Basic ideas in Ecological Economics

1. Economics and Ecology –
basic ideas
Toni Menninger

2. The Story of Stuff (20 min documentary)
From its extraction through sale, use and disposal, all the
stuff in our lives affects communities at home and abroad,
yet most of this is hidden from view. The Story of Stuff is a
20-minute, fast-paced, fact-filled look at the underside of
our production and consumption patterns. The Story of
Stuff exposes the connections between a huge number of
environmental and social issues, and calls us together to
create a more sustainable and just world. It'll teach you
something, it'll make you laugh, and it just may change
the way you look at all the stuff in your life forever.
http://www.storyofstuff.org/movies-all/story-of-stuff/

3. The three pillars of sustainability
 Environment
 Economy
 Society

4. Why need to consider the economy?
 Much of what humans do - the good and the bad -
are economic activities. Resource depletion and
pollution result from economic activities.
 Ecosystem services have a genuine economic value.
 Businesses and consumers are motivated by
economic incentives. These incentives (usually short
term) need to be aligned with the long term goal of
sustainability.
• Ethical insight (knowing what is right or wrong) is
often trumped by the profit motive.

5. Basic insights of Ecological Economics
 Externalities - hidden environmental / social
costs
 Natural Capital and Ecosystem Services
valuation
 Shortcomings of GDP, alternative indicators
of progress (GPI...)
 The human economy (the anthroposphere)
as part of the ecosphere

6. Basic insights of Ecological Economics
 Economic Externalities: unintended
consequences of economic activity
 Can be negative or positive
Standard example of negative externality:
Pollution
 The polluter imposes a burden on other
people and/or on society at large
 The polluter has no economic incentive to
reduce pollution or increase efficiency unless full
cost pricing is introduced

7. Economic measures to promote
sustainability
• Green taxes - "tax bads not goods"
 Full cost pricing - "internalize
externalities“ (Pigouvian taxes)
 Marketable pollution permits - "cap and trade"
 Remove subsidies (e. g. fossil fuel industry,
transportation industry)
Alternative measures of success instead of
GDP

8. Economic incentives are effective!
Prices change behavior
Oil
price

9. “Tax bads not goods”:
fuel taxes promote conservation

10. Economic externalities: External costs of Energy
Who pays for these hidden costs?
Hidden Costs of Energy: Unpriced Consequences of Energy Production
and Use Freely available at http://www.nap.edu/catalog.php?record_id=12794

11. Energy Efficiency through taxes?
●Energy taxes are not a “drain” on the economy – they move
resources from less to more energy efficient sectors.
●Revenues from energy taxes flow back into the domestic
economy – money spent importing fuel is lost from the domestic
economy.
● Revenues from energy taxes can be redistributed to soften the
impact on low-income groups, or used to create jobs, or
invested in energy efficient infrastructure.
●Energy generation and use causes massive negative
externalities (carbon emissions etc.). Taxes designed to
compensate for a negative economic externality are known as
Pigouvian taxes. Standard economic theory predicts that
Pigouvian taxes increase economic efficiency.
● Difficulty: quantifying the externality
●Difficulty: energy intensive industries will go where energy
taxes and regulations are least strict

12. The Argument for Environmental Taxes
“Environmental taxes can play a central role in
reducing the fiscal gap in the years to come.
These are efficient taxes because they tax “bads”
rather than “goods.” Environmental taxes have the
unique feature of raising revenues, increasing
economic efficiency, and improving the public
health. (…) It is striking how the political dialogue
in the US has ignored a policy that has so many
desirable features. (…) Simply put, externality
taxes are the best fiscal instrument to employ at
this time, in this country, and given the fiscal
constraints faced by the US.”
Economist William D. Nordhaus

13. What's wrong with GDP?
The gross national product does not allow for the health of our children, the quality of
their education, or the joy of their play. It does not include the beauty of our poetry or
the strength of our marriages; the intelligence of our public debate or the integrity of our
public officials. It measures neither our wit nor our courage; neither our wisdom nor our
learning; neither our compassion nor our devotion to our country; it measures
everything, in short, except that which makes life worthwhile.
Robert F. Kennedy, 1968
Some would blame our current problems on an organized conspiracy. I wish it were so
simple. Members of a conspiracy can be rooted out and brought to justice. This system,
however, is fueled by something far more dangerous than conspiracy. It is driven not by a
small band of men but by a concept that has become accepted as gospel: the idea that all
economic growth benefits humankind and that the greater the growth, the more widespread
the benefits.
John Perkins, Confessions of an Economic Hit Man, 2004
Our phony economy
Jonathan Rowe, Harper’s Magazine 2008
http://harpers.org/archive/2008/06/0082042

14. Index of Sustainable Economic Welfare =
Genuine Progress Indicator (GPI)
GPI peaked in the 1970s while GDP
continued growing. How could that be???

15. What's wrong with GDP?
• GDP does not distinguish cost from benefit –
in fact costs are counted as a positive.
• GDP does not account for the liquidation of
Natural Capital (deforestation, soil erosion,
depletion of non-renewable resources, etc.) or
the depreciation of man-made capital.
• GDP does not account for non-market
activities (unpaid domestic work, unpaid care
for children, sick or elderly)
• GDP does not account for inequality

16. What's wrong with GDP?
GDP includes economic activities that few
regard as desirable:
• Transaction costs: administration, government,
financial system, legal system, litigation
 Cleaning up oil spills, toxic dumps
 Damage repair after disaster
 Cost of crime, law enforcement
 War, military expenses
 ... (name your own example)

17. What's wrong with GDP?
Example: prisons
 US prison population increased from 500,000 in
1980 (1 out of 450) to 2.3 million in 2008 (1 out of 132)
 Prisons cost 3% of the California state budget in
1979, 10% now (higher education: reduction from 15%
to 12%)

18. What's wrong with GDP?
Example: Health care
 National Health Expenditures (NHE, all private
and public spending on health care) was 5.2% of
US economy in 1960, 17.9% in 2010.
 Average annual growth rate 5.5% (adjusted for
inflation), compared to 3.1% GDP growth
 Doubling time 13 years!
 Over the 2000-2010 period, 42% of economic
growth in the US was due to growth in health
care expenses.

19. What's wrong with GDP?
Example: Health care
Over the 2000-2010 period, 42% of
economic growth in the US was due to
growth in health care expenses
How to calculate:
2000: NHE 13.8% of 88.9 GDP quantity index
2010: NHE 17.9% of 103.5 GDP quantity index
-> NHE increased 6.2 index points (from 12.3 to
18.5), GDP 14.6 index points
The Real GDP Quantity Index (NIPA Table 1.1.3) is calculated by the U.S. Bureau of
Economic Analysis; it is adjusted for inflation and indexed to the year 2005=100.

20. What's wrong with GDP?
Example: Arms sales

21. What's wrong with GDP?
Income Distribution and Inequality
Share of pre-tax
income of top 1%
of households
increased from
8% in 1970s to
20% in late 2000s
-> top 1% earners
captured about
28% of the
economic growth
of last 30 years

22. What's wrong with GDP?
Why Inequality Matters
• Statistically misleading: When Bill Gates
enters a bar, the average income of patrons
soars.
• Economic inefficiency: scarce economic
resources should be directed where they do
the most good.
• Diminishing returns and declining marginal
utility: a dollar has more value for a homeless
beggar than for a billionaire.
• Social Justice: Do the super-rich “deserve”
their wealth? Do the poor “deserve” poverty?

23. The economy as part of the ecosphere
 The ecosphere - a finite, materially closed
system: nutrient cycles, nonrenewable
resources
 Laws of Energy
 Steady but finite flow of solar energy
drives almost all life processes on earth,
ecosystem services
 Solar energy provides renewable hydro,
wind, and biomass energy. Fossil fuels are
condensed solar energy.

24. The economy as a subsystem
of the ecosphere FInite Global Ecosystem
Solar
Energy
Entropic flow of
matter-energy from
Energy Growing Energy
nature's sources, Source
Functions
Economic Sink
Functions
Subsystem
through the human Resources Resources
economy, and back
to nature's sinks: Recycled
Matter
resources (low
entropy) are
converted to wastes
and pollution (high
entropy). Waste Heat

25. The Anthroposphere as a Subsystem of the
Ecosphere FInite Global Ecosystem
Solar
Energy
Energy Energy
Source Growing Sink
Functions Economic Functions
Subsystem
Dramatic economic Resources Resources
and population
growth in recent Recycled
centuries – what Matter
are the limits?
Waste Heat

26. The Debate about Economic Growth
• Is economic growth always desirable?
• Is economic growth necessary?
• Is economic growth sustainable?
→ What do you think?

27. Toward Sustainable Ethics
Frontier Ethics
American frontier people hat little notion of
limits. Frontier ethics influences countless
decisions every day.
Sustainable Ethics
The Earth’ resources are finite and should be
managed carefully.
Aldo Leopold’s land ethic (1933) held that
humans were part of a larger community that
included the soil, water, plants, and animals.

29. Take Home Message
• Economic incentives matter
• Economic Externalities: unintended consequences of
economic activity
• Genuine Progress Indicator (GPI)
•versus Gross Domestic Product (GDP)
• Examine the big picture

30. The Debate about
Economic Growth:
Thought-provoking
readings