Environmental Economics: Arthur Anderson Meets the Rainforest

1
Environmental Eco-nomics(Arthur Anderson Meets
the Rainforest)

• APES Class
• September 2004
• Where there is no dream the people
  perishProverbs 2918

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Key Concepts

• Types of economic systems
• Resources that support economic systems
• Monitoring growth and progress
• Using economics to address environmental problems
• Using regulations and market forces to improve
  environmental quality
• The effects of poverty on the environment

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Economic Resources

• The kinds of resources or capital needed to
  produce the goods and services of an economy
• Natural Resources (natural capital)
• Human Resources (human capital)
• Financial Resources (financial capital)
• Manufactured Resources (capital)

4
Economic Systems

• Command
• Govt makes almost all the economic decisions

• Market
• Pure-free market
• (doesnt exist)
• Capitalist market

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Capitalistic Market

• Real world subverts many theoretical conditions
  of free-market
• Principles
• Drive out competition monopolize
• Lobby for unrestricted global free trade
• Lobby for government subsidies/tax breaks/or
  regulations that give a market advantage
• Withhold info about dangers (direct or indirect)
  posed by products deny access to information to
  make informed decisions
• Maximize profit by passing on harmful costs of
  production to the public/environment (Maximize
  Tragedy of Commons)
• Primary obligation is shareholder profit no
  legal obligation to supply a goods/services/jobs

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Conventional Economic Theory(aka Julian Simon)

• Things are getting better all the time
• System of flow between household and business
• Nature is but a sub-system of economy
• Earths resources are infinite, cheap, and wastes
  just disappear
• Depletion of natural resources will not limit
  growth but rather catalyze search for new
  alternatives/technologies

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Pure Free Market System

• Theoretical
• Arena of markets where sellers and buyers of
  goods freely interact without any government or
  interference
• Based on pure competition (no monopolies)
• All sellers and buyers have full and free access
  to market and its information
• Beneficial and harmful aspects of goods known
• Prices reflect all harmful costs to society and
  environment
• Also known as full cost pricing or
  internalizing external costs

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Conventional Economic Theory
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Ecological Economist Theory

• All human economies are sub-systems that are
  supported by earths natural capital (most of
  which have no substitutes)
• Distinguishes between environmentally
  unsustainable economic growth and environmentally
  sustainable economic development

10
Ecological Economic Theory
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The role of Government

• Level the playing field by preventing monopoly
  (theoretically)
• Help economic stability by attempting to control
  boom-bust cycles
• Provide basic services
• National security education health care (not
  here) social services protect from fraud,
  insurance, protect common property resources
  prevent or reduce pollution
• Problem political decisions are often dictated
  by powerful business interests

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Monitoring Economic and Environmental Progress

• Conventional
• GNP/GDP
• Problems
• Hides harmful environmental and social costs
• Measures env. damage only if we clean it up
• Pollution, crime, and death increase these
  metrics
• Harmful effects counted as benefits
• Does not include external costs
• Does not include beneficial activities
• Up 4-5X since 1950s

• Ecological
• Subtracts things that tend to lower quality of
  life or deplete natural resources
• Adds for beneficial things that improve
  environmental quality and human well being
• GPI
• Declining since 1980

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GNP vs GPI
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Internal vs. External Costs

• Internal Costs (START)
• All direct and indirect costs of a good paid for
  by buyer/seller
• Example a car
• Cost of factory, overhead, raw materials, labor,
  marketing, shipping, and profit
• External Costs
• Hidden costs representing the harmful effects
  passed onto public, the environment, or future
  generations
• Pay later in poorer health, higher health care
  costs, higher taxes to clean-up pollution
• Example a car
• Depletion of mineral and non-renewable resources
  production of solid and hazardous waste
  pollution to air and water climate change
  disruption to land

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Full Cost Pricing

• Integrate short term and long term external costs
  into current internal cost
• Will not happen without govt regulation
• Businesses currently receive subsidies and tax
  breaks to use virgin resources
• 2Trillion in subsidies globally
• Need to levy taxes on polluters pass laws and
  develop regulations provide beneficial subsidies
• Obstacles
• Initial rise in market prices shift to taxing
  pollution and not income political will to
  withdraw subsidies prices of harmful goods would
  rise hard to agree on costs of environmental
  degradation and health effects
• Powerful business interests entrenched in govt

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Discount Rate

• Primary factor affecting cost-benefit analyses
• Traditional capitalism in essence minimizes the
  future value of natural resources
• 0?1M today1M tomorrow
• 10?1M today10k in 50 years
• High rate supporters
• Inflation kills future earnings innovation could
  make some products obsolete move elsewhere for
  more profit
• High rate Critics
• Encourages rapid exploitation of resources
• Say 0 for rare resources
• Say 1-3 for sustainable or slowed growth

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Solutions

• Market Forces
• Encourage internalization of external costs
• Economic incentives/punishments
• Government
• Phase in subsidies and tax breaks that encourage
  environmentally beneficial behavior
• Phase out subsidies and tax breaks that encourage
  harmful behavior
• Green Taxes (see page 33)
• User fees (common property resources)
• Tradable pollution credits/resource use rights

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Making the Transition to Environmentally
Sustainable Economics

• Use environmental and social indicators (as well
  as economic ones) to measure progress
• Use full cost pricing (internalize external
  costs)
• Replace taxes on profits and income with taxes on
  matter and energy throughput (pollution)
• Use low discount rates for evaluating the future
  worth of resources
• Do not use renewable resources faster than they
  can be replenished
• Do not use non-renewable resources faster than
  substitutes can be developed and phased in
• Slow population growth
• Reduce poverty? (redistribute wealth)

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Biosphere II A lesson in humility

• 1991 200Million 8 people, 3.2 acres
• Mimic earths recycling and natural processes
• Problems
• Oxygen gone carbon dioxide to toxic levels
• Nitrogen and carbon cycle failed to function well
• Plant nutrients leached from soil polluted water
• 19 of 25 small animal species became extinct
• All plant pollinating insects became extinct
• Lesson
• 200M failed to support 8 people for 2yrs
• 6.3 Billion people times 12.5M per person per
  year equals 1900 times annual gross world
  product
• Technology cant replicate nature at any price!!

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Cost-Benefit Analysis

• Tool for making economic decisions
• Compares estimates for short and long term
  economic benefits (gains) and costs (losses) for
  various actions
• E.g., build a dam fill wetland clear forest
• Problems
• Hard to know who benefits/who loses
• Natural resources/good health are difficult to
  put a price on
• Controversy over discount rate
• Need for standardization, assumptions upfront
  make projections using a range of discount rates
  and a range of costs

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The economics of pollution control

• Clean up costs increase for each unit of
  pollution removed
• Beyond certain point, clean up costs exceed
  harmful costs of pollution
• Breakeven point
• Plot two curves
• Costs of cleaning up pollution
• External Costs to society
• Add together to show total costs
• Lowest point on cumulative curve is optimum level
  of pollution (stop big)

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Optimal Level of Pollution
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Effects of Poverty on the Environment

• Inability to meet basic needs
• 1.4 billion live on less than 370/yr
• 3 Billion live on less than 2/day
• Negative effects
• Death
• Health problems
• Environmental racism
• Increase in birth rates
• Pushes people to use renewable resources
  unsustainably in order to survive
• Social instability?war?terrorism

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Why has growth not eradicated poverty?

• Economic growth is supposed to lead to increased
  jobs, allow to reach workers increase tax
  revenues to pay for helping poor
• Since 1960, wealth has flowed up to the rich
  rather than trickled down to the poor
• Wealth gap has dramatically increased

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The great wealth gap between rich and poor
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Eradicating Poverty

• Forgive some of 2.6 Trillion in debt if spent on
  fulfilling human needs or protecting the
  environment
• Increase aid
• Encourage micro finance loans
• Require development proposals to include full
  cost pricing
• Encourage population stabilization
• UNDP?40B/yr would provide education/health
  services, nutrition, family planning, safe water,
  sanitation
• Only 0.1 of total annual world income
• USA is NOT generous in this regard!

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Environmental Revolution

• Efficiency revolution
• Not wasting matter and energy resources
• Pollution-prevention revolution
• Reduce, refuse, replace, reuse, recycle
• Sufficiency revolution
• How many material things constitute a decent and
  meaningful life
• Demographic revolution
• Decrease birth rates
• Economic revolution
• Full cost pricing or environmentally sustainable
  economic development

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Unsustainable vs. Sustainable
Characteristic
Environmentally Sustainable Economic Development
Unsustainable Economic Growth
Production emphasis Natural resources Resource
productivity Resource throughput Resource
type emphasized Resource fate Pollution
control Guiding principles
Quantity Not very important Inefficient (high
waste) High Nonrenewable Matter
discarded Cleanup (output reduction) Riskbene
fit analysis
Quality Very important Efficient (low
waste) Low Renewable Matter recycled, reused,
or composted Prevention (input
reduction) Prevention and precaution
Fig. 2-4
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Reading YOU are responsible for.

• You are responsible for carefully reading
  sections 2-6, 2-7 thru 2-10
• We will touch on this material throughout the
  course
• You will be tested on this on the AP but only a
  few questions at most