Carbon tax

1. Carbon tax • To promote a major shift away from fossil fuels, a much larger tax would be needed. According to one study, a carbon tax in the range of $200/ton would be required to stabilize global CO2 emissions  double price of oil; 4x price of coal. • Is it politically feasible? How to make it so? • First, the revenues from such taxes could be used to lower other taxes – a tax-shift; revenue-neutral • if such a tax shift did take place, individuals or businesses whose operations were more energy-efficient would actually save money

2. Another policy: tradable permits • How does it work? You tell me 

3. Project: Part 1 • By now: • Each team to submit: • Product chosen • Market price • Location of market price identified • Location of producer (or producers) • Brief discussion of importance of this product in Lebanon’s agricultural production [yes, research needed] • Properly written

4. Homework #1 • How manageable and practical do you think an international market for trading emissions of CO2 would be? What major obstacles to a smooth functioning of such a market could you foresee? What would be the advantages of such a market if it worked? • By Tuesday • A paper – in which you answer those questions

5. Redefining national income and wealth • What is GNP/GDP? • GDP can be characterized as a (rough) measure of the amount of “throughput” going on in an economy—as measuring the level of activity whose purpose it is to turn renewable and non-renewable resources into new products. How does “throughput” relate to sustainable well-being? Is more “throughput” always a good thing? • Two broad categories of human activities: • Those rewarded by a payment – a monetary flow • Those which aren’t rewarded by a monetary flow • Not included in GDP/GNP

7. Factors of production • Land • term which is used by economists to represent all natural resources used in economic production, including soils, water, forests, species, minerals, fossil fuels, and other such resources. • Labor • Capital • What we typically call ‘capital’ is ‘manufactured capital’ • Natural capital: all natural resources + environmental health are included • Human capital: the value of the knowledge and skills of people.

11. GDP/GNP • GDP includes monetary flows which correspond to a decrease in well-being • How can economists deal with monetary flows which not only do not increase well-being but may even decrease it? • One approach is to measure defensive expenditures made to eliminate, mitigate or avoid damages caused by other economic activity. • GDP neglects the depreciation of natural capital • GDP can be measured as the sum of the domestic value added in all sectors of the economy • This process of wearing out, repairing, and replacing capital is taken into account by measuring the depreciation of manufactured capital. If we subtract an estimate of manufactured capital depreciation from gross domestic product, we obtain net domestic product (NDP) • NDP = GDP – depreciation of manufactured capital

12. NDP • If we had high short-term consumption but allowed all our capital stock to wear out without replacement, measured GDP would give an erroneously positive impression of how well we were doing economically. NDP would be a better measure since it would show the negative effects of the loss of productive capital. • NDP: - applies only to manufactured capital • What about natural capital? • The process of production uses up nonrenewable natural resources such as coal, oil, and minerals. Often renewable natural resources such as productive soils, forests, and fisheries are also depleted or damaged through over-use. And wastes and pollution

13. Alternatives to GDP • net domestic product is obtained by subtracting depreciation of manufactured capital from GDP. • Further adjusting GDP to account for the depreciation of natural capital yields environmentally-adjusted net domestic product (EDP): EDP = GDP – depreciation of manufactured capital – depreciation of natural capital • requires a monetary estimate for the depreciation of natural capital. • considers how much a nation is saving for the future • The World Bank’s genuine saving measure (S*) adds a social and environmental element to national saving rates. A nation’s genuine saving rate is calculated as: • S* = gross domestic saving – produced capital depreciation + education expenditures – depletion of natural resources – pollution damage

15. Movie this thursday

16. Homework #1 • How manageable and practical do you think an international market for trading emissions of CO2 would be? What major obstacles to a smooth functioning of such a market could you foresee? What would be the advantages of such a market if it worked? • By Tuesday – due today • A paper – in which you answer those questions

17. By Thursday – March 17 • Develop a blog • Blogspot.com • Wordpress.com • Develop questions – methodology – for your project And • Bring relevant news/journal articles with you Thursday and include them on your blog

18. Natural Capital “We treat the earth like a business in liquidation.” Herman Daly Opportunity cost. Loss is not counted.

19. How to “account”? Economies are based on natural capital (physical assets provided by nature), manufactured capital (physical assets generated by human productive activities applied to natural capital), social capital (trust, mutual understanding, shared values, and socially held knowledge) and human capital (people’s capacity for labor and their individual knowledge and skills). Only the value of manufactured capital (structures and equipment)--and recently, software--is estimated in the current national accounts. Can you think of ways that the stocks of natural, social, and human capital might be measured? What kind of information would be needed?

20. “accounting” • Resource functions: the natural environment provides natural resources that are inputs into human production processes. • Environmental service functions: the natural environment provides the basic habitat of clean air, drinkable water, and suitable climate that directly support all forms of life on the planet. • Sink functions: the natural environment serves as a “sink” which absorbs (up to a point) the pollution and wastes generated by economic activity. • damage cost approach: assigning a monetary value to an environmental service that is equal to the actual damage done when the service is withdrawn • maintenance cost approach: assigning a monetary value to an environmental service that is equal to what it would cost to maintain the same standard of services using an alternative method

21. Your turn In Burgess County, current irrigation methods are leading to rising salt levels in agricultural fields. As a result, the number of bushels of corn that can be harvested per acre is declining. If you are a county agricultural economist, what two approaches might you consider using to estimate the value of the lost fertility of the soil during the current year? What sorts of economic and technological information would you need to come up with your estimates?

22. What do you think? Some people have argued that the monetary valuation of environmental costs and benefits is important because “some number is better than no number” – without valuation these factors are omitted entirely from GDP accounts. Others say that it is impossible to express environmental factors adequately in dollar terms. What are some valid points on each side of this debate? How do you think this debate should be resolved?

23. Another problem with GDP

24. Accounting for households: missing Only two aspects of household production are currently counted in GDP: • the services of the house itself (the rent paid explicitly or implicitly by residents) and, • the services provided by paid household workers such as housekeepers and gardeners.

25. History of exclusion • Households not ‘productive’ • Not producing economic goods • Gender split: ‘economy’ – man’s world; ‘home’ – woman’s world • ‘too hard to distinguish from consumption’ • third person criterion: the convention that says that an activity should be considered to be production (rather than leisure) if a person could buy a market replacement or pay someone to do the activity in his or her place • ‘GDP measures market production’ • GDP aims to only measure production for the market. Since household outputs are not sold, this argument goes, it is consistent to exclude them from GDP. • The problem with this argument is that a substantial portion of GDP already reflects nonmarket production

26. Accounting for household production • Why? How? • Time use surveys

27. Accounting for household production • Replacement cost method • (for estimating the value of household production): valuing hours at the amount it would be necessary to pay someone to do the work • Opportunity cost method • (for estimating the value of household production): valuing hours at the amount the unpaid worker could have earned at a paid job • Many counties, including US, Australia, Canada, India, Japan, Mexico, Thailand and the United Kingdom, have conducted or are conducting national time use surveys to aid their understanding of unpaid productive activities.

28. Think back on at least one household activity you’ve done in the last couple of days that would be replaceable in principle by market or third-person services. How would that activity be valued by the replacement cost method? By the opportunity cost method? What sorts of manufactured capital goods were important, along with your labor, in the activity?

29. How to measure economic well-being? • Since the goal of macroeconomics is human well-being, we need to be sure the indicators we pay most attention to are ones that relate to the goal we want to achieve! • Re growth in production per capita, need to ask: what, for whom, and how • Well-being reducing products? Defensive expenditures? Loss of leisure? Loss of human and social capital formation? Well-being reducing production methods? Unequal distribution?

30. Other indicators • Index of sustainable welfare (1989) • Genuine Progress Indicator • a measure of economic well- being that adds many benefits, and subtracts many costs, that are not included in GDP. This measure is calculated by the nonprofit group Redefining Progress. • - starting point is the Personal Consumption Expenditures (PCE) component of GDP for each year, as calculated by the BLS, on the reasoning that this number approximates the welfare associated with consumption. Then include externalities: (+) values; (-) social costs; (-) environmental costs • Human Development Index • an index of well-being made by combining measures of health, education, and income. Calculated by the United Nations Development Program (UNDP). • Life expectancy at birth; An index reflecting a combination of the adult literacy rate and statistics on enrollments in education; GDP per capita • Index: between 0 and 1 (Lebanon. 2007. 0.803)

31. Index of Sustainable Economic Welfare (ISEW) • partnership between an economist, Herman Daly, and a theologian, John Cobb. • They construct an indicator of aggregate welfare by taking into account the current flow of services to humanity from all sources (and not only the current output of marketable commodities which is relevant to economic welfare) • They deduct spending whose purpose is defensive or intermediate and not welfare- producing • They account for the creation and losses of all forms of capital by adding the creation of man-made capital and deducting the depletion of natural capital