13. Natural Resources & the Environment

2. 13. Natural Resources & the Environment • Sustainable Development • Importance of Natural Resources • Land, Natural Resources, & Environmental Resources • Petroleum • Dutch Disease • Sustainable Development • Importance of Natural Resources • Land, Natural Resources, & Environmental Resources • Petrol

3. Natural Resources & the Environment (continued) • Resource Curse • Poverty & Environmental Stress • Grassroots Environmental Action • Market Imperfections, Policy Failures, & Environmental Degradation

4. Natural Resources & the Environment (continued) • Pollution • Arid & Semiarid Lands • Tropical Climates • Global Public Goods: Climate & Biodiversity • Policy toward Global Climate Change • Limits to Growth • Daly’s “Impossibility Theorem”

5. Natural Resources & the Environment (concluded) • Natural Asset Deterioration, Adjusted Net Savings, & the Measurement of National Income • Adjusting Investment Criteria for Future Generations

6. Sustainable Development • “Progress that meets the needs of the present without compromising the ability of future generations to meet their own needs” The 1987 (UN (Brundtland) Commission on Environment and Development 1987). • More than survival of the human species. • Maintenance of the productivity of natural, produced, and human assets from generation to generation. • Can physical (produced) capital substitute for natural capital? (See Daly’s theorem).

7. Land, natural resources & environmental resources • Land –Immobile, potentially renewable, & nonproducible (with exceptions such as Boston & Mumbai’s landfills) • Natural resources--Mobile but nonrenewable • Resource flows—renewable energy sources • Environmental resources—resources provided by nature that are indivisible

8. Petroleum

9. Response to 1973-74 & 2005 petroleum price increases • Short run price elasticity of demand (% change in quantity/% change in price) is close to 0. • Long run elasticities are much higher (slightly less than one) • DCs adjusted better in 2005 than 1973-74; however, LDCs were badly affected both times

10. TABLE 13-1 indicates leading crude oil countries (by 2003 production and 2003 estimate proved crude oil reserves (billions of tons)

12. Dutch Disease • A pathology resulting from the way a booming resource export retards the growth of other sectors through unfavorable effects on the foreign-exchange rate and the costs of factors of production.

13. Resource Curse • Resource-abundant economies grow slower than other economies (Sachs and Warner 1999; Lal and Myint 1996; Auty 2002), • Oil revenues increased average material welfare, widened employment opportunities, and increased policy options, but also altered incentives, raised expectations, distorted and destabilized nonoil output, frequently in agriculture.

14. Resource curse • A top Nigerian official in 1970s: Striking it rich on oil was “like a man who wins a lottery and builds a castle [but] can’t maintain it and has to borrow to move out.” • Why? • Exchange-rate, pricing, investment, and incentive policies that Nigeria failed to take to counter Dutch disease (Chapter 6)

15. Reverse Dutch disease • Reverse Dutch disease from oil bust severe, especially for those, such as Nigeria or Angola, that are highly dependent on oil

16. Is the resource curse valid? • Resource abundant economies more likely to suffer growth collapse, due to higher wages obstructing industrialization. • Neumayer (2003) finds virtually no resource curse if you measure GNI accurately. Should subtract capital depreciation, natural resource depletion, and damage from carbon dioxide & particulate emissions from national savings (Figure 4-2). • “Curse” is partly result of unsustainable overconsumption in resource-abundant economies (as in Nigeria during its oil boom).

18. Mineral export abundance & predatory rule • Abundance of exportable minerals more likely to be associated with poor governance. • Resource exportables enabled warlords or predatory rulers (Liberia’s Charles Taylor and Zaire’s Mobutu Sese Seko) to support private armies without providing public services. • Predatory economic behavior not viable in resource-poor economies, such as Togo.

19. Poverty & environmental stress • People living hand-to-mouth existence more likely to destroy their immediate environment (e.g., Nepalese collecting firewood denuded forests on the hills & mountains). • Poor, landless people often forced to cultivate marginal lands.

20. World Bank (1992) on environment & productivity • Adverse effect of environmental degradation on health and productivity: • (1) water pollution & scarcity contributes to poor household hygiene, added health risks, aquifer depletion, & limits on economic activity, contributing to millions of deaths yearly. • (2) excessive urban particulate matter responsible for 300 to 700 thousand premature deaths annually and for half of childhood chronic coughing.

21. Environment, health, & productivity • (3) Smoky indoor air affects 400 to 700 million people, mostly in poor rural areas. • (4) Air pollution from factories and vehicles affects forests & water through acid rain. • (5) Solid and hazardous wastes & polluted groundwater increase diseases. • (6) Soil degradation reduces nutrition for poor farmers on depleted soils and increases susceptibility to drought.

22. Environment, health, & productivity • (7) Deforestation & flooding leads to death and disease, increased erosion, & reduced carbon sequestration. • (8) Reduced biodiversity reduces new drug and genetic resource potential. • (9) Atmospheric changes increase risks from climatic natural diseases, and increase diseases from ozone depletion

23. Grassroots environmental action • Local participation to defend environment & livelihood can have effect • Poor with secure long-term user rights will behave responsibly toward environment (Broad 1994)

24. Determinants of environmental degradation • Market distortions – government does not set conditions for efficient markets • Defective economic policies – Misguided government intervention in well-functioning markets • Inadequate property rights

25. Why environmental degradation? • People maximize profits by shifting costs onto others, and appropriate common and public property resources without compensation. • “Ultimately, excessive environmental damage can be traced to ‘bad’ economics stemming from misguided government policies and distorted markets” (Panayotou 1993) • Growth should be derived from increased efficiency and innovation not by shifting environmental costs to innocent third parties.

26. Determinants of environmental degradation • Negative externalities – economic activities conveying direct and unintended costs to other individuals & firms. • Common property resources – “tragedy of the commons” – just as herder’s cattle overgrazes pasture open to all, individuals exploit open access resource as if facing an infinite discount rate

27. Determinants of environmental degradation • Public goods – with nonrivalry & nonexclusion in consumption • Irreversibility – resource cannot be reproduced in future if fail to preserve it now • Undefined user rights – people will not pay for resource without secure & exclusive rights. • High transactions costs – Information, coordination, bargaining, monitoring, & enforcement costs may be prohibitively high

28. Coase’s theorem • When property rights are well defined & transactions costs not prohibitive, participants will organize their transactions voluntarily to achieve efficient (mutually advantageous) outcomes • Works less well with large numbers, or where subject to free riding

29. Pollution • Production and consumption create leftovers or residuals that are emitted into the air or water or disposed of on land. Pollution of air and water is excessive not in an absolute sense but relative to the capacity of them to assimilate emissions and to the objectives of society. • Pollution problems result from divergences between social and commercial costs

30. Pollution • Hardin’s “tragedy of the commons” takes something – trees, grass, or fish – out of the commons. • Reverse of tragedy is pollution, which puts chemical, radioactive, or heat wastes or sewage into the water, and noxious and dangerous fumes into the air. Without a clear definition of ownership and user rights and responsibilities, an economy “fouls its own nest” (Hardin 1968:1244–1245).

31. Pollution Urban air pollution major form of environmental degradation. Most serious health problems result from exposure to suspended particulate matter (SPM), consisting of small, separate particles from sooty smoke or gaseous pollutants. Finer particulates carry heavy metals, many of which are poisonous.

32. Pollution • Environmental Kuznets curve • Water shortage caused by a low price (Figure 13-2) • Efficient level of pollution emissions based on marginal social costs & benefits (Figure 13-3)

35. Tropical climates • Why is economic underdevelopment more likely to occur in tropical climates? Kamarck (1976) • No winter kill, so weeds, insect pests & parasitic diseases that are enemies to crops, animals & people are not exterminated. • In the tropics, soil is damaged by the sun, which can burn away organic matter & kill microorganisms, and by torrential rains, which can crush soil structure & leach out minerals. • Tropics are hospitable to human disease. At least three-fourths of adult population is infected with some form of parasite. Infectious, parasitic, and respiratory diseases account for about 44% of deaths in LDCs but only 11% in DCs.

36. Global Public Goods: Climate and Biodiversity • Public goods are characterized by nonrivalry and nonexclusion in consumption. • Atmosphere & biosphere are global public goods: nations cannot exclude other nations from the benefits of their conservation or from the costs of their degradation. • Cannot expect tropical regions to provide global public goods, forests, for biodiversity & carbon sequestration.

37. Greenhouse gases • Phenomenon by which the earth’s atmosphere traps infrared radiation or heat. • Smudgepot or greenhouse effect (Schelling). (1993:465), warming the earth’s surface and keeping it from rising to be replaced by cooler air. • Greenhouse gases include carbon dioxide (CO2), methane, nitrous oxide, and water vapor, that keep the earth habitable, and chlorofluorocarbons (CFCs).

38. Components of greenhouse effect (1990) • Carbon dioxide (from coal, oil, natural gas, and deforestation) 57%. • CFCsdepleting stratospheric ozone layer 25%. • Methane (from wetlands, rice, fossil fuels, livestock, & landfills) 12%. • Nitrous oxide (from fossil fuels, fertilizers, and deforestation) 6%.

40. Costs of global climate change from increased carbon emissions • Consensus scientific forecast – increased temperatures of 2.5-5.5 C (4.5-9.9 F) in 21st century depending on industrial growth & policy • LDCs’ parasitic disease, coastal & river flooding, drought, tropical storms, water contamination • Example: heat damage during rice, wheat, & corn flowering (>30 C/86 F). Yields may fall by 10% for 1C increase. Grains in India & perhaps Philippines already suffering from increased temperatures (Sheehy & UN Environmental Program)

41. Policy approaches • Green taxes to equate social marginal abatement cost and social marginal damage • Increases price & reduces quantity produced of coal & petroleum, improving economic (social) allocation between resources (Figure 13-4) • Over time, environmental taxes (market correcting taxes) could be substituted for some income taxes

43. Policy approaches • International tradable emission permits (based on “least cost” principles of abatement, preferable to Kyoto approach, based on physical targets) • U.S. needs to join Kyoto Treaty process again but insist on green markets with tradable emission permits based on market approach

44. Will a shortage of natural resources limit economic growth in the next half century, especially in LDCs? Yes or no?

45. Limits to growth? Yes. • Daly’s impossibility theorem: a U.S.-style high mass consumption economy is impossible for 6.5 billion people • Present resource flows would allow U.S. living standard to 15% of world’s population

46. Limits to growth? Yes • Humans already use or destroy 25% of earth’s net primary productivity, total amount of solar energy converted into biochemical energy through photosynthesis of plants minus the energy these plants use for their own life (Postel). - Georgescu-Roegen: producing luxury goods with high entropy shortens life span of human species.

47. Limits to growth? No. • Proven reserves, thought to be woefully short, represent no more than an assessment of working inventory of minerals that industry is confident is available during its forward planning period (typically 8-12 years) & should not be used for making long-term projections. • Critics understate technological change (MIT study arbitrarily assumes nonexponential limits compared to exponential growth on demand side).

48. International agencies need to subtract environmental degradation & resource depletion from GNI or GDP • World Bank has estimated adjusted net savings, a component of GNI (Table 13-3) • Venetoulis & Cobb, using Daly, Cobb, & Cobb’s framework estimate Genuine Progress Indicator (GPI), showing that GPI per capita peaked in 1976 (Figure 13-5). Despite large margins of error, including environmental & depletion variable will give us better measures of economic welfare