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 ...