Sustainable Development

1. Sustainable Development A Jaundiced View and Ramble

2. Outline • Definitions of Sustainable • Sustainable and National Income

3. Define Sustain • Over time, there is not less of the object that is being sustained. • Example from Forestry: A non declining flow of timber. • Example for Clean Air: No further deterioration in air quality in a critical air-shed • From theory: Future generations shall be as well off as current generations

4. What to Sustain • Capital Stock, x • Human Made Capital (xk) • Natural capital (xn) • exhaustible resources not “sustainable” • product flows, h ( a vector of goods) • h(x, labor, tech. Progress, ….) • allows substitution of two types of capital • Breathing and Cars still separate goods

5. What to sustain... • Utility( h) • that’s human happiness in mathematical form • can substitute Cars for Breathing • only human welfare matters • animals matter in so far as people feel bad and are willing to pay for their non-existence • Utility per capita? Or per Generation?

6. Not Possible ? • Can’t Sustain Exhaustibles? • recycling means minerals not exhausted • energy in great supply • carbon dioxide level • Probably can’t sustain product flow • Car services eat Air • fossil fuels = home heating= limited

7. Can We Really Sustain U? • Not even U in very long run • people are not good at population control • earth has so much air • Thermodynamics: only solar energy can be used to reverse entropy • Sun will blow up

8. Sustain or Overtake or ...? • Path c* overtakes path c • From T forward, U(c*) > U(c). • Could be very poor for a very long while

9. Useable Definition: • in 100 years • have no less natural capital than today • have no less physical capital than today..

10. National Income Accounting • (Value of Output) is GDP • Output - Net Investment = NNP • Conventional NNP doesn’t measure resource consumption • Green NNP = NNP - resource consumption • need value of resources; cost of discovery • not cost of extraction • minerals might be zero value.

11. Green NNP • Less important than Leisure for US • Should make big difference for Brazil, Saudi Arabia, etc. • NNP or GDP aren’t decision variables, so who cares anyway?

12. Sustain and National Income • Does Economy acts as if it maximizes discounted (at small rate) utility. • c(t) = argmax  U(c(t) (1+r)-t • Social rate of discount v. market rate • Bequest motive to transfer wealth • per capita income vs. per generation • infinite, non-decreasing plan is feasible?

13. Assume So... • Without exhaustible resource, • economies path may have a steady state for consumption: it is sustainable • With high initial capital stock/capita would have high consumption and then lower consumption, but forever. • With exhaustible, • could still be sustainable • could have model where consumption declines over time.

14. NNP and Sustain • If • 1. Economy maxs welfare • 2. Resulting consumption profile is flat • 3. Enough investment (of both kinds) is actually undertaken • Then…Green NNP is the sustainable level of consumption. • Are 1,2 and 3 facts in evidence? • (Asheim and Pezzey challenge 2.)

15. Forestry and Sustainable • Old Idea Multiple Use Sustained Yield Act • Don’t Impair Productivity of Land • National Forest Management Act • Nondeclining Flow of Timber • Endangered Species Act • Must Save Habitat for Owls and Murrulets

16. Sustainable Plan for a Watershed • Project Evaluation for Sustainable Rural Development: Plan Sierra in the Dominican Republic • de-Janvry,-Alain; Sadoulet,-Elisabeth; Santos,-Blas • Journal-of-Environmental-Economics-and-Management; 28(2), March 1995, pages 135-54.

17. Setup • A project generates income both now and later • Two generations are affected • Income y and present value of the project • NPV1 = present value for both generations • is also present value of project • NPV2 = present value for only the second generation • is present value over last half of time period of project

18. Planning Criterion • I. Feasible • Traditional NPV test. • NPV =Present Value of Benefits - Cost of Project • Benefits= Value of agricultural output, y(t) • PV =  y(t) (1+r)-t • Cost is assume to be at time zero • NPV1 > 0 is traditional test for efficiency.

19. Planning Criterion continued • II. Acceptable to project households • Also called Individual Rationality • For first generation households, income, y, must increase because of the project • III. Sustainable • NPV2 > NPV1 • IV. Environmental Benefit--Downstream users

20. Plan…. • watershed development project in the Dominican Republic. • watershed was already cut over and there was already severe soil erosion • soil erosion was filling and making useless downstream dams • the farmers were quite poor. • new less erosive farming practices • managed forest, less pasture, mulching, etc on other crops

21. Sustainability through Financial Transfers ? • These three criteria may be achieved by schemes of tax and subsidy between project and non-project households and between present and future generations. • For instance, planted forests instead of pasture, require a subsidy to the current generation accomplished through loans that future generations have to pay off • Moving from Slash and Burn Coffee to Managed Forest makes both generations better off, but adds more to current than to future income. Current users should pay tax for future users benefit to be sustainable.

22. Fisheries and Sustainable • Will open access or regulation kill off a fishery? • Shutdown point • Critical Depensation • Random element to growth

23. Shopping Center + Swamp • (A Berck and Ligon Original) • Sustainable, More Natural Capital, Low Interest Rates • Low Interest Rates implies more natural capital. See next slide • Low Interest Rates means more other investment

24. Quick Fishery... • Fish, xt, growth F(xt) • harvest, h • xt+1 = xt + F(xt) - ht • Steady state when h = F(x) • Biggest steady state when x is chosen to make F as large as possible

25. Fishery Long run optimal economic exploitation where interest rate = slope of growth curve Growth MSY Population

26. Present Value Max. Fishery • (might be a goal of a management agency) • assume constant price • A fish not caught yields 1 + F’ fish • F’ is the marginal product of a fish today in producing a fish tomorrow • Good deal if (1+ F’)/(1+r) > 0 • present value of the uncaught fish and its offspring.

27. Max Present value tp ht (1+r)-t s.t. biology xt+1 = xt+ f(xt) - ht Write L() = Get at steady state, if one exists: x* After some algebra f’(x*) = r Max sustainable Yield is f’() = 0 Both may or may not be likely to cause extinction Capitalist Fishery

28. The swamp • Low Interest means a Shopping Center gets built on the swamp. • Low interest means higher Capitalist managed stock of fish in remaining water. • Also means international financial chaos...

29. Ruined Regulated Blame Foreigners Blame Tech Progress True blame is fish industry to wanted the money now and didn’t care about later. George’s Bank

30. Sustainable More Stuff in Future Permanent Poverty OK Environmental Save Warm and Furry Creatures Save Trees Maybe even Save Creepy Crawlies Less Pollution People count, but so do other life forms Choose Your Banner Carefully