Transcript Sustaining Natural Capital

Sustaining Natural
Capital
Big Ideas on Sustainable Prosperity
Ottawa April 2014
Geoffrey Heal
Capital and Progress
 Distinguish physical capital from human capital,
intellectual capital and natural capital
 Note intangible capital of growing importance in
modern economics – Apple, Google, etc
 Vast majority of the value of these companies is not in
its physical capital – Apple’s market cap is $505bn,
value of tangible assets <25%
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Capital and Progress
 Development has been a process of destroying natural
capital – forests, fisheries, biodiversity – and building
up physical, intellectual and human capital
 We destroy forests and fisheries, species and
landscapes, but develop antibiotics, the internet, air
travel, mobile phones, etc
Capital and Progress
 But today there are more people, they all have more
impact, and technologies are more powerful
 So far the gains from more physical, intellectual and
human capital have more than offset the losses from
the destruction of natural capital and we are better off
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Capital and Progress
 But will this continue? Are we reaching a point where
we are destroying natural capital that really is essential
to our living standards?
Market Failure
 In an ideal world markets induce us to use Earth’s
resources efficiently
 But often things go wrong ……….
 In the environmental area, most common problem is
external costs
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External Costs
 Costs that a transaction imposes on people who are
not parties to it
 I buy gasoline from Exxon and burn it in my car. Exxon
and I are the parties to this transaction
 But we impose external costs on others by
 Emitting greenhouse gases and changing climate
 Emitting other pollutants and damaging human health
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External Costs
 Are costs of an activity that the parties to it neglect
because they don’t pay them.
 Lead to a breakdown of the economic system
 Most environmental problems, most unsustainable
behaviors, are associated with external costs
 Destruction of natural capital is associated with
external costs
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Responses
 Make sure the parties to a transaction pay the full
costs of that transaction, including the external costs.
Full cost pricing – a big simple idea!
 Do this via taxes or via cap-and-trade –or several other
alternatives
 Or via liability or even consumer/investor activism
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Illustration
 Electricity from wind costs about $0.04-0.06 per kWh,
from gas about $0.05-0.08, from solar $0.10 to $0.20,
from coal $0.4 to $0.8
 So coal is a competitive fuel in the power market.
 But these figures only reflect private costs – those paid
by the parties to the transaction
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Illustration
 Including the external costs of coal use would put the
cost of power from coal up above $0.15 per kWh,
pricing it out of the power market.
 Half the world’s emissions of GHGs come from burning
coal – so full cost pricing of electric power could go a
long way to solving the climate problem & preserving
important item of natural capital
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SCC – a digression
 Computing external costs is sometimes easy – and
sometimes hard
 Obama admin uses $37 as SCC – output of
interagency task force
 SCC is the PDV of damages from the emission of 1 ton
of CO2 over its lifetime
 Computing SCC involves two difficult tasks
SCC – a digression
 Evaluating impact of CO2 on the economy
 Discounting this back to present
 Current computations use IAMs, and impact depends
on
 Effect of CO2 on temperature – ECS
 Effect of temperature on economy – damage function
 Current IAMs involve poor choices of ECS and damage
functions
Uncertainty, Decision & Climate Change
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SCC – a digression
 Damage functions are generally arbitrary and involve at
best casual empiricism
 “These models have crucial flaws that make them close
to useless as tools for policy analysis …… ; the
models’ descriptions of the impact of climate change
are completely ad hoc, with no theoretical or empirical
foundation.”
 Research that provides a solid empirical basis for
damage functions becoming available but not yet built
into these models
SCC – a digression
 Discounting is also complex: what discount rate? Or
should we use a declining discount rate?
 $37 figure used a constant discount rate and in fact the
task force used several and showed sensitivity
 Strong argument for declining rate in a world with
disagreements over the correct rate – efficient
allocation in a world of different discount rates requires
a non-constant rate
SCC – a digression
 Right now. We probably can’t compute a useful SCC.
 BUT we can compute a lower bound
 We have estimates of some of the damages but not all
 And we can use discount rates that are in the upper part
of the possible range
 Lower bound is actually very useful – if coal not
competitive at a lower bound then it’s certainly not
competitive at the real figure
Can we be sustainable?
Is the technology ready?
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Can we be sustainable?
 If we priced coal out of the power market by full cost
pricing, would we go without energy? What are the
alternatives?
 The US, China are richly endowed with wind and solar
energy and could produce a lot of their electricity from
these
 But they are intermittent
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Renewables alone?
 Could we use 100% wind and solar?
 No – outputs are too variable and there would be
power shortages
 Need a backup, currently natural gas – gas power
stations are the most flexible in terms of changing
outputs to offset sudden variations in wind, sun
 Locks in a fossil fuel
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100% Renewables?
 To go 100% renewable we need to store electricity from
wind and sun
 Current technologies – batteries, pumped storage,
compressed air energy storage, flywheels – are all
costly and inefficient
 San Diego utility recently bought 40 mWh battery for
$50m to try to store some renewable energy
 40 mWh is about 120 hours of a big wind turbine
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100% Renewables?
 Battery technology has to improve, costs have to fall,
before we can go even 60% renewable. In process
right now
 Over a dozen start-ups claim they will more than halve
battery prices will more than doubling energy density
 Or clean energy sources that are not intermittent – like
nuclear
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Nuclear power
 Clean – no greenhouse gases, no pollution of other
types unless there is a meltdown and a containment
failure, as at Chernobyl and Fukushima
 And of course operates 24/7
 Nuclear to date has killed far far fewer people than
coal!
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Sustainable Transportation?
 Oil use in vehicles another major source of GHG
emissions
 Can we move away from this?
 Options are
 Electric vehicles –using clean electric power
 Biofuels
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Big Ideas
 Probably the biggest technological obstacle to
sustainability is our inability to store electricity cheaply
and efficiently
 It’s a bottleneck for renewable power and for electric
vehicles
 And solving this problem is a priority
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Big Ideas
 External costs need to be brought home to those who
generate them
 This single change could lead to massive strides
toward sustainability, probably the most important
change we could make in our economic system from
perspective of sustainability
 Would rapidly lead to reductions in use of coal, oil and
eventually gas
Problem is Political
 Technology is not the biggest obstacle to sustainability
– the technology is largely there and will almost surely
be there fully 10 years from now
 Obstacles are political  Getting people to recognize the seriousness of the
problem
 Overcoming vested interests in the status quo
 Persuading developing countries this is consistent with
growth
 Making progress on climate
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Recognizing the Problem
 A big idea is needed here, and I don’t know what it will
be
 Surveys show people are aware of the issues of
climate and sustainability, see them as serious but not
urgent
 18% alarmed, 33% concerned, 25% cautious about
climate change
 All accept the reality but only alarmed see need for
action now – though all support renewable energy
Coal
 Coal industry is vocal and influential – but it has to go
 Buy it out and close it down! Market cap of US coal
industry < $40bn.
 Carbon tax could easily raise this much
Growth
 A good illustration is Brazil – rates highly for use of
carbon-free energy and still is economically successful
 Extensive use of sugar biofuels in vehicles
 Extensive use of biomass and hydro in electricity
generation
 Most of its CO2 comes from deforestation
Climate
 UNFCCC has not worked
 Time to use a smaller group of main emitters
 More from targets & timetables to development and
implementation of technologies
 A positive rather than negative goal
 Can be seen as having commercial potential
 More widespread support for renewable energy than for
emissions reductions!
Bottom Line
 Full cost pricing – polluter pays
 Store energy – better batteries
 Recognize problem
 Buy out opponents
 Convince developing world that sustainability
consistent with growth
 Do better on climate negotiations