Linking Global and Local Perspectives on Sustainable Development and Ecological Tax Reforms

1. Sustainable development, innovation and ecological tax reforms: linking global and local perspectives Massimiliano Mazzanti OPENLOC workshop December 12th 2011 UniversitA’ di Ferrara

2. Sustainability I: Capital based economic view Sustainable society is an ‘investing society’

3. Capital shares at different income levels

4. Applied estimations genuine saving(world bank) • Kazakistan • 30% GDp gross saving • 18% net saving • Saving Rises to 22% including education investments • - 10% including all natural resource depreciations • Negative genuine saving

5. Holland vs Kenya capital stocks shares of wealth • Holland • 78% Human capital + institutions • Of which 36% schooling; 57% institutions, property rights • 3% natural capital (of which 57% land) • 19% produced man made capital • Kenya • 46% natural capital (1/2 crops) • 13% man made • 42% intangible including human capital

6. Hamilton adjusted rule (2007) • U/ t= Uc G(r- G/G) • G= genuine saving (net saving) • G=0 Hartwick rule  U/ t=0 • G=Y/G fixed share • Growth in net income • (C+G)/(C+G) = net saving (constant)* MPK (r)/α • MPK 0.07 o 7% • α = non nat resource share, around 0.7 average • So (C+G)/(C+G) = net saving (constant)* 0.1 • Growth 10% of net saving

7. Ferreira Hamilton Vincent (2008) • Current saving  future consumption • Gross -0.76* • Net save -0.72* • Green saving 0.558** • Pop adjusted 0.560** • Ferreira Vincent add developing countries

8. Holland vs Kenya capital stocks shares of wealth • Holland • 78% Human capital + institutions • Of which 36% schooling; 57% institutions, property rights • 3% natural capital (of which 57% land) • 19% produced man made capital • Kenya • 46% natural capital (1/2 crops) • 13% man made • 42% intangible including human capital

9. Ghana – decomposition of genuine saving SD  Whatmatters is to accumulate anincreasing stock of total capital forms

10. Key issues • Sustainable development • Weak and strong economic perspectives • Daly idea of zero growth • Renewable and non renewable resources • Environmental efficiency of economic systems • The critical role of innovation only engine for sustainaed economic growth and sustainability (Solow models) • Sustanaibility and sustaianed growth entangled issues: trade offs but also complementarities through the role of innovation

11. What is sustainable development? • SD is the achievement of a sustained path of economic growth which does not undermine future generation possibilities of consumption • We may define what “future generation” means • An orthodox economist would claim that this depends on our time preference  discount rate reasoning.. • The higher the discount rate, depending on consumption and oportunity costs factors, the less future benefits and costs are valued… • r = pure time myopic preference + consumption growth; otherwise equals tha market oppotunity cost, the foregone benefit of an investment

12. Recall that GNP=C+I • Recall that NetNP= GNP – depreciation of capital • Capital stocks dynamics depends on accumulation and depreciation

13. SD is linked to Total capital or natural capital? • Total capital = manmade + human capital + natural capital • Each capital stock is defined by a rate of growth, I – Deprec. • If I=dep, then capital is steady • Y=(TOT-K) • Thus, a first intuitive golden rule for SD is that total K should be at least constant, Inv should at least match depreciation.. • Genuine saving rule: INV >= depreciation

14. ..but.. • This may imply a decreasing natural capital stock, if natK is substituted by other forms • This is the western country history • i.e. arab countries management of non renewable resources • UK oil exploitation • In any case, rents from natural resource use should be re-invested..

15. Thus, weak sustainability may also imply a complete exhaustion of natural resources… • Strong sustainability is instead stressing the critical role of some natural capital forms…irreversible losses…eco-systemic losses • The genuine saving rule is applied to specific environmental assets • i.e. compensation projects • It works for renewable resources (forests, fishery..) • Striking difference between the management of non renew resources (the problem is a correct price and a path of exploitation which takes into account the existence of an alternative backsyop technology) and renewable resources, which often posses use and non use values…

16. SD is also possible in case a reduced amount of capital is inherited by future generations…. • …but this capital must be more productive..more efficient.. • We go back to the role of environmental innovation in triggering higher resource efficiency of the economy • A key issue is what he driving forces of innovation are: • Prices (neoclassic view) • Policy  which kind of policy…static reasoning demonstrate the higher efficiency of green taxes and tradable permits (over CAC)…dynamic efficiency should also be higher for economic instruments, but it is more an empirical matter • Firm internal strategies..Porter hp..firm gains from innovation in the long run, to achieve new competitive advantages…hp at macro and micro level • A weak version of the hp claims that in the long run the policy costs are lower than the induced innovation gains…NET benefits..

17. ..summing up.. • SD depends on the decision on how much investing in each period…(recall Y=C+I)..a part of the investment is in innovation (tech and organizational) • ..but even sustained economic growth (Solow Model) is possible only in presence of technological change enhancing factor productivity.. • SD intrinsically depends on innovation, which is an investment, which also depends on economic growth.. • The possibility of achieving a SD path relies on the extent to which innovation investments are capable of reducing the impact of a sustained economic growth.. • This issue is known as Delinking: environmental impact from economic growth

18. Human Development Index (HDI)

19. Human Development Index (HDI) IL’HDI introduce un modo nuovo di misurare lo sviluppo dei diversi paesi mondiali combinando insieme indicatori di: • Aspettativa di vita • Scolarizzazione • Reddito In un unico indicatore sintetico. La principale novità di tale approccio è la capacità di esprimere, tramite una sola statistica, aspetti sociali ed economici dei diversi paesi. Lo scopo è quello di avere un indicatore più preciso del PIL pro capite per misurare lo sviluppo dei paesi.

20. Per la costruzione dell’HDI vengono creati dei pesi delle singole variabili prese in considerazione, che vanno poi a creare l’indicatore finale. L’HDI fissa il livello minimo e massimo per ogni dimensione e indica a che livello è posizionato ogni singolo paese all’interno di questo range (minimo è 0, massimo 1)

21. Education • La componente relativa alla scolarizzazione è misurata da due indici. Il primo è rappresentato dal numero di anni medio di scuola per adulti di 25 anni e il secondo dal numero di anni attesi di scuola per i bambini al primo anno di scuola. • Expectedyears of schoolingestimates are based on enrolment by ageatalllevels of education and population of officialschoolage for eachlevel of education.

22. Aspettativa di vita • L’aspettativa di vita è calcolata normalizzando la serie usando un valore minimo di 20 anni e massimo di 83.4. Questo è dato dal massimo valore possibile registrato per la serie di tutti i paesi analizzati dal 1980-2010. Di conseguenza, la componente di longevità dentro all’HDI per un paese con aspettativa di vita pari a 55 anni è di 0.552.

23. Ricchezza • For the wealth component, the goalpost for minimum income is $100 (PPP) and the maximum is $107,721 (PPP), both estimated during the same period, 1980-2011. • References: http://hdr.undp.org/en/statistics/hdi/

24. Inequality-adjusted Human Development Index (IHDI) Il rapporto UNDP del 2010, introduce per la prima volta una versione dell’HDI che tenga conto della distribuzione dei redditi e del concetto di disuguaglianza, chiamato Inequality-adjusted Human Development Index (IHDI). Sotto l’ipotesi di perfetta distribuzione dei redditi l’IHDI e l’HDI sono uguali, ma l’IHDI si discosta dall’HDI (diventa minore) quando l’uguaglianza viene meno. In altri termini, l’IDHI può essere considerato come il reale livello di sviluppo umano raggiunto da un paese, mentre l’HDI può essere visto come il livello di sviluppo umano potenziale che un paese potrebbe raggiungere se non vi fosse disuguaglianza. References: http://hdr.undp.org/en/statistics/ihdi/

25. Sustainability II: efficient growth Sustainable society is a society that ‘de-couples’ environmental performance from growth

26. CO2/GDP intensity - 42% over 1950-2000 • GDP per capita: three times higher over1950-2000

27. High growth ITALY

28. Delinking and Kuznets curves Turning point Policy effect? Environmental pressure Absolute delinking Recoupling possibility (?) Relative delinking (if any) Economic drivers

29. Delinking • Advanced economic systems have been characterised by a decreasing intensity of energy and materials per unit of output, driven by technological dynamics and regulatory pressures. OECD recently published a document (OECD, 2002) containing an updated evidence on the de-linking from economic growth, concerning diverse environmental indicators, such as climate change, air pollution, water quality, waste management, and material use.

30. Delinking may occur on a relative basis (the elasticity of the environmental impact indicator with respect to an economic driver is positive, but less than unity) or on an absolute basis (negative elasticity). • The assessment of both de-linking processes can be referred to the mostly applied research field concerning Environmental Kuznets Curves (EKC). • The hypothesis derives from the original analysis of Kuznets on the relationship between income level and income distribution

31. The EKC hypothesis is shortly that for many environmental impacts, an inverted U-shaped relationships between per capita income and pollution is documented. • The concentration of a certain pollutant first increases with income/production, reflecting a scale effect, more or less proportional, then eventually starts to decrease, de-linking from income even on an absolute basis. • More specifically, the hypothesis predicts that the “environmental income elasticity” decreases monotonically with income, and that it eventually changes its sign from positive to negative, thus defining a turning point for the inverted U-shaped relationship. • It does not derive from a theoretical model, it is an intuitive conceptual approach, inductive in nature..though some theoretical explanations have emerged…

32. EKC motivations • Supply side • Technology driven by economic growth (profits and investments..) • The share of cleaner activities in GDP increases with the scale of the economy (scale + composition effects) • As scarcity increases, market prices should reflect it..self-regulatory mechanism? • Environmental policy more likely in a developed economy  economic and political conditions needed • Property right enforcement (policy issue) • Demand side • Environmental quality is a normal luxury good (as culture)..higher incomes mean higher WTP for the environmental services..higher taxes are possible, new markets are profitable.. • Preferences change as the society develops..the marginal value of consumption is positive but decreasing • Environmental costs are increasing even steeply…growth benefits decreasing….even a simple marginal cost-benefit scheme may explain why delinking may occur • As it is evident, many forces play their role, in the interplay between supply and demand, and between policy and spontaneous market dynamics

33. Policy relevance • The EKC evidence may support the idea that no policy is needed…market forces and market dynamics are self-sufficient in inverting the income-environment link • BUT the environmental impact may be higher than what is defined as sustainable…policy efforts are needed to support and correct markets..affecting the shape of the EKC

34. Empirical evidence, which has mainly concerned air emissions, is still ambiguous. Some pollutants show a turning point, though it shared view that some critical externalities, like CO2 and waste flows, are monotonically rising with income. At best, relative de-linking may be occurring (Stern, 2004).

35. Air quality indicators • Local air quality (CO, sulfur, PM) seem to show an inverted U-shape with income. • Global pollutants either rise monotonically with income or eventually present very high turning point (not reached if not by US) • * private/public goods as far as countries are concerned..free riding on global commons  policy needed • Water indicators • The turning point is generally higher • EKC for some indicators (local issues) • N shape? (Borghesi, 1999)

36. waste • Empirical evidence on Delinking concerning environmental waste indicators is probably the scarcest. Contributions providing results for waste are rare. Cole et al. (1997) find no evidence for an inverted U-shape EKC curve concerning municipal waste • See the Mazzanti-Zoboli paper (2005) on waste and delinking…

37. There is currently no evidence concerning de-linking with respect to primary sources of waste in Europe (i.e. municipal and packaging waste), which have been targeted by waste-oriented European Directives aimed at reducing diverse environmental externalities associated to waste production and disposal

38. Some evidence • Turning points 2003$/per capita (international studies) • CO2: 37000-57000 • CO 16000 • Nitrates 25-41000 • Nitrogen oxide 25-29000 • Sulfur dioxide 10000 • Sulfur dioxide (trans) 12-13000 • Suspended particulates 12-13000

39. Water pollution • Differentiated EKC evidence by pollutants • From 3400$ for nitrates to 17700$ for lead • All other pollutants (cadmium, fecal coliforms, oxygen, arsenic, sulfur dioxide…) around 8000-13000

40. Deforestation • Some studies, but: • Low data quality • Deforestation is a complex issue: many drivers play a role • Evidence for tropical countries, latin america, africa • 9000 and 8000$ for Latin america and africa in 2001..higher than most country level around 5000 • Other study 10000-12000 in 2003$ • Other evidence (Panayotou and others) find lower turning points occuring at 1000-3000$...but we recall that the environmental peak matters… • Panayotou also argues that the most dramatic impact overall occurs between 1000 and 3000 per capita (China, India, Africa...)

41. The first methodological problem for the applied analysis is how specifying the EKC functional relationship. There is no consensus on it. • Some authors use second order polynomial, others have estimated third and even forth order polynomials, comparing different specifications for relative robustness. It is worth noting that neither the quadratic nor cubic function can be considered a full realistic representation of the income-environment relationship. • The cubic implies that environmental degradation will tend to plus or minus infinity as income increases, the quadratic implies that environmental degradation could eventually tend to zero. The issue is thus highly unresolved.

42. Shobee (2004) suggests a third order polynomial specification as more realistic relationship between environmental degradation and income per capita. This supports the credence of a logistic shape, wherein environmental degradation first accelerates, then decelerates, and finally falls. • Marginal environmental degradation is thus not modelled as constant. The issue still remains highly unresolved, with the EKC hypothesis relying mainly on empirical evidence. The theoretical foundations of the EKC are still ambiguous, though some contributions have emerged (Andreoni and Levinson, 2001).

43. Third or forth level polynomial could also lead to N rather than U shaped curves, opening new problematic issues in understanding the income-environment phenomenon for policymaking. • This N shape is justified by a non-linear effect by the scale of economic activity on the environment, which is difficulty to prove. • Finally, the use of the income factor only, without quadratic and cubic terms, would collapse the EKC analysis to the basic decoupling analysis. • For a simple presentation of EKC with a discussion of the core hypothesis see De Bruyn et al. (1998) and Stern (2004).

44. The aforementioned delinking hypothesis is tested by specifying a proper reduced form usual in the EKC field (Stern, 2004). • panel data framework, where the relative fit of fixed effect and random effect models is compared by the Hausman statistic • it allows the treatment of unobserved effects..but rare.. • Cross section frame (usually OCSE, world bank data..)..endogenity issue…causality relationship…??? • The need to move the analysis from cross country to single country and regional analysis..cross country analysis may hide some EKC specificity..we just estimate mean values…no policy value..

45. The hypotheses on Delinking are thus tested by estimating a reduced form regression model (i.e. waste): • log(waste/N)= 0i + t + 1Log(Consumption/GDP) it + 2 Log(Consumption/GDP)2 it + 3 Log(Consumption/GDP)3 it + ei • Where the first two terms are intercept parameters, which vary across countries and years (in a panel frame).

46. Literature review • An extensive literature has developed since the early 90s… • Biased on emissions at macro level…good availability…but rough data..need of panel regional studies… • Let’s see and comment some key works.. • The main objective is the finding of a turning point… • …but even the presence of a demonstrated turning point may not assure a Sustainable path.. • Irreversible losses over a certain environmental impact (critical threshold) • Developed and non developed countries…may the world economy sustain the impact of a EKC path in developing countries equal to that experienced by western economies? • The problem of consequential developemnt….with scarce resources… Innovation must be transfered in order to “cut” the developing countries EKC…this is a crucial issue within Kyoto

47. List and Gallet (1999), Ecolec • Sulfur dioxide and nitrogen oxide for 1929-1994, panel data • US State level • They underline: • Evidence at US state level • The issue of “omitted variables”..when including additional explanatory variables EKC evidence changes… • State level evidence is needed..they find that states with urban areas and more densely populated show a turning point at lower income levels..more policy attention?

48. Harbaugh et al (2001), NBER paper • They also test whether EKC evidence changes when the set of explanatory factors is extended, in addition to income terms… • Policy • Country/state features (weather, pop density, industrial/rural..) • Other control variables • TRADE intensity • Evidence may change even when • the set of countries is changed • The number of years is different • They show that for SO2, smoke and total susp part. The GDP/pollution relationship is sensitive to both sample seelction and empirical specification • No EKC evidence

49. TRADE • Some authors claim that for some pollutants the EKC evidence may only imply that more polluting activities are moved to other countries  from western to developing countries

50. Markandya et al (2004), FEEM • This is a EU12 specific study using a long time series..probably the most effective way of estimating EKC • Sulfur emissions 1850-1999: top value for 9 countries during 1970-1985 • Panel analysis: • Best fir with fourth order polynomial • Two turning points: 7000$ and 25000$ (lower emissions) per capita income • Individual country analysis show different model fits and different turning points • Then, UK only to account for the effect of Acts/regulations on emissions..including a dummy in policy years..no impact