European Business Environment MEB

1. European Business Environment MEB Green Economy /Clean economy for reshaping society Lecture 3: The economic and business point of view Prof.ssa Carmen Pasca and John Hey Website: http://www-users.york.ac.uk/~jdh1/ESCP/

2. The objective and plan for today Objective: to ask whether the transition to a green economy is hindered or helped by economic growth and increasing globalisation. Plan We remind you about Group Projects and their role in your assessment. We mention green business and green jobs. We ask you questions about bikes, cars, buses and pollution in Torino. We show you two films on globalisation and the green economy. We ask: is growth bad? What is cause and effect? We talk about growth and inequality. We discuss economic incentives to go green. We go to the computer lab and do two relevant experiments We mention the Stern review. We discuss discounting. We discuss possible economic/business solutions to the brown economy. We conclude.

3. Suggestions for Group Projects Do remember that 50% of the assessment is through class participation and Group Projects. A group project should be three or four pages. If it is a business case study you should construct the business case. One possible source of group projects is the following three: Nike Walmart Shell You will see that there are different business reasons in each case for going green: Marketing, Image, Profits, Legislation. Alternatively see the next slide...

4. Suggestions for Group Projects Do remember that 50% of the assessment is through class participation and Group Projects. Let us repeat our advice about this. In the definitive text Environmental and Natural Resource Economics by Tom Tietenberg (right) and Lynn Lewis (Pearson 2012) there are lots of case studies, called by them ‘Examples’. Each of them has a brief description of the example (from which you can decide whether they are interesting or not) and there are usually references which you can follow up. You can go directly to Tietenberg’s Sustainable Developments Case Studies page which provides a whole host of examples. We would suggest that you glance through these examples and the three on the previous slide, select one (or one of your own) and get our approval. Then prepare a 30-minute presentation and be prepared for a question and answer session afterwards. These presentations are scheduled for the 11th of June 2013. You should also prepare a 3-4 page overview and hand that in.

5. Green business and green jobs • Are there business opportunities in going green? • Let us look at the video “What are Green Jobs? – closed captioned”. (4.11) • And how about Green Jobs 101? (6.51) • This is what CNN(3.24) thinks. • For the ILO “the notion of green jobs summarizes the transformation of economies, enterprises, workplaces and labour markets into a sustainable, low-carbon economy providing decent work. But much needed innovative strategies to promote green jobs can only succeed with the full involvement and participation of workers and enterprises. Green jobs are decent jobs that: • Reduce consumption of energy and raw materials • Limit greenhouse gas emissions • Minimize waste and pollution • Protect and restore ecosystems”

6. Lecture 2

7. Some cynicism

8. A synthesis Some would argue that the transition to a Green Economy requires growth. We need extra resources to feed a growing population and to invest in green production methods. Others would argue that growth (and certainly that of the type we are currently witnessing) is hindering the transition to a Green Economy. The world is getting increasingly divided into the rich and the poor – because of the type of growth that we have – with the resources of the poor countries being plundered by the rich and their countries polluted with waste from the rich. The rich are getting obese and unnecessarily squandering resources. The poor are forced to destroy their natural habitat with land becoming increasingly unproductive.

9. Some questions for you In big cities like Torino, you have to pay for parking in the city centre. Buses are subsidised by the city council. There is a bike hiring system [TO]BIKE, which you have to pay for. Why? Are these green measures? Or economic? Or social – from the rich to the poor? If they are green measures, why are the buses old and polluting? Why does the council not replace them with electric buses or buses that pollute less? Why not ban cars? Why do they charge for the hire of bicycles? Who pays? Is there pollution in Torino? Are there business opportunities here? Let us have a brief discussion now and pursue it later.

10. Two films The first film(10.02), produced by the Foundation GoodPlanet, and co-funded by the UNEP (United Nations Environment Programme), UNIDO (United Nations Industrial Development Organisation) and AFC (Agence Francais de Developpmente) highlights some of the economic issues. The message of this is that we need more international agreements and co-operation. But this second film(4.22), produced by MyGreenGlobe, suggests that it is all to do with the take-up of existing opportunities by entrepreneurs. These highlight the differences between the Market Liberals, the Institutionalists, the Bioenvironmentalists and the Social Greens.

11. Is growth bad? Some argue that growth is necessary and beneficial; it is needed because of rising population and people expect it; it is beneficial because it makes people happier. Maybe, but let us first look at two main problems of growth, one concerned with inputs and the other with outputs (from production): Certain natural resources are declining and may run out soon Pollution is increasing and is causing problems. What do market liberals say? As far as declining natural resources are concerned, they argue that as resources decline, they will increase in price and firms will naturally look for cheaper/more efficient input sources. As far as pollution is concerned, they admit that this is probably a sign of market failure – which can be fixed by appropriate action.

12. Declining natural resources Market liberals say that the prices of these natural resources will increase as they become scarcer and producers will have the incentive to find alternatives. This may be true if producers pay the ‘correct’ price for these natural resources. But what about water? Fresh air? What is the correct price for knocking down a tree? Should it include replanting a tree for every tree knocked down? What is the correct price for fishing? Who should it be paid to? And should fish stocks be replaced by the fishermen? Institutionalists say that government action is required. Bioenvironmentalists say that we should worry about the knock-on effects. Social Greens say that the destruction of natural resources is displacing people, and changing their social and environmental life. Can we achieve a balance amongst these views?

13. Increasing pollution Here market liberals may grudgingly admit that it is an example of market failure and some intervention is necessary: Charging for pollution (costly – and to whom is it to be paid?) Licences; regulation; user fees etc. May not eliminate the pollution (can it?) but reduces it and the polluter pays (to someone). Institutionalists agree that some institution of some kind should intervene. Bioenvironmentalists would say that this type of intervention is too narrow and ignores the knock-on effects of pollution. Social greens would argue that the market liberals solution might solve at best the economic impact and not the social impact. However some market liberals might go as far as arguing that it will solve itself.

14. The environmental Kuznets curve “The problem solves itself in time.” This classic graph to the right shows what happened to sulphur emissions. But be careful in interpreting this graph. It is not through time, and even though it suggests that emissions fall with GDP, the interesting question is “why?” Was it endogenous or was it caused by institutional intervention of some kind? And it does not always hold….

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16. Let us pursue the market liberal approach Market liberals would argue that business has a natural incentive to pursue greenness and sustainability, and that we can leave the problems to the market. Part of this concerns production and part concerns sales. They would argue that green production is or will become cheaper and hence firms have an incentive to go green However they admit that free pollution (firms to not have to pay for their effluents) is a problem. We shall explore this in an online game shortly. They would also argue that demand for green and sustainable products is growing – as a result of public awareness (and advertising). What do you think about this? And what do you think about this video(5.11) – describing a Green home (that apparently costs no more than a non-green home – do you believe that?) If you are interested you could buy and play the Green Economy Board Game(3.52) (in which players have to make money, create jobs and solve some environmental problems. Or this more complicated game – which takes too long to play. Or this.

17. Globalisation, growth and equality Jagdish Bhagwati, termed by Clapp and Dauvergne a market liberal talks, for and against globalisation(4.49). One thing that is missing is the effect of growth on global inequality. Bad in the US, worse elsewhere.

18. Growth and inequality across the globe While GDP is growing, so is inequality… The Gini coefficient is a measure of income inequality – the bigger the more unequal.

19. Inequality The rich are very rich and the poor (relatively) relatively poor

20. Global trends The world’s richest countries are increasingly locating their production in underdeveloped or developing countries… …are exploiting the local workers with low wages and bad working conditions. They are increasingly taking their energy resources from poor countries. And are increasingly dumping their waste products in poor countries. In many poor countries agriculture is becoming increasingly unsustainable and the environment is being damaged. As a consequence the rich are getting richer and the poor poorer.

21. A vicious circle This is what is happening in many poor countries – particularly sub-Saharan Africa

22. A break Let us take a break here and go to the computer lab and experience two experiments: one on Public Goods (which has something to tell us about whether we need public intervention) and the other on ‘The Tragedy of the Commons’ (which might tell us something about the form any public intervention should take). In the computer lab, take a seat at an individual terminal and go to http://veconlab.econ.virginia.edu/ and then click on ‘Login as participant’. On the next screen you should click on ‘Login’ and wait for further instructions. While doing these experiments, you should take decisions individually – with the intention of maximising your own (imaginary*) profits/payment – and not talk to your fellow students. *We are not actually going to pay you but we would in a real experiment.

23. The Stern Review Published in 2006, it follows up the idea that markets by themselves cannot solve the problem of climate change (which we have just seen in the experiment?) The Review proposed that 1% of global GDP per annum is required to be invested in order to avoid the worst effects of climate change, and that the cost of not doing this is a possible 20% loss of GDP in the future. In 2008 he revised the 1% figure up to 2%. The Review noted that “The benefits of strong, early action on climate change outweigh the costs” and that “There is still time to avoid the worst impacts of climate change if strong collective action starts now.” What about discounting? Let us look at this on the next slide.

24. Discounting A crucial part of any economic or business plan that extends over a period of time is that connected with discounting. If costs are incurred and benefits accrued at different points of time, one needs to know how to compare them. For example, is an investment which costs $1m today and yields a return of $1m in 25 years time (both figures in real terms) worthwhile? Usually economists discount future amounts of money (why? because we care more about the present). Is that appropriate for climate change: if our children’s children starve to death in 50 years time because we have destroyed resources, is that what we want? Stern used a (real) discount rate of 1.4%. Others (for example, Nordhaus) argued that he ‘should have’’ used a rate of up to 3%. What do you think?Are these economic issues, or ones of social justice?

25. Roemer and intergenerational justice Intergenerational justice would require more realistic assumption: one particular view is what Roemer calls the "sustainabilitarian" approach, which seeks to maximise present consumption subject to the constraint that future generations enjoy a quality of life at least as good as that enjoyed by the current generation. Are these economic issues? But Stern’s report was calling for international cooperation to halt the decline in the globe’s capacity. He was sceptical that markets would solve the problems. Let us revisit the two main problems: Natural (particularly energy) resources becoming depleted – some irreplaceable, some substitutable. Pollution and environmental degradation increasing. Once again the solution depends upon your world view. I personally think...

26. Natural resources becoming exhausted We have already discussed some of this. This is something where market forces may work. As resources get exhausted, their price should go up (unless subsidised by government or not priced) and therefore there is a natural tendency for business to seek new resources. The problem is if there is no price. For example, fish. But market liberals think that business will help us go green: the world is full of business opportunities(4.12). Some think that there are lots of green jobs(6.52) out there.

27. Global pollution Global pollution is increasing at a frightening rate: Chinese seas(1.10) are increasingly polluted. Also Chinese air(2.46). But it is not just China. It is a global(3.29) problem. Note that some of these incidents led to international action. Note too that it is the poorest and most vulnerable that are most at risk. A sign of market failure. Can we however solve the problem through markets? With appropriate taxes, legislation. Does business have a role to play? Here is an argument put forward by the Nobel Prize Winner Milton Friedman about solutions to market failure. Do you agree with it?

28. Our personal conclusions We think that markets and business could solve the problem of declining natural resources and profitably invent new sources of energy. However we feel that more national involvement and international co-operation is necessary to eradicate pollutants and other public bads. Socially we feel that there needs to be more re-distribution between the rich and the poor, not only in nations but also internationally. Growth is neither necessarily a bad or necessarily a good – it depends upon the way it is used.

29. Lecture 3 • Arrivederci 29