Environmental Economy
Environmental (Green) Economy
- Most of us accept the need for a more sustainable way to live, by
reducing carbon emissions, developing renewable technology and
increasing energy efficiency.
- But are these efforts to save the planet doomed? A growing band of
experts are looking at figures like these and arguing that personal carbon
virtue and collective environmentalism are futile as long as our economic
system is built on the assumption of growth. The science tells us that if
we are serious about saving Earth, we must reshape our economy.
- This, of course, is economic heresy...
Liberal economy
- main idea: free market, capable of self-regulation
- in the market, supply (S) meets demand (D) which the
"invisible hand of the market" can return to equilibrium
when changing the price (P) or quantity (Q) of goods
- quantity x price - given by demand
- based on the utility of the good
Liberal economy
A free (perfect) market assume:
- a large number of equally strong buyers and sellers
- market participants have perfect information, without a time lag
- buyers and sellers compete, and do not enter into collusions
- consumers maximize benefits, producers maximize profits
- the producer/consumer pays the actual costs - these reflect the final price
Liberal economy
A free (perfect) market assume:
- a large number of equally strong buyers and sellers
- market participants have perfect information, without a time lag
- buyers and sellers compete, and do not enter into collusions
- consumers maximize benefits, producers maximize profits
- the producer/consumer pays the actual costs - these reflect the final price
Market distortions
- incomplete information
- transaction costs (long chain of merchants)
- artificial stimulation of demand - advertising
- tendency to eliminate competition
- formation of monopolies
- price distortion: the price does not reflect the value of the goods
Market distortions
- incomplete information
- transaction costs (long chain of merchants)
- artificial stimulation of demand - advertising
- tendency to eliminate competition
- formation of monopolies
Liberal economy
A free (perfect) market assume:
- a large number of equally strong buyers and sellers
- market participants have perfect information, without a time lag
- buyers and sellers compete, and do not enter into collusions
- consumers maximize benefits, producers maximize profits
- the producer/consumer pays the actual costs - these reflect the final price
Market distortions
- incomplete information
- transaction costs (long chain of merchants)
- artificial stimulation of demand - advertising
- tendency to eliminate competition
- formation of monopolies
- price distortion: the price does not reflect the value of the goods
Market distortions
- incomplete information
- transaction costs (long chain of merchants)
- artificial stimulation of demand - advertising
- tendency to eliminate competition
- formation of monopolies
Environmentalists‘ objections
- public goods and the problem of externalities
- consumption of goods vs. carrying capacity of the Earth
Greening of the economy
1) Internalization of externalities = polluter pays principle
- a product is disadvantaged by a higher price on the market =
pressure to change technology or to perish
Greening of the economy
1) Internalization of externalities = polluter pays principle
- a product is disadvantaged by a higher price on the market =
pressure to change technology or to perish
2) Ecological tax system
- higher taxes are imposed on those products that are more
harmful to the environment - electricity, natural gas, solid fuels
Greening of the economy
1) Internalization of externalities = polluter pays principle
- a product is disadvantaged by a higher price on the market =
pressure to change technology or to perish
2) Ecological tax system
- higher taxes are imposed on those products that are more
harmful to the environment - electricity, natural gas, solid fuels
3) Eco-labels - people make choices not only by price but
also by other value
Greener economy – more radical
- change economic indicators
- GDP is unsatisfactory, better - GPI, HDI or others that better
reflect the real development of society
Greener economy – more radical
- change economic indicators
- GDP is unsatisfactory, better - GPI, HDI or others that better
reflect the real development of society
Radical Green economy – alternative system
- criticism of the system based on growth of GDP
- efforts to introduce alternative systems
Steady state economics (H. Daly)
Sustainable economy (P. Victor)
To most economists, continual growth is a necessity and a
slowly growing economy, or a “steady state” economy that
puts the health of the planet first, means catastrophe. Many
see endless growth as the only way to create jobs and reduce
poverty.
To most economists, continual growth is a necessity and a
slowly growing economy, or a “steady state” economy that
puts the health of the planet first, means catastrophe. Many
see endless growth as the only way to create jobs and reduce
poverty.
Not everyone agrees. Peter Victor, an ecological economist at
York University in Toronto, modelled the Canadian economy
from 2005 to 2035 under three conditions:
1) business as usual
2) zeroing out all sources of economic growth
3) managed transition to a steady state (sustainable option).
To most economists, continual growth is a necessity and a
slowly growing economy, or a “steady state” economy that
puts the health of the planet first, means catastrophe. Many
see endless growth as the only way to create jobs and reduce
poverty.
Not everyone agrees. Peter Victor, an ecological economist at
York University in Toronto, modelled the Canadian economy
from 2005 to 2035 under three conditions:
1) business as usual
2) zeroing out all sources of economic growth
3) managed transition to a steady state (sustainable option).
Business as usual produced no major surprises. The economy
grew, but so did greenhouse gas emissions. Slamming on the
economic brakes produced the catastrophe mainstream
economists dread – GDP fell while unemployment and poverty
soared.
The third scenario, which phased in a
carbon tax, boosted anti-poverty
programmes and reduced working
hours, yielded results that mainstream
economists would never have
dreamed of: GDP per person rose and
stabilised at about 150 per cent of
current levels, while unemployment,
poverty and greenhouse gas
emissions all fell.
“It is possible for people to live well in
a society in which economic stability
rather than economic growth is the
norm, where all its members flourish
and social justice is served,” Victor
concludes.
Common goods issue
• common goods – collective consumer goods, the consumption of which
by any individual reduce the level of consumption of another individual
• under the influence of active demand and unrestricted access, common
goods are often abused or even looted
• this pays also for global public goods, the use of which is not regulated
by national legislation
Common goods issue
• common goods – collective consumer goods, the consumption of which
by any individual reduce the level of consumption of another individual
• under the influence of active demand and unrestricted access, common
goods are often abused or even looted
• this especially pays for global public goods, the use of which is not
regulated by national legislation
• public goods - collective consumer goods, the consumption of which by any
individual does not reduce the level of consumption of another individual
The Tragedy of the Commons
„The Tragedy of the Commons“
Garrett Hardin, Science (1968)
- two possible solutions:
- Somali
- Tyrranical (authority)
Price x scarcity
The degree of scarcity in economics is expressed by price
→ price - the most important source of information in the economy
→ does the actual price correspond to the scarcity of the goods? - NO!
Price x scarcity
The degree of scarcity in economics is expressed by price
→ price - the most important source of information in the economy
→ does the actual price correspond to the scarcity of the goods? - NO!
Three reasons
1) the price does not correspond to the total value of the goods
→ utility x non-utility value
2) price distortions
→ subsidies, regulation, corruption
3) externalization of costs (externalities)
→ not counting all costs
Price x scarcity
The degree of scarcity in economics is expressed by price
→ price - the most important source of information in the economy
→ does the actual price correspond to the scarcity of the goods? - NO!
Three reasons
1) the price does not correspond to the total value of the goods
→ utility x non-utility value
2) price distortions
→ subsidies, regulation, corruption
3) externalization of costs (externalities)
→ not counting all costs
According to economists, there is no reason for the price of abundant resource
- e.g. The price of today's forests?
→ real appreciation of natural goods can never be achieved (non-marketed
values, health, heritage, etc.) - but it is possible to get closer
→ market mechanisms (alone) do not ensure the maintenance of a quality
of the environment
Value of the goods
Total value of the goods
= utility + non-utility value
Utility values
1) direct
→ marketed values,
- direct benefit from the consumption
2) indirect
→ non-marketed values,
Value of the goods
Total value of the goods
= utility + non-utility value
Utility values
1) direct
→ marketed values,
- direct benefit from the consumption
2) indirect
→ non-marketed values,
- functional benefit
Value of the goods
Total value of the goods
= utility + non-utility value
Value of the goods
Total value of the goods
= utility + non-utility value
Option value
→ the value of preserving freedom
of future decision (someday in the
future I can use the goods)
Value of the heritange
→ value of preservation by others,
including future generations
Existential values
→ existence of the goods itself
(intrinsic value, value of life,
value of being)
Value of the goods
Total value of the goods
= utility + non-utility value
Option value
→ the value of preserving freedom
of future decision (someday in the
future I can use the goods)
Value of the heritange
→ value of preservation by others,
including future generations
Existential values
→ existence of the goods itself
(intrinsic value, value of life,
value of being)
Increasing of the value
Economic benefits of alternative management
practices.
„A 100-metre belt of dense
mangroves could reduce the
destructive energy of a tsunami
by as much as 90 per cent.“
„ Coral reefs and mangroves of Belize
yield about $15 mil. in fish, at least
$150 mil. in tourism and about $150
million in storm protection per year.
Price distortions with consequences for ecosystems
Subsidy
- meaning:
Price distortions with consequences for ecosystems
Subsidy
- meaning: to support the desired (social) goals
- industry growth, productivity…
Consequences - Increased pressure on ecos.
- eg. subsidies for pesticides → increase
employment in production ↑ agricultural
production, but also the overuse of "cheap"
pesticides = eco. consequences, negative
to the health of peasants, water contam. etc.
Price distortions with consequences for ecosystems
Subsidy
- meaning: to support the desired (social) goals
- industry growth, productivity…
Consequences - Increased pressure on ecos.
- eg. subsidies for pesticides → increase
employment in production ↑ agricultural
production, but also the overuse of "cheap"
pesticides = eco. consequences, negative
to the health of peasants, water contam. etc.
- eg. subsidies for the fishing industry
Price distortions with consequences for ecosystems
Regulation
- a "grow now, clean up later" approach
consequence - in China, for example, in 1998, the cost of environmental
damage and pollution was 14% of GDP!
Corruption
- embezzlement and theft of public goods with the „approval" of leaders
- price increase (due to lost profits) with a consequent increase in mining
Externalities
"Unintended effects of economic activity
which are not reflected in market transactions
Externalities
"Unintended effects of economic activity
which are not reflected in market transactions
Positive x negative externalities
- not counting total production costs,
use and disposal of products / services
→ transfer of these costs to other market participants
spatially (elsewhere) or temporally (other times)
Externalities
"Unintended effects of economic activity
which are not reflected in market transactions
Positive x negative externalities
- not counting total production costs,
use and disposal of products / services
→ transfer of these costs to other market participants
spatially (elsewhere) or temporally (other times)
→ market damage
- the entrepreneur does not receive the correct signal about the
effectiveness of his activity
- the buyer does not receive the correct signal about the scarcity of the
purchased goods (underestimation of the price of the goods)
„Indeed, everywhere we look, we see products whose prices
don’t reflect the true environmental costs of their production.“
T.H.Dixon, We must green the market
Internalization of externalities
„Polluter pays" → burdening the polluter with extra-market costs that are
otherwise involuntarily payed by the public and future generations
- including negative externalities in the price of the product
→ price increase → product not for sale → producer forced to
change production to reduce negative externalities
„Polluter pays" → burdening the polluter with extra-market costs that are
otherwise involuntarily payed by the public and future generations
- including negative externalities in the price of the product
→ price increase → product not for sale → producer forced to
change production to reduce negative externalities
Problems associated with internalization
I) the free market model does not work in practice
- prices determine monopolies and multinational companies → risk of
relocation of production to countries with ↓ costs
II) distance of environmental impacts in time and space
→ the problem of quantifying permanent externalities
→ nature complex system → impacts complex, nonlinear, with long
latency
III) often lacks a clear causality of the injuring-injured
Internalization of externalities
„Polluter pays" → burdening the polluter with extra-market costs that are
otherwise involuntarily payed by the public and future generations
- including negative externalities in the price of the product
→ price increase → product not for sale → producer forced to
change production to reduce negative externalities
Problems associated with internalization
I) the free market model does not work in practice
- prices determine monopolies and multinational companies → risk of
relocation of production to countries with ↓ costs
II) distance of environmental impacts in time and space
→ the problem of quantifying permanent externalities
→ nature complex system → impacts complex, nonlinear, with long
latency
III) often lacks a clear causality of the injuring-injured
IV) nature provides its goods and services for free – common goods
- the problem of determining the price of natural services, resources and
the value of nature, human health, life, and just pay for the damage at all?
Internalization of externalities
Possibilities and methods of env. valuation
- the price is formed on the relevant markets
- for many goods there are no markets (common goods) → underestimation
- valuation of the environment (natural resources) → determining the demand for
the quality of nature's goods and evaluating the benefits they provide
→ assigning a certain value or price: a necessary precondition for adequate
internalisation of externalities
Valuing the „real“ value of natural resources
I) market / off-market mechanisms
- microeconomic level
II) techniques at the macroeconomic level
III) regulatory mechanisms (state)
I) Market / off-market mechanisms - microecon. level
(A) methods based on direct markets
- creation of markets for environmental goods and services - privatization
→ the premise here is the opinion that the owner manages his private
property better ...
I) Market / off-market mechanisms - microecon. level
(A) methods based on direct markets
- creation of markets for environmental goods and services - privatization
→ the premise here is the opinion that the owner manages his private
property better ...
(B) methods based on proxy markets
- the methods used to find and analyze certain representative markets
I) Market / off-market mechanisms - microecon. level
(A) methods based on direct markets
- creation of markets for environmental goods and services - privatization
→ the premise here is the opinion that the owner manages his private
property better ...
(B) methods based on proxy markets
- the methods used to find and analyze certain representative markets
I) hedonic evaluation method
- is based on the analysis of real markets, how positive or negative changes in
the quality of the environment are reflected in the price of real estate
- the price is therefore sought in the representative (real) real estate market
and the difference in price corresponds to the financial value of the
environment where the real estate stands
II) travel cost method
- finds out the amounts that people spend in order
to visit the recreation area → such is its "value"
criticism: a hidden assumption - the value of a
territory is determined by market behavior
Valuation of ecosystem services
• ecosystem → production engines of the planet = life
I) Market / off-market mechanisms - microecon. level
III) methods of so-called off-market (non-market) evaluation
- eg the method of conditional (contingent) evaluation
finding a willingness to pay (for the preservation of a certain property) or a
willingness to accept compensation (for damage to a certain property)
→ finding out the preferences of individuals (consumers)
Willingness to pay
Willingness to accept
I) Market / off-market mechanisms - microecon. level
III) methods of so-called off-market (non-market) evaluation
- eg the method of conditional (contingent) evaluation
finding a willingness to pay (for the preservation of a certain property) or a
willingness to accept compensation (for damage to a certain property)
→ finding out the preferences of individuals (consumers)
E.g. Conditional valuation of a certain area - to protect it?
A questionnaire survey finds out how much an individual would be willing to pay for
a visit to the newly proposed protected area, and how many times he visited it.
E.g. 1st visit = 25 CZK, 2nd visit = 20 CZK, 3rd visit = 15 CZK etc.
From these values, you can construct a pseudo-demand curve. The area under the
curve then corresponds to the individual's willingness to pay.
Criticism: hidden assumption - people are consumers with a priority of personal interest
Willingness to pay
Willingness to accept
ad II) Macroeconomic level
- efforts to assess the environmental damages objectively (eg damage to
forests caused by acid rains)
- efforts to count externalities from the scientific data
1) Cost-benefit analysis – analyis of pros and cons
process: identification of positives (profits, benefits) + identification of
negative impacts (losses, costs) → expression in cash → sum of all
monetary values ​​of benefits, from which the costs for the given year are
deducted → project implementation only if the result is positive
criticism:
- Lots of costs and benefits
are hard to express in money
(difficult monetization of ecosystems)
2) Life cycle analysis (LCA)
- Evaluation of externalities that
originates in the whole life cycle
of a product or service
Economic tools of environmental policy
- indirect influencing of entities damaging the environment
- does not operate on the basis of direct power but economic motivation
1) Negative stimulation
fees → mostly income of the SFŽP and the state budget:
- for environmental pollution (emissions to air, water, landfills)
- for the use of natural resources (water, wood, minerals)
- user fees (freons, dog fee ...)
taxes
- for environmental protection (road tax, tolls, consumption tax
on coal fuels)
- ecological tax reform
penalty payments
- fines, surcharges – eg. for electronics
Economic tools of environmental policy
2) Positive stimulation
tax relief (within VAT, income taxes, road taxes, real estate
taxes)
financial support (grants, subsidies, loans)
deposit-refund systems
- beer bottles
EU ETS – emission trading system
environmental insurance
- environmental liability insurance - usually does not cover
damage to the environment itself, to biodiversity and does
not include remediation costs
- transport insurance - covers accidents during transport.
substances
Consumer intervention
Ecolabelling
Eco-labels Other labels
GDP - criticism and alternatives
- the monetary value of goods and services created per year in a territory
- a macroeconomic indicator for determining the performance of national
economies
GDP calculation
- eg expenditure method
→ GDP = sum of following expenditures:
- personal consumption expenditure (durable goods, short-term goods,
services)
- gross private domestic investment (fixed investment by companies, changes
in inventories, fixed investment in housing)
- government expenditure on the purchase of goods and services
GDP - criticism and alternatives
- the monetary value of goods and services created per year in a territory
- a macroeconomic indicator for determining the performance of national
economies
GDP calculation
- eg expenditure method
→ GDP = sum of following expenditures:
- personal consumption expenditure (durable goods, short-term goods,
services)
- gross private domestic investment (fixed investment by companies, changes
in inventories, fixed investment in housing)
- government expenditure on the purchase of goods and services
Criticism
- GDP does not include services that people do outside the official market
→ garden work, cooking, counter-work…
→ illegal production - eg production and sale of drugs, prostitution…
- GDP includes the costs of liquidation of environmental damage, the fight
against crime…
GPI – Genuine Progress Indicator
- an indicator trying to better describe the quality of life in the territory
- based on GDP, from which
subtracts items associated with
deterioration of the environment
or society, and adds new items
GPI – Genuine Progress Indicator
GDP growth x happiness
- assumption of the consumer society - ↑ consumption = ↑ happiness
- What makes people happy?
GDP growth x happiness
- assumption of the consumer society - ↑ consumption = ↑ happiness
- What makes people happy?
- GDP per capita in the
USA has tripled since 1950,
the percentage of the
population claiming to be
very happy has not
increased since the mid-
1970s.
- In Japan, the number of
happy people has not
changed in the last few
decades
- In the UK, the percentage
of very happy people fell
from 52% (1957) to 36%
(2006).
GDP growth x happiness
- assumption of the consumer society - ↑ consumption = ↑ happiness
- What makes people happy?
- GDP per capita in the
USA has tripled since 1950,
the percentage of the
population claiming to be
very happy has not
increased since the mid-
1970s.
- In Japan, the number of
happy people has not
changed in the last few
decades
- In the UK, the percentage
of very happy people fell
from 52% (1957) to 36%
(2006).
HDP x HPI (Happy Planet Index)
Fair Trade
- alternative to conv. international trade
- emphasis on the social and environmental
dimension of production and trade
Fair Trade
- alternative to conv. international trade
- emphasis on the social and environmental
dimension of production and trade
Objective: sustainable development of producers,
mainly in the "South" countries - Africa, Latin
America and South and South-East Asia
- providing fair business conditions
- about 3,000 Fair Trade shops in Europe
- about 70% are food (mostly coffee, cocoa,
bananas, tea), 30% handicrafts
- Fair Trade coffee - 2-3% of the European coffee
market
- largest market share - 50% of bananas in
Switzerland
- total retail sales turnover 6 billion euros (2014)
Fair trade - principles
It offers to the manufacturers:
- adequate and stable prices for products
- possibility of pre-financing (up to 50% of the order)
- interest-free or low-interest investment loans
- long-term business partnership and supply security
- investments from the common fund in local infrastructure, social
development and environmental protection projects - consulting
(marketing, management, organic farming, etc.)
It offers to the employees
- social security and working conditions in accordance with the ILO
It offers to consumers
- quality products (organic?) at
a reasonable price
- a guarantee of the origin of goods
- a choice
Fair trade – reality
- certification costs (repeated) high - not everyone can pay for it
- repeated personal checks by Commissioners
- sometimes guaranteed too low purchase prices (x quality)
- however, certainty of guaranteed prices and consumption, and a feeling of
self-sufficiency, very important, so farmers are mostly satisfied with FT