Economic Returns from the Biosphere

1. Economic Returns from the Biosphere Pegram Lectures Brookhaven National Laboratories Graciela Chichilnisky UNESCO Chair in Mathematics and Economics Columbia University Program on Information and Resources Columbia University

2. Program on Information and ResourcesColumbia University Program on Information and Resources Columbia University

3. Human beings, or their close genetic relatives, have lived on Earth for several million yearsYet only recently has human activity reached levels at which it can affect fundamental natural processes • the concentration of gases in the atmosphere (CO2, Ozone) • the planet’s water mass • The complex web of species which constitute life on earth Program on Information and Resources Columbia University

4. Changes in global atmospheric composition Sources: Fossil Fuel Consumption Forest Burning The Facts - Trace Gas Concentrations are increasing Refrigerants Foam Blowing Solvents Rice Paddies Marshlands Cattle Source: World Resources Institute, 2002 Program on Information and Resources Columbia University

5. Program on Information and Resources Columbia University

6. Source:National Oceanic and Atmospheric Administration (NOAA). US Department of Commerce. http://www.noaa.gov/ Program on Information and Resources Columbia University

7. Policy responses • 1992 Rio targets: roll back industrial countries emission to 1990 levels by 2000 • Since then emissions have increased • Little progress has been achieved Program on Information and Resources Columbia University

8. Source:National Oceanic and Atmospheric Administration (NOAA). US Department of Commerce. http://www.noaa.gov/ Program on Information and Resources Columbia University

9. Sources:“A timeline of climate change” Matthew Knight, CNN science, 14, May 2008. http://www.cnn.com/2008/TECH/science/03/31/Intro.timeline/index.html (the rest came from G. Chichilnisky directly). Program on Information and Resources Columbia University

10. How to achieve the Rio targets?Proposals: • Global carbon taxes (OECD Study, 1993 – 4 • Global markets for carbon emission permits (Chichilnisky, 1993: proposal to OECD, to UN Framework Convention on Climate Change, Chair R. Estrada-Oyuela, and to World Bank 1995 Program on Information and Resources Columbia University

11. 1995 Berlin Mandate • Negotiate Protocol to quantify limitations by industrial countries, e.g. in 2000, 2010, 2020 • Joint implementations pilot • Prelude to emissions trading Program on Information and Resources Columbia University

12. Geneva: June 1996 • U.S. Tim Wirth proposes global emission markets Program on Information and Resources Columbia University

13. ● In 1996, the IPCC reported that human induced emissions of carbon have a discernible effect on climate● Scientific uncertainty persists● But the risk of climate change is real and potentially catastrophic Program on Information and Resources Columbia University

14. Kyoto: 1997 • 166 nations accepted our emissions market proposal to UNFCCC The Kyoto Protocol Program on Information and Resources Columbia University

15. Kyoto set 5% emission reductions for Annex 1 countries by 2008-2012 and created three facilitating mechanisms to achieve this Program on Information and Resources Columbia University

16. The Kyoto Protocol sets caps on CO2 emissions, and allows industrial nations to trade the rights to emit Program on Information and Resources Columbia University

17. Facilitating mechanisms for Annex 1 countries: • Joint implementation (article 6) • Emission trading (article 17) See also art 3.10 and 3.11 Program on Information and Resources Columbia University

18. Only one mechanism involves both industrial and developing countries:CLEAN DEVELOPMENT MECHANISM(ARTICLE 12) Program on Information and Resources Columbia University

19. 1993 BUENOS AIRES COP4Set 2 year deadline for completing the KYOTO AGENDA Program on Information and Resources Columbia University

20. The Kyoto Protocol sets caps on CO2 emissions, and allows industrial nations to trade the rights to emit Program on Information and Resources Columbia University

21. TODAY The profits obtained are the same for a Ford factory that produces cars in China using dirty technology or clean technology Program on Information and Resources Columbia University

22. BALI - COP 13: The Bali RoadmapCOPENHAGEN COP15Reducing the U.S. – China impasseA NEW COLD WAR? Program on Information and Resources Columbia University

23. Three outstanding issues for implementation of the Kyoto Protocol: • Opposition from the private sector • Developing countries do not participate in emissions limits • U.S.-China impasse: A new Cold War? Program on Information and Resources Columbia University

24. Both issues arise from fears that emissions limits will interfere with economic growth and the rise in standards of living Program on Information and Resources Columbia University

25. How to cut the link between emissions and economic growth?Only new clean technologies can achieve this Program on Information and Resources Columbia University

26. New technology requires appropriate economic conditions to be implemented. Resource prices are key Program on Information and Resources Columbia University

27. Prices have an impact A much-quoted statistic on this subject is that the amount of energy used in producing $1000-worth of constant-dollar GNP in the USA fell by 38.9% from 1973 to 1983. This was a result of switching to more energy-efficient technologies, and mostly of demand patterns changing away from energy intensive products and services. Most of this striking drop in energy use occurred in the period 1979-1983. Program on Information and Resources Columbia University

28. New Technologies(fuel cells, solar)seem uncompetitive because of excessively low resource pricesIn real terms, oil prices are the lowest ever today Program on Information and Resources Columbia University

29. Through clean technologies, developing countries can “leapfrog”, without repeating the resource-intensive growth that characterizes industrial countries Program on Information and Resources Columbia University

30. Technology transfers and emissions trading Today there is no incentive for a USA corporation to set plants in developing countries using modern, clean technology Program on Information and Resources Columbia University

31. EMISSIONS MARKETS Change all this They reward the transfers of clean technology How? Program on Information and Resources Columbia University

32. If Ford is allocated permits for clean car technology corresponding to the emissions saved, it can cash these permits in the emissions market Program on Information and Resources Columbia University

33. Markets for Emission Permits Annex 1 Countries are given allocations of property rights on emissions summing up to a 5% reduction, and they can trade these freely among themselves Program on Information and Resources Columbia University

34. EXAMPLES • The trading of SO2 in the Chicago Board of Trade since 1993, following the Clean Air Act • Proposed Water Markets in California Program on Information and Resources Columbia University

35. Biodiversity and Markets for emissions permits Deforestation is the source of approximately 20% of global greenhouse gas emissions. Science has shown that forests act as “sinks” retaining large amounts of carbon and absorbing large quantities of carbon dioxide Program on Information and Resources Columbia University

36. Biodiversity and Markets for emissions permits The Bolivian government has added 2.1 million acres of tropical forest land to the Noel Kempff Mercado National Park, essentially doubling its size. By investing in the protection of this area, three U.S. corporations, American Electric Power, BP America and Pacific Corp., and the Bolivian government will receive carbon offset credits. These credits could have significant market value, should a trading system develop as a result of international negotiations stemming from the December 1997 Kyoto conference on climate change Program on Information and Resources Columbia University

37. Market Innovation New Markets are created, which trade property rights on the use of the Global Commons Program on Information and Resources Columbia University

38. The Emergence of Global Environmental Markets The Kyoto Protocol Program on Information and Resources Columbia University

39. Financial Innovation Offers A Solution • New York purchased conservation land in the Catskills • The $660 million purchase was paid by selling an environmental bond • New York saved $3.34 billion by conserving the watershed Program on Information and Resources Columbia University

40. Financial instruments to preserve and realize the value of watersheds • For decades the water of New York is purified by micro-organisms in the Catskill soil • Their survival is threatened today by pesticides and fertilizers • A $6 billion purification plant would be needed if they disappeared • Trading an innovative environmental bond, New York purchased conservation land for $680 million in the Catskills, thus avoiding the cost of the plant Program on Information and Resources Columbia University

41. The watershed problem is global • The value of watershed services to major cities across the world is estimated at $900 billion • One can securitize watershed services through innovative financial instruments Program on Information and Resources Columbia University

42. SECURITIZATION • Form corporation to manage conservation • Corporation owns the cost savings from conserving watershed • Finance conservation by selling shares • Local community and state should own shares Program on Information and Resources Columbia University

43. Increased knowledge can helpHow?It can lead to: • Better understanding of natural risks and how to manage them (El Nino and catastrophic bundles) • Better understanding of human impacts on nature and of new courses of action (watersheds and environmental bonds Program on Information and Resources Columbia University

44. Markets are widely used institutionsThey are decentralized, and can be efficient.But global environmental markets trade unusual goods: privately produced public goods● Biodiversity is one● The planet’s atmosphere is another Program on Information and Resources Columbia University

45. Environmental assets are often public goods • CO2 concentration in the atmosphere is a quintessential public good because it mixes very thoroughly throughout the planet and is very stable (remains about 100 years) • It is not a typical public good because it is not produced by the government such as defense • CO2 is privately produced Program on Information and Resources Columbia University

46. Public goods change mattersNew Economic Findings • Only certain allocations of property rights on the atmosphere between countries will yield efficient market solutions • This ties together the goals of efficiency and fairness: • The aspirations of North and South Program on Information and Resources Columbia University

47. Privately produced public goods • are goods which are not “rival” in consumption, but are privately produced • we all produce emissions but the atmosphere is the same for us all Program on Information and Resources Columbia University

48. First Theorem of Welfare EconomicsThe allocation resulting from a competitive market equilibrium with private goods is Pareto efficient (Arrow, 1950) • This theorem is independent of the distribution of property rights. For example: all but two traders may have zero endowments of property rights and the resulting equilibrium is still Pareto efficient. Program on Information and Resources Columbia University

49. But it requires all traded goods to be private goods, with rival consumption, and privately owned. Program on Information and Resources Columbia University

50. Markets with PPP goods are different from standard marketsIn private goods markets, efficiency and fairness are separate conceptsIn markets with privately produced public (PPP) goods these two concepts are linked Program on Information and Resources Columbia University