economics and the environment

Environmental Market Failures: Failure to value the environment: unpriced use values; option values; existence values; bequest values  Lack of information  Externalities  Common Acce

ECONOMICS AND THE

ENVIRONMENT

 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?

 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?

 What is an economy supposed to do?

 What is the Neo-classical

approach?

What is a market?

A system of exchange

What is exchanged?

Resources: land, labor, capital (ie goods or services in some form)

How does the market work?

Matching of supply and

demand

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

What enables the

Does the market operate

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?

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

 “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.”

 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

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

Environmental & Ecological

Economics

1 Why should CLP pay for pollution controls in

Guangdong rather than in Hong Kong?

2 Are there any economic tools we can use to value

Hong Kong’s environment?

3 Are air-conditioned shopping malls reasonable

substitutes for clean air and clean beaches?

4 What impact would the use of the Mai Po

conservation area for building houses have on

Hong Kong’s net worth?

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.

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

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

Policy Guidelines from Environmental Economics:

I Benefits of Using the Market (as

Policy Guidelines from Environmental Economics

II Better Valuation of

Non-market Valued Assets

regulations, fines

Environmental Economics and

Ecological Economics

Weak vs Strong Sustainability

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

The Environmental Economics

Trade-off

Economy H

M

M S

Recycle?

Neo-classical Empty World

Figure 1: The Economy as an Open Subsystem of the Ecosystem

(Daly 1996:49).

S = solar energy H = heat M = matter E = energy

natural capital man-made capital

Ecosystem

Figure 1: The Economy as an Open Subsystem of the Ecosystem (Daly 1996:49).

S = solar energy H = heat M = matter E = energy

natural capital man-made capitalEcosystem

Ecosystem

 Uniqueness, uncertainty and irreversibility

 Ecosystem services

 Growth outpaces substitution

 Ecosystem fragility

Policy Influences from Ecological Economics

 Strict demands for environmental protection reflected in:

 Environmental impact assessment

 Natural preservation areas (parks, reserves)

 Absolute limitations on chemicals

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

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."

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

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

Community Based

Development

 Community rather than corporations or government creates social conditions (wants and needs) that limit impacts

 Greater self-sufficiency through

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