Transcript EVSC 239 - welcome - Green Resistance (teaching, organizing, and

 Exam: March 29
 All the readings
 Slides / lectures (including today’s lecture
Reminder: Homework #1
 How manageable and practical do you think an international
market for trading emissions of CO2 would be? What major
obstacles to a smooth functioning of such a market could
you foresee? And what major obstacles to such a market do
already exist – given that the market does exist? What would
be the advantages of such a market if it worked? Plus: how
successful is the market in the ultimate end goal?
 By Tuesday – March 22 (via email. By 8 am.)
 A paper – in which you answer those questions
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Methodology
 Missing from Tobacco and Cucumbers
 Ms Amal Salibi would answer your questions. She has all
the statistical figures, and she's an agricultural economist.
Her office phone nb is: 01-849637
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methodology
 Questions
 Tools
 Timeline
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Economic growth and
sustainability
 Growth of economic activity: / growth of human impacts
on the environment:
 Population Growth: Each individual has certain basic needs for
food, water, and living space, so a large population will generally
have a higher resource requirement and higher environmental
impact.
 Economic Growth: As per capita income rises, each individual
tends to consume more, increasing resource demand and waste
production.
 From Growth to sustainable development
 IPAT -> I = P*A*T
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IPAT equation
 the environmental impact I of human economic activity
 P: the population involved in the activity;
 A: the affluence factor, which represents the standard of
living of this population –usually measured by an indicator of
income or consumption per capita;
 T: the technological factor, indicating the environmental
impact per unit of income.
 considering CO2 emissions in the atmosphere, the global impact I is the total
amount of emissions which is the product of: the #of people P * the
affluence factor A which can be measured by the amount of energy use per
person * the technological factor T which measures the amount of CO2
released in the atmosphere for each unit of energy produced and consumed.
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Sustainable development
 Difference between strong and weak sustainability
 Weak -> any loss of natural capital should be balanced by
creation of new capital of at least equal value.
 a developing nation could cut down its forests, replacing
them with plantations and sawmills, or destroy its natural
fisheries and replace them with aquaculture facilities where
fish are raised in pens for human consumption.
 This would meet the definition of weak sustainability,
provided that the productive value of the new facilities was
at least equal to that of the former natural systems.
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Sustainable development
 Strong -> natural systems should be maintained intact
wherever possible. They identify critical natural capital -such as water supplies -- as resources which must be
preserved under all circumstances. In this view, for
example, maintaining the natural fertility of the soil is
essential -- even if it is possible to compensate for
degraded soils with extra fertilizer.
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Precautionary principle
 - we should not risk environmental damage which could permanently
harm our own society or future generations.
 when there is any risk of a major disaster, no action should be
permitted that increases the risk.
 If, as so often happens, an action promises to bring
substantial benefits together with some risk of a major
disaster, no balancing of benefits against risks is to be
allowed. Any action carrying a risk of a major disaster must
be prohibited, regardless of the costs of prohibition.
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Precautionary principle
 could be applied to atmospheric emissions which result in
ozone depletion or unpredictable climate change, the
release of long-lived chemicals or bioengineered organisms
into the environment, or the creation of long-lived nuclear
wastes.
 Thus: tied to?
 Discount rate
 Perception of risk / risk assessment
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FYI: Libertarian principle
 risks are unavoidable, that no possible course of action or
inaction will eliminate risks,
 a prudent course of action must be based on a balancing
of risks against benefits and costs. In particular, when any
prohibition of dangerous science and technology is
contemplated, one of the costs that must be considered is
the cost to human freedom
 Back to precautionary principle
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Discount rate (again)
 rate at which society as a whole is willing to trade off present
for future benefits.
 Who is ‘society’?
 Reasons for discount rate
1. a dollar received today is considered more valuable than one received in the
future [what is the assumption here?]
2. positive rates of inflation diminish the purchasing power of dollars over time.
3. dollars can be invested today, earning a positive rate of return.
4. there is uncertainty surrounding the ability to obtain promised future income
5. humans are generally impatient and prefer instant gratification to waiting for
long-term benefits
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Calculating – w discount rate
 Discount rates are used to compress a stream of future benefits and
costs into a single present value amount.
 Thus, present value (PV) is the value today of a stream of payments,
receipts, or costs occurring over time, as discounted through the use
of an interest rate.
 PV calculations of B and C are then compared to determine benefitcost ratios.
 For example, if the PV of all discounted future benefits of a restoration
project is = $30 million and the discounted PV of project costs = $20
million, the BC ratio would be 1.5 ($30 million / $20 million), and the net
benefit would be $10 million ($30 million — $20million). Thus positive
economic returns to society.
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DR equation
 PV = FV / ( 1+i) n
 Where PV = the present value of a benefit or cost,
 FV = its future value,
 i = the discount rate
 n = the number of periods between the present and the time when
the benefit or cost is expected to occur.
 Assume that a future benefit of a salmon habitat restoration project is
an expanded catch valued at $10,000,000 in Year 10. Here is how we
would calculate the present value of that benefit, assuming a 3 %
discount rate.
 PV = $10,000,000 / (1+.03) 10
 = $10,000,000 / 1.34
 = $7,440,940
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More on discount rate
 - the inverse of compound interest. Whereas compounding measures
how much present-day investments will be worth in the future,
discounting measures how much future benefits are worth today.
 What rate to use?
 The National Oceanic and Atmospheric Administration (NOAA)
recommends using the social, or consumer, rate of time preference for
discounting interim service losses and restoration gains when scaling
compensatory restoration (NOAA 1999). NOAA has adopted a 3.0
percent discount rate
 Since 1992, the US federal Office of Management and Budget (OMB)
has recommended a 7 percent real discount rate for the analysis of
federal programs. The OMB notes that “this rate approximates the
marginal pretax rate of return on an average investment in the private
sector”
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Eco-centric discount rate
 Ecological economists on the discount rate:
 - presumption that a unit of something is worth more to an individual today
than years from now to the presumption that this would also be true if it were
different individuals at different points in time. To avoid this individualistic
presumption, economists have suggested using rates of social time preference, which
reflect how much an existing society would discount the same society's benefits in the
future.
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The problem with even this social concept is that it places the members of the present
society in a position of dictating the legacy to be passed to the future, with the
weighting of future generations' welfare less than the current generations'.
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A discounting procedure consistent with sustainability goals could be as follows. In
making decisions over the management of ecosystems, those changes that would
enhance or degrade the human life support capacity of the ecosystem, in the sense
of providing for basic physical and biological needs would not be discounted at all;
i.e., have a zero discount rate. Those ecosystem changes that impacted welfare
above the threshold basic needs level would be discounted, but at the social rate of
discount (Mikesell, 1977).
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Risk assessment
 Back to precautionary principle.
 What do we know about risk?
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 Hazard
 “the potential to cause harm”
 Can be defined as “a property or situation that in particular could lead to
harm”
 Risk
 A more difficult concept to define
 Used to mean “chance of disaster”
 In the process of risk assessment, most commonly means: ‘the combination
of the probability, or frequency, of occurrence of a defined hazard and the
magnitude of the consequences of the occurrence.”
 Risk = Severity x Likelihood
 Risk assessment
 the evaluation of the degree of harm or danger from some condition such as
exposure to a toxic chemical - either quantitatively or qualitatively
 The process of determining an expected annual mortality
 Carried out to examine the effects of an agent on:
 Humans (health risk assessment)
 Ecosystems (ecological risk assessment)
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Risk assessment - again
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Risk = Severity x Likelihood
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a technical, four-step procedure:
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Hazard identification. What is the potential source of danger? For example, does a waste
incinerator emit highly toxic dioxins or other hazardous chemicals?
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Assessment of human exposure. Are any human populations exposed to this hazard? If
so, can the various routes or pathways of the hazardous substance to specific organs or
tissues of human bodies be traced? Finally, how much (what dosage) of this substance
enters these human bodies?
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Modeling of the dose responses. What is the relationship between the dosage that is
received and harmful responses or illnesses in the exposed population?
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Characterization of the overall risk. What are the overall implications of the dose
responses for the health of the exposed population?
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Technical models of risk assessment use the resulting numerical value as the basis for
judgments of what is an “acceptable risk. This judgment involves values.
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Limitations of technical model
 exceedingly difficult to trace the “pathway
 need to show direct correlation between particular
chemicals and the specific illnesses
 Cultural-Experiential Model of Risk
 technical models conflate numerical risk (expected annual
mortality) with judgments about the experience of those
forced to live with imposed or involuntary risks
 big difference between those who take risks and those who
are victimized by risks others take
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As Lois Gills of Love Canal stated
‘From a community’s perspective, risk assessments are
‘the risks that someone else has chosen for you to
take.’ What is a life worth … but equally important is
whose life”’
 Is risk a technical matter that is determined
objectively or a social construction that emerges
from communication among experts, affected
parties, and public agencies?
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Finding the Optimal Outcome
 A.
An allocation is efficient or has achieved static efficiency if the net
benefit from the use of those resources is maximized by that allocation. If at
an allocation marginal cost is greater than marginal benefit, then net benefits
are less than the maximum possible, and the allocation is inefficient (too
much has been produced). Likewise, if marginal benefit is greater than
marginal cost, net benefits can be increased by increasing the allocation.
Thus, an efficient allocation will be achieved when marginal benefit and
marginal cost are equal. Inefficient allocations do not maximize net benefit.
 B.
The first Equimarginal principle says that net benefits are maximized
when the marginal benefits from the allocation equal the marginal costs.
 C.
An allocation is Pareto optimal if no other feasible allocation could
benefit some people without any negative effects on at least one other
person.
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Utopian Capitalist View:
Pareto Optimality
 Conditions of Pareto Optimality
 You cannot make one party better off without making
another worse off.
 Parties involved in exchange bear the full true cost of
the transaction.(no externalities)
 Is the cap and trade policy clear?
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Allowance Trading Basics
 An emissions "cap": A limit on the total
amount of pollution that can be emitted
(released) from all regulated sources (e.g.,
power plants); the cap is set lower than
historical emissions in order to reduce
emissions.
 Allowances: An authorization to emit a fixed
amount of a pollutant.
 Measurement: Accurate tracking of all
emissions.
Source:http://www.epa.gov/airmarkets/trading/basics.html
Allowance Trading Basics
 Flexibility: Sources can choose how to
reduce emissions, including whether to buy
additional allowances from other sources that
reduce emissions.
 Allowance trading: Sources can buy or sell
allowances on the open market. Because the
total number of allowances is limited by the
cap, emission reductions are assured.
 Compliance: At the end of each compliance
period, each source must own at least as
many allowances as its emissions.
Source:http://www.epa.gov/airmarkets/trading/basics.html
Trading the Right to Pollute
 The NOx Budget Trading Program is a market-based
cap and trade program created to reduce emissions of
nitrogen oxides (NOx) from power plants and other
large combustion sources in the eastern United
States.
Source : http://www.epa.gov/airmarkets/progsregs/nox/sip.html
Trading the Right to Pollute
 Market-based sulfur dioxide (SO2) allowance
trading component of the Acid Rain Program
 Utilities regulated under the program, decide
the most cost-effective way to use available
resources to comply with the acid rain
requirements of the Clean Air Act.
 Purchase pollution allowances.
 Switching to lower sulfur fuel.
 Reduce emissions by employing energy
conservation measures
Source: http://www.epa.gov/airmarkets/trading/factsheet.html
Success of Acid Rain Program which
includes trading pollution allowances
 Reduced SO2 emissions by over 5.5 million tons from
1990 levels, or about 35 percent of total emissions from
the power sector. Compared to 1980 levels, SO2
emissions from power plants have dropped by more
than 7 million tons, or about 41 percent.
 Cut NOx emissions by about 3 million tons from 1990
levels, so that emissions in 2005 were less than half the
level anticipated without the program. Other efforts, such
as the NOx Budget Trading Program in the eastern
United States, also contributed significantly to this
reduction.
 Led to significant cuts in acid deposition, including
reductions in sulfate deposition of about 36 percent in
some regions of the United States and improvements in
environmental indicators, such as fewer acidic lakes.
Source: http://www.epa.gov/airmarkets/progress/arp05.html
Kyoto Protocol
 Industrialized nations reduce CO2 5 percent from
1990 levels by 2008-2012 compliance period.
 United States withdrew in 2001.
 China and India are not required to comply
because they are developing nations.
 By 2002 Kyoto only covered about 30 percent of
global CO2 emissions.
 Too little too fast.
 Not enough change to make a difference.
 Difficult to comply with for countries who experienced
substantial growth in the 1990’s.
European Union Emissions
Trading Scheme (ETS)
 Kyoto with teeth.
 Covers half of Europe’s carbon emissions. (8% of global)
 Each country creates a national allocation plan for specifying caps on
greenhouse gases.
 Businesses can either reduce their emissions or purchase allowances
from facilities with an excess of allowances.
 Allowances traded in the ETS are not printed but are held in electronic
account registries set up by Member States and are overseen by a
Central Administrator at the EU.
 Emissions considered a service under EU’s VAT.
Sources: http://ec.europa.eu/environment/climat/emission.htm and Nordhaus, William D. The American Economic Review, “After Kyoto: Alternative
Mechanisms to Control Global Warming” 96(2) May 2006, 31-34
Reminder: Externality Defined
 An externality is present when the activity of one
entity (person or firm) directly affects the welfare of
another entity in a way that is outside the market
mechanism.
 Negative externality: These activities impose damages on
others.
 Positive externality: These activities benefits on others.
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Examples of Externalities
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Negative Externalities
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Pollution
Cell phones in a movie theater
Congestion on the internet
Drinking and driving
Student cheating that changes the
grade curve
The “Club” anti-theft devise for
automobiles.
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Positive Externalities
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Research & development
Vaccinations
A neighbor’s nice landscape
Students asking good questions in
class
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Nature of Externalities
 Arise because there is no market price attached to the
activity.
 Can be produced by people or firms.
 Can be positive or negative.
 Public goods are special case.
 Positive externality’s full effects are felt by everyone in the
economy.
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Graphical Analysis: Negative
Externalities
 For simplicity, assume that a steel firm dumps
pollution into a river that harms a fishery
downstream.
 Competitive markets, firms maximize profits
 Note that steel firm only care’s about its own profits, not the
fishery’s
 Fishery only cares about its profits, not the steel firm’s.
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Calculating gains & losses raises
practical questions
 What activities produce pollutants?
 With acid rain it is not known how much is associated with
factory production versus natural activities like plant decay.
 Which pollutants do harm?
 Pinpointing a pollutant’s effect is difficult. Some studies show
very limited damage from acid rain.
 What is the value of the damage done?
 Difficult to value because pollution not bought/sold in market.
Housing values may capitalize in pollution’s effect.
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Private responses
 Coase theorem
 Mergers
 Social conventions
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Coase Theorem
 Insight: root of the inefficiencies from externalities
is the absence of property rights.
 The Coase Theorem states that once property
rights are established and transaction costs are
small, then one of the parties will bribe the other to
attain the socially efficient quantity.
 The socially efficient quantity is attained regardless
of whom the property rights were initially assigned.
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Illustration of the Coase Theorem
 Recall the steel firm / fishery example. If the steel
firm was assigned property rights, it would
maximizes its profits.
 If the fishery was assigned property rights, it would
initially mandate zero production, which
minimizes its damages.
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Coase Theorem – assign property
rights to steel firm
 Consider the effects of the steel firm reducing production in
the direction of the socially efficient level, Q*. This entails a
cost to the steel firm and a benefit to the fishery:
 The steel firm (and its customers) would lose surplus between
the MB and MPC curves between Q1 and Q1-1, while the
fishery’s damages are reduced by the area under the MD curve
between Q1 and Q1-1.
 Note that the marginal loss in profits is extremely small,
because the steel firm was profit maximizing, while the
reduction in damages to the fishery is substantial.
 A bribe from the fishery to the steel firm could therefore make
all parties better off.
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Coase Theorem – assign property
rights to steel firm
 When would the process of bribes (and pollution reduction)
stop?
 When the parties no longer find it beneficial to bribe.
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When is the Coase Theorem relevant
or not?
 Low transaction costs
 Few parties involved
 Source of externality
well defined
 Not relevant with high
transaction costs or illdefined externality
 Example: Air pollution
 Example: Several firms
with pollution
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Next: Externalities
 Remember externalities – positive and negative
 Remember the pursuit for efficiency
 So how to solve an externality between two parties?
1. Private resolution through negotiation is the simplest
means of restoring efficiency.
For example, a downstream firm hurt by an upstream polluter
could negotiate or bribe the upstream polluter to reduce
pollution. “Victim pays” outcomes tend to be unsatisfactory
to most students. Other options include consumer boycotts
or other means of imposing costs on the polluters.
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How to solve externalities?
2. Property rights that are not well-defined and lead to inefficiencies can
be corrected by a court system which imposes either property rules or
liability rules. Examples relevant to the upstream polluter example
include discharge permits.
3. Legislative and executive regulation are remedies that can take
several forms, including taxes and regulatory laws. Gasoline taxes and
regulations on unleaded fuels are potential discussion topics as are
proposals for carbon taxes. The subject of zoning laws also typically
makes for a lively discussion topic and serves as introductions to later
chapters.
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Coase theorem
The Coase Theorem says that when negotiation costs are negligible and affected
parties can freely negotiate, the entitlement can be allocated by the courts to
either party and an efficient allocation will result. Only the distribution of
costs and benefits among the effective parties is changed. Regardless of
which party the property right is assigned to, an efficient level of production
will result. Inefficiency causes the pressure for improvement.
The Coase Theorem is not without problems. If the property right is assigned to
the polluter, pollution could become a profitable activity. Also, the Coase
Theorem relies on some very restrictive assumptions such as the number of
polluters being small. If the number of polluters
is large, negotiation is difficult and free-riders more prevalent.
The Coase Theorem also relies on transactions costs being small. The courts can
use liability rules if negotiation is not practical, however transactions costs
such as lawyers fees and administrative costs could be large.
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Externalities and Environmental Economics
Internalizing Externalities
Bargaining and Negotiation
Coase theorem Under certain conditions, when
externalities are present, private parties can arrive
at the efficient solution without government
involvement.
Legal Rules and Procedures
injunction A court order forbidding the continuation
of behavior that leads to damages.
liability rules Laws that require A to compensate B
for damages imposed.
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According to the Coase theorem, in order to arrive at an efficient
solution to an externality problem associated with a given activity:
a.
No party should be given the right to that activity prior to
negotiation; otherwise, that party would have no incentive to
bargain.
b. The right to an activity must be decided during the negotiation
process.
c.
It doesn’t matter which party is initially assigned the right to that
activity.
d.
Both parties must feel that they have equal rights to the activity
prior to negotiation.
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According to the Coase theorem, in order to arrive at an efficient
solution to an externality problem associated with a given activity:
a.
No party should be given the right to that activity prior to
negotiation; otherwise, that party would have no incentive to
bargain.
b. The right to an activity must be decided during the negotiation
process.
c.
It doesn’t matter which party is initially assigned the right to that
activity.
d.
Both parties must feel that they have equal rights to the activity
prior to negotiation.
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review
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