Transcript Brazil Environmental Economics

Brazil Environmental Economics
Alyssa Cobus
Madeline Mitchell
Matthew Ferrara
Doreen Brown
OUTLINE
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VII
Introduction
Environmental Policies in Brazil
Pollution as Negative Externality
Incomplete Market
Solution to complete Market
Pros/Con’s of Environmental Policies
What’s next?
Area: 8,514,877 sq km
Population: 198,739,269
GDP (PPP):
$2.025 trillion (2009 est.)
$2.029 trillion (2008 est.)
$1.931 trillion (2007 est.)
(U.S. GDP (PPP) $14.26 trillion (2009 est.)
Labor Force:
agriculture: 20% (2003 est)
industry: 14%
services: 66%
Environmental History in Brazil
- Brazilian Amazon region covers an area of
4,000,000 sq km
- average loss of the Rainforest is 6,000 sq miles
1995 and 2004 historical records of deforestation
REASONS
IMPLICATIONS
- Increase in Global warming
and Carbon dioxide (CO2)
emissions
- Decrease of the rainforest
causing alterations to the
climate
- Rainforest once covered
14% of the earth land
surface, nowadays 6% (est.
that the rest is consumed in 40
years)
- Forest fires releases tons of
greenhouse gases into
atmosphere
Brazil is one of the largest greenhouse gas emitter in
the world, but it is also one country with the largest
potential to reduce such emission
History of deforestation in international
policy
• 1972 The Stockholm Declaration on the Human Environment
(first global environment conference)
 Brazil defended its position: cautioned that "environmental
protectionism" should not stand in the way of economic development
among the less developed countries
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1992 UN Conference on Environment and
Development also known as “Earth Summit”, in Rio de
Janeiro
 Brazil committed the nation to lead on efforts to reconcile
environmental protection with economic development
• 2005 Kyoto Protocol
 In few years Brazil ramped up a
set of policies addressing global
warming (deforestation)
History of deforestation in national
policy
• In the 80s, deforestation in the Amazon emerged in
the political agenda of the Brazilian government
(early reforms were not successful)
• First successful deforestation policy launched in 2004
“The Action Plan for the Prevention and Control of
Deforestation” (PPCDAm)
PPCDAm
Improve and increase the use of satellite
monitoring
 Increase law enforcement
 Increase the land under federal and state
protection
 Establish environmental criteria as pre-requisites
for loans for farmers and ranchers
Foster sustainable activities
in the region
PPCDAm - Results
• It helped to reduce deforestation in the
Amazon by 74.8 % from 2004-2009
• Brazilian policies have
prevented the emission
of about 2661 million
tCO2e between 2005-09
Continued policies and programs
decreasing deforestation (emissions)
1. PPCDAm strategies included new initiatives and
implementation (2009-2011)
e.g. signing agreements with organizations representing productive
sectors – org. pledge not to purchase raw material from illegally
deforested area (by Oct. 2009, 62 companies have signed)
2. Public Forest Management Act (2006)
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To regulate access and economic exploitation of public forest
(launched by state governments)
3. The Plan on Climate Change - PNMC (Dec. 2008)
sets out policies aimed to achieve sustainable development
The Plan on Climate Change goals
The two main challenges in achieving the objective of
reducing greenhouse gas emissions are emissions
from land use, land use change and forestry and to
follow a low carbon path of development
Under the plan, deforestation is to be reduced by 70% below the 19962006 average by 2018, which would avoid 4.8 billion tons of greenhouse
gas emissions
• The plan focuses on 7 areas:
1. Low carbon development
2. Renewable electricity
3. Biofuels
4. Deforestation
5. Forest cover
6. Vulnerability and adaption
7. Research and development
Compensation for avoiding
deforestation
• In regard of the region’s size and complexity of
factors that lead to deforestation Brazil will need
additional resources to reach its goal and keep
permanently the deforestation rate low
• International framework and financing options e.g
Kyoto protocol (carbon market), Voluntary carbon
market, Donor funding
(Amazon fund)
Economies and the Environment
• What are the main issues
from an economists
perspective?
An Inconvenient Truth
• Film by Al Gore exposing progression of
pollution and emissions since industrial
revolution.
• Attempt to raise awareness in society because
without public knowledge / support it is much
harder to affect change.
• But why do we need to be made aware if it is
supposedly very important and relevant to us?
Environmental Degradation =
Economic “Externality”
• Remember 1101? Externalities are the
unaccounted for elements in the economy.
• Not necessarily always good or bad.
– Examples: Beekeeper bee’s make products he can sell
(honey, wax). Externality is the bees pollinating the
surrounding areas vegetation.
• Climate Change? The Stern Review on the
Economics Of Climate Change says "Climate
change presents a unique challenge for
economics: it is the greatest example of market
failure we have ever seen."
Who/What will Save Us?
Al
Gore?
…The Economist’s Viewpoint
• An inconvenient truth… = an INCOMPLETE market!
• Nobel Prize in Economics 2007 for Mechanism Design
Theory!
Leonid Hurwicz
Roger Myerson
Univ of Minnesota
Princeton Univ.
Eric Maskin
Univ. of Chicago
Prize in Economics 2007 for Mechanism
Design Theory
• “Mechanism design theory, initiated by Leonid
Hurwicz and further developed by Eric Maskin
and Roger Myerson, (...) allows us to
distinguish situations in which markets work
well from those in which they do not. It has
helped economists identify efficient trading
mechanisms, regulation schemes and voting
procedures.”
The Royal Swedish Academy of Sciences
Agenda
• Why is there a problem of over‐pollution?
– Cause: Missing market for pollution.
– Solution: Design market for pollution.
Pollution as a negative externality
•Pollution is a negative production externality −
Firms don’t include pollution into production
• Cleaner Supply Curve – supply curve that includes
pollution.
Cleaner Supply = Dirty Supply + Pollution Cost
Missing Market for Pollution:
Price for Pollution Unknown!
• Over-pollution is due to firms not internalizing
cost of pollution into costs.
• Firms have no incentives to internalize
pollution costs
– Ownership of pollution emission allowances is not
well defined
• Firms don’t know the price of pollution to
compute its costs
– Ambiguous ownership prevents market from
discovering price of pollution.
Cap & Trade Approach
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Also known as “Emissions Trading”
Market-based instrument
Sets limit of emissions that can be produced
Decrease over time
Emission levels as credits
Can be traded if not needed
Creates a market
Trading Credits
• Polluting and non-polluting groups can
purchase credits
• Environmental groups often purchase these
credits and phase them out of the system
2 Sides of Emissions Market
Supply
• Government
• Providers of CERs
• Polluters with extra credits
Demand
• Big polluters
• Environmentalists
Cap and Trade System in Action
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Price of CO₂ emission allowance= $5
MCA= Marginal cost of emission abatement
Firm 1: MCA₁=$2,
Firm 2: MCA₂= $6
Each firm emits 1000 tons of CO₂
Each firm gets 900 CO₂ allowances
Total CO₂ abatement= 2x(1000-900)=200
Scenario 1: “No Trade”
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Firms DON’T trade CO₂ emission allowances
Each firm reduces emissions by 100 tons
Cost for firm 1: 100 x $2= $200
Cost for firm 2: 100 x $6= $600
Total cost of abatement by 200: $800
Scenario 2: “Trading”
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Firms DO trade CO₂ emission allowances
Firm 1 sells 100 allowances to Firm 2 for $5 each
Firm 1 cuts emissions by 200 tons
Firm 2 continues to emit 1000 tons
Cost for firm 1: 200 x $2 –(100 x $5)=-$100= $100
profit
• Cost for firm 2 : 0 x $6 + (100 x $5)=$500
• Total cost of abatement by 200: $400
What does this mean?
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Creation of market for pollution
Efficiency
Pollution reduction
How has this been applied…?
Kyoto Protocol
• Adopted in Kyoto, Japan, December 11, 1997
• United Nations Framework Convention on
Climate Change
• Ratified by 175 countries (Brazil in 2002)
• Exceptions made for developing nations
• Goal: to reduce greenhouse gas emissions to
5.2% below 1990 levels between 2008 and
2012
Mechanisms
• Emissions Trading, “Carbon Market”
• Clean Development Mechanism (CDM)
• Joint Implementation (JI)
Clean Defense Mechanism (CDM)
• Allows a country w/ emission-reduction
commitment under Protocol to implement
emission-reduction project in developing
countries
• Projects can earn certified emission reduction
(CER) credits
• Stimulates sustainable development & emission
reductions
• Gives industrialized countries flexibility in how
they meet limitation targets
Joint Implementation
• Takes place in countries with an emissions
limit
• Annex 1 countries
• “economies in transition”
Why did some countries NOT sign?
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China, Australia
have since signed (2007)
US signed, no ratification
Congress says…
Brazil and REDD
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Compensation
Different from Kyoto plan
Difficulties with baseline
Brazil’s view
Pros and Cons of Cap and Trade
in Brazil
Pros of Cap and Trade in Brazil
• Decrease of CO2 emissions
– Protect the rain forests
– Reduce the effects of climate change
– Lean manufacturing: cleaner, reduces waste
• Raise revenue from selling of carbon credits
– Credit auctions
– Cost of buying carbon credits vs. reducing
emissions
– Cap will shrink over time
Pros (cont’d)
• Option to “bank” credits to use for future
years’ emissions, rather than selling to
developed countries
Cons of Cap and Trade in Brazil
• Possibility that other countries won’t
participate
– Can move production to other countries where it
is cheaper
• Difficulty of enforcing local emissions
reductions while selling credits to other
countries
• Price volatility of manufactured products
Another Option
• Tax on emissions
• A tax fixes the price of pollution, while a cap
controls the quantity
• Easy to enforce
• However, a tax only achieves emissions
reductions indirectly, through the price
• Don't really know the appropriate level of the tax
necessary to induce the changes that are needed
to bring emissions down far enough and fast
enough to avoid dangerous climate change
What Are Other Countries Doing?
• Europe overall:
– Covers 45% of the continent’s emissions
– Over 10,000 companies
• Dutch factory that calls itself the greenest plant in the
world, but now can't afford to run full-time
– Electricity prices are so high that the factory routinely
shuts down for part of the day to save money on power
– Laid off 40 of its 130 employees and trimmed production
– Two customers have turned to cheaper imports from
China, which is not covered by Europe's costly regulations
What Are Other Countries Doing?
• French cement workers fear they're going to
lose jobs to Morocco, which doesn't have to
meet the European guidelines
• German homeowners pay 25% more for
electricity than they did before, even as their
utility companies earn record profits.
What Are Other Countries Doing?
• United States:
– Cap and trade for reduction of SO2 emissions
– Reduced 50% from 1980-2007
– Clean Air Act 1990
– Western Climate Initiative (WCI)-greenhouse gas
emissions trading system
The Future
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Warmer temperatures
Higher sea levels
More and stronger earthquakes
We can do something about it!