Transcript Introduction to environmental economics

ENRE Lecture 1, Part 1
Environmental Policy Objectives
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Efficiency (static and dynamic);
Sustainability;
Equity (fairness);
Non-conflict with other objectives.
Economy-Environment Interactions
Economic activity has a material basis.
It draws resources from the environment, and provides
flows back into the environment.
These flows must satisfy the laws of thermodynamics:
•First law: Conservation of mass/energy (materials
balance principle)
•Second law: Entropy is non-increasing
Environmental resource services and functions
•Waste assimilation and re-processing by ecological
systems
•Environmental systems support processes (air, climate,
water, soil)
•Provision of productive inputs
•Provision of environmental amenities
* that contribute to labour productivity
* that contribute directly to well-being
Principles of ecology
The ability of the environmental system to perform these
functions depends on its “state of well-being”.
Of relevance here are two central concepts:
•Ecosystem stability
•Ecosystem resilience
Environment and Ethics
Utilitarianism
There are important reinterpretations of that philosophy which
allow for more that merely narrow self-interested “consumer”
behaviour (see the work of Sen and Singer, for example).
Alternative ethical frameworks also exist.
Required reading
Perman, Ma, McGilvray and Common: Natural Resource and
Environmental Economics (3rd edition)
Chapter 1: An introduction
Chapter 3: Ethics and the Environment
Sustainability and Sustainable Development
WCED (1987)
The most well-known phrase from this report:
“Sustainable development is development that meets the
needs of the present without compromising the ability of
future generations to meet their own needs.”
Environment - Economy Interactions
We are interested in:
•Reproducibility of each system over time (sustainability)
•Interactions between the two systems
•Predictability or uncertainty in the operations of these subsystems
Economic sustainability
Some “economic” concepts of sustainability:
Sustainability is defined as... non-declining utility of a
representative member of society for millennia into the future.
A sustainable state is one in which utility (or consumption) is
non-declining through time.
The alternative approach [to sustainable development] is to
focus on natural capital assets and suggest that they should not
decline through time.
Some “interdisciplinary” concepts of sustainability:
Preserving opportunities for future generations as a common
sense minimal notion of intergenerational justice
Sustainable activity is...that level of economic activity which
leaves the environmental quality level intact, with the policy
objective corresponding to this notion being the maximisation of
net benefits of economic development, subject to maintaining the
services and quality of natural resources over time.
CRITICAL ISSUES
Critical to sustainability, however defined, seem to be:
 the degree of resource substitutability
 the rate of technical progress
 the degree of eco-system stability and resilience
 irreversibility of “investment” decisions
The degree of resource substitutability
The assets available to society, now and in the future, comprise:
 Natural capital
 Physical capital
 Human capital (labour and embodied skills)
 Intellectual capital (disembodied skills & knowledge
Some of these can be accumulated over time. Others cannot be – they
are either finite, or there are limits to their accumulation.
So, as we move through time, to what extent can those resources
which can be accumulated substitute for those which cannot (or which
are depleted)?
The rate of technical progress
Important because technical progress implies we can get more output
from given quantities of inputs. So limited resources can be stretched
further.
Technical progress may also impact on the extent of resource
substitutability.
And possibly also on the degree of eco-system stability and resilience.
The degree of eco-system stability and resilience
Sets fundamental limits to all economic activity.
Of recent interest in the research literature in this regard are:
 biodiversity decline and evolutionary capacity
 interference with natural ecosystems
Various indicators may signal future stability/resilience.
But can never know ex ante whether a system is stable and resilient.
Changes are non linear, and path dependent (so dependent on initial
conditions).
FEASIBILITY OF SUSTAINABILITY
Is sustainability feasible?
Is it possible for the economy to attain a state in which production and
consumption track along non-declining paths (or grow at positive rates)
over indefinite periods of time, in the presence of finite stocks of
exhaustible resources and constraints imposed by natural
environmental processes?
Is a huge (and sometimes technically difficult) literature on this
question.
See, for example, the literature surrounding the so-called Hartwick
savings rule.
Irreversibility
Suppose that an asset is developed (or used) in some way.
New information arrives and we change our mind about the
desirability of that development.
Is it possible to reverse the process so that we are back in the
original position?
Often this is NOT possible. In those cases, the decision is irreversible
This gives us much less room for making mistakes.
Important in resource valuation.
MODELS OF THE FEASIBILITY OF
SUSTAINABILITY
Much of this based on a neo-classical growth model with finite
environmental resources – examines the possibility of constant
consumption over unlimited time horizons.
Not surprisingly, results depend on assumptions made about
• Resource substitutability
• Technical progress
• Population growth
It is easy to get specific results for specific sets of assumptions.
But these are of dubious validity as a guide to actual policy.
Required reading
Perman, Ma, McGilvray and Common (3rd edition):
Chapter 2: The origins of the sustainability problem
Chapter 4: Concepts of Sustainability