June 2007

Sustainability Forum

Joshua Farley, PhDUniversity of Vermont

Community Dev. and Applied EconomicsGund Institute for Ecological Economics

June 2007

Natural Capital

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Outline of Presentation

• What is Natural Capital?

• What does this mean for the economy?

• Why is it’s value increasing?

• What does this mean for the waste industry?

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What is Natural Capital?The Laws of Physics,The Laws of Ecology

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What is Capital?

• Conventional definition: A produced means of production

• Broader definition: A stock that yields a flow of benefits

• Natural capital: The stock of resources provided by nature that yields a flow of benefits for humans• Energy

• Ecosystem goods

• Ecosystem services

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First law of thermodynamics

• Matter energy cannot be created or destroyed• We cannot create something from nothing, nor

nothing from something

• All economic production requires raw materials provided by nature

• Continuous physical growth of the economy is impossible

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Second law of thermodynamics

• Entropy never decreases in an isolated system• Things fall apart, wear out, become useless

• All economic activity generates waste

• It is impossible to do work or recycle waste without low-entropy energy: no economic production without energy

• There is only a finite stock of accumulated low entropy matter/energy

• There is only a finite flow of solar energy

• The ultimate limit to the physical size of the economic system is our ability to capture low entropy provided by solar energy

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Energy

• Finite stock of fossil fuels (finite flow of solar energy, which is a service)

• Use = depletion

• Use = pollution

• 1 barrel of oil = 25,000 hours of human labor

• Substitution very difficult

• What’s the state of the stock?

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The Hubbert curve-discovery

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The Hubbert curve-production

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Unconventional Fossil Fuels

• Alberta tar sands

• Orinoco heavy crude

• Shale oil

• Liquid coal

• Energy return on energy invested very low

• Waste emissions extremely high

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Waste Emissions

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Ecosystem Goods: Biotic Raw Materials

• We can use them up as fast as we like

• If I use it, you can't• Competition for use

• Private property rights common

• Market goods

• Scarcity price increase innovation of substitutes

• Ecosystem structure, building blocks of ecosystems

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Ecosystem Services

• Structure generates function, ecosystem functions of Structure generates function, ecosystem functions of value to humans=ecosystem servicesvalue to humans=ecosystem services

• Climate regulation, water regulation, disturbance Climate regulation, water regulation, disturbance regulation, etc.regulation, etc.

• Waste absorption capacityWaste absorption capacity

• Capacity for ecosystem structure to reproduce itselfCapacity for ecosystem structure to reproduce itself

• Habitat for biodiversity, nutrient cycling, without which Habitat for biodiversity, nutrient cycling, without which other services cannot exist.other services cannot exist.

• Essential to human survivalEssential to human survival

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Ecosystem Services

• Provided at a given rate over time

• If I use it, you still can (except waste absorption)• Cooperative in use

• Can't be owned: no property rights (except waste absorption)

• Non-market goods—no price signal

• Scarcity price increase innovation

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The Special Case of Waste Absorption Capacity

• Competitive in useCompetitive in use• E.g. If the global climate absorbs US COE.g. If the global climate absorbs US CO22 emissions, it emissions, it

can no longer absorb someone else’scan no longer absorb someone else’s

• Can be assigned property rightsCan be assigned property rights• Government level regulations determine supply and Government level regulations determine supply and

ownershipownership

• We’ve done it in the US for SOWe’ve done it in the US for SO22 emissions emissions

• Kyoto seeks to do this for COKyoto seeks to do this for CO22

• Can be made into a market good through Can be made into a market good through regulationregulation

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The Laws of Ecology

• The raw materials converted into economic products are elements of ecosystem structure

• Ecosystem services are provided by a special configuration of ecosystem structure

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Ecosystem Services, uncertainty and Ignorance

• We often don't know what services are until they're gone• The ozone layer

• Sardines and global climate change

• Sample size of one: uncertainty is unavoidable

• How much risk do we accept with life support functions?

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What does this mean for the economy?

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The Economic Problem

• Micro-allocation : how do we allocate resources provided by nature among different economic products?• Markets are favored approach

• Macro-allocation: How do we allocate ecosystem structure between:• Economic production, essential to our survival

• Planetary life support functions, essential to our survival

• Life support functions have no price; markets alone cannot solve this allocation problem

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Current Status

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Currents status

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Earth, Inc.

• If the Earth were a business, how well would you assess the performance of its CEOs?

• We are disinvesting in natural capital• How do you feel about this as a shareholder

in Earth, Inc.?

• Can a business survive if it continually disinvests in essential capital?

• Can an economy?

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Why is the value of Natural Capital

Increasing?The laws of economics

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What are the limiting factors ?

• Of production?• If we want more seafood, do we need more boats and

factories, or larger wild stocks?• If we want more timber, do we need more chainsaws or

more forests?

• For human well-being?• Material consumption doubles every generation.• Do you want your grand-kids to have more air-

conditioning or more ozone layer?• More cars or more climate stability?• More consumer goods or more ecosystem services?

• We need to invest in the limiting factors

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The Demand Curve for Natural Capital

Natura l Capita l S tocks

Ma

rgin

al

Va

lue

Valuable:elastic demand

Critical: Perfectly

inelastic demand

Important: inelastic demand

Natural Capital stocks

Marg

inal valu

e

Demand curve for natural capital

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Conventional Economists: Missing the point….

• Schelling (Nobel Memorial Prize in 2005): “Agriculture and Forestry are less than 3% of total output, and little else is much affected. Even if agricultural productivity declined by a third over the next half century, the per capita GNP we might have achieved by 2050 we would still achieve in 2051.”

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What does this mean for the waste industry?

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How are we addressing macro-allocation?

• For better or worse, government regulation is the main mechanism• Limits to waste emissions

• Limits to resource extraction (mostly fisheries so far)

• Voluntary measures• Often done to pre-empt regulations, or get a jump on

competition

• e.g. Wal-Mart

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What is the impact of regulations on waste industry?

• Regulation of waste sector creates markets

• No regulation no waste industry

• More regulation growth in waste industry• E.g. carbon markets: converting methane to energy could

give triple dividend

• Benefits those who anticipate it, may harm those who don’t

• Yet more regulation no-waste industry• Closing the loops

• Waste outputs from one industry become resource inputs into another

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Future of the Waste Industry

• Less waste requires more value added, lower costs

• Emphasis must shift from managing waste outflows to handling materials

• Landfills become source, not sink

• Industrial ecology and closed loop systems

• Increased reliance on ecosystem services • Living machines, bacterial digesters, nutrient cycling

• Increased reliance on renewable energy• Ecological processes are solar powered

• Energy from waste

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Conclusions

• Natural capital has become the limiting factor in economic production

• Economy must move towards less waste and greater regulation of waste emissions to protect natural capital

• Threat and Opportunity

• Reactive• Regulations forced upon you, no control. • Tough to catch up with the leaders. Other countries well

ahead of us.

• Proactive• Can become leaders in a booming sector• regulations modeled on industry’s innovations

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