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REM 621 TOPIC 2 Sustainability and Economic Growth

REM 621 TOPIC 2 Sustainability and Economic Growth. Economic growth: What and Why?. Economic growth – continuing increases in per capita national income (GDP) There are several potential sources of growth:

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REM 621 TOPIC 2 Sustainability and Economic Growth

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  1. REM 621TOPIC 2Sustainability and Economic Growth

  2. Economic growth: What and Why? • Economic growth – continuing increases in per capita national income (GDP) • There are several potential sources of growth: • accumulation of capital (K) through net investment, or total savings less depreciation of the existing capital stock • growth in the labor force (L), from new entrants and net immigration; tends to be most important source of growth • increased resource supply (R), as resources become more available • technological progress (A), which provides for an increase in output per unit of input, ie. more can be produced with the same level of input or fewer inputs are required to produce the same output • Production function is the relationship between the levels of inputs to production and the output produced

  3. Modeling growth in the economy: Production • The aggregate production function links the amount of output produced in an economy to the inputs of factors of production and to the state of technical knowledge: Q = f (K, L, R; A) • where: Q is output of goods and services (GNP?), K is the stock of capital, L is labor supply, R is resource inputs and A is the level of technology • All of the sources of growth are accounted for here • Various mathematical forms can be used to represent the production function

  4. Why is growth considered so important? • To reduce poverty and close the gap in per capita incomes between countries → theory of convergence suggests this should happen • To reduce unevenness in the distribution of income within countries → ‘rising tide’ theory vs. redistribution • People are happier with higher levels of income → Easterlin paradox • Do these ideas hold empirically?

  5. Happiness and GDP per capita across countries

  6. The Problem of Economic Growth (Techno-pessimists) Arguments against long term economic growth • ends-based or moral arguments • means-based or biophysical arguments The main developments concern biophysical limits: • the Malthusian prognosis, for David Malthus (ca 1798) • the Club of Rome's Limits to Growth model (ca 1972) • Herman Daly's "Empty" vs. “Full” World (ca 1980s/90s)

  7. “Empty World” ECOSYSTEM ECONOMIC SYSTEM MATERIALS RECYCLING ENERGY & MATERIALS EXPLOITATION AMENITIES PRODUCTION CONSUMPTION GOODS & SERVICES ENERGY & MATERIALS EXPLOITATION ENERGY & MATERIALS WASTES ENERGY & MATERIALS WASTES AMENITIES

  8. “Full World” ECOSYSTEM ECONOMIC SYSTEM MATERIALS RECYCLING ENERGY & MATERIALS EXPLOITATION AMENITIES PRODUCTION CONSUMPTION GOODS & SERVICES AMENITIES ENERGY & MATERIALS EXPLOITATION ENERGY & MATERIALS WASTES

  9. The Counter Arguments (Techno-optimists) Julian Simon and the ultimate resource ??? Nordhaus and the World Models: substitution among production inputs and the role of “prices” Others arguments against steadfast biophysical limits: • recycling • technological change • decoupling/dematerialization Environmental Kuznets Curve (EKZ)

  10. Environmental degradation Income per capita Can growth be good for the environment? Environmental Kuznets Curve (EKC)

  11. Standard Specification for the EKC Et = b0 + b1 Yt+ b2 Yt2 + b3 Yt3 + … + cB + dt + eit Et = an environmental indicator for country i at time t Yt = per capita income for country i at time t B = a set of other explanatory variables (geographic) t = time et= error term Source: Ekins (1997)

  12. Environmental degradation Environmental degradation Environmental degradation Environmental degradation Environmental degradation Environmental degradation Income per capita Income per capita Income per capita Income per capita Income per capita Income per capita Empirical results for the EKC (Ekins 1997) True EKC = SO2, Particulates, NO2,X, CO/CO2, water quality, deforestation

  13. Human Appropriation of Terrestrial NPP (Net Primary Product in Petagrams) Source: Vitousek et al. 1986

  14. Human Appropriation of Aquatic NPP to Sustain Global Fisheries Source: Pauly & Christensen, 1995

  15. Thermodynamics and Systems • Thermodynamics is the study of energy and its conversion or transformation • Applied to the study of systems, of which three types: • Open system, where both energy and material can be exchanged • Closed system, allowing only energy to be exchanged • Isolated system, where neither energy nor material can be exchanged

  16. Laws of Thermodynamics • First Law of Thermodynamics Conservation of energy and matter; energy and matter are neither created nor destroyed but energy can be “converted” from one form to another • Second Law of Thermodynamics“Entropy law” and time’s arrow; available work that can be performed by converting energy to another form is decreasing[Entropy is the measure of energy quality or system disorder] • Importance of throughput in the economic system • Key reference is Georgescu-Roegen’s The Entropy Law and the Economic Process

  17. Thermodynamics Approach to the Economic Process Source: Daly (2004) after Georgescu-Roegen

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