Sustainable Economics

Ethics of Sustainability Class 8 Charles J. Kibert, Ph.D., P.E.

Powell Center for Construction & Environment Rinker School of Building Construction University of Florida

CK Assignment 2

Find an example of a company that is considering how best to minimize its externalities and describe how they are accomplishing this.

Overview

• Problems with current economic theory • Ecological economics as an alternative theory • Externalities and internalization • Alternative measures of welfare

The Five Forms of Capital

• Human Capital – physical, intellectual, emotional and spiritual capacities of any individual.

• Manufactured Capital – the built environment, infrastructure, tools, equipment, machinery and technology • Social Capital – social networks of family and community, the “social glue” that holds society together • Financial Capital – monetary assets (really a form of social capital) • Natural Capital – any part of the natural world that humans make use of or benefit from, including resources, waste sinks and ecosystem services

Problems with Current Economic Theory

• Assumes market prices reflect consumer willingness to pay. • Assumes that consumers are the best judge of value and that community considerations are irrelevant.

• Assumes consumers understand the value of ecological resources provided by many biological resources. Assumes consumer, aided by the market place, knows which species are unnecessary for ecosystem maintenance.

• Assessment of economic value ignores many equity and moral considerations.

• General failure to recognize that market prices are highly distorted.

M.D. Young, Sustainable Investment and Resource Use, Parthenon Publishing Group, 1992, 24-25.

The Prevailing Economic System

• Private ownership of material resources • Public ownership of “sinks” • Perfect functioning of the market • Infinite subsitutability of resources • Subsidized disposal, energy, water

Business Household

Business Household

• Ecological economics movement • Laws of thermodynamics • Principles of ecology

Herman Daly

Capital

Capital

Pollutants Heat

Pollutants Heat

What is Ecological Economics?

• Ecological economics is a transdisciplinary field of academic research that addresses the interdependence between human economies and natural ecosystems. Ecological economics connects different disciplines within the natural and social sciences.

• Fundamental focus is on the concept of NATURAL CAPITAL.

• Economic definition of capital: A STOCK of something that yields a FLOW of valuable goods and services.

Ecology and Economics • From same Greek word

oikos

, house • Ecology is the study of the house • Economics is the management of the house

Relationships of Economic Schools

Natural Capital

• Capital is a stock that yields a flow of goods and services into the future • Natural capital = raw materials and services provided by nature – Source, service, sink and site • Essential inputs into: – Economic output – Life support functions

Worth of Ecosystem

• Costanza et al 1997, “The value of the world’s ecosytem goods and services,”

Nature

, 387:253-260.

– Pollination, Raw Materials Production, Water Supply, Waste Recycling & Pollution Control, Recreation & Education, Climate and Atmosphere Regulation, Soil Formation and Erosion Control, Control of Pests & Diseases • Value of services: US$16 to $US54 trillion • World GNP: US$18 trillion • Ecosystem-to-GNP ratio 1.8

Strong sustainability

• Strong sustainability rejects the idea that MMK adequately compensates future generations for ecological depreciation • Regardless of price, MMK cannot replace the unique services and amenities provided by nature – most notably life-support services • Strong sustainability advocates the precautionary principle – where there are threats of serious or irreversible damage, one should not wait for full scientific consensus.

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Weak sustainability vs strong sustainability

• Weak sustainability acknowledges the concept of Hicksian income* – limiting consumption to the ‘interest’ or flow of services produced by the capital stock • But, it is assumes maintenance of total capital stock (MMK + NK) without regard to proportions • Each kind of capital is treated as being substitutable for another.

John Hicks * Hicks, John R. (1939). Value and Capital: An Inquiry Into Some Fundamental Principles of

The ‘everything-has-a-price’ view of neoclassical economics

• Weak sustainability is achieved so long as investment > the combined depreciation of MMK and NK • Robert Solow (1974)*: ‘If it is easy to

substitute other factors for natural resources … then... the world can, in effect, get along without natural resources, so exhaustion is just an event, not a catastrophe.’ *Solow, R. (1974). ‘The economics of resources or the resources of economics?’ American Economics Review, 64 (2), pp.1-14.

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Ayres (1993)

• The most important ‘scarcities’ (clean air, clean water, climatic stability, biological diversity, the absorption of waste by natural systems, etc) lie outside the market mechanism and outside the realm of plausible technological substitution.

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Hicksian Income

...income that can be consumed without reducing future consumption possibilities

Externalities

- Are equal to cost of eliminating the problem.

- Distort the economic rationality by influencing decisions on the allocation of means. - Are reflected in the revenues of the whole social or consumer groups (e.g. by making other economic actors pay for the pollution caused by them, some companies are ‘subsidized by those who incur those costs) - May lead to exploitation of some geographical regions by others when regional distribution of labor is taken into account (e.g. migration of polluting industries)

Internalization

• Benefits of Internalization Processes • Transparency • Across All Sectors • Flexibility • Stimulates Innovation • Polluter Pays • Caveat: must be transnational • Cooperation between sectors • Another example of interconnectedness

Socialism collapsed because it did not allow prices to tell the economic truth. Capitalism may collapse because it does not allow prices to tell the ecological truth.

Source: Dahle, 2001.

Changing the Signals to the Economy

• Currently taxes are applied to positive aspects of behavior: wages, productivity, profit • It would be better to tax aspects that are negative: waste, inefficiency, pollution • Possible mechanisms: – Pollution taxes – Tradable pollution permits – Deposit fees • Shifting impacts of production to producers is called “internalization”

Government Use of Internalization Processes

 Regulations  Performance Standards  Manufacturer Responsibility  Subsidies  Permits  Taxes : “Tax pollution, not production” -Pollution, excise, severance, tax credits  Alternative National Accounting Systems  Government as Purchaser and Facilitator (Recycled Content Products/EPA Green Lights

Alternative Measures of Welfare (Examples)

• Index of Sustainable Economic Welfare (ISEW) • Genuine Progress Indicator (GPI) • Human Development Index (HDI) • The Happy Planet Index (HPI)

Human Development Index

• Created by the United Nations Development Program (UNDP) • A composite of three indicators – Longevity: life expectancy – Knowledge: literacy, years of schooling – Standard of Living: purchasing power based on GDP/capita

Genuine Progress Indicator

• Developed by non-profit: Redefining Progress • Starts with real personal consumption, adjusts for income distribution • Subtracts: – Crime & Divorce – Resource depletion – Environmental Damage – Income Distribution – Pollution – Lifespan of durable goods & public infrastructure – Dependence on foreign assets • Adds: – Value of household work and parenting – Value of volunteer work

INDEX OF SUSTAINABLE ECONOMIC WELFARE – U.S., 1990 (Constant billion $ of 1972 Personal income adjusted for income distribution +services for household labor +services of consumer durable goods +services of highways and streets +consumption public spending on health/education -consumer spending on durable goods -defensive private spending on health and education -cost of commuting and auto accidents -cost of personal pollution control -cost of air, water, and noise pollution -lost of wetlands and farmland -depletion of natural resources -long term damage from nuclear wastes, ozone depletion, and greenhouse gases +net capital growth +/- net international investment position INDEX OF SUSTAINABLE ECONOMIC WELFARE $1,164 +520 +225 +18 +45 -225 -63 -67 -5 -39 -58 -313 -371 +29 -34 $818

The Happy Planet Index (HPI)

• Product of the New Economics Foundation • Similar to UN HDI

Corporate Social Responsibility

• Change lies in the hands of corporate managers Reside in a role of leadership Can therefore can help create a more just and environmentally sustainably world • As a manager, what steps would you take to change the following companies to create Corporate Social Responsibility: (Small) Locally owned restaurant (Large) Wal-Mart (Extra Large) British Petroleum