Part two

1. Principles of sustainable developmentIndicators of sustainable developmentEvaluation of natural resources Part two George Horváth Building Q, room A235. george@eik.bme.hu

2. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources We’ve talked about the basics of environmental economics We’ve addressed the three main macroeconomic problems in environmental economics Economic growth Scarcity Indicators Where we left off last time…

3. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Resources aren’t available indefinitely This is what we call „scarcity” We are forced to choose between alternatives We have to sacrifice one good to be able to have more of another The problem with scarcity

4. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources This curve shows the frontier (limit) of production possibilities The production-possibility frontier cannons If we want more butter, (b2>b1), we will have to sacrifice some cannons (c2<c1). c1 (b1; c1) c2 (b2; c2) b1 b2 butter

5. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Any combination under the curve is inefficient Any combination over the curve is impossible The problem with efficiency cannons c1 (b1; c1) c2 (b2; c2) v1 v2 butter

6. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Given are two economies at time instance t=0, with the same PPF curve About PPF & making choices consumption c1 (i1; c1) c2 (i2; c2) i1 i2 investment

7. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Investing in R&D and education can expand the production possibilities What does investment do to the PPF? consumption c1 (i1; c1) c2 (i2; c2) i1 i2 investment

8. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources About PPF & and the environment Economic goods g1 (p1; g1) g2 (p2; g2) Environmental protection p1 p2

9. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Inadequate environmental protection contracts production possibilities About PPF & and the environment Economic goods g1 (p1; g1) g2 (p2; g2) Environmental protection p1 p2

10. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Economic theorem: The PPF should not contract even on the long run. Ethical theorem: The PPFs of future generations should not be affected adversely by decisions taken today. Intergenerational solidarity Sustainability

11. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Sustainable development is a form of development which „meets the needs of the present without compromising the ability of future generations to meet their own needs” Our Common Future – The Brundtland Commission A definition of sustainable development

12. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Weak sustainability: When we allow natural resources to be substituted by another type of resource, provided that the PPF remains constant Strong sustainability: When we do not allow the value of natural resources to be reduced (ie. it cannot be substituted by another type of resource at all) The levels of sustainability

13. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources These economic concepts must be treated separately from the political principle of sustainable development The concept of sustainable development includes economic and social requirements besides the maintenance of natural capital The levels of sustainability

14. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources We have to measure… …economic performance …the level of welfare …the state of the environment How do we measure? We use statistical indicators Most often used: GDP (or GNP, if you want to be American about it) Problems with measurement

15. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources GDP is the aggregate sum of all products at a given territory over a period of time It is frequently used to indicate the average quality of life of the population (GDP per capita), which is an over-simplification GDP is an area-based measure GNP is a „nationality” based measure, ie. it is of all the people who belong to a certain area. Remember GDP?

16. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources GDP=C+I+G+(X-M) where C is the Consumption I is the Investment G is Goverment Expenditure (X-M) is the balance of eXport and iMport) What’s in GDP?

17. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Quality of the enviromnent, and the changes in the stock of natural resources It measures the changes in productive capital, but not the changes in natural capital Services provided by the environment Measures to improve quality of life, sink functions, non-market effects (externalities) What’s not in GDP?

18. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Expenditures on environmental protection appear as positive expenditures (these are mostly end-of-pipe measures) Environmental damage increases GDP, but expenditures on environmental protection also! Environmentally friendly, preventative, thrifty measures decrease GDP. What’s incorrectly in GDP?

19. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Cars are a status symbol in Hungary As welfare increases, more cars are purchased After a while, traffic jams become a constant urban feature… …and people are late from work - GDP …and goods arrive late - GDP …people get less healthy all the time - GDP Essentially: welfare is increasing while GDP is decreasing Welfare can increase with a decreasing GDP too!

20. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Decision makers can only think in terms of GDP (because it wins votes, right?) GDP can increase while welfare is decreasing! A number of indicators ought to be considered in parallel with GDP (such as HDI, ecological footprint) Several indicators are to be evaluated simultaneously GDP should be replaced by a new, more complex indicator Reforming indicators: beyond GDP

21. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources NEW – Net Economic Welfare. (Nordhaus & Tobin, 1972) ISEW – Index of Sustainable Economic Welfare. (H. Daly & J. Cobb, 1989) GPI – Genuine Progress Indicator. (C. Cobb et al, 1995) Alternative macroeconomic indicators: indices derived from GDP

22. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources W. Nordhaus and J. Tobin, 1970. + Housekeeping work by housewives + DIY activity (IKEA and the like) + Leisure time / free time – Environmental pollution – Adverse effects of modern urbanisation – Correctional factors NEW – Net Economic Welfare

23. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Herman Daly & John Cobb, 1989 + Personal consumption + Non-defence expenditures + Capital growth + Services provided by domestic labour – Private defence expenditures – Costs of environmental pollution – Depletion of stock of environmental resources ISEW –Index of Sustainable Economic Welfare

24. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources C. Cobb et al, 1995 + Personal consumption + Household work and child nurturing + Voluntary work + Services provided by long-lasting domestic appliances + Services provided by government investments ∆ Private defence expenditures ± Net capital investments ± Balance of net foreign loan / debt GPI – Genuine Progress Indicator (1)

25. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources – Costs of criminality – Costs of divorces and separations – Costs of reduced free time – Costs of underemployment – Costs of commuting – Costs of domestic waste and pollution – Costs of road traffic accidents – Costs of water pollution – Costs of air pollution – Costs of noise pollution – Costs of loss of wetland areas – Costs of soil loss and erosion – Costs of the decrease of the stock of non-renewable resources – Costs of other long-term environmental damages – Costs of thinning of ozone-layer – Damages to rainforests GPI – Genuine Progress Indicator (2)

26. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources An interesting comparison:GDP vs. GPI

27. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources When it comes to the evaluation of natural resources, our task is a lot harder than we first think We come across some difficulties we need to find a way around What are these difficulties, though? Evaluation of natural resources

28. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources It begins a process of systematic organisation, weighing and putting in order It is a means of compression of information, whereby some properties are expressed in a common unit Once in the possession of the concise information, we can now make a judgement, and we can make a well-informed decision What do we mean by evaluation?

29. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources The undisturbed functioning of the markets depends on the perfect information of every participant about the qualitative and quantitative properties of the goods, and the terms of the exchange In reality, this is only approximately true for any market When it comes to environmental resources the collection and compression of information is particularly problematic If we think about competitive markets…

30. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Ecological economists say that we „betray” the environment if we give a price to its assets The environment is a holistic, complex, intertwined, interrelated and interrelying system, whose sub-systems cannot be alienated or treated independently James Lovelock (1919-) described his „Gaia hypothesis”, meaning that the Earth itself is a living organism, the biosphere and the other Earthen spheres form a densely interwoven system The problems with environmental economic evaluations

31. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Economists reject holism, because it undermines the necessary simplification (atomisation) to formulate theories Environmental goods are not atomisible; the value of many environmental goods arise from the fact that they form a part of a system, and can become effectively worthless once removed from the system Environmental goods and services cannot be divided up into individual units (see the problem with common goods) The need for environmental economic evaluations

32. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Schumacher says that we betray the environment by putting a price-tag on it. If we put a price on everything, the biggest value would be money, and not nature For the sake of development we have to use the opportunities offered by the markets If we don’t price, we will take valuable goods as valueless (see common goods and free goods) If people have to pay for their damages, they pay more attention to their actions Therefore: environmental evaluation is a realistic possible solution Then what?

33. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources Particularities ofenvironmental evaluations Externalities Common goods Discounting Environmental changes Social damage

34. The principles of environmental and ecological economics (cont’d) Principles of sustainable development Indicators of sustainable development Evaluation of natural resources It is composed of two main value groups Use value Non-use value It is subdivided into altogether five components These components cover various fields and approaches, and combined they give the total economic value of an environmental asset Total Economic Value