Chapter 7

1. Sustainability: An Ecological View Chapter 7

2. The Ecological View • Natural and created capital are fundamentally complements • Technological pessimists: as sinks and sources are exhausted, human welfare will decline, perhaps dramatically. • Nature can lose its resilience; collapse of some of the ecological foundations of the economy are becoming more likely. • Globalizing world economy is unsustainable. Needed: a largely expanded role for government to aggressively protect our dwindling stock of natural capital

3. IPAT • Environmental Impact = Population * Affluence * Technology • Main drivers of environmental problems • Population growth • Growth in consumption per person • The damage per unit of consumption inflicted by the available technology

4. CO2 and the IPAT Equation • Automobile CO2 emissions: • CO2 emissions / year = (7 billion people) * (.1 cars / person) * (5.4 tons CO2 / car per year) = 3.8 billion tons CO2 / year • By 2050, global Population could rise to 10 billion people and Affluence could more than quadruple • Technology would have to reduce emissions by a factor of 8 to maintain emissions

5. Unsustainable Pressure • The gradual reduction in human welfare as the environment is degraded and natural resources become scarce and expensive • The fragile ecosystems in which our economy are embedded are accumulating stresses that may lead to catastrophic changes • Ecologicals believe our economy depends heavily on the natural environment as it exists today • Major stresses to the environment could then lead to very large and sudden declines in human welfare

6. Ecologicals: Aggressive Role for Government • Ecologists believe the government needs to engage in an aggressive program to control the twin pressures of population and consumption growth • In the short-run, government also needs to promote clean technology

7. Malthus and Ecological Economics • Reverend Thomas Malthus, 1798: The food supply grows arithmetically; A healthy population grows geometrically • Eventually, population growth outstrips the food supply and famine, disease, or war provides a natural check on further population growth • The Malthusian Population Trap has earned economics the title of “the dismal science” • Ecological economists = “neomalthusians”?

8. Malthusian Population Trap

9. Malthus’ Assumptions: Food Supply • Technological advances (agriculture, health care, and birth control) have challenged Malthus’ basic assumptions • Agriculture need not grow arithmetically • The Green Revolution (from the 1950’s to the 1980’s) centered around seeds that produced much higher yields • During the period of the Green Revolution, population doubled while world grain output increased by a factor of 2.6

10. Food Production Per Person Source: WRI

11. Malthus’ Assumptions: Population • Population does not (always) grow geometrically • Wealthy countries have very low growth rates, often below zero • Again, technology: Birth control • Malthus’ assumptions about food and population growth did not hold up from 1950-2010.

12. Malthus Redux? • Beyound 2010: • Grain output per capita is growing only slowly • In some areas, population growth moved ahead of growth in food production • Some explanations: • The Green Revolution has exhausted its potential • Also, the productivity gains of the Green Revolution were not evenly shared and led to greater poverty and hunger • Much current grain feeds cattle, pigs, and chickens, rather than humans directly

13. The Forerunner of Ecological Economists • Malthus captured both senses in which fundamental limits on natural capital lead to unsustainable development • 1) A steady decline in available food per capita, leading to rising prices, and gradual impoverishment • 2) An eventual catastrophic change in the ecosystem-economy relationship

14. Differences Between Malthus and Ecologists • The sources of stress on the environment have shifted from population to population and consumption • Ecological economists have turned to ecologists for guidance in measuring sustainability • In the ecological view, because economic functions are embedded in nature, sustainability requires handing down to future generations local and global ecosystems that largely resemble our own

15. Ecosystem Resilience • To pass on to future generations ecosystems resembling our own, ecosystems must be kept resilient, where external stresses do not lead to catastrophic change • Ecosystem resilience is a function of the number and complexity of the underlying interspecies interactions

16. Measuring Sustainability • Because ecological economists do not believe that created and natural capital are substitutes, they reject the NNW approach to measuring sustainability • Instead, ecologicals use physical measures of ecosystem resilience and resource stocks weighed against population and consumption pressures as their measure of sustainability

17. The Precautionary Principle To what extent, if any, can we afford to further run down the existing stock of natural capital? • Never reduce the stock of natural capital below a level that generates a sustained yield unless good substitutes are currently available for the services generated. When in doubt, conserve.

18. The “Availability of Substitutes” • Uniqueness • Species may exist in tropical rainforests that may contain the key to curing cancer and other diseases • They thus have unique economic benefit • Uncertainty combined with irreversibility • Destroying parts of the tropical rainforest may cause severe economic damage or it might not • Decisions to degrade capital stocks are often irreversible • This combined with uncertainty calls for greater caution in the exploitation of natural capital

19. The PP and Species: The “Safe Minimum Standard” • If the future benefits from preserving our options are truly unknown, then it is impossible to make decisions about preservation on a benefit-cost basis • This has led some economists to advocate a safe minimum standard for resources with highly uncertain future value-- these should be preserved at levels that prevent their irreversible depletion, unless the costs of are “unacceptably” high • Graphically, the point where the S curve first crosses the 45-degree line is called the minimum standard

20. Peak Oil: Are we there yet?

21. The Safe Minimum Standard

22. The Safe Minimum Standard and Endangered Species • Species extinction is irreversible • Endangered species often serve as indicator species for threatened ecosystems • Endangered species legislation is the one major national law currently on the books that reflects ecological sustainability as an underlying goal

23. The PP and Nonrenewable Resources: Peak Oil? • Current world petroleum consumption is about 20 billion barrels per year • Shell Oil predicts a production peak in 2030 • The World Resources Institute predicts a production peak between 2007 and 2014 • This is against a backdrop of much higher world demand • Are we penalizing our children’s generation by depriving them of a more abundant oil supply?

24. Are We Penalizing Our Children? • The answer would be no, if we can offset the reduction in natural capital through the use of created capital • Examples: • Solar, wind, and biomass technologies • As oil becomes more scarce and prices rise, firms will seek out cheaper technologies • However, there is oil prices today have only begun to reflect long-run scarcity

25. Inflation-Adjusted Oil Prices, 1970-2009

26. The Impact of Oil Prices • U.S. investors have not (yet?) seen a long-run upswing in oil prices and thus have not engaged in large scale development of alternative energy technologies • In other countries, where taxes drive up the price of oil, market forces are more successfully promoting the development of substitute technologies

27. The Ecological Perspective • From an ecological perspective, energy use in the U.S. is not following the Precautionary Principle • Both prices and R & D funding are too low, so future generations will be punished in the form of higher prices • Some have argued that to achieve sustainable oil use in the U.S., taxes should drive gas prices up until they equal those of the currently available substitute

28. Review of Market Forces and Sustainability: • Markets do provide incentives for sustainable use of privately owned natural capital in the phenomenon known as profit-based conservation • Markets also promote sustainability: as resources become scare, their prices rise and people look for substitutes • But even if markets are working well, sustainability is not guaranteed • Both open access to common property and high market discount rates work against sustainable use

29. Environmental Impact Statement: Applying the PP? • The 1970 National Environmental Policy Act (NEPA) has a section requiring that government agencies prepare an Environmental Impact Statement (EIS) for “legislation or other major federal actions significantly affecting the quality of the human environment”

30. The EIS • An EIS must include • Any adverse environmental effects that cannot be avoided should the proposal be implemented • Alternatives to the proposed action • The relationship between local short-term uses of man’s environment and the maintenance and enhancement of long-term productivity • Any irreversible and irretrievable commitments of resources that would be involved in the proposed action should it be implemented

31. Problems With the EIS • Statements are often filled with irrelevant data to discourage reading • There is no process to ensure post-project compliance • The EIS process imposes costs on both the public and the private sector • Environmentalists can drag out the approval process by what is known as paralysis by analysis

32. Other Proposals • PP Measures stronger than Environmental Impact Statements have been proposed: • For example, resource depletion quotas determining the maximum quantity of key resources that the country as a whole would be legally allowed to consume in a given year • The ecological economics view requires much stronger government intervention to promote sustainability than we are currently seeing

33. The Ecological-NeoclassicalDebate in Context • The differences between ecologicals and neoclassicals are similar to the differences between the safety and efficiency camps • Both safety and ecological advocates reject benefit-cost analysis and rely on physical measures of their underlying goals: safety and sustainability • Efficiency advocates and neoclassicals insist that benefit-cost analysis is needed to maintain a balance between environmental protection and investment in other goods

34. Malthusian Debates: Neoclassicals in the Lead? • In the 1960s Paul Ehrlich predicted the world was running out of food • Ehrlich also bet neoclassical economist Julian Simon that the prices of half a dozen key minerals would rise during the 1980s: Ehrlich lost • A 1970s report, “Limits to Growth” predicted (incorrectly) that many natural resource supplies would begin to decline sharply in the mid 1980s • The problem with these predictions is that they dramatically underestimated the impacts of changing technologies

35. The Ghost of Malthus • Even if Neoclassicals are winning so far, ecologicals, to be right, only need to “win” once…. And the combined impact of population and consumption growth is indeed exponential. • Areas of agreement? Technological change leading to less pressure on natural capital is one key to sustainability.

36. Ecologicals vs. Neoclassicals:Topsoil • Ecological estimates: topsoil loss cost the U.S. $27 billion per year--about a quarter of total U.S. farm output--in reduced agricultural activity • Neoclassical estimates: $500 million. Differ by a factor of 50! • Disagreement--How do you measure The I in the IPAT? • Agreement-- Unless more environmentally friendly techniques are developed, I will quickly grow in the face of a 50% increase in P, and at least a doubling of A

37. Summary on: “How Much is Too Much?”

38. Game Theory and the Safe Minimum Standard Appendix 7A

39. Minimum Regrets • Applying a safe minimum standard (SMS) is recommended when fundamental uncertainty about the value of natural capital means that benefit-cost analysis simply cannot be undertaken • The SMS is generally equivalent to a social decision rule that delivers minimum regrets • This means that under an SMS, the worst possible outcome will be avoided

40. The SMS Game • Society is faced with a decision to develop a dam on a river • If the dam is built, it will drive to extinction species of plants and animals that may or may not provide a cure for a nasty disease that may or may not materialize • We cannot attach probabilities to the outcomes, having no way of knowing which outcome is more or less likely

41. The SMS Game

42. The SMS Game: Assumptions • Let’s make two assumptions • 1) Bdev > Bpres • 2) Cdis >> (is much greater than) Bdev • Assumption 1 says that ignoring the disease potential, development yields more benefits than preservation • Assumption 2 tells us that this is a bad disease, which will generate large costs • Which option should society choose?

43. The SMS Game: The Answer • If we are interested in minimizing the cost of being wrong, then preservation is the right answer • When society seeks to minimize its regrets, it will choose to preserve the resource if: • The maximum development regret > The maximum preservation regret • We would preserve the river as long as the costs of the disease are larger than twice the net benefits of development minus the benefits of preservation • This holds true as long as our underlying assumptions remain reasonable • This proves that the SMS strategy usually minimizes the costs of being wrong