ECONOMICS AND THE ENVIRONMENT

1
ECONOMICS AND THE ENVIRONMENT
2

• How much is clean air worth?
• Can you charge somebody for damaging your air?
• How much are you willing to pay for clean air?
• Should you have to pay for clean air?

3

• Have you ever caught a fish off the UST pier?
• Is cutting down the rainforests efficient?
• What market incentives are there for research on
  the environment?
• How can the environment be priced and sold?
• Does Hong Kong have any mechanisms for valuing
  its environment?

4
Lecture Objectives

• Review Advantages and Limitations of Market
  Economics
• Understand how economics is creating new
  principles and guidelines for business activity.

5
Comparing

• Neo-classical Economics
• Environmental Economics
• Ecological Economics
• To reveal policy implications

6

• What is an economy supposed to do?
• What is the Neo-classical approach?

7
What is a market?

• A system of exchange

8
What is exchanged?

• Resources land, labor, capital (ie. goods or
  services in some form)

9
How does the market work?

• Matching of supply and demand

10
Why is the market such a good system?

• Optimal use of resources buyers force
  competition on suppliers greatest return for the
  efforts of suppliers
• Pareto efficiency a situation where it is
  impossible to make one person better off without
  making anyone else worse off
• Meaning allocation of resources to the uses that
  will bring the greatest overall increase in
  production and monetary value by matching
  producers with the highest bidders

11
What enables the market to work?

• Price or Value setting
• Profit motive
• Private property
• Government and other regulating institutions

12
Does the market operate perfectly?

• 1. General Market Failures
• Monopoly
• information asymmetry
• missing markets
• transaction costs.

13
Market Failures

• What company did you buy your air from?
• How much did you pay for your air? How was that
  price set?
• How clean was the air you bought? How do you
  know?
• How can a company stop other companies from
  dirtying its air? What can you do if someone
  makes your air dirty after you bought it?
• What rate of return should a company expect to
  get from investing in air quality?

14
2. Environmental Market Failures

• Failure to value the environment
• unpriced use values option values existence
  values bequest values
• Lack of information
• Externalities
• Common Access Resources/Sinks
• Discounting the future
• Missing Markets

15
(No Transcript)
16
Externalities

• An unintended cost or benefit of production or
  consumption that is not reflected in the price of
  the related transactions. Externalities are
  often borne by people who are not parties to the
  transactions that create them.

17
Externalities

• Define the externalities of your company who are
  the parties to the monetary transaction and who
  or what pays for the impacts of the transaction

18
Discounting the Future with Net Present Value
(NPV)
NPV x/(1.10)nyrs X your present money
value .10 the discount rate nyrs the power of
how many years down the future you are looking
at NPV of 100 dollars in five years with a
discount rate of 10 is 100/(1.10)5 or 62.09
19
Environmental Ecological Economics

• Why should CLP pay for pollution controls in
  Guangdong rather than in Hong Kong?
• Are there any economic tools we can use to value
  Hong Kongs environment?
• Are air-conditioned shopping malls reasonable
  substitutes for clean air and clean beaches?
• What impact would the use of the Mai Po
  conservation area for building houses have on
  Hong Kongs net worth?

20
Cleaner air on horizon by year's end Liao
Improvements to Guangdong power plants will cut
pollution, says minister

• Guangdong's biggest cluster of power plants, at
  Humen in Dongguan - which are blamed for much of
  Hong Kong's air pollution - are being equipped
  with desulphurisation devices to cut emissions.
• In the longer term, Dr Liao hopes a cross-border
  emission trading scheme can be set up to  assist
  other power plants in Guangdong to cut emissions
  in a more cost-effective manner.
• In the meantime, the government has started
  talks with CLP Power and Hongkong Electric on
  emission reduction and an emission trading scheme.

21
Hong Kong administration states preference for
system to be used in cross-border emissions
trading
the government says a "cap and trade" method is
best for Hong Kong. Under this system, the
government would set an emissions cap as well as
a timetable for this to be lowered. The capped
quantity of emissions would then be distributed
to sources of air pollution, including power
plants and large factories, in the form of
emission allowances or permits. Polluters who
fail to meet the requirements of the cap would
have to buy emissions reduction credits from
others who could successfully lower their
emissions below the capped level
22
Environmental Economics From Market Failure to
Government Failure

• Limited information of how to deal with specific
  environmental problems (of area or industry) and
  of firms capability to deal with or hide
  environmental impact
• Limited resources to regulate, monitor and
  enforce
• Command and Control regulations uniform
  standards and technologies

23
Policy Guidelines from Environmental
EconomicsI. Benefits of Using the Market (as
opposed to CAC)

• 1. Cost effectiveness example, emission trading
  credits
• 2. Substitution and technological advance
  example, green taxes
• 3. Other institution/market based schemes
  deposit refund schemes, environmental bonds,
  transferable quotas, transfer of development
  rights.

24
Policy Guidelines from Environmental Economics
II. Better Valuation of Non-market Valued Assets

• 1. Financial Costs
• 2. Averting Behavior
• 3. Travel Cost Method
• 4. Hedonic Pricing
• 5. Contingent Evaluation

For Better Cost-Benefit Analysis, regulations,
fines
25
Environmental Economics and Ecological Economics

• Weak vs. Strong Sustainability

26
Environmental Economics and Ecological Economics
Weak vs. Strong Sustainability

• Efficiency standard vs. ecological standard
• Discount rate (growth) driven vs. discount rate
  (growth) limiting
• Resources as inputs outputs of unlimited
  economic system vs. economic system as limited
  subsystem of ecosystem
• Substitutability vs. complementarity

27
The Environmental Economics Trade-off
28
Neo-classical Empty World
Environmental Economics World
S
Recycle?
Recycle
M
M
M
M
H
Economy
Economy
S
E
E
E
E
Ecosystem
Ecosystem
H
Ecosystem
Figure 1 The Economy as an Open Subsystem of the
Ecosystem (Daly 199649).
29
(No Transcript)
30
Substitutability vs. Complementarity

• Manufactured capital depends on natural capital
• Uniqueness, uncertainty and irreversibility
• Ecosystem services
• Growth outpaces substitution
• Ecosystem fragility

• Manufactured and knowledge capital for natural
  capital
• Land, labor and capital substitutability
• Same service by different product
• Technological fixes
• Ecosystem resilience

31
Policy Influences from Ecological Economics

• Strict demands for environmental protection
  reflected in
• Environmental impact assessment
• Natural preservation areas (parks, reserves)
• Absolute limitations on chemicals

32
Policy Guidelines from Ecological Economics

• 1. Daly Rule
• 2. Index of Sustainable Economic Welfare (ISEW)
• 3. Ecological tariffs on free trade
• 4. Community based sustainability through
  self-sufficiency and diversification

33
Policy Guidelines from Ecological Economics

• 1. Daly Rule "Never reduce the stock of natural
  capital below a level that generates a sustained
  yield unless good substitutes are available for
  the services generated."

34
Index of Sustainable Economic Welfare
ISEW total output unpaid work -
environmental destruction and degradation -
environmental improvement measures -
depreciation of human-made capital /- welfare
distribution effect
35
Free Trade Limitations

• Regional specialization obscures view of resource
  exploitation, depresses ecological and social
  laws, weakens terms of trade and impoverishes
  landholders
• Externalities from the shipping of goods around
  the world
• Therefore, tariffs to compensate or reduce free
  trade

36
Community Based Development

• Community rather than corporations or government
  creates social conditions (wants and needs) that
  limit impacts
• Greater self-sufficiency through decentralized
  control
• Local synergies for recycling and energy
  reduction
• Ethical bonds amongst business community

37
Summing up

• Market success in exchange efficiency
• Market failures in valuation, common access,
  externalities, and discount rate
• Environmental economics guidelines cost
  effectiveness and market-based incentives
• Ecological economics guidelines limiting growth
  to within global and local ecosystems
• therefore reducing throughput of economy
  within ecological carrying capacity