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Growth and environment, and how to measure welfare

Growth and environment, and how to measure welfare. Economic growth and environment. Does economic lead to a deteriorating environment? Is economic growth a necessary precondition for a good environment?

thaddeus-munoz
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Growth and environment, and how to measure welfare

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  1. Growth and environment, and how to measure welfare

  2. Economic growth and environment • Does economic lead to a deteriorating environment? • Is economic growth a necessary precondition for a good environment? • Can we use economic theory to understand and explain the relationship between growth and environment? • Sustainable development, how do we know?

  3. What is this? GDP CO2 SO2

  4. Pessimist I Thomas Robert Malthus, Essay on population (1798) Population Food production Human population grows faster than food production time

  5. Pessimist II Club of Rome. Limits to growth, Meadows, m.fl.(1972) population emissions natural resources 1900 2000 2100

  6. Pessimist assumptions • Club of Rome (and Malthus) predictions were based on e.g.: • Given land area for agricultural production • Upper limit for agricultural production per hectare • Upper limit for the ability of the ecological system to assimilate leftovers from consumption and production. • Hard to include technical progress in this type of model • e.g. growth in telecom in relation to copper demand

  7. The EnvironmentalKuznetsCurve (EKC) “The view that greater economic activity inevitably hurts the environment is based on too static assumptions about technology, tastes and environmental investments”. World Development Report 1992, The World Bank Emissions At high income levels emissions are decreasing with higher income At low income levels emissions are increasing with income Income

  8. Production possibilities production, Q emissions, z Technical development means that we can produce more with the same resources, alternatively produce the same amount with less resource use. 3 Q = Q (z ) 0 Q 3 2 Q = Q (z ) 0 Q 2 1 Q = Q (z ) 0 Q 1 z 0

  9. utility, U disutility, -U U(Q) U 1 -U 1 U 0 -U 0 Q 2 * Q emissions, z consumtion, Q 0 0 Preferences (taste) (a) (b) More emissions increase disutility z 2 * z 0 0 Consumtion of goods (Q) increase utility (U), but at a decreasing rate (second pizza slize not as good as the first)

  10. Consumption or environment? consumtion, Q consumtion, Q U U 2 2 U > U U 2 1 1 U 1 Q(z) b a emissions, z emissions, z Indifference curves U1 and U2 show different combinations of consumption and emissions that give the same utility (U2 higher than U1) Point b is the combination of consumption and emissions that gives the highest utility and is possible.

  11. Growth and environment Consumption (income) U 2 U U 2 2 Q (z) 4 U Q (z) 1 3 Q (z) 2 Q (z) 1 emissions, z Source: Brännlund & Kriström (1999) Technical development means that the production function shifts upward. We can consume more, have a better environment or both. Depending on preferences it can imply that we reduce consumption in favor of a better environment.

  12. EKC in realityCO2 och NOx koldioxid nitrogen monoxide

  13. EKC in realitySO2

  14. Conclusions • Economic growth does not have to imply reduced environmental quality • Depending on preferences technical development can actually improve environmental quality • However, the existence of an EKC does not mean that growth policy can solve all environmental problems.

  15. What are national accounts and why do we have them? • A systematic way to keep track of the economic activity of a country • Five main tasks • To describe economic activity • To give an image of how income changes affect consumption and other parts of the economy • To give the basis for structural (macro) analyses of the economy • To give the basis for the government budget • To give the basis for forecasts of the economic activity

  16. GDP as a welfare measure What is GDP? GDP = Consumption + Gross investment + Export - Import (”expenditure side”) GDP = Profits + wages (”income side”) GDP = Sum of value added (”production side”) Gross investment = new investment + reinvestment Is GDP a good measure of welfare?

  17. GDP as welfare measure Gross and net investments The capital stock, K, in period t is equal to: d = capital depreciation It = Gross investment Net investment, or the change in the capital stock, is then: i.e., equal to gross investment minus capital depreciation Gross investment is then equal to: i.e., equal to net investment + capital depreciation

  18. GDP as welfare measure • Assume that Ex = Im = G = 0: • GDPt= Ct + It • Through the expression for Iwe get that: • GDP can increase although the capital stock is decreasing. Does this mean that welfare has increased? • Depends on how welfare is defined • If welfare only depends on the consumption in period t, the welfare has increased • But if welfare also depends on the consumption in period t+1, t+2, etc. then welfare doesn’t necessarily increase if GDP increases. How come?

  19. GDP as welfaremeasurea simple example An economy with one resource, oil. Consumption is equal to the extraction of oil The capital stock is equal to the amount of oil in the ground We then has that: GDPt= Ct + It = Ct - Ct + Ct = Ct GDP in a certain period is equal to the oil extraction. GDP measures the activity in a certain period Change in capital stock, net investment Gross investment

  20. GDP as welfare measure But if welfare depends on future consumption? We should ask the question if GDP = C is a sustainable level? Consumption possibilities in the long run depend on net investments. A unit of oil extracted today is a unit less to use in the future. We are depreciating the capital with Cin every period. We then get that Net National Product is equal to: NNPconsiders capital depreciation and hence reflect welfare better

  21. GDP as welfare measure GDP = C + Gross investment NNP = GDP – Capital depreciation NNP takes capital depreciation into account (net investment). NNP is therefore a better welfare measure since future consumption is considered GDPandNNP in the ”oil economy” GDP = C NNP = GDP – capital depreciation = C - C = 0

  22. Green accountingProblems with GDP and NNP • Home work (unpriced) is not included • The distribution of income in society is not considered • The value of leisure time is not included • Consumption of many environmental goods and services are not included (the ones who are unpriced, or who has the ”wrong” price) • Investments in natural capital are not included (only investment in buildings and machines are included) GDP and NNP does not measure activity and welfare in the correct way

  23. Green accountingEnvironmentally adjusted accounts From the present GDP we must: 1. subtract the value of environmental damages Green GDP = GDP – value of environmental damages From present NNP we must: 1. Subtract the value of environmental damages 2. Add net investment in natural capital Green NNP = NNP – value of environmental damages+ net investment in natural capital

  24. Sustainable development, what is the meaning? In the UNCED:s report "Our Common Future" from 1987 (the Brundtlandcommision) sustainable development is defined as: "...meets the needs of the present without compromising the ability of future generations to meet their own needs"

  25. Sustainable development defined Sustainable development can imply that… • …welfare, or consumption does not diminish (Solow, 1974) • …the natural capital stock does not diminsih. Limited room for replacing (substituting) natural capital with manufactured or human capital. • …a positive yield from different capital stocks is achieved. • …the sum of welfare over all generations does not diminish (DasguptaandMäler, 2000, 2001) • …the value of net changes of all assests does not diminish (genuine saving) 1) and 5) are the definitions that are closest to the original idea in the Brundlandt commission

  26. How to measure sustainable development • Environmentally adjusted GDP • Does not consider future consumption possibilities, capital depreciation is not included • Environmentally adjusted NNP • Considers future consumptions possibilitites, takes capital depreciation into account • Genuine saving • Value of net change in all capital stocks. • A measure closely related to NNP.

  27. Genuine saving, Sweden(million kr, 1913 prices)

  28. Genuine saving% of GDP

  29. Environmentally adjusted accounts: The green gold of the forest

  30. Genuine Savings

  31. Genuine savings

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