Economics and Ecology – basic ideas Toni Menninger
The Story of Stuff (20 min documentary)From its extraction through sale, use and disposal, all thestuff in our lives affects communities at home and abroad,yet most of this is hidden from view. The Story of Stuff is a20-minute, fast-paced, fact-filled look at the underside ofour production and consumption patterns. The Story ofStuff exposes the connections between a huge number ofenvironmental and social issues, and calls us together tocreate a more sustainable and just world. Itll teach yousomething, itll make you laugh, and it just may changethe way you look at all the stuff in your life forever.http://www.storyofstuff.org/movies-all/story-of-stuff/
The three pillars of sustainability Environment Economy Society
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.
Basic insights of Ecological Economics Externalities - hidden environmental / socialcosts Natural Capital and Ecosystem Servicesvaluation Shortcomings of GDP, alternative indicatorsof progress (GPI...) The human economy (the anthroposphere)as part of the ecosphere
Basic insights of Ecological Economics Economic Externalities: unintendedconsequences of economic activity Can be negative or positiveStandard example of negative externality:Pollution The polluter imposes a burden on otherpeople and/or on society at large The polluter has no economic incentive toreduce pollution or increase efficiency unless fullcost pricing is introduced
Economic measures to promotesustainability• Green taxes - "tax bads not goods" Full cost pricing - "internalizeexternalities“ (Pigouvian taxes) Marketable pollution permits - "cap and trade" Remove subsidies (e. g. fossil fuel industry,transportation industry)Alternative measures of success instead ofGDP
Economic incentives are effective! Prices change behaviorOilprice
“Tax bads not goods”:fuel taxes promote conservation
Economic externalities: External costs of Energy Who pays for these hidden costs?Hidden Costs of Energy: Unpriced Consequences of Energy Productionand Use Freely available at http://www.nap.edu/catalog.php?record_id=12794
Energy Efficiency through taxes?●Energy taxes are not a “drain” on the economy – they moveresources from less to more energy efficient sectors.●Revenues from energy taxes flow back into the domesticeconomy – money spent importing fuel is lost from the domesticeconomy.● Revenues from energy taxes can be redistributed to soften theimpact on low-income groups, or used to create jobs, orinvested in energy efficient infrastructure.●Energy generation and use causes massive negativeexternalities (carbon emissions etc.). Taxes designed tocompensate for a negative economic externality are known asPigouvian taxes. Standard economic theory predicts thatPigouvian taxes increase economic efficiency.● Difficulty: quantifying the externality●Difficulty: energy intensive industries will go where energytaxes and regulations are least strict
The Argument for Environmental Taxes“Environmental taxes can play a central role inreducing the fiscal gap in the years to come.These are efficient taxes because they tax “bads”rather than “goods.” Environmental taxes have theunique feature of raising revenues, increasingeconomic efficiency, and improving the publichealth. (…) It is striking how the political dialoguein the US has ignored a policy that has so manydesirable features. (…) Simply put, externalitytaxes are the best fiscal instrument to employ atthis time, in this country, and given the fiscalconstraints faced by the US.”Economist William D. Nordhaus
Whats wrong with GDP?The gross national product does not allow for the health of our children, the quality oftheir education, or the joy of their play. It does not include the beauty of our poetry orthe strength of our marriages; the intelligence of our public debate or the integrity of ourpublic officials. It measures neither our wit nor our courage; neither our wisdom nor ourlearning; neither our compassion nor our devotion to our country; it measureseverything, 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
Index of Sustainable Economic Welfare = Genuine Progress Indicator (GPI)GPI peaked in the 1970s while GDPcontinued growing. How could that be???
Whats 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 ofNatural Capital (deforestation, soil erosion,depletion of non-renewable resources, etc.) orthe depreciation of man-made capital.• GDP does not account for non-marketactivities (unpaid domestic work, unpaid carefor children, sick or elderly)• GDP does not account for inequality
Whats wrong with GDP?GDP includes economic activities that fewregard 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)
Whats wrong with GDP?Example: prisons US prison population increased from 500,000 in1980 (1 out of 450) to 2.3 million in 2008 (1 out of 132) Prisons cost 3% of the California state budget in1979, 10% now (higher education: reduction from 15%to 12%)
Whats wrong with GDP?Example: Health care National Health Expenditures (NHE, all privateand public spending on health care) was 5.2% ofUS economy in 1960, 17.9% in 2010. Average annual growth rate 5.5% (adjusted forinflation), compared to 3.1% GDP growth Doubling time 13 years! Over the 2000-2010 period, 42% of economicgrowth in the US was due to growth in healthcare expenses.
Whats wrong with GDP?Example: Health careOver the 2000-2010 period, 42% ofeconomic growth in the US was due togrowth 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 pointsThe Real GDP Quantity Index (NIPA Table 1.1.3) is calculated by the U.S. Bureau ofEconomic Analysis; it is adjusted for inflation and indexed to the year 2005=100.
Whats 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
Whats 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?
The economy as part of the ecosphere The ecosphere - a finite, materially closedsystem: nutrient cycles, nonrenewableresources Laws of Energy Steady but finite flow of solar energydrives almost all life processes on earth,ecosystem services Solar energy provides renewable hydro,wind, and biomass energy. Fossil fuels arecondensed solar energy.
The economy as a subsystemof the ecosphere FInite Global Ecosystem Solar Energy Entropic flow of matter-energy from Energy Growing Energy natures sources, Source Functions Economic Sink Functions Subsystem through the human Resources Resources economy, and back to natures sinks: Recycled Matter resources (low entropy) are converted to wastes and pollution (high entropy). Waste Heat
The Anthroposphere as a Subsystem of theEcosphere FInite Global Ecosystem Solar Energy Energy Energy Source Growing Sink Functions Economic Functions SubsystemDramatic economic Resources Resourcesand populationgrowth in recent Recycledcenturies – what Matterare the limits? Waste Heat
The Debate about Economic Growth• Is economic growth always desirable?• Is economic growth necessary?• Is economic growth sustainable?→ What do you think?
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.
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
The Debate aboutEconomic Growth:Thought-provoking readings