Chapter 12

1. Chapter 12 The Environment and Sustainable Development in Asia

2. Introduction • Environmental problems in Asia include the deterioration of natural treasures at a dramatic rate • Other problems include air pollution, contaminated rivers and reckless disposal of hazardous wastes • Economic implications of these problems include a reduction in the pace of economic development through: • Reduced productivity of resources • Health related expenses

3. Life Support Waste Sink Raw Materials Aesthetic Services The Natural Environment The Economic System Firms Factor Market Goods Market Households Introduction

4. The Market of an Environmental Good Costs/Benefits $ S, MC D, MB Q (units of resource) Q* Environmental Degradation: A Source of Market Failure

5. The Market of an Environmental Good • Q* is the most efficient level of output since: • Marginal benefit (MB) = Marginal cost (MC) of providing the good, • Producers and consumers gains are maximized from the exchange. • Coase Theorem

6. Coase theorem says that a market for a public good can be created. • The market will determine the price of a public good based on the marginal social cost and the marginal social benefit. • By incorporating the environmental damage into the pricing structure of public goods markets can determine a social optimum. • Government intervention is not needed. • The Coase theorem can work in many cases but not in others.

7. What is Market Failure? • Market failure is: • In the environmental sense, when the market determined price and output levels of environmental goods are not efficient • In other words, there is a disparity between MSC and MPC or MSB and MPB for a market at Q* level of production

8. Market Failure An Example of Market Failure S, (MSC) Costs/Benefits $ S, (MPC) D, MB Q (units of resource) Q1 Q*

9. Externalities • Externalities is one of the major sources of market failure • It refers to costs incurred or benefits gained by a third party from an exchange of good or service • It brings about a disparity between MSC and MPC from production activity • For e.g. river pollution by industrial producer induces MSC > MPC • It brings about a disparity between MSB and MPB from consumption activity • For e.g. immunization induces MSB > MPB

10. Externalities & Property Rights • Property rights defines owner’s rights to use a resource • It can be vested with individuals or a state • Externalities often arise because of improperly designed or inadequate property rights systems • Thus adequate property rights are essential to the society’s efficient use of natural resources

11. Externalities & Property Rights • Efficient resource allocation in a market economy depends on 4 basic characteristics of property rights: • Privately owned resources • Exclusivity – prevents non-owners from gettingany benefits from the resource • Transferability – property rights can be transferred from one part to another • Enforceability – the resource can’t be seized by someone else.

12. Externalities & Property Rights • Property rights cannot be easily implemented for: • Open-access resources -resource • Fore.g. air, rivers and seas. • Public goods – goods that, once provided, can not exclude users • Fore.g. community parks, defense, roads, light house • They have indivisible and non-exclusive nature, and this results in the free rider problem

13. Approaches to Correct Externalities • Three broad approaches taken by the government to correct externalities: • Public Education • Command and Control Regulations • Economic Incentives

14. Approaches to Correct Externalities (Public Education) • True costs of environmental degradation are unknown due to imperfect information failures • Public education to influence public behavior via moral suasion and direct mitigation of environmental market

15. Approaches to Correct Externalities (Regulations) • Direct controls: • Restrict behaviours of individuals • Include specific laws and rules and regulations • Penalties apply if these are violated. • Command and control regulations: • Restrictions on inputs and output • Effective if the polluters are easily identified

16. Approaches to Correct Externalities (Economic Incentives) • Economic incentives • Matches individual self-interest with the interest of the wider society via pollution taxes, pollution subsidies, market permits, deposit-refund system, bonding and liability systems • Taxation forces firms and households to internalize the external cost and reduce cost • Tax revenue earned can be used to fund environmental programs and compensate the affected party • Effective if polluters are highly responsive to taxes

17. Approaches to Correct Externalities (Economic Incentives) • Marketable permits: • Allows holders to harvest resources up to a limit; or • Grants license to pollute the environment to a certain specific amount • It provides firms incentives to make their production process more environmentally friendly • Provide buyers and sellers a choice, unlike regulations

18. Economic Incentives • Marketable permits use markets to regulate pollution by raising the price of products that pollute to equate marginal social cost with marginal social benefit. • They also presume that there is a level of pollution that is acceptable. • Marketable permits then can be sold by one polluter to another to reflect the costs of pollution. • A high polluter can buy permits from a low polluter, thereby raising his costs and lowering the costs of the low polluter. • This provides an incentive in the long run for best practice firms low polluting firms to prevail over polluting firms

19. Developing Countries & Natural Resources • 2 important factors contributing to environmental degradation in developing countries are: • High incidence of poverty; and • Population growth

20. Developing Countries & Natural Resources: Asia • Rich endowment of resources • 2nd largest rain forest • More than 50% of world’s coral reefs • 17% of important wetlands • Rapid development in the region puts these at risk

21. Fresh Water Resources in Asia • Fresh water resources in Asia have been worst hit by rapid economic and population growth • It has the highest rate of fresh water withdrawals in the world • This results in an inadequate supply of clean water

22. Fresh Water Resources in Asia • Asia has the lowest per capita availability of freshwater • This adversely affects people’s health conditions and lower productivity levels • Irrigation problems are also experienced • There is severe shortage of safe water particularly in South and Southeast Asia

23. Air Quality in Asia • Air quality in Asia is ranked among the world’s most polluted • Rapid and unplanned urbanization has increased air pollution • Transportation is the major source of air pollution in most Asian cities • E.g. Bangkok, Beijing, Delhi, Tokyo etc

24. Air Quality in Asia • Other causes of air pollution include the burning of fossil fuels in: • Domestic heating • Power generation • Industrial processes • Asia has a heavy dependence on carbon-intensive fuels and is a big consumer of wood fuels as well as coal

25. Carbon and global warming • When burned coal is the biggest source of carbon dioxide and also a source of methane which is 10 times as damaging to the environment in terms of raising air temperatures (global warming) • China and India are the worlds largest consumers of coal. • China recently surpassed the US as the biggest emitter of carbon dioxide. • Scientists are working on how to reduce the CO2 emissions from coal by sequestering the carbon dioxide underground. • They are also working on using other fuels. • Oil is the second biggest polluter after coal

26. Global warming • China produces twice as much coal as the US and consumes about twice as much as the US. • There are hundreds of new power plants being commissioned in China every year. • Most of them are not using most modern equipment to get rid of sulphur and fly ash byproducts. • As a result pollution levels are high and also respiratory illness.

27. Land and Forest in Asia • Asia has lost 72% of over 15 million sq. km of original forest • Main losses are due to: • Commercial logging • Agriculture • Settlement demand by the rapid growing population

28. Land and Forest in Asia • Most severely hit countries include: • Bangladesh • India • Philippines • Sri Lanka • Vietnam • Only a mere 6% of the remaining forests are frontier forests, found in islands of Borneo, Sumatra, Sulawesi and Irian Jaya

29. Protecting the Environment (Policy Implications) • Owing to the presence of market failure, government intervention is necessary to stop environmental degradation • Policy instruments available include: • Command and Control Policies • Economic Incentives • Clarity of Property Rights • Phasing out Subsidies • Improving Institutional Capacity

30. Protecting the Environment (Policy Implications) • Command and control policies are popular approaches especially in cases where: • Monitoring costs are high – e.g littering, toxic waste • Zero level emissions is best • During emergencies Economic incentives are generally preferable to command and control policies

31. Protecting the Environment (Policy Implications) • Other policy instruments such as clarity of property rights are not easily implemented for open access resources • It is also more relevant for countries where tenanted farming is still in place

32. Protecting the Environment (Policy Implications) • Phasing out subsidies reduces overuse of natural resources and improve the allocation of resources. This includes reduced subsidies to energy production, logging, fishing and water. • Improving institutional capacity involves taking a decentralized approach to environmental policy implementation • It also stresses partnership with the private sector, NGOs and local communities

33. Water Availability in Asia • Water stress is getting worse in Asia • Water stress is encountered when the amount of fresh water per capita falls below 1700 cubic meters per year. • South Asia is sometimes coming close to that level. • Pricing needs to reflect the costs of water. • Irrigation water should be better regulated and priced. • Urban water systems recover only about 35 percent of costs. • Less than half of Asia’s population has access to sanitation and clean water.

34. Aquatic Resources • Over fishing is widespread. • Subsidies to fishermen to build and maintain bigger boats is counterproductive. • Destruction of natural habitats on sea coast such as mangrove raises risks of flooding and high tides as well as Tsunamis. • Pollution also increases the risk of red time – algae that poisons shellfish. • Coral reefs also bleached by warmer water associated with global warming.

35. Air Quality • Coal has already been mentioned. • Wood burning by the poor for cooking also contributes. • Fires from burning straw after harvest – a policy followed in Malaysia and Indonesia has caused a sharp deterioration in air quality and an increase in respiratory disease. • Mercury concentrations as well as lead (in leaded gasoline) , cadmium are spread to fish through air pollution. • Sulfur dioxide levels are also high.

36. Damage from water pollution • Arsenic poisoning responsible for many deaths in Asia – Bangladesh in particular. • Water borne diseases like malaria, intestinal problems affect billions of people (4 billion cases of diarrhea, 2 billion people at risk from malaria) • Disability Adjusted Life Years (DALY) is a way of measuring economic loss from illness caused by environment. • 42% of DALY is due to water pollution and inadequate sanitation. • Environmental clean up has secondary benefits for the poor who are more likely to be affected by water pollution.

37. Costs of global warming • Cost of global warming so far is modest. • Ultimate cost will depend on sea level rise. • A one meter rise would flood parts of China, Bangladesh and India as well as low lying areas of Thailand. • Science is still not clear how much sea will rise and when. • Extreme weather patterns are predicted to increase. • Earth is in a warming cycle now and will be for the foreseeable future.

38. Energy • Asia will account for the bulk of increase in energy use over the next two decades. • Need more public transport in India and China • More fuel efficient and less polluting cars in Asia. • Replace coal burning into coal gasification (Integrated gasification combined combusion or IGCC) • IGCC allows separation of mercury and sulfur and easy disposal. • So far India and China not adopting this approach. • There are still energy subsidies in China.

39. Energy • Alternative energy sources are not going to help much. • Ethanol raises prices of food and causes substitution of production from ethanol producers to other countries that may be more polluting. • Nuclear, tidal power, solar, geothermal can’t supply much. • Long run hope is fusion. • Even with new technology OECD projects fossil fuels will supply 77 percent of global primary energy needs by 2030 down from 81 percent with no change in technology.

40. Technology • Is there a magic bullet in the long run to substitute for coal, oil and natural gas? • Genetically modified crops can save on water and artificial fertilizers. • Nuclear power can provide some help but capacity in India and China is very low. • It will increase a lot in next twenty years but so will demand (see Table 6.5 in book) • Solar power not a major source in Asia outside of Japan.

41. Technology and Global Warming • Table 6.3 shows the pattern of climate change historically and shows we are still in a very cold phase of earth’s climate experience. • There are also nonlinear changes that could make climate change accelerate. • Amount of carbon dioxide released by invertebrates and microbes is 10 times higher than the level of carbon emission from fossil fuels. • Soil hold more carbon than trees and atmosphere combined. • Disruptions in the carbon cycle in soil could result in greater acceleration in global warming.

42. Technology and Global Warming • Adopt policies that encourage super externalities such as

43. Gore Socolow Pacala • More efficient use of electricity in heating, cooling, lighting, running of appliances • Better building design • More efficient automobiles • More efficient trucks, mass transit. • Wind and biofuels • Capture and storage of carbon.

44. A Solar energy alternative • Install solar panels in deserts throughout the world. These include Southwest of US, Gobi and Sahara deserts, Argentina, Chile and Peru. • The energy generated during the day can be stored as compressed air and then released on demand. • Storage in salt an alternative but seems more risky because of corrusion. • Energy sent from the solar cells through high-voltage DC lines to storage facilities throughout each individual country.

45. A Solar Energy Alternative • These facilities would be similar to existing storage facilities for natural gas. • Such a system has been described for the United States in January 2008 Scientific American. • System would require some natural gas to help power the turbines that generate electricity.

46. Thermostats to control use • Economists suggest thermostats that give a better picture of energy usage. • Book that details this is called Nudge, by Richard Thaler and Cass Sunstein. • These would include red lights that indicate high usage and comparisons with others in the neighborhood. • High users would follow more efficient use of energy. • Also will show trade offs in life style choices – car emissions not offset by recycling, postponing long air flights could save more than substituting a Prius for a Hummer.

47. Global agreements • Kyoto Protocol agrees to cut greenhouse gases by 5.2 percent by 2012 from 1990 levels. • Signed by 141 countries not including US and Australia, who didn’t ratify the treaty. • India and China are exempt although they did sign. • Pollution rights can be purchased through a trading system. • Industrial countries buy rights from poorer countries. • Unclear whether the transfer of resources to poor countries will do anything for global compliance.

48. Time delays and environmental management • Ecological changes take time to manifest and to understand. • Mercury poisoning is an example – working up through the food chain. • Nonlinear and irreversible changes possible –great barrier reef, crown of thorns starfish and Giant Briton shellfish. • Aging of the global population could reduce human impact on environment. • Older people live in smaller more dense spaces, consume less, drive less etc

49. Ecological footprint • Ecological footprint is a measure of total area required to produce food and other products plus area required to dispose of waste and construct infrastructure. • Footprint compared with biocapacity, which is drawn down by consuming resources. • Keep global biocapacity by reducing toxic chemicals, soil erosion, protecting wetlands, watersheds, forests and fisheries. • Increase technology investment to improve efficiency of resource use.

50. Ecological footprint • Reduce consumption of luxury goods. • Reduce rate of population growth. • Good to reduce footprint and raise human development index. • US footprint is huge, more than twice that of nearest country, Japan see Table 6.11 in textbook and on next page