Transcript r – interest rate

Ecological Economics
Lecture 07
6th May 2010
Tiago Domingos
Assistant Professor
Environment and Energy Section
Department of Mechanical Engineering
Collaboration: Rui Pedro Mota
What is Sustainable Development?
• Brundtland report (1987) – “Development that meets the needs of the present
without compromising the ability of future generations to meet their own need.”
– Intra- and inter-generational equity
– Anthropocentric
• Sustainability of what?
–
–
–
–
non-declining aggregate output or consumption,
non-declining utility,
non-declining aggregate resources (productive base),
non-increasing pollution, …
• Weak vs. Strong Sustainability
• We choose non-declining utility as the criterion for sustainable development
– some call this Weak Sustainability, but we don’t agree 
– this still misses the intra-generational component
• What is green net national income (GNNI) and what does it measure?
• What is genuine saving and what does it measure?
Alternative measures of well-being
• World Bank’s Adjusted Net Savings (Genuine Savings)
• ANS measure the true rate of savings in an economy after taking into account investment in
human capital, depletion of natural resources and damage caused by pollution. ANS time
series can be downloaded for 140 countries. (http://go.worldbank.org/VLJHBLZP71)
• Beyond GDP, European Comission (http://www.beyond-gdp.eu/)
• Which indices are most appropriate to measure progress, and how these can best be
integrated into the decision-making process and taken up by public debate.
• “We cannot face the challenges of the future with the tools of the past. It's time to go
beyond GDP.” Durão Barroso
• Extending European National Accounts to environmental and social issues
• OECD work on alternative measures of welfare (www.oecd.org/dataoecd/13/38/36165332.pdf)
• Extending GDP to include leisure time and inequality.
• Stiglitz Commission (http://www.stiglitz-sen-fitoussi.fr)
• Identify the limits of GDP as an indicator of economic performance and social progress.
• SEEA 2003, United Nations (http://unstats.un.org/unsd/envaccounting/seea.asp)
• Satellite system of the System of National Accounts that brings together economic and
environmental information in a common framework to measure the contribution of the
environment to the economy and vice-versa.
World Bank’s Genuine Savings
World Bank’s Genuine Savings
World Bank’s Genuine Savings
World Bank’s Genuine Savings
World Bank’s Genuine Savings
World Bank’s Genuine Savings
• Resource Curse: Countries dependent on natural resources tend to depict
unsustainable development (negative GS).
World Bank’s Wealth Estimates
Multisector Optimal Growth
• m-dimensional consumption bundle, including everything that influences
well-being.
– Includes all non-market commodities, e.g, produced at home, environmental
services, …
• n-dimensional capital vector:
– Includes man-made capital, natural resources, human capital
(education and knowledge) and foreign capital. Time is included as a
capital, to depict technological progress in production.
• Attainable production possibilities C(t ),I(t )  S (K(t ), t )
• The model

max  U (C (t ))e  t dt s.t.
c
0
dK
I
dt
C(t ),I(t )  S (K(t ), t )
Criteria for Sustainability, Pezzey (2004) EDE
• An economy is sustainable at time t if and only if the representative
agent’s current utility does not exceed the maximum level of utility which
can be sustained forever from t onwards.
• One-sided sustainability test:
QI  0 or
dY
 0  un-sustainable development.
dt
• Multisector results in real terms.
– Real Net Income, Y  P  C  Q  I
– Genuine Saving, Q  I
Consumption
– dY  RQ  I  R dW
dt
Variation in
Real Net Income
 dt
Variation in
Welfare
Investment
Welfare Relationships
• Both Genuine Savings and Green NNI are related to future consumption.
• These relationships can be used to empirically check the theory.
• If genuine saving is negative (or green NNI deacreases) then current
consumption will decrease in the future.
Small Open Economy
• Include
– stocks of commercial forests,
– welfare costs of air emissions,
• The capital stocks are K : ( K , K f ,S) :
– Domestic man-made capital,
dK
 I  CFC
dt
– Net foreign capital held privately or by the government,
dK f
 rK f  X  M  QR  (R X  R M )
dt
– Stock of commercial natural resources
dS
 G(S)  R d  R X
dt
• Production
I  F ( K , R d  R M )  M  X  C  a  f (R d  R X ,S)
r – interest rate
Small Open Economy
• Households’ utility function U (C) : U (C ,E) depends on material
consumption rate and (negatively) on the flow of emissions
• The vector of emissions E( F ( ),a) depends on production and abatement
expenditure.
• Maximize welfare subject to the above relations and having as controls
consumption, C (t ) , all forms of extraction, Rd (t ), R X (t ), RM (t ), abatement
expenditure a(t ) and trade balance M (t )  X (t ).
• Conventional (SNA) NNI:
• Green Net National Income:
NNI : C  K  K f

Y  NNI  (Q  f R )  S  e E Q t
R


• Genuine Saving (Adjusted Net Saving): Q K  Q  NNI  C  (Q  fR )  S Qt
t
R
Small Open Economy – Table of symbols
C (t )
K
Consumption rate at time t
Man-made capital,
Kf
U ()
Utility
E()
Rate of emissions of air pollutants
e
F ()
a
Ri , i  d , X , M
MX
Marginal cost of abatement = Marginal damage cost
Production function
Abatement expenditure
Extraction of natural resources for domestic use, exports and
from imports.
Imports - Exports
r
Constant nominal interest rate
S
Stock of resources
R
Constant real interest rate
QR
Resource price
f (R d  R X ,S)
fR
Net foreign capital
Cost of extraction of resource
Marginal cost of abatement
Small Open Economy
• Starting from conventional SNA aggregates:
– Deduct the damage from flow pollution emissions, e E
– Deduct (add) the value of rents from resource depletion (or
not), (Q R  fR )  S
140000
120000
100000
GNI
CFC
Million €
80000
Air emissions
Forest Depl.
60000
Tech. Progress
GNNI
40000
Pot GNNI
GNNI, T=100
20000
0
1990
-20000
1995
2000
2005
GNNI and GS in Portugal – Air Emissions
• How to value a unit of emissions?
– Marginal benefit of avoided emission,
– Marginal cost of emission (MDC), or
– Marginal abatement costs?
• Marginal cost of emission per emitted pollutant [€2000/ton]:
[€2000/t]
SO2
NH3
NOx
VOC
PM2,5
Best
6872
7399
2040
1150
44000
Low
High
3472
9972
3699
10999
1140
3040
450
1550
22000
64000
GNNI and GS in Portugal – Air Emissions
70
60
SO2
% of total cost
50
NH3
40
NOx
VOC
30
PM 2,5
20
10
0
1990
1995
2000
2005
GNNI and GS in Portugal – Forests
• National Forest Inventory 2005/06
1400
1200
Conifers
Eucalyptus
10^3 ha
1000
800
600
400
200
0
1990 1991 1992 1993
1994 1995 1996 1997
1998 1999 2000 2001
2002 2003 2004 2005
• Average Volumes:
[m3/ha]
95/98
05/06
Conifers
88.5
82.5
Eucalyptus
55
55
GNNI and GS in Portugal – Forests
100
Coniferous
Eucalyptus
50
million €
0
1990
1995
2000
2005
-50
-100
-150
-200
The depreciation of commercial forests in Portugal is on average
10% of the contribution of forestry to national product (around
4%).
GS in Portugal
40000
35000
30000
GS, no Qt
25000
Million €
GS
20000
GS, T=100
15000
Potential GS
10000
5000
0
-5000
1990
1995
2000
2005
-10000
• Without the value of time – Decreasing tendency throughout the period
and negative GS after 2002.
• With the value of time – Decreasing tendency until 2001, but GS are
always positive.
What’s Missing?
• The depletion of water resources.
• The depletion of biodiversity.
• Depletion of stocks of fish.
• Inclusion of the value of ecosystem services.
• Soil quality.
• Distributional issues (intragenerational concerns).
• ...