ecological economics lecture 08 13th may 2010 rui pedro mota tiago domingos environment and energy...
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Ecological EconomicsLecture 08
13th May 2010
Rui Pedro MotaTiago Domingos
Environment and Energy SectionDepartment of Mechanical Engineering
World Bank’s Genuine Savings
World Bank’s Genuine Savings
Criteria for Sustainability, Pezzey (2004) EDE
• An economy is sustainable at time t if and only if the representative agent’s current utility does not exceed the maximum level of utility which can be sustained forever from t onwards.
• One-sided sustainability test:
un-sustainable development.
• Multisector results in real terms.
– Real Net Income,
– Genuine Saving,
–
0 0dY
QI ordt
P C Q IY
dY R dWR
dt dt Q I
Q IConsumption Investment
Variation in Real Net Income
Variation in Welfare
Small Open Economy
• Include – stocks of commercial forests,
– welfare costs of air emissions,
• The capital stocks are :
– Domestic man-made capital,
– Net foreign capital held privately or by the government,
– Stock of commercial natural resources
• Production
K : ( , ,S)fK K
dKI CFC
dt
ff R X MdK
rK X Mdt
Q (R R )
d XdS
dt G(S) R R
d M d XI F K M X C a f ( , R R ) (R R ,S)
r – interest rate
Small Open Economy
• Households’ utility function depends on material consumption rate and (negatively) on the flow of emissions
• The vector of emissions depends on production and abatement expenditure.
• Maximize welfare subject to the above relations and having as controls consumption, , all forms of extraction, , abatement expenditure and trade balance .
• Conventional (SNA) NNI:
• Green Net National Income:
• Genuine Saving (Adjusted Net Saving):
(C) : ( ,E)U U C
E( ( ),a)F
( )C t R ( ), R ( ), R ( )d X Mt t ta( )t ( ) ( )M t X t
: fNNI C K K
R(Q f ) S e ER tY NNI Q
R(Q f ) St R tQK Q NNI C Q
Small Open Economy – Table of symbols( )C t Consumption rate at time t
( )U Utility
E( ) Rate of emissions of air pollutants
( )F Production function
a Abatement expenditure
, , ,iR i d X M Extraction of natural resources for domestic use, exports and from imports.
M X Imports - Exports
r Constant nominal interest rate
S Stock of resources
K Man-made capital,
RQ Resource price
R Constant real interest rate
(R R ,S)d Xf Cost of extraction of resource
e Marginal cost of abatement = Marginal damage cost
Rf Marginal cost of abatement
fK Net foreign capital
Small Open Economy
• Starting from conventional SNA aggregates:
– Deduct the damage from flow pollution emissions,
– Deduct (add) the value of rents from resource depletion (or not),
e E
R(Q f ) SR
-20000
0
20000
40000
60000
80000
100000
120000
140000
1990 1995 2000 2005
Mill
ion
€
GNI
CFC
Air emissions
Forest Depl.
Tech. Progress
GNNI
Pot GNNI
GNNI, T=100
GNNI and GS in Portugal – Air Emissions
• How to value a unit of emissions?– Marginal benefit of avoided emission,
– Marginal cost of emission (MDC), or
– Marginal abatement costs?
• Marginal cost of emission per emitted pollutant [€2000/ton]:
[€2000/t] Best Low High
SO2 6872 3472 9972
NH3 7399 3699 10999
NOx 2040 1140 3040
VOC 1150 450 1550
PM2,5 44000 22000 64000
• Models point to measure emissions at the – Marginal cost of abatement (MCA), or
– Marginal social cost (MSC) = Marginal benefit of abatement (MBA), a.k.a. Marginal Damage Costs (MDC)
• Measurement away from the optimum– c, over-polluting (assumed current state) => a is upper bound
– d, under-polluting => b is lower bound
Social costs vs Marginal abatement
Constant MDC
GNNI and GS in Portugal – Air Emissions
0
10
20
30
40
50
60
70
1990 1995 2000 2005
% o
f to
tal c
ost
SO2
NH3
NOx
VOC
PM2,5
GNNI and GS in Portugal – Forests
• National Forest Inventory 2005/06
• Average Volumes:
Conifers
Eucalyptus
95/98 05/06[m3/ha]
88.5
55 55
82.5
0
200
400
600
800
1000
1200
1400
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
10^3
ha
Conifers
Eucalyptus
GNNI and GS in Portugal – Forests
-200
-150
-100
-50
0
50
100
1990 1995 2000 2005
mill
ion
€ConiferousEucalyptus
The depreciation of commercial forests in Portugal is on average 10% of the contribution of forestry to national product (around 4%).
Forest Depletion in Genuine Savings
• Net Forest Depletion = Net Rent / GNI * 100
• Net Rent = (Production - Increment)*Unit Rent
• Stock Changes = Increment – Production
• Unit Rent = Price – unit cost
• Whenever depletion is positive the WB assumes it to be zero. Bias towards unsustainability.
GS in Portugal
• Without the value of time – Decreasing tendency throughout the period and negative GS after 2002.
• With the value of time – Decreasing tendency until 2001, but GS are always positive.
• In 1993, SO2 costs of emissions, which represent around 30% of total emission costs, decreased substantially. Increases welfare but does not counteract the loss of production.
Sustainability Message
What’s Missing?
• The depletion of water resources.
• The depletion of biodiversity.
• Depletion of stocks of fish.
• Inclusion of the value of ecosystem services.
• Soil quality.
• Distributional issues (intragenerational concerns).
• Other assumptions ...
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