SinksAbsorbtion of waste

3 Ss:

GREEN TAX SOURCES

Intro to Ecological Economics

Entropy=disorder, randomness2nd Law: entropy always increases

ECONOMY

(waste)

LOW ENTROPY HIGH ENTROPY

(dissipated)

Intro to Ecological Economics

WHAT IS ANTI-ENTROPIC? (SYNTROPIC)

ECONOMY

(waste)

LOW ENTROPY HIGH ENTROPY

Intro to Ecological Economics

Throughput-closed system

ECONOMY

earth

SCALE-Full World or Empty World?

Source:

Ecological Economics Principles & Applications,

Farley and Daly

Marginal disutility

Differences

ECONOMY

(waste)

(some)

SourcesSub-surface Resources

Sky-Trust model

GO UPSTREAM!

Sky-Trust modelAppendix : Key Features of U.S. Sky TrustHere are the key features of the proposed U.S. Sky Trust.

o Carbon emissions cap set initially at 1.346 billion tons, the 1990 level

o Tradable carbon emission permits sold annually to energy companies at the top of the carbon chain.

o All revenue from permit sales goes into a nationwide trust.

o Trust pays equal annual dividends to all U.S. citizens (like the Alaska Permanent Fund).

o Dividends can be placed tax-free in Individual Retirement Accounts or Individual Development Accounts for children.

o Initial price ceiling on carbon emission permits of $25 a ton; ceiling rises 7 percent a year for four years.

o Transition Fund to help those most adversely affected by higher carbon prices. Fund starts at 25 percent of permit revenue, declines 2.5 percent per year.

Governance

Governance

“Maximization of Shareholder Value”

“Golden Rule of Publicly held companies:

Rational behavior:

Externalize costs

Influence politics to

Seek subsidies and favors

“Invisible boot”

“Altruism is evil and selfishness is a virtue.” -Ayn Rand

Quotable Quotes

“Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.”-Milton Friedman 1962

Enron, World Com, Tyco????

Cost of regulations-OMB report

Annual Cost: $37-43 billion

EPA conservative approach, Consistently overestimates costs, not considering least cost approach and technical innovation

Annual Benefits: $121-193

EPA consistently underestimates benefits

USING ACTUAL NOT THEORETICAL CASES BENEFITS OUTWEIGH COSTS 5:1

CONSILIENCE

“~Resources are infinite and the economy can grow forever” -Julian Simon

“Anyone who thinks you can have infinite growth on a finite planet is either a madman or an economist” Kenneth Boulding

Intro to Ecological Economics

Throughput-isolated system

Universe

Intro to Ecological Economics-human dev

Growth Development

Growth=increase in throughput-quantitative

Development=qualitative improvement

Intro to Ecological Economics-population

Growth Development

Demographic transition Theory

Intro to Ecological Economics-population

Intro to Ecological Economics-forest succession

Growth Development

Reorganization Aggredation Transition Steady-state (mature)

We hear:“There is no conflict between economic

growth and environmental protection!”

World GDP and CO2

$1

$10

$100

$1,000

$10,000

$100,000

100010501100115012001250130013501400145015001550160016501700175018001850190019502000

World GDP Billions US$$

250

270

290

310

330

350

370

ATMOSPHERIC CO2

World GDPCO2 level

CO2 vs WORLD GDP

270

290

310

330

350

370

$1 $10 $100 $1,000 $10,000 $100,000

WORLD GDP Billions of 1990 Intl $$ Log scale (source: De Long)

ATM CO2 CONCENTRATION parts per million(ppm)

GDP 1825: ~$200 BILLION

2000: $41,000 B ILLION OR $41 TRILLION

=205X 1825 level.

60 Million yrs of CO2

CLIMATE DAMAGE

CLIMATE DAMAGE

Europe in August 2003

COUNTRY DEATHS DETAILS

France 14,802Temperatures soared to 104 degrees Fahrenheit in parts of the country; temperatures in Paris were the highest since record-keeping began in 1873.

Germany 7000High temperatures of up to 105.4 degreesFahrenheit, the hottest since records began in 1901, raised mortality some 10 percent above average.

Spain 4230High temperatures coupled with elevated ground-level ozone concentrations exceeding the European Union's health-risk threshold.

Italy 4175Temperatures in parts of the country averaged 16 degrees Fahrenheit higher than previous year.

UK 2045The first triple digit (Fahrenheit) temperatures were recorded in London.

Neth 1400Temperatures ranged some 14 degrees warmer than normal.

Portugal 1316Temperatures were above 104 degrees Fahrenheit throughout much of the country.

Belgium 150Temperatures exceeded any in the Royal Meteorological Society's records dating back to 1833.

TOTAL 35,118

ESA Listings and GDP

0

200

400

600

800

1000

1200

1400

1973 1980 1990 2001

$10

$9

$8

$7

$6

$5

$4

$3

R2 = 98.4

Source: The Wildlife Society Technical Review 2003-1.

Endangerment CausesUrbanization

Agriculture

Water diversions (e.g., reservoirs)

Recreation, tourism development

Pollution

Domestic livestock, ranching

247

205

160

148

143

136

Czech et al. 2000. Bioscience 50(7):593-601.

Causes (cont.)Mineral, gas, oil extraction

Non-native species

Harvest

Modified fire regimes

Road construction/maintenance

Industrial development

134

115

101

83

83

81

Czech et al. 2000. Bioscience 50(7):593-601.

K

Carrying Capacity ScenariosIn

divi

dual

s

Time

r-selection

K-selection

K and r-selected Species

Time

GN

PK

Natural capital allocated to human economy

Natural capital allocated to wildlife

Czech, B. 2000. Economic growth as the limiting factor for wildlife conservation. Wildlife Society Bulletin 28(1):4-14.

Natural Capital

“We treat the earth like a business in liquidation.”

Herman Daly

Opportunity cost. Loss is not counted.

K

Economic Carrying Capacity(“Plimsoll line”)

GNP

Time

r-selection

K-selection

(OVERSHOOT)

K and r-selected Economies

GG

P

K

Human economy

Economy of nature

We Might Ask

American GNP, 1929-1997

0

1000

2000

3000

4000

5000

6000

7000

8000

19291932193519381941194419471950195319561959196219651968197119741977198019831986198919921995

K or r-selected?

KTGNP

Natural capital allocated to human economy

Natural capital allocated to non-human economy

X natural capital allocable

Time

KU

Natural Capital Allocation Revisited

Distribution-Grow out of poverty?Poverty rate vs. GDP per Capita (1996$)

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

1959196119631965196719691971197319751977197919811983198519871989199119931995199719992001

8%

10%

12%

14%

16%

18%

20%

per capita GDP (1996$) poverty rate

ALLOCATION

Adam Smith

Rivalness and Excludability• rival

– My use leaves less for you to use

• Excludable (property rights)– One person can keep another from

using the good– Consumer must pay, market will

supply

Must have a price to work in the free market!

Rivalness and Excludability• Non-rival

– My use does not leave less for you to use

– Market sells for a price, discouraging use, but social cost of use = 0, therefore market should not supply

• Non-excludable– One person can’t keep another from

using the good– Consumer will not pay, market will

not supply

Must have a price to work in the free market!

Rival}

Non-rival}

Excludable Non-Excludable

Market Good: Food, clothes, cars, land, timber, fish once captured, farmed fish, regulated pollution

Potential market good(Tragedy of the “non-commons”)but inefficient: patented information,Pond, roads (congestible),streetlights

Pure Public Good:climate stability, ozone layer, clean air/water/land, Biodiversity, information, habitat, life support functions, etc.

Open Access Regime: (misnamed: Tragedy of the commons)Oceanic fisheries, timberetc. from unprotected forests, air pollution, waste absorption capacity

Non-rival,congestible

Private beaches, private gardens, toll roads, zoos, movies

Public beaches, gardens, roads, etc.