Unit 2, GRE401

Sustainable Development and
Competitive Advantage

Unit 2, Part 1:

Introduction to
Ecological Economic Efficiency

© Jeremy B Williams 2012

2

Outline

1) Limitations of the neoclassical model
2) EEE and the steady state economy
3) ‘Cowboy world’ vs ‘Spaceman world’
4) Reworking the circular model (Circular
flow in a steady state economy)


3

1. LIMITATIONS OF NEOCLASSICAL MODEL

• Neo-classical economics views the economy as an
isolated system in which neither matter nor
energy enters or exits – like an animal with no
digestive tract
• This vision might be useful for analysing
exchange between producers and
consumers, and related questions of price and
income determination
• It is quite useless for studying the relation of the
economy to the environment.


4

The economy as a closed system

• If the economy is the total system, the implication
is that growth is unconstrained by anything
• Nature may be finite, but it is just a sector of the
economy, for which other sectors can substitute
• Some people are quite content with this notion;
e.g. to trade off the Great Barrier Reef for access
to the Internet


5

The economy as a subsystem of a finite and
non-growing ecosystem

• Ecological economists see the economy as a
subsystem
• Beyond some point, it must approximate a steady
state in its physical dimensions
• According to this notion of the economy, it is
possible to develop qualitatively without growing
quantitatively
• The key is ecological economic efficiency (EEE)


6

2. EEE AND THE STEADY STATE ECONOMY

• EEE focuses on throughput use – what
flows through a system, entering as input
and exiting as output
• More specifically, the efficiency with which
capital (MMK and NK) is used to provide
life support and life-enhancing services.


7

[A note on stocks and flows]

• Stock is the accumulation of capital (MMK as well
as NK), that yields a flow of services.
• This flow of services are satisfactions of wants
yielded by the stock
• But the capital stock is an intermediary that, on
the one hand, yields services, and on the other
requires throughput for its maintenance and
replacement.


8

Defining the steady state
• EEE is consistent with the notion of the steady
state economy
• This is where throughput remains constant at a
level that neither depletes the environment
beyond its regenerative capacity, nor pollutes it
beyond its absorptive capacity.


9

SD = development
without growth
• In summary, a steady-state economy may
continue to develop greater capacity to
satisfy human wants by increasing the
efficiency of resource use, but not by
increasing the resource throughput


10

3. ‘COWBOY WORLD’ vs
‘SPACEMAN WORLD’
• The Economics of the
Coming Spaceship
Earth
By Kenneth E.
Boulding, 1966


11

• In a full (‘spaceman’)
world it could be at the
sacrifice of ecosystem
services required to
maintain the natural
capital stock.

• In an empty (‘cowboy’)
world increasing
throughput implies no
sacrifice of ecosystem
services

Examples of ecosystem services (Costanza et al 1997) 12

Ecosystem service Examples
Climate regulation Greenhouse gas regulation, dimethyl sulfide production affecting cloud
formation.
Disturbance regulation Storm protection, flood control, drought recovery and other aspects of
habitat response to environmental variability mainly controlled by
vegetation structure.

Water regulation Provisioning of water for agriculture (e.g. irrigation) or industrial (e.g.
milling) processes or transportation.
Water supply Provision of water by watersheds, reservoirs and aquifers.
Soil formation Weathering of rock and the accumulation of organic material.
Nutrient cycling Nitrogen fixation, nitrogen, phosphorous and other elemental or nutrient
cycles.
Waste treatment Waste treatment, pollution control, and detoxification.
Pollination Provision of pollinators for the reproduction of plant populations.
Biological control Keystone predator control of prey species, reduction of herbivory (plant
eating by insects) by top predators.
Food production Production of fish, game, crops, nuts, fruits etc. by hunting, gathering,
subsistence farming or fishing.
Raw materials Production of lumber, fuel or fodder.
Genetic resources Medicine, products for materials science, genes for resistance to plant
pathogens and crop pests, ornamental species (pets and horticultural
varieties of plants).

Recreation Eco-tourism, sport fishing and other outdoor recreational activities.
Cultural Aesthetic, artistic, education, spiritual and/or scientific values of
ecosystems.

13

Chinese proverb: “Better to give a man a rod than a fish”

Source: Daly, H.E. (2005) ‘Economics in a full world’, Scientific American, September, p. 102.

… the supply of fishing rods is no longer the problem

14

15 football pitches per day

Image source: nationalgeographic.com

• It is a shortage of trees, not chainsaws, that threatens timber
production

15

• Water itself has
become scarce
relative to the
powerful
pumping
technologies
used to access it


16
The economy as an open subsystem
of the biosphere
‘Cowboy’ economy ‘Spaceman’ economy
S S

Recycle Recycle

M M M M
Economy Economy
E E E E
Ecosystem
Ecosystem
H H

Legend Man-made Natural capital Solar energy Heat Matter Energy
capital
S H M E

17

4. A RE-WORKING OF THE CIRCULAR MODEL
(CIRCULAR FLOW IN A STEADY STATE ECONOMY)
Must be within the regenerative
and absorptive capacities of the
ecosystem if steady state economy
Depletion-Production is to be maintained

S

Ecosystem Economy
Throughput
(stocks)

H

Pollution-Depreciation
Ecosystem Economic
services Service services

18

Ecological Economic Efficiency defined
• It follows that the efficiency with which humankind
satisfies its wants depends on the amount of service
generated per unit of MMK, and the amount of service
sacrificed per unit of NK lost as a result of its
conversion into manmade capital
• This conception of ecological economic efficiency may
be expressed thus:

EEE = MMK services gained
NK services sacrificed


19

Sustainable Development and
Competitive Advantage
Module
Unit 2, Part 2:

Sustainable Development
and Ecological Economic Efficiency


20

Outline
1) The Comprehensive Efficiency Ratio
2) Service efficiency
3) Throughput efficiency
4) Growth efficiency
5) Eco-system efficiency
6) Optimal macroeconomic scale
7) The three principles of sustainability


21
1) THE COMPREHENSIVE
EFFICIENCY RATIO (CER)
• The efficiency with which humankind satisfies its
wants depends on the amount of service generated
per unit of MMK, and the amount of service sacrificed
per unit of NK lost as a result of its conversion into
manmade capital
• This conception of ecological economic efficiency may
be expressed thus:

CER = MMK services gained
NK services sacrificed


22

The four components of the CER

• The CER can be disaggregated into four
components by means of an identity
• Each element of the identity represents a
dimension of efficiency that might be
improved by increased investment in
knowledge or technique.


23

The 4 factors of overall
efficiency
MMK services gained
NK services sacrificed =

MMK services gained MMK stock Throughput NK stock
MMK stock X Throughput X NK stock X NK services
sacrificed
(1) (2) (3)
(4)


24

2) SERVICE EFFICIENCY
• Ratio (1) is the service efficiency of the MMK stock
• It depends upon:
i. the technical design efficiency of the product itself
ii. the economic efficiency of resource allocation among the
different product uses according to individual
preferences and ability to pay
iii. the distributive efficiency among individuals

(Mainstream economists refer to this as allocative efficiency)


25

… the nature and quality of the
service
• An iPod that malfunctions shortly after
purchase is not service efficient
• A bridge that collapses under the weight of
the vehicles using it, is not service efficient
• A café offering only full cream milk coffees
is probably not service efficient.


26

Improving service efficiency
1. Is it possible to get more service from a
product using the same amount of MMK?
or…
2. Is it possible to get the same amount of
service by using up less product (i.e. by
using up less MMK)?


27

(The ‘good juice of utility’)

• ‘So much of the
good juice of utility
is allowed to
evaporate out of
commodities by
distributing them
unequally’
Joan Robinson (1962) Economic
Philosophy, London: C.A. Watts.
Source: http://cepa.newschool.edu/~het/profiles/robinson.htm

Joan Robinson 1903-83

28

3) THROUGHPUT EFFICIENCY
• Ratio (2) reflects the throughput efficiency or
durability of the MMK stock
1. Is it possible to get more man-made capital (cars,
refrigerators, iPods etc.) from a given amount of
throughput?
or…
2. Is it possible to get the same amount of man-
made capital using less throughput?


29

Generating throughput efficiency
• A slower rate of throughput, means
reduced depletion and pollution
• Throughput efficiency is increased by
designing commodities to be durable,
repairable, and recyclable
• Eliminating planned obsolescence and
excessive model changes would improve
this ratio.


30

4) GROWTH EFFICIENCY
• Ratio (3) is the growth efficiency of natural capital
in yielding an increment available for throughput
1. Is it possible to get more throughput per unit of
natural capital stock used up?
or…
2. Is it possible to get the same amount of throughput
but use up less natural capital to get it?


31

Factors affecting growth efficiency
• It is determined by the biological growth rate of
the population or ecosystem being exploited
• For example, paulownia trees grow faster than
silky oak, so in cases where either will
do, paulownia is more efficient


32

(A distorted picture of growth
efficiency)
• In the short run this ratio can be driven very high
by the non-sustainable practice of exceeding
renewable rates of harvest and the conversion of
permanent stock into one-time throughput
• This appears as an increase in growth efficiency
due to the standard national accounting practice
of counting natural capital depletion as current
income.


33

5) ECO-SYSTEM EFFICIENCY
• Ratio (4) measures eco-system service efficiency
– the amount of natural capital stock that can be
exploited for throughput (either as source or
sink), per unit of other natural capital services
sacrificed

• e.g. exploitation of a forest to get maximum
sustainable yield of timber will be at the
opportunity cost of other eco-system services
such as wildlife habitat, erosion control, and
water catchment


34

Improving ecosystem efficiency
1. Is it possible to obtain or extract the natural
capital resource input in a less harmful way?
or
2. Is it possible to use (or dispose of) a natural
resource, or choose an alternative resource, such
that less damage is done to the assimilative
capacity of the earth’s ecosystems?


35

Undermining ecosystem efficiency
• Harmful fishing technologies which ‘strip-mine’
ocean ecosystems not only catch many non-
target species, but also lay waste to the sea-floor.
The habitat of remaining species is therefore also
destroyed

• Use of natural resources that leave toxic residues
in landfill or waterways or release harmful
emissions into the atmosphere (e.g. from burning
fossil fuels).


36

6) OPTIMAL MACROECONOMIC SCALE

• In a ‘full world’, the maximisation of EEE will
produce a theoretical optimum for an economy;
its optimal macroeconomic scale

• This optimum position will be consistent with the
notion of the steady-state economy

• Operationally, arriving at this point and staying
there – even with a sound understanding of the
science – is most unlikely in a complex and
increasingly dynamic world


37

Operational objectives
• In practical terms, therefore, a workable goal is to
stay below known thresholds and aim to keep
‘shocks’ small and local, (rather than large and global)

• It is evident that the health of many of the world’s
ecosystems are already at (or close to) critical points

• An apt ‘operational’ rule would be to attempt to
preserve and (where possible) restore the integrity
of all natural capital so as to protect its vital
ecosystem services … raw material inputs, waste
assimilation services, life-supporting functions, etc


38

Managing depletion
• How can we make non-renewable natural capital
last (e.g. oil and other minerals), if so much of our
expanding MMK is made from it and the resource
is finite and exhaustible?
• Rapid depletion of important mineral resources is
a threat to intergenerational equity


39

Business continuity
• Ecological enomists have suggested that one way
to manage the transition is to pair a non-
renewable mining project with a renewable
project
• A part of the net receipts from liquidation of the
non-renewable resource can be dedicated to
finance investments in renewable natural capital


40

Cross-subsidisation
• The net receipts from the exploitation a non-
renewable resource need to be divided into two
components
– an income component
– a capital to be set-aside component

• The capital set-aside is invested in a renewable
substitute so that, by the time the non-renewable
resource is depleted, the stocks of the renewable
resource will have the capacity to replace the
non-renewable resource


41

7) THE THREE PRINCIPLES OF
SUSTAINABILITY
1. Limit use of all resources to rates that ultimately
result in levels of waste that can be absorbed by
the ecosystem
2. Exploit renewable resources at rates that do not
exceed the ability of the ecosystem to
regenerate the resources
3. Deplete non-renewable resources at rates
that, as far as possible, do not exceed the rate of
development of renewable substitutes


42


43

Case Study 2:

Life enhancing services and life
support services: Finding the balance


44

Think


45

Centre for Science and Environment

• Established in 1980, CSE is
an NGO committed to
development that is both
sustainable and equitable
• It conducts research,
lobbies government and
business, and
communicates and
Anil Agarwal, Founder-Director educates to raise
awareness


46

The challenge
• According to Agarwal, there are two dimensions to the
challenge:
• First, millions live within a subsistence economy, at the
margins of survival, where the environment is their only
natural asset. A degraded environment means stress on
land, water and forest resources for survival, which means
increasing destitution and poverty
• Second, rapid industrialisation is throwing up new
problems: growing toxicity and a costly disease burden.


47

India's Ecological Footprint
1961-2002


48

Minister for the Environment
and Forests
• Ms Natarajan took office in July
2011 (having previously been
minister of state in the civil
aviation and parliamentary
affairs ministries)
• Agarwal has been quite
impressed with her
contributions to date, but feels
she has yet to grasp the
concept of ecological economic
efficiency
Ms Jayanthi Natarajan

49

Read


50

• Web-based data on India relating to
economy and ecology
• PowerPoint Slides for Unit 2
• Study Guide for Unit 2
– particularly Topics 2.2 and 2.3


51

Discuss


52

Life-enhancing services and life-
support services in India
• Consider the life-enhancing services
generated through MMK
• Consider the sacrifice of life-support
services as a result of the reduction in NK
• Consider the dynamics of this relationship
and how it is changing within the Indian
context


53

Deliver


54

Your consultancy company has
been contracted by CSE
• With a growing reputation in South Asia for your
expertise in ecological economics, CSE would like
you to produce a Situation Analysis which it can
then present to the Minister for the Environment
and Forests
• The brief from Agarwal is that the Situation
Analysis need only be a broad overview at this
stage, and that your primary focus should be on
the current health of ecosystem services


55

Prepare for a 10 minute presentation to
Anil Agarwal …

• Drawing on the resources you
have at your disposal, critically
evaluate the current state of life-
enhancing and life-supporting
services in India, and the
prospects for development that is
sustainable and equitable


Unit 2, GRE401

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