Sustainable Development Part 1: Measuring sustainability

1. Sustainable Development Part 1: Measuring sustainability

2. What is sustainability? • Sustainability gets at the linkage between economic growth and the environment. • Economic growth is simply the quantity of goods and services we produce and consume over time, typically adjusted for population (per capita). • More growth usually is thought to contribute to economic welfare by creating more jobs, higher incomes, and a better standard of living.

3. Growth and GDP • Gross Domestic Product (GDP) is used to measure economic growth. • Real GDP is GDP adjusted for inflation. • The economy is growing when real GDP is on the rise. • The average standard of living improves when real GDP per capita is rising.

4. GDP and the standard of living • This traditional way of measuring the standard of living excludes important items: • Impacts on the environment and human health, • Depreciation of natural capital, and • Depreciation of produced capital. • A more comprehensive measure of welfare, net national welfare (NNW), takes these into account.

5. Net National Welfare • NNW = GDP – costs of growth – depreciation • Costs of growth: • Externality costs, and • Cost of pollution abatement and cleanup. • Depreciation is capital that is used up • Depreciation of produced capital, and • Depreciation of natural capital.

6. Net National Welfare More specifically, NNW is defined as: GDP – externality costs – pollution abatement and cleanup costs – depreciation of produced capital – depreciation of natural capital.

7. Dynamic efficiency • When NNW is rising, we can claim that growth is sustainable. • When NNW is maximized, we have achieved dynamic efficiency.

8. Depreciation of natural capital • Depreciation of natural capital is the monetary measure of using up a unit of resource. • It is a measure of what we give up in the future to produce today.

9. Resource rent • The market value of a resource is production cost plus resource rent. • Production cost is simply the expense of producing the resource (finding and pumping the oil, for example). • Resource rent is the permanent economic profit that results from producing a scarce resource.

10. Resource rent $ Market for oil Supply Resource Rent Market price Demand Barrels of oil produced Q0

11. Resource rent • Producing a barrel of oil today means we cannot produce the same barrel in the future. • When we produce today instead of tomorrow we give up future resource rent. • This is true because production cost would have to be incurred in either period. • Resource rent is a dollar measure of the depreciation of natural capital.

12. What is sustainability? • But we know by now that growth has negative impacts on the environment; growth draws down our natural capital. • When natural capital is depleted excessively, our welfare diminishes over time. • Sustainable development attempts to achieve a balance between economic growth and depletion of natural capital.

13. Sustainable development definitions • Bruntland Commission (1987): ‘development that meets the needs of present generations without compromising the ability of future generations to meet their own needs.’ • Economist Ger Asheim: ‘a requirement to manage the resource base so that the average quality of life can be shared by all future generations.’

14. Defining sustainable development (SD) • SD essentially an equity issue, rather than efficiency. • However, fairness is easier to attain when the economic pie is growing than when it is shrinking; efficiency and equity can be complements, not competitors. • Sustainable development does not mean no growth. Instead, SD gets at how to maintain a broadly-defined standard of living over time.

15. Sustainability criterion • Total capital available for the economy consists of • Human capital (Kh), • Produced or man-made capital (Km), and • Natural capital (Kn). • Total capital stock = Kh + Km + Kn.

16. Hartwick rule • John Hartwick – the current generation has been given an endowment of natural capital, produced capital, and human capital. • Sustainability means that we live off the flow of services from our capital, and do not dip into the principal. • Consumption per capita can be sustained indefinitely if resource rent is captured and invested (in capital stock). • This level of investment would be sufficient to maintain the value of total capital stock over time.

17. Hartwick rule • The bottom line for the Hartwick rule is this: • Growth can be sustained indefinitely if we take the resource rent and invest it in new produced capital. • Doing this will ensure that total capital will remain level (we don’t dip into the principal). • Even though we draw down natural capital, it is replaced by new investments in produced capital (or perhaps human capital).

18. Hartwick rule implications • Sustainability can be determined by examining whether the value of total capital stock is declining. • If total capital stock is steady or increasing, the pattern of resource usage is sustainable. • If total capital stock is falling, resource use is not sustainable.

19. Hartwick rule implications • We can use up natural capital as long as we invest the resource rent to build up produced capital or human capital. • Implies that produced capital and human capital can be substituted for natural capital.

20. Weak and strong sustainability • The maintenance of total capital is known as the weak sustainability criterion; implies a degree of substitutability between types of capital. • But in fact, substitution can be very difficult and expensive for some types of natural capital (can we substitute machines for the air we breathe?).

21. Sustainability criteria • A more restrictive approach calls for maintaining the value of the stock of natural capital alone. • This is known as strong sustainability. • Strong sustainability requires than Kn not decline. • Substitution within Kn is allowed.

22. Sustainability criteria recap • Weak sustainability: • No decline in total capital: K = Kn + Kh +Km • Substitutions acceptable • Strong sustainability: • No decline in natural capital: Kn • No substitutions with other types of capital • Substitutions within Kn possible