DE303 Sanatan Nayak L1 Definition Meaning of Environment It is sum total of things or circumstances surrounding an organism including humans Natural Environment all biotic amp abiotic ID: 926645
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Slide1
Economics and the Environment
DE-303
Sanatan Nayak
L-1
Slide2Definition
Meaning of Environment:
It is sum total of things or circumstances surrounding an organism including humans.
Natural Environment – all biotic &
abiotic
elements that forms our
surroundings.
Our
land, water, forests, seas, animals and all
living things.
Slide3Functions of Environment
Provision of natural goods, lakes, landscapes, wildlife.
Supplying natural resources, land, water, forests and minerals.
Functioning as sink into which by-products of economic activities are dumped.
Providing environmental services and amenities such as Ozone layer, climatic stability, genetic diversity, recreation etc.
Slide4Definitions of Environmental Economics
Sub part of economics: choice of economic behavior.
Lionel Robbins: Economics is the science which studies human behavior as a relationship between ends and means, which have alternative uses.
EE to study why and how human beings interact with their environment, the way they do, how they use and manage the environmental resources and what are the impacts of human activity.
Slide5Definitions Cont..
Sub-disciplines: micro, macro and welfare
EE seeks the analysis of environmental issues.
It deals with interdependence and interactions between human being and economic activity.
Positive and Normative EE
Positive is descriptive and predictive, where as normative is prescriptive.
Slide6Traditional Economics and Environmental Economics
Traditional
Economy: Micro, Macro, Public Economics, Trade, Econometrics and applied
field of
economics
Contribution of EE
It deals with the interaction between economic development and environment.
Non-
Mkt
valuation, i.e. methods for measuring
demand curve for goods
.
Adopt
tools form other parts of economics to question regarding environment.
Slide7Economics
Environment Economics
No Interaction economics & Environment
Yes, Interaction.
Private goods, brought & sold on market.
Public goods, no market.
No consideration the externality
Externality exist
Time related decision & no equality
Time related decision & equity considerations
No limited capacity of environment to provide inputs for productions
Limited capacity of environment
Slide8Contribution of Environmental Economics
It deals with the public goods with no market situations.
It handles with externality and market failures.
It considers the time related decision and equity.
It always considers environment has limited capacity.
Slide9Natural Resources: The concepts
Pre-classical or Physiocratic school of thoughts (1758-1778 AD).
Classical economists (1776-1890 AD): Land, labour and capital .
Natural elements: All original elements that comprise earth’s life support systems such as air, water, earth’s crust.
Examples of Natural Resources: arable land, wilderness areas, mineral fuels, non-fuel minerals, watersheds, degradation of waste, ozone layer.
Slide10Ecological Perspectives
Slide11Renewable and Non-Renewable Resources
Biological Resources: Plants and Animals have self regenerating capacity.
Flow resources: continuous renewal of these resources is largely detected by atmospheric and hydraulic circulation.
Non-renewable resources: Metallic (iron, aluminium, copper and uranium) and non-metallic minerals (fossil fuels, clay, sand, salt and phosphates).
Natural economics is divided into environmental and resource economics
.
Slide12Environmental & Resource Economics
Environmental Economics
Resource
Economics
EE assess the damages inflicted on the environment. Present and future damages such as health cost, lower productivity, depletion of ground water
It determine the rate of extraction of renewable and non-renewable resources over time
EE studies
what is put into the environment
It deals with what
is removed from the environment.
It is both normative and positive.
Ecological economics is normative . It takes more bio-physical views.
Both are inter related. It means what is to be disposed off into
the environment affects what is to be withdrawn.
Slide13Evolution & Growth of EE
Classical Economist: Adam Smith (1776), Malthus (1798), Ricardo (1817), J.S. Mill (1885; Principles of Political Economy).
Did not explicitly address environment issues but left the legacy of ideas:
Ricardo: Growth with Scarcity of Natural Resources.
J.S. Mill: Technical Change & Diminishing Returns in Agriculture.
Classical Political Economy pessimistic about long run growth.
Neo- Malthusian Views :
Ehrich
-Commoner Model.
Neo-Classical Thoughts: Growth Economics emerged (1960): EKC by Simon
Kuznet
.
Slide14Evolution & Growth of EE
As a sub-discipline of economics, EE started in 1960s, the environment movement.
1972 Stockholm conference on Human Development and Environment.
1974: Journal of Environmental Economics and Management.
1987:
Brundtland
Commission’s Report “Our Common Future”.
Establishment of ISEE in 1989: International Society in Ecological Society.
1992 – Earth Summit of
United Nations Conference on Environment and Development
(
UNCED
) held at
Rio de Janeiro.
It Prompted UNSD, to prepare & publish in 1993, a Handbook of National Accounting entitled “Integrated Environmental Economics Accounting (CEEA).
Slide15Evolution & Growth of EE
1992: World Development Report: Development and Environment.
1992: Creation of UNFCCC for Climate Change Control and subsequent conferences on Climate change.
In 2002, the
United Nations Conference on Sustainable Development
was also held in
Johanessburg
, and is also commonly called Rio+10.
In 2012, the
United Nations Conference on Sustainable Development
was also held in Rio, and is also commonly called Rio+20 or Rio Earth Summit 2012.
Swadish
Royal Academy’s
Beiler
Institute in Sweden.
Establishment of Ecological Economics:
Keneth
Boulding
, Nicholas
Geozgescu-Rogen
( Energy and Thermodynamics),
Hermon
Daly ( Steady State Economy).
Establishment of Sustainable Development:
Brandtland
Report ,
Hartwick
Solow Approach, Safe Minimum Approach, National Income Accounting.
Slide16Issue in Environmental Economics
Measuring the demand for non-marketable goods.
Methods are of great controversy.
Stated Preferences – some people says they are biased & worst.
Others say they valid and tremendous importance.
2. Regulation of environment goods: equity, different amount of information by polluters and government.
3. International issues of environmental regulation:
Climate change:
Trade Regulations: whether free trade at the cost of environment or trade liberalizations.
Slide17Environmental Economics: Scope and Nature
Human Activity that causes environmental degradation have three broad origins:
Human economy extracts raw materials for the production of goods and services. Example: deformation of landscape, loss of vegetation due to mining, soil fertility loss due to Intensive agricultural practises, loss of biodiversity due to deforestation.
EE focuses on adverse effects of pollution. Example: Municipality SW, untreated sewage, emission of sulphur and CO2, agricultural runoff from fertilisers and release of toxic wastes.
Passive use of natural environment for recreational and educational purposes such as ecotourism.
Other way to look into these three issues are: resources for production, assimilative capacity to absorb waste and enjoyment of nature.
Slide18Major Land Mark growth of EE in India
Ministry of Environment, Forest and Climate Change : Established in 1985.
Many Institutions were developed in India:
Courses were floated relating to Environment at School, and higher education system.
Central Pollution Control Board (PCB) was established in 1974 under the Water (Prevention and Control of pollution) Act, 1974.
The CPCB is also entrusted with the powers and functions under the
Air (Prevention and Control of Pollution) Act, 1981
.
Nationally Determined Contribution in 2015 at Paris.
Slide19Major Land Mark Growth of EE in India
In India: India Natural Resources Economics
Programme
(INREP) in at ICRISAT, Hyderabad.
First Book on Indian Environment: Environmental Economics: Theory & Application in India, 1997 by John Kerr,
Dinesh
Marothia
,
Katar
Singh,
Ramasasy
& William
Benthy
.
INSEE registered in 1999: Conducts Seminar & Conferences on every two years.
MSE at Chennai, CSE at New Delhi, IIFT at Bhopal.
Slide20Major Land Mark Growth of EE in India
Important INSEE Publications.
Ecological Economics for Sustainable Development (2002), by
Kanchan
Chopra, Charles
Perrings
, U. R.
Rao
,
Kirit
Parikh, Academic Foundation, New Delhi, INDIA.
Interdisciplinary in Environmental Research: Concepts, Barriers and Possibilities (2002),
Sharachchandra Lele, Gopal Kadekodi and Bina Agrawal (eds),
Indian Society for Ecological Economics, Delhi.
Water Resources, Sustainable Livelihoods and Eco-System Services (---),
Kanchan
Chopra, C. H.
Hanumantha
Rao
,
Ramprasad
Sengupta
(
eds
), Concept Publishing Company, New Delhi, INDIA.
Biodiversity and Quality of Life (----),
Nirmal
Sengupta
,
Jayanta
Bandyopadhyay
(
eds
), Macmillan India Limited New Delhi.
Ecology and Human Well-Being (-----),
Pushpam
Kumar and B.
Sudhakara
Reddy (
eds
), Sage Publication India Private Limited, New Delhi.
Slide21Major Land Mark Growth of EE in India
6.
Environmental
Goverance
: Approaches, Imperatives and Methods (2012),
Jayanta
Bandyopadhyay
,
Kanchan
Chopra
,
Nilanjan
Ghosh
(
Eds
),
Bloomsbury Publishing India Pvt. Ltd.
7. Nature, Economy and Society: Understanding the Linkages (2016),
Nilanjan
Ghosh
,
Pranab
Mukhopadhyay
,
Amita
Shah,
Manoj
Panda (
eds
), Springer Publications.
8. Global Change, Ecosystems, Sustainability Theory, Methods, Practice (2017),
Pranab
Mukhopadhyay
,
Nandan
Nawan
,
Kalyan
Das (
eds
), Sage Publication India Private Limited, New Delhi.
9. INSEE publishes bi-annual Journal:
Ecology, Economy and Society
Slide22References
Singh
Katar
and Anil
Shisodia
(2007), Environmental Economics: Theory and Applications, Sage Publications.
Kolstad
, Charles D., (2007), Environmental Economics, Oxford University Press, New Delhi.
Hanley, Nick et al., (2008), Environmental Economics in Theory and Practice, Macmillan, New Delhi.
A.M.
Hussen
(2013), Principles of Environmental Economics and Sustainability,
Routlege
Publications.
Slide23Natural Environment and Economic Development: The LinkagesSanatan Nayak L-1
Slide24IntroductionEvolution of Natural Resource Economics
Pre-classical or
Physiocratic
School (1756-78)
Classical Economist (1776-1890): Adam Smith, Malthus, David Ricardo, J.S. Mill.
Neo-Classical (1870-1960): Simon
Kuznet
Modern Economist or Ecologists or Sustainable Development Economists (1970 onwards):
Slide25The Environment and Economic Development: the Linkages
Slide26Parts of Natural environment
Natural environment consist of Physical, Chemical and Biological structure of the earth.
Show the figure 1.
Figure shows that economy is completely dependent of the natural environment for the three important purposes.
1.Production and Harvest of raw materials of both renewable and non-renewable
2. Disposal and storage of wastages: Organic and Inorganic
3. The provision of eco-system services and amenities such as pollination, habitat and refugee, water supply and regulations, nutrient cycling, climate regulation, aesthetic enjoyments.
Slide27Raw Materials
Production or
Harvest
The Economy
(Goods and Services)
Nature
(The Natural Environment)
Waste
Ecosystem
Services
Slide28Implications of Natural Environment
The earth is finite and there is upper limit of resource extraction and harvest, disposes of wastage. Therefore, there is problems of scarcity.
Trade off between economic goods and services and preservation of natural environment.
Ecosystem services is also adversely affected in direct proportion to amount of resource extraction.
Therefore, environmental economics also deals problems of scarcity.
Slide29Fundamental Assumptions of Economic Approach to Natural Environment
Environmental Resources are essentially factors of productions for production of goods and services.
They are economic concerns of scarce and can be measured by price.
Scarcity of ER are to be augmented either through factor substitution or technological advancement.
NE and human economy are two separate entities. Natural system is treated as being outside the human being and exogenously determined.
Slide30Economics Views with Natural Environment
Prices are adequately signal for resources scarcity including the environmental resources.
To the extent factors substitution and Technological advancement be augmented to meet resource scarcity.
Human economy can be treated as open system for both its materials and energy use.
Slide31Neo-Classical Economists Perspective: Market as Provider of Information about Resources Scarcity
Price as an indicator of absolute scarcity and provides information on scarcity values. Explain them. Membership of golf club and availability of oxygen.
Price as an indicator of relative scarcity or opportunity cost: gold and crude oil,
Px
/
Py
=12/1.
Absolute
vrs
. Relative scarcity.
Is environmental price is right always?
Does price of crude oil captures the damage cost in the form of producing CO2 ?
Slide32S
D
P
e
Price ($)
Q
e
Membership at a Golf Club
S
D
Price ($)
Availability of Oxygen from the Ambient Air
Slide33Resources (factors) substitution, technological advancement
Factor Substitution Possibility
Resources are considered to be fungible.
Natural capital
vrs
human capital
Factor substitution and its implication for resources scarcity; Constant, diminishing and no factor substitution. Technology constancy and output constancy.
Exa
: natural capital (forest watershed)
vrs
manmade capital (filtration plant).
Example of constant output. Is it possible?
Does a change in production technique affect the use of factors of production. Yes
Lessons to be drawn: 1. Factor substitution is possible but increasing opportunity cost. 2. Scarcity of any resources can be augmented through substitution of other factors of production
Slide34Q
0
M
1
M
0
N
1
N
0
Human-made Capital
Natural Capital
Slide35Resources (factors) substitution and Technological Advancement
Change in Production Technology or Technology advancement: Constant output with less technology or otherwise. It is the ability to produce a given amount of output by using less of all inputs.
It implies also conservation of resources including environment.
Are all factors of production equally affected by change in production technique.
What exactly are the broader implications of change in production technology for the issue of natural resources adequacy or scarcity?
This includes the discussion on factors substitution possibility, technical advances in production and discussion in pollution control technology, debate on bio-physical limits to economic growth.
Slide36M
0
M
1
N
1
N
0
Q
1
Q
0
Human-made
Capital
Natural Capital
Slide37Human Economy and Natural World: The Neo-Classical world View
Objectives: 1. Basic institutional components of a market oriented economy.
2. Flow of materials (inputs and outputs) are circulated within a human economy process.
3. Implied relationship between human economy and natural world.
What is a economy?
A complex institutional mechanism
It facilitate to production, consumption, and exchange of good and services,
Keeping the preferences of households and legal systems of ownership rights (
Randell
, 1987).
Economies differs in the degree of empowerment.
Capitalistic
vrs
centrally controlled economy.
Slide38Human Economy and Natural World:
Economic Entities (Households and firms): households are users of Good and services, firms enters transformers of inputs to goods and services.
Commodities: Flow of resources both as factors of production and final goods and services.
Markets: Product Markets and Factor Market: buying (DD) and selling (SS) of goods and commodities product markets. Factor market consists of labour, capital and natural resources. Both PM and FM is transmitted through price.
Non-Market Public and Private institutions: social institution such as public and quasi public institutions.
Ownership rights to be clearly defined.
Competition in the market through public interventions.
Slide39Human Economy and Natural World:
Lessons:
1. Human economy is consists of people, social institutions and flow of commodities.
2. Economic notion of resources is are purely anthropocentric.
3. Creation of value is the essence of production system. Chair
vrs
. Wood. Consumption of goods and services is meant for utility.
4. Material flow (commodities) in the human economy is dependent of Natural ecosystem.
Slide40r
-Households-
Consumers of Goods
Owners of Resources
Factor Market
S.I
Product Market
-Firms-
Producers of Goods
Employers of Resources
Resources
Goods
Goods
Resources
An Economy
Slide41Ecological Perspectives
Environmental resources includes both living and non-living being in the biosphere.
Basic Principles governing the nature, structure and function of the Biosphere. Biosphere the layer of air, land and water that support life.
Functional Linkages of biosphere and human economy.
Ecological perspective is bio-centric in nature because it does not recognise the main output of economic system.
It describe the interaction between living and non-living matter in physical sense.
Slide42Principles Governing the Nature/Natural Ecosystem
ER are finite.
Mutual interdependence among all elements that constitute biosphere.
Human economy is subset of biosphere.
Human economy is dependent on biosphere for input and deposit of waste
Biosphere needs continuous flow of external energy i.e., solar energy.
Human economy and Biosphere is open system for energy. Biosphere for its entirety for matter is closed.
Nature acts as a source and limiting factor for material requirements for human being.
Human economy is dependent on both the inputs of energy and matter from external sources and output to external depository.
Hence human economy is completely dependent on ecological system.
Slide43Four Ecological Principles
Interdependence between living and non-living beings.
Continuous transformation of matter and energy.
Ecological succession. Stability, diversity and resilience.
The risk factor involved when single species dominate at the expense of many other species.
Slide44o
Consumers
Factor
Market
Producers
Product
Market
Inputs
Human
Economy
Output
(waste)
Biosphere
Slide45Interdependency and its implications
What is eco-system?
It includes living organism in specified physical environment.
Interaction between the organism and non-biological factors in the physical environment that limits their growth and reproduction
It house of life
It can like a pond or earth.
Slide46Structure of the Ecosystem
Slide47Atmosphere: Air
1. The
abiotic
component are used as habitat (space) and immediate source of water and air.
Atmosphere: Carbon (c), Nitrogen (N), Oxygen (O), Sulphur (S), Phosphorous (P).
These elements are fixed.
They are recycled.
2. Biotic:
Producer: Photosynthesis
Consumer: Carnivores, herbivores, omnivores
Decomposer: Fungi, Bacteria, yeast, worms, small insects. They produce CO2, H2O, PO4 (phosphate)
Slide48Structure of Atmosphere
Region
Altitude (in Km)
Temperature
range in 0C
Important chemical species
Troposphere
0-11
15 to -56
N2,
Co2, O2, H2O
Stratosphere
11-50
-56 to -2
O2
Mesosphere
50-85
-2 to -92
O2, NO
Thermosphere
85-500
-92 to 1200
O2, O, NO
Slide49Composition of Biosphere
Slide50Ecosystem Functions
Interrelationship among atmosphere, lithosphere and hydrosphere: Natural Process
1.Removal and erosion of earth’s crust.
2. Flows and formation of water
Process of photosynthesis: Solar to chemical energy.
Producer, consumer and decomposer: cyclical process
This process is transformation of matter and energy.
Slide51Material Recycling
Formation of plant tissues through photosynthesis and Biosynthesis. Release of O2
Animal eat plant issues and produce CO2 and organic waste: Metabolism.
Decomposer decomposes organic matter into inorganic matter. Mineral produced N and P is limited.
Decomposition is not always complete and forms peat, coal, petroleum, thus ultimately produces CO2.
Atmospheric Cycle: Nitrogen (79 %), Oxygen (20%),
Orgon
(0.9 %), CO2 (0.03 %) are maintained or regulated.
Atmospheric cycle can not be viewed in isolation from geological and biological cycles.
Slide52Material Recycling
Microorganism does Nitrogen fixation from gaseous form to inorganic form used by plants. Gaseous form to inorganic form of
ntrogen
by micro-organisms.
Geological cycle: by erosion and water. Nitrates, Phosphates, and Sulphates are from rocks and used for Plants.
Other cycles are Phosphorous, carbon etc.
Volcanic activities and combination of fossil fuels also creates lot of nitrogen.
Slide53Material Recycling
Lessons:
Physical point of view-constant transformation of matter and energy.
There is no concept as waste: Waste is food. Material recycling is growth.
Human economy can not be viewed in isolation and hence economy is subsystem of natural environment.
Living and non-living have reciprocal relationship.
Slide54Law of Transformation of Matter-Energy and Their Implications
Why natural ecosystem need to have continuous flow of energy from sun?
Laws relating to transformation on matter and energy or laws of Thermodynamics.
First law of matter and energy:
Principles of conservation of energy or material balance principles.
Law of entropy or energy degradation: energy quality or useful
vrs
useless energy.
Some useful energy is converted into useless energy.
Useful energy can not be recycled or limits to energy conservation.
Slide55Implications of Second Laws of Thermodynamics
Energy varies in its quality.
There are limits to energy conservation through technological means. Conservation of energy to work, there will be always certain loss.
Energy ca never be recycled. That is why, NE requires continual energy from external sources.
Lessons from 1
st
and 2
nd
law.
Human economy is part of biosphere.
Natural resources are finite.
There are finite limits to conservation of energy through technological means.
Slide56Ecological Succession
Succession: process of natural changes in species composition
At the Pioneer stage: few different species, uncomplicated interrelationship, unstable, highly vulnerable.
Mature stage: stable dynamic, equilibrium.
It follows a pattern and reach at climax or biome.
It follows diversity, stability, resilience and dynamic equilibrium (long run equilibrium).
Slide57Ecological Succession
Exa
: 1. abandoned weedy field. 2. with abundant grass and herbs. 3. shrubby community, 4. forest
It is called as climax.
Lessons:
Ecosystem go through a development stages for maintaining balance among diversified producers, consumers and decomposers
Slide58Dynamics of Matured EcosystemEquilibrium:
In a healthy ecosystems, elements, and process in the atmosphere, hydrosphere and lithosphere remain healthy dynamic equilibrium through various well known material cycles.
Matured ecosystem characterised by diversity, stability and resiliency.
Criticism:
Stability does not always depend upon diversity.
Exa
. Tundra.
Slide59Humans as a Breaker of Climax
Net primary products (NPP): 40 percent
Commercial, residential, mining activities: Cost to environment.
Clearing of forest land.
Disrupting the natural nutrient cycles.
Simplification of natural ecosystems.
Non-degradable toxic waste: DDT, Dioxins, PCBs, CFC.
Non-toxic waste: CO2
Invasive Alien Species (IAS): birds, aquarium species, ornamental plants:
Rapid growth of human population and per capita energy consumption.
Slide60Humans as a Breaker of Climax
Human ecological footprint has increased.
Increasing the risk of carrying capacity of ecology.
Extinction of species
Narrow perspectives: Human welfare
Pollination, biological control of pests and diseases, water supply and sanitation, climate regulation, atmospheric regulation, recreation education, waste recycling, pollution control, nutrition cycles depend on biosphere.
Slide61References
Hussen
, A.M., (2004), Principles of Environmental Economics, Rutledge.
Hanley, Nick et al., (2008), Environmental Economics in Theory and Practice, Macmillan, New Delhi.
Slide62Trade off : Economic Activity vrs Environmental Quality
Sanatan Nayak
DE/SAS/BBAU
Slide63Economic Activity vrs. Environmental Quality
Natural environment
vrs
Human Economy: Three distinct features
Environment provides both renewable and non-renewable resources.
As a provider of environmental amenities and ecosystem services.
As a decomposer
Law thermodynamics first and second rule say:
Economic activity generates some degree of pollution.
Environmental economics estimates the trade-off economic goods and services and environmental quality.
Slide64Relationship between Economic Well Being and Environmental Quality
Economic well being derives from production of goods and services and condition of physical environment.
Production of goods and services causes direct positive utility to economic well being
Production of goods and services causes environmental degradation and hence negative utility.
Hence, conscious trade off between good and services and environmental quality.
See the diagram.
Slide65Trade off Between Goods & Services
Economic Well- Being
Well- being
Pollution
(waste)
Production of Goods & Services
(A)
Deterioration of Environmental Quality
(B)
Utility (+)
Disutility (-)
Slide66Ecological and Technological Trade off
Transforming material input into economic goods, creation of residuals can not be avoided (law of TD-2). Hence, degrading natural environment.
This reflects Residual are pollutions.
Self degrading ability of the natural environment is commonly referred to as Assimilative capacity of earth.
Three important factors of Assimilative capacity of earth.
Assimilative capacity of earth is limited.
Assimilative Capacity of Natural Resources depends on flexibility of ecosystem and nature of waste. Natural environment does not degrade every and any waste with equal efficiency.
Rate and volume greatly affects the ability of Natural Environment to degrade residuals.
Hence quality and quantity of the residual is important factors that is emitted to the environment.
Slide67Relationship between Economic Activity and Natural Environment
Linear relationship exist between economic activity and pollution (emission of waste).
Math: W=f(X, t), Hence, W= a +
bX
W is the waste, X is the level of economic activity, t
is time
factor based on technological development and ecological factor influencing waste and economic activity.
Ecological threshold. It is level at which all wastes are degradable at
Wo
.
Four important points can be derived from this analysis.
Xo can be produced without inflicting damage to the natural environment.
2. Increased economic activity beyond Xo lead to in-assimilative waste to the natural environment.
Economic activity more than thresholds level causes accumulated waste progressively. Assimilative capacity would be closer to economic activity if not zero.
Slide68Relationship between economic output & waste discharge
Waste
W=
f
(X, t)
The Assimilative Capacity of the Natural Environment
W
0
X
0
X= Economic Activity
Slide69Dynamic Effects of Continued waste Disposal beyond the assimilative Capacity of the Environment
Waste
W
0
X
0
X = Economic Activity
W=
f
(X, t)
The Assimilative Capacity of the Environment
Slide70Relationship between Economic Activity and Natural Environment
3. Technological factors.
a. Decomposition facility may be accelerated and economic thresholds will increase. It is caused by the variant t. Adding activated charcoal sewage treatment plant may accelerate assimilative capacity.
b. A change in technology may alter relationship between economic activity and waste generation. Use of from high to low suffer content coal in the production of electricity. Technological improvement would trigger by an improvement in waste processing or input switching.
Commoner pointed technology has also negative impacts. Increase in the height of factory smokestacks would control acid rain out of
sulfer
dioxides. It turns into
transboundry
problems.
4. Natural environment will not degrade all waste in equal efficiency.
Slide71Effect of Technology on the relationship between Economic output and Waste Discharge
Waste
W
0
X
0
X
1
W =
f
(X, t)
The Assimilative Capacity of the Environment
Slide72Lessons from this relationships
Natural environment has limited capacity to degrade waste.
Minimum amount of economic good can be produced without harm to the NE.
Cumulative effect of waste discharge into the NE is non-linear.
Ecological threshold can augmented through technology.
Slide73Anatomy of Market Failure
Assignment of Ownership Rights to Environmental Resources
Can the private cost and benefit analysis be done in case of Natural resources?
Common Property Resources and Economic Problems
Allocation of any scarce resources is socially optimal if MSB=MSC
How can it transformed from private interest to social interest?
Adam Smith’s invisible hand would operate if ownership rights is clearly defined.
Two aspects:
Ownership rights of CPR
Externality.
Slide74Ownership Rights of CPR
What is ownership right’s is entitled?
Ownership rights are completely specified
Rights are completely exclusive.
Ownership rights are transferable
Ownership is enforceable.
Example: Car
vrs
. Lake
Then how car turn into trash and why?
For CPR, individual maximum interest will not in same direction as social benefits. Then, Adam Smith’s invisible hand will be violated.
If tragedy is to be controlled, then the use of commons needs to be controlled.
Slide75Externalities and Consequences
Theory of invisible hands and failure of proper cost benefit analysis. Therefore, external effect are inevitable.
Externalities are defined as conditions arising when the action of some individuals have direct (positive and negative) effects on the welfare or utility of other individuals, none of whom have direct control over such activity.
Externalities are incidental benefits or costs to other for whom they are not specifically intended.
Positive and Negative externalities:
Two classic examples. Gardner
vrs
fish hatchery.
Gardner who invest in beatification of his garden, as result the property value of surrounding areas increased.
A fish hatchery plants that has to bear cleanup costs for wastes discharged by paper mill located upstream.
Slide76Externalities and Consequences
What are main source of externality?
First example: fruit of this investment is aesthetic enhancement or environmental amenity.
Non-rival (joint consumption); consumption of one will not reduce the utility of other. It is appropriate in case of positive externality.
It makes no economic sense to exclude anyone form the use of such commodity. But can be done.
In order to internalise (remedying) excludability, transaction cost need to be expanded.
TC includes any outlays expended for the purpose of specifying properties excluding non-users and enforcing property rights.
Summary:
Externality arise in case of private garden, when the use of resources is difficult to exclude.
This may due to two reasons:
Non-exclusiveness is resulted due to resources are non-rival or Joint consumption.
Transaction cost is very high due to any reasons.
Slide77Externalities and Consequences
Second example: Fish Hatchery in the River with a paper mill at the upstream of river.
Non-excludability is resulted due to lack of ownership rights or common property.
Non-excludability is the root cause of externality. In addition, it may high transaction cost.
Divergent between private and social cost and benefits.
What is economic consequences of externality?
Divergent between private and social cost and benefits.
1. Social benefits= private benefits+ external benefits
external benefits > 0, hence, Social benefits> private benefits
2. Social cost = private cost+ external cost
external Cost > 0, hence, Social cost> private cost
Due to this divergent market failure exists.
The market if allowed alone will not address the issue of external cost and benefits.
Slide78Social Optimum in the Presence of Externality
$
P
s
P
e
MSC= MPC + MEC
S= MPC
MEC
D = ∑MPB = MSB
O Q
m
Q
s
Q
e
Paper (tons)
T
S
U
R
Slide79Externalities and Consequences
Paper industry instead of paper mill.
D is market DD curve. It reflects MPB. As External benefits is zero, hence D=MPB=MSB
S represent the MPC. Here, no cost for depositing their waste in the river.
Damage cost is represented as Marginal external cost (MEC).
Two features of MEC.
MEC do not arise until production is at
Qm
.
MEC is positively sloped. Pollution reduces the capacity of an environment to withstand further pollution.
Efficiency point, when MSC=MSB at Qs. MSC= MPC+MEC
This is optimal point of economic goods and environmental quality.
If market mechanism operate fully, the optimal point is
Qe
, where MPC=MPB
Slide80Externalities and Consequences
Qe
will represent higher level of pollution than social optimal level of output Qs.
It suggests that if market left alone, it would lead to lower environmental quality.
At
Qe
, MSC>MSB, therefore, it pays to reduce production till MSC=MSB
Reducing paper production from
Qe
to Qs
Cost :
QeTSQs
=
QeURQs+UTSR
Loss in benefit:
QeUSQs
is the foregone consumer’s benefit. Therefore, UST is generated.
UTSR is total external cost.
Slide81Externalities and Consequences
Conclusion:
In the presence of externality, resource allocation through free market leads to inefficiency.
Market lacks a mechanism to account external cost.
It favours more production of goods and services.
Presence of externality creates misallocation of social resources.
What can be done to correct the misallocation of resources arises due to externality.?
Does it require modification in the market system?
Solution is effective institutional mechanism to correct the externalities.
Slide82Reference
A.M
Hussen
(2009), Principles of Environmental Economics and Sustainability,
Routledge
, London.
Slide83Biophysical Limits to Economic Growth: Neo-Classical View
Sanatan
Nayak
L-3
Slide84Neo-Classical Perspective
Why Malthusian perspective on limits to Economic Growth is considered to be unwarranted?
How economic growth and technological advances could be viewed as not as problem in themselves? But as
Cure for stress involving population, resources, pollution and other environmental damage on three issues.
Increasing Resource Scarcity
Economic growth is an panacea for both population and environmental quality concerns.
Economic growth and Population
Slide85Increasing Resource Scarcity: The empirical Evidence
Malthusian argues that depletion of material resources would act as bottleneck for economic growth
Evidence of 130 years suggest that resources are getting more abundant rather than more scarce.
Slide86Empirical evidence before 1970
Scarcity and Growth: The economics of Natural resources Availability: Barnett and Morse, 1963.
End of civil war-1865 to 1957.
Strong Hypothesis:
Increasing scarcity means increase in real cost of labour and capital for extracting output.
Evidence by Barnett and Morse:
Except forestry (< than 10%), the extraction costs for agriculture, fishing and mining was not declining.
Kerry Smith (1979) study on USA also observed decreasing resource scarcity.
Slide87Empirical evidence before 1970
How it is possible in USA?
Technological progress
Increase in resource use particularly in energy.
Substitution of more plentiful to less plentiful
Improvement in transportation and trade
Improvements in exploration techniques and discovery of new deposits
Increased recycling of scraps
Cautions:
It is only applicable to USA
It said nothing about environmental quality
Slide88The empirical evidence since 1970
1970 as the environmental decade:
First earth day was celebrated in April, 1970
USA established new government agency: Environmental Protection Agency (EPA)
Lot of books and articles were published:
Limits to Growth
was published in 1971:
Arab Oil Embargo (Arab-Israeli War) in 1973:
Energy shortage in 1978: to limit petrol supply OPEC
Slide89The empirical evidence since 1970Study by
Bernett
(1978): increasing resource scarcity
Julion
Simon and Herman Kahn (1980):
The Resourceful Earth: A Response to Global 2000
Energy crisis arising with local problems, shortage and pollution but well functioning economy and social system enable to rectify the problems.
If this trend continues, world will be more pollution, more stable ecologically and less vulnerable to resource supply disruption.
Slide90Why past trend of decreasing resource scarcity may not sustainable?
Can the decreasing scarcity of resources be Sustainable?
Three reasons for No?
1. Quality of environmental goods are not evaluated and price of commodities were undervalued due to externalities.
The greater degree of technological substitution possibilities in the past from the increased replacement of priced commodities to the un-priced commodities.
The neo-classical treatment of natural and human capital as substitutes will be valid in the future.
Slide91Why past trend of decreasing resource scarcity may not sustainable? Cont …..
2. Transformation of energy has been taken place: higher quality replaced the lower quality oil.
The decline in the real cost of resource extraction observed by empirical studies of the
Bernett
and Morse was not due to technological change rather due to substitution of higher quality energy for
labour
and capital in the extraction of resources.
Cleveland’s study portrayed high quality resources were depleted, more energy would be needed to extract further unit.
Slide92Why past trend of decreasing resource scarcity may not sustainable? Cont …..
3. The pace of technological progress over the past has been uneven.
It would be dangerous to use the past evidence and merely extrapolate it.
There are technological, ecological and energy factors that could work against the continuation of past trends of decreasing resources scarcity.
Slide93Economic growth is an panacea for both Population and Environment (EKC)
Economic growth and healthy environmental quality:
Significant improvement in environmental quality is fully compatible with economic growth.
PCI and Income inequality (
Kuznet
, 1955):
Nobel prize in 1971
Kuznet
hypothesized that income inequality first rise then falls as economic development proceeds.
Slide94EKC Hypothesis
Slide95Development of EKCEKC is emerged in early 1990 by Grossman and Kruger (1991): the economic growth tends to alleviate pollution problems.
Panayotou
, 1993: income at early stage higher stage.
Structural change of the economy: agriculture to industrial.
Slide96Implications of EKC
Poor countries can grow up to certain standard with pollution.
Developed countries environmental quality improves after peak points.
Environmental policy to be scrutinised.
Slide97EKC: Explaining the ResultsThe Role of Structural Change
Income and demand for environmental quality
Local
vrs
. Global pollution
Country specific effects
Role of national and local policy
Role multilateral policy
Slide98Argument against Hypothesis
True for few pollutant: local health effects, SO2, suspended particles, sanitation and deforestation.
Carrying capacity and ecosystem resilience capacities have been ignored.
Ekins
(1996): it is appeared up to 1996. not all the pollutants equivocally show it.
Torras
and Boyce (1998): other factors such as social, literacy, greater political liberties.
Ekins
(2000): OECD and
Europian
countries show serious environmental degradation.
Slide99Conclusion: Implication of EKC
EKC establish some underlying relationship
Economic growth is not the only solution for degradation.
Ekins
(2000): any improvement in environmental quality is likely to be due to enactment of environmental policy rather than economic growth or technology.
It may true for low income and developed country.
Slide100References
Kuznet,
S
. (1945),
“Economics growth and income
Inequality”,
American Economics Review,
Vol.45.
Barbier
(1997): Introduction to EKC: Special Issue, Summaries, EDE, No.2.
Stern, D.I.; M.S. Commons;
Barbier
, E.R.(1996), “Economic Growth and environmental Degradation: The EKC and SD”, World Development, No.24, Vol.7.
Stern, David (2004), The Rise and Fall of EKC, World Development, No.32, Vol.8.
Hussen
, A.M., 2007, Principles of environmental economics,
Routledge
, London
Slide101Economic Growth and Population
Economic growth is a panacea for population growth.
Theory of demographic transition:
Industrialisation is accompanied by sustained reduction in population growth.
Microeconomic theory on Human fertility: Negative relationship between household income and family size.
Childbearing and is influenced by income.
Children as durable consumption good (Becker, 1960, Blake, 1968).
Slide102Economic Growth and Population
Benefit of children:
Consumption or psychic utility
Work or income utility
Security or old age benefit
Disutility of Children:
Direct costs
Indirect costs: Opportunities foregone in terms of time and money.
Slide103Economic Growth and Population
Paradoxical Negative relationship:
Children are
inferior
consumption goods:
Few children but superior quality: cost of raising children.
Fewer children is associated with higher cost of children, which is consistent with consumer demand.
Slide104GNP and Population growth
Income increase – improved health care-reduction of IMR-small family.
Wealthier family does not require much as insecurity against old age.
Mother to work to generate income:
Caution:
Child production is on rational basis.
Education free, subsidies food-grains,
Incentive for family size
Private cost will be less than social costs.
Population control policy. Institutional, political and economic resources.
Freedom of commons and ruins (
Hardins
, 1968).
Slide105Conclusions
Population, environmental degradation, resource depletion can be tackled by normal market.
The conventional wisdom in neo classical economics is that limits to growth are more likely to arise due to social and technological failures than from environmental or biophysical limits.
Slide106Summary
They rejects the notion that natural resources are infinite.
They do not believe that economic growth is limited.
What they believe.
Technology by finding substitute have no bounds in ameliorating resource scarcity.
They differentiate between general and specific resources scarcity.
Relative scarcity does not limit to growth due to possibility of substitutions.
They believe economic growth is better solutions to population and environmental degradation.
They also believe in effectiveness of the market.
Through knowledge human technology progress can be sustained.
Prosperity of education and manufactured capital is essential.
Slide107Biophysical limits to Economic Growth: The Malthusian perspectivesL-1
Slide108Limits to Growth: Different Perspectives
Malthusian and Neo-Malthusian Perspective
Neo-Classical Perspectives
Sustainable use of Natural Resources:
Weak Sustainability,
Strong sustainability
Ecological sustainability
Slide109Basic postulations of Malthusian DoctrineResources are scare and humanity is endowed with finite material resources: resource control is required
If uncontrolled, population is to grow exponentially.
Technology should not be perceived as ultimate escape from resource scarcity
Slide110Population, Resource Scarcity and limits to growth: Malthusian growth Doctrine
T.R. Malthus (1766-1834)
1798: an Essay on the Principle of population as It affects the Future Improvement of mankind.
Three assumptions:
Total amount of land available for agriculture is fixed.
The growth of population is limited by the amount of food available for subsistence
Human population increases invariably where potential for increase in subsistence is possible.
Slide111Malthusian growth Doctrine cont…..
Population to grow geometrically
Means of subsistence to grow arithmetically.
Negative checks
Positive checks: vice and misery
Dismal Doctrine of Malthus or Iron Law of Wages (population beyond L2).
Malthusian Trap (Margin)
Optimum size of population
Slide112Real per capita output (Q/L)
Q*/L*
The Malthusian Trap (Margin)
Subsistence Level of Food
Q/L = Per Capita Food Production
Quantity of
Labour
or Population size
L
1
L
2
A simple Malthusian Growth Model
Slide113Limits to growth: the Ricardian Variations
David Ricardo (1772-1823): Principles of Political Economy and Taxation , 1817.
Human material progress would not be hampered by explosive growth of population but by the progressive decline in quality and quantity of extractive natural resource i.e., agricultural land
Resources scarcity in the long run in terms of land.
Three category of land:
High fertile land: zero rent
Marginal land: rent for high fertile land
Sub marginal land: Rent for both category
Rent is defined at the total payment to owners of a factors of production in excess of the minimum price necessary to bring the resource available for use.
Slide114Limits to growth: the Ricardian Variations cont
Real cost and rent increases as
dd
for land increases and quantity of land continue to decline.
How did rent comes about?
Steady increase in rent as quality of land declines.
In particular context to Ricardo, population is relevant only to the extent it has an effect on what happens to demand.
It is not meant for biophysical limits to growth but land lords stifle grow through their rent seeking behaviour.
Slide115P
0
P
1
P
2
0
C
1
C
2
A
B
C
G
E
F
Price ($)
Coal (tons)
D
0
D
1
D
2
Ricardian
Scarcity.
Successive increases in demand (D
0
,
D
1
, D
2
) are met with corresponding increase in resource prices (P
0
, P
1
, P
2
)
Slide116Limits to Growth: John Stuart Mill (1806-1873AD)
Principles of Political Economy: of the Stationary State (one chapter), which states unlimited economic growth lead to destruction of environment and lower the quality of life.
He has given a actual environmentalist argument.
William Stanley Jevons (1835-1882 AD) said it is non-renewable energy not agricultural land which determine the economic prosperity or decline of nation.
Slide117Malthusian growth Doctrine cont…..
Limitations:
Ignores institutional and socio-economic factors roles
It ignore the role of technology in ameliorating resource scarcity: New technology could change the Malthusian margin right wards.
It is ecologically naive: it does go beyond the existence of absolute limit of natural resources.
Conclusions:
It is very difficult completely dismiss Malthusian theory in developing and underdeveloped nations.
Slide118Population, Resource Use and the Environment: The Neo-Malthusian Variations
Adverse impact of human activities on natural resources: Biophysical limits to sustainability.
Ehrlich Model: Population (EM)
I=P X F
I: total environmental effects or damage
P: population in head count:
dI
/
dP
>0.population size and environmental damage positively correlated.
F: per capita impact to the environment. Ecological footprint of the average person.
It suggest total environmental impact or damage is product of population size and per capita damage.
I= P X F
Slide119A
B
C
Increase in population(P)
Increased per capita damage due to increased population F=f(P)
Environmental damage I=P*F
+
+
Graphic illustration of Ehrlich’s model of population and its impact on the environment
Slide120Ehrlich Model
Population plays primary role in explaining the impact of human activity.
I increases due to two reasons.
P increases.
F increases with successive increase in Population.
F =f(P)
Why F increases with Population because
Law of diminishing marginal return and
Diseconomies of scale.
Critics say other factors such as per capita consumption of resources and choices of technology.
Population is the major factor for environmental degradation.
Slide121Commoner Model: Population, Affluence, Technology
Barry Commoner: Biologist and eco-socialist, a ardent critics of Ehrlich Model.
EM precisely says that population growth is an dominant factor in explaining total environmental impact i.e., I.
Choice of particular technology that perform certain economic activity.
Technology is the major factor for production of goods and services and extraction and harvest of materials.
Technology is mix of inputs and outputs. Decision of technology is for profit not sustainability.
Technological choice is important.
I derives not from population growth (P) but from changes in the mix of input and outputs.
Slide122ECM Cont ….
I= PAT
P = population; a= affluence, economic good/P; T= technology: pollution/economic good
T exerts significant pressure on environment that is independent of population growth.
It is technology that produces smog, and smoke, synthetic pesticides, herbicides, heavy metals such as lead, radiation, heat, accumulating rubbish and junk.
However, modern technology is more successful in shifting the environmental impact than removing it.
Environmental problems in developed countries at local and regional levels at removed but it converted into global problems.
Exa
. Coal burning electric power plants.
That is reason global climate change takes place.
Slide123Affluence: Over Consumption and Environmental degradation
Over consumption not population growth is the bigger threat to environment.
Affluence people’s position of well being because of increasing disposable income.
Share of consumption and production of hazardous metal, paper and waste are not linked to population.
It is linked to developed countries.
Developed countries have larger share of consumption and production of waste.
Slide124Share of population resource consumption and waste production (in percentage)
Country
population
Fossil fuel consumption
Hazardous metal
Hazardous paper
Hazadous
waste
USA
5
25
20
33
72
Other developed countries
17
35
60
42
18
Developing countries
78
40
20
25
10
Slide125Basic lesson of the Ehrlich –Commoner Model (ECM)
Environmental sustainability and Economic growth.
Neo-Malthusian views: Three factors for environmental degradation
Increase in population
Per capita consumption
Proliferation of production
Ehrlich and follower: population is major factor for environmental degradation.
Commoner and followers: inappropriate application of modern technology, Increase in per capita income and consumption is the major culprit.
Slide126Neo-Malthusian views
Policy implications
Control of population growth
Moderate or reduce resource use
Promote or develop technology of environmental friendly.
Weakness of Neo-Malthusian views:
With defining sustainability all about?
They ignored technological substitution and progress
Social, technological and political factors are important
Politically not useful.
Slide127Summary
Natural resources are finite.
Malthusian view exponential population growth is major determinant of biophysical limits
Whereas Recardian limits to decrease in quality of land.
EC views population, technology and per capita consumption as main determinants for environmental degradation and limits to growth.
They are sceptical about technology can circumvent biophysical limits to growth.
Technological progress is subject to diminishing returns.
Malign technology produces huge social costs.
Slide128Reference
Hussen
, A.M., 2007, Principles of environmental economics,
Routledge
, London
Slide129Global Climate Change
Sanatan Nayak
Lecture 4
BBAU, Lucknow
Slide130Climate Change
Climate and Weather:
Weather:
It deals with temperature, precipitation,
and
humidity
,
wind and similar process.
It deals with minute to minute, day to day and month to month change.
Weather can be extreme and change at a large scale over a year.
Climate:
it is average weather, average rainfall, average temperature.
Climate is the distribution of weather.
In actually, we do not observe climate.
We observe weather and from that we infer climate.
Slide131Important forms of Climate Change
Acid rain
Depletion of Ozone layer
Global warning
Slide132Acid RainAcid rain is a term commonly used to refer to several process through which human generated pollutants increase levels of acidity in the environment.
It is due to release of
Sulphur
Oxides (SO2) and Nitrogen Oxides (NO) in the
atmosphere
Motor Vehicle, electrical power plants and industrial boilers are major source of
sulpher
oxide (SO) .
The acid deposition occur, when SO2 and NO react with water to produce dilute solution of sulfuric acid (H2so4), Nitric acid (
HNO
3
), nitrous acid (HNO
2
)
Slide133Effects of Acid Rain
Adversity effect plants, fish, birds and corrodes metals and buildings.
It is recorded in parts of USA Germany,
Checoslovakia
and the Netherlands
Rains with PH of 4.5 and below are observed in China.
Emission of
sulpher
dioxide has been tripled in India during 1960-1980.
Acid rain affects lakes, streams, rivers, bays, ponds and other bodies of water.
It also affects vegetables, forest.
Toxic metal such as lead, Zink, Copper, Chromium, and aluminum are deposited in the forest from the atmosphere.
No estimates of economics loss due to acid rain has been developed so far.
Slide134Solution
Conserve
energy and pollute
less
.
The coal should be cleaned before they burst.
Sulpher
dioxide and Nitrogen oxides in the
air is to be reduced, then acid rain will be reduced.
Use less electricity
, more
car pools
and public transportation
.
Slide135Ozone Layer Depletion
Concentration of ozone molecules make up ozone layer at stratosphere.
It protects earth life from ultra violate rays.
Causes:
Increase in Nitric oxide (NO),
Hydroxyl (OH),
Chlorine(
Cl
),
Bromine(Br)
CFC
One chlorine and bromine molecule can break down – 10,000 ozone molecules at a time.
Slide136Effect of Ozone Layer
Ozone Holes:
First evidence of significant decline in stratospheric ozone came from
Antarica
(1985).
Ozone layer in North Hemisphere has been dropping by 4 percent per decade.
5 percent of the Earth’s surface is covered by Ozone holes.
Ozone holes in 24 sq km in area of North America, Antarctica.
Health Hazards:
Skin Cancer and Cataract:
Sun glasses with 100 percent UVA and UVB protection
Slide137Global Warming
Global Warming and Climate Change
:
A higher average temperature is only one type of CC.
Increase in emission of CO2.
Average temperature is the result of balance between the incoming sunshine and outgoing infrared radiation given off by the warmed surface.
If the balance disturbed, then surface temperature changes.
GHGs make the surface opaque to outgoing infrared radiation.
Co2 is emitted from the combustion of fossil fuels. In 2009, nearly 30 billion tones per year was injected.
To control SO2, one can polluter can switch to lower SO2 combustion, from coal to natural gas.
Slide138Global Warning
NAS
– National Academic of
Science
Earth
surface has risen about 1
F in past century
Mean temperature of the World
1980
–
15.18 c
1990 – 15.38 c
1995 – 15.39 c
2005 16.04 c
IPCC (2007) estimates that the global temperature has already increased by ¾
0
C over that period will most likely to rise by an additional 1
0
to 3
0
C by the end of this century.
Increasing
concentrations of green house
gasses (GHGs).
Northern
hemisphere is
considered as the
warmest in 2005 as ever recorded.
CO2 concentration is 30 billion tones per year in 2009
Slide139Global Warning cont ……
The concentration of CO2 is 280 parts per million (
ppm
) in 1750 beginning of industrial revolution to 379 in 2005 (IPCC, 2007 in AR4). In May 2013, the CO2 concentration in our atmosphere crossed 400 parts per million (
ppm
) (The Hindu, July 13, 2013).
It is increasing 2
ppm
per year.
The last time the Co2 level was as high as 400
ppm
was around 3-5 million years ago, when sea levels were much higher and regional climates were very different (The Hindu, July, 13, 2013).
Slide140Causes of Global Warming
Human activities
– increase in green houses gases, i.e., carbon dioxide, methane and nitrogen oxide, CFC – Chlorofluorocarbon.
Carbon dioxide has increased by 30%, methane has doubled, nitrous oxide concentration has raised by 15%.
IPCC – Inter Governmental Panel on Climate Change reported Human induced air pollution plays key role for climate change.
1c to 3.5c in temperature by 2100 (Raven et. al., 1998).
Increase in motor vehicles.
Increased agriculture, deforestation, landfills, industrial production and mining.
Why GHG concentrations increase?
Combustion of fossil fuel and other human activity are the primary reasons for the increased concentration of Co2 in USA.
Around 98% of Co2 by transport sector,
18 percent nitrous oxide emission
Slide141Effects of Global Warming
Melting of glaciers and polar ice.
Increase in sea level
: Flooding of low lying areas. Sea level has risen by 18 cm. IPCC predicts it will rise 50 cm by 2100.
Precipitation pattern changes: droughts and snowfall, storms.
Shortage of fresh water.
Human Health
: heat related diseases and deaths. Higher incidence of malaria, dengue, yellow fever and viral encephalitis.
Agricultural Production
: declines due to droughts and increased incidence of pests, causing shortage of food.
Slide142Impact Measurement: Approaches
1.
Positive Analysis:
observational and very important input into public policy formation.
2.
Normative Approaches
It provides guidance for several policy to pursue.
Which policy should be best for the society?
Shortcomings:
it is not value neutral.
it may not agreed by everyone.
Slide143Positive Analysis
How different climates resulted in differential levels of agricultural profit in geographical area.
Mendelsohn et al., 1994 measured the effect of CC on agriculture.
Other things remain same, difference in temperature.
If profitability is more, then land value is more.
The value of climate as capitalized in land values.
If climate changes, how land values and thus profitability changes.
Take the example of Ricardo method.
When climate changes,
Without adaptation: Production function approach mostly before 1994
Slide144Ricardian Approach
With adaptation:
Ricardian
Approach
With regression analysis
Major Findings:
1. Production/value of land increases with increase in temperature.
2.
Ricardian
approach captures the adaptability, as a result the loss is lower than that of production approach.
3. Adaptability depend on technological investment and capital inflows into the economy.
Slide145Ricardian Approach, 2006
Mendlesohn
, et al. 2006 added
1. Along with earlier reasons, location factors (geographical factors) of a particular country is also depend by climatic factor.
2. A country located in tropical regions are more vulnerable to increase in temperature than that of temperate regions.
Slide146Impact of Global warming on Agriculture
Normative Approach
What are the consequences of development path and CO2 emissions?
What action can and should be taken to ameliorate the negative impact of CC?
What abatement policy should be taken?
Recent studies, William
Nordhaus
(2008) and sir Nicholas Stern (2006)
Both measured potential damage of CC and costs of controlling GHGs.
Slide147Normative Approach cont ….
Nordhaus
examined in different sectors.
Estimated a damage function due to increase in temp on economic damages.
The benefit of reducing emissions GHGs.
Estimating the costs of emission of GHGs is easier than estimating the costs of damage from CC.
Stern has suggested many options for reducing GHGs.
Nordhaus
approach is to estimate MC abatement level in a number of analysis through carbon control.
Slide148Normative Approach cont
1. it explains the relationship between increase in temperature with percent of GDP loss in world. GDP loss= F(increase
intemp
)
2. it explains the reduction of CO2 with MC of control. Therefore, MCA=f(emission control level).
The relationship consumption, production investment in terms of emission control.
Emission control reduces stock of GHGs and check increase in temperature at global level.
So, this expand output in long run.
Slide149Emission control cont…
1. Emission control trajectory.....
(a) societal policy with regard to GHGs.
(b) discount time with CBA.
A modest expenditure on emission control today is better than huge damage in future.
There are many other value laden assumptions.
Slide150International Response
United Nations conference on the Human Environment, 1972 Stockholm: Sweden and Norway, Acid Forming Air pollution.
It was adopted in 1979 at a meeting in Geneva by UN Economic Commission for Europe (UNECE): Scandinavian countries are added and SO2 reduction was mandatory.
LRTAP (Long Range Transboundary Air Pollution): Framework agreement.
Acidifications:
In 1985 LRTAP decided to reduce SO2 by 30 from 1980 levels by 1993.
Many of them have refused UK, USA, Poland and Spain. However, Norway, Finland, set out to achieve 80% reduction by 1995.
In 1988, LRTAP decided to limit
NOx
to 1987 level by 1994.
Further, it lost the mandate.
Slide151International Response cont ….
In 1991, targeted volatile organic chemicals (VOCs), ground level ozone and photo chemical smog. They agreed to cut by 30% by 1998 with the base year 1988.
In 1994, LRTAP adopted revised sulphur protocol: computer model estimated how much sulphur deposition is more than bearing capacity.
Initial commitment was to reduce 60% by 2000. Austria, Denmark, Germany, Sweden committed to reduction of 80% by 2000 with the level of 1990.
Further, negotiations led to abate acidification,
eutrophication
and ground level ozone at
Gothenborg
, Sweden in 1999.
It decided to reduce four pollutants viz. SO2,
NOx
, VOCs and NH3 by 2010.
Slide152International Response cont ….
Ozone Layer:
In 1978, USA banned aerosol followed by Canada, Norway, and Sweden.
However, no action was taken to control CFC in late 70’s and early 80’s.
In 1987, at Montreal protocol, countries agreed to reduce by 20% by 1993 and 50% by 1998 as base year 1986.
In 1990, all Montreal countries met at London and agreed to complete phasing of CFC by 2000.
Use of HCFCs a substitute for CFCs poses less threat to ozone layer would be phased out by 2030.
Slide153International Response cont ….
Global Warming:
Negotiations started in 1991 before 1992 Earth summits: Rio de
Janerio
for reduction of CO2.
Many countries favoured for mandatory cuts but USA has denied, therefore, no substantial improvement.
Periodical monitoring for all countries to cut the emission was proposed and cut down to 1990 level by 2000 for developed nations.
Slide154GLOBAL WARMING POLITICS
In 1992, the United Nations Framework Convention on Climate Change (UNFCCC).
Conference on Parties (COP) in each year.
UNFCCC discusses global issues, including poverty, economic development, population growth, sustainable development and resource management.
To limit CO2
By 1995, limiting is inadequate and therefore, COP1 at Berlin decided to binding reduction for COP3 at Kyoto.
1997, adopted the Kyoto Protocol.
Slide155UNFCCC’s Kyoto Protocol, 1997
The Kyoto Protocol legally binds developed countries to emission reduction targets.
Modest GHGs emissions cuts of 5.2 percent by 2008-12 over 1990.
The (CP1) started in 2008 and ended in 2012.
Collective reduction but differentiated targets.
There are now 195 Parties to the Convention and 192 Parties to the Kyoto Protocol
European countries and EU-8%
USA and Japan-7 and 6%
Russia and
Ukrain
committed to come back to 1990 level.
Norway and
Austrailia
to increase by 1% and 8%.
Slide156UNFCCC’s Kyoto Protocol, 1997
Several options were kept:
Increase in forest areas, purchase of emission credit from low carbon countries, joint implementation projects.
North’s commitment to reduce GHG emission falls short of Kyoto commitment.
Instead, many of them meet their targets by buying carbon credits from overseas (
Bidwai
, 2013).
The (CP2) began on 1 January 2013 and will end in 2020
Slide157COP4 to COP7USA restraining the GHG emission at COP4 and 5.
COP6 in 2000 at the
Hauge
, USA insisted for carbon credit and end in disarrays.
2001, Bush administration rejected Kyoto and did not attend Earth summit in 2002.
Slide158UNFCCC’s Bali Action Plan, 2007Common but differentiated responsibilities (CBDR).
The North must make the bulk of the emission cuts required and do so first.
Slide159UNFCCC, 2009 at Copenhagen, Cop-15
It failed to produce an agreement on overall GHGs emissions.
Developed countries’ obligations to undertake quantitative time bound emissions cuts and financially supports the South’s mitigation and adaptation action was failed.
Emergence of Brazil, South Africa, India and China (BASIC) countries.
Cop-15, the rich countries pledged $30 billion to poor countries over the three years.
It is known as coalition of the un-willing.
It is a three half page documents mentions about the voluntary GHGs emissions reduction.
It contains no global or country specific quantitative targets.
CoP-15 does not have legal status.
Cop-15 has greatly failed to agree on country specific emission reduction targets for 2020, 2030 and 2050.
Slide160CoP-16 at Cancun, Mexico, 2010
Cancun at least produced an agreement although its legal status has been questioned.
Cancun failed to setting targets for cutting GHGs emissions by dates, by quantity on North.
It failed to mustering technological and financial support for the Southern countries.
USA drove a hard bargain and successes CBDR.
CoP-16 lessoned that voluntary reductions bear no relationship to their responsibility.
Slide161CoP-17 at Durban in SA, 2011
Durban, 2011 decided by parties to adopt a Universal legal agreement on climate change as soon as possible and no later than 2015.
BASIC countries played an important role
Durban was important because it was last year of commitment period one CP1.
Countries, viz., USA, Russia, Japan, Canada and Australia, which wants the “
North and South differentiation principles to be abolished altogether in favour of the single agreement all major emitters and imposes emissions reductions targets on all countries, especially emerging economies like BASIC, baring only LDCs, SIDs and AOSIS.
Slide162CoP-18 at Doha, 2012
The COP_18 has extended the life of Kyoto Protocol, from end of 2012, to 2020 to cut 15 % CO2 emission.
Loss and Damage", was agreed upon.
The richer nations could be financially responsible to other nations for their failure to reduce co2.
Adaptation
– adopt to CC but not limited to changes in agriculture and urban planning.
Finance:
How countries will finance adaptation to and Mitigation of climate change.
Mitigation
– steps and actions that the countries of the world can take to mitigate the effects of climate change.
Technology
– the technologies that are needed to adapt or mitigate climate change.
Funding of the Green Climate Fund
Slide163CoP-18 at Doha, 2012Reaction to COP-18
Deeply deficient in mitigation and finance
$100 billion to GCF.
UNFCCC inefficient system for enacting international policy
Slide164Economics and Pollutions
Slide165Reading List
Kolstad
, Charles D., (2011), Intermediate Environmental Economics, International Second edition, Oxford University Press, New Delhi. Chapter 2.
A.M
Hussen
, Principles of Environmental Economics,
Routledge
, Chapter 7.
Nayak, Sanatan ((2014), GCC and Need of Green economic Model,
South Asian Journal of Management Research
, vol.6, No.2.
Slide166GLOBAL WARMING POLITICS
Two issues are clear:
1. Emission of GHGs which heat up the atmosphere are rising, thus rising the concentration of CO2.
This aggressively disrupting the nature’s cycle.
The world has failed to do the minimal necessary to prevent the earth from rapidly heating up even after two decades of 1
st
earth summit at Rio.
World’s public has very few instruments to influence national climate policies and complex international negotiations since 1992.
Slide167Green Economy and Climate Change
From 1972 to Rio, 2012
Changes in global thinking on human, environment and ecological problems.
Three pronged approaches
Developed countries to change production and consumption.
Developing countries to travel on sustainable path.
Developed countries to enable and support the developing countries’ SD through finance, technology, strategy and policies to address poverty and deprivation and equity issues.
Slide168UN protocols
UNFCCC, 1992 to 2013
UN Convention to Combat Desertification (UNCCD)
Convention on Biological Diversity (CBD)
Multilateral Agencies, UNDP, UNEP.
MNREGS, Compensatory Afforestation Fund Management and Planning authority (CAMPA), Clean Development Mechanism (CDM), Millennium Development Goals (MDGs).
Many studies identified and proposed rectification on CC.
Grave picture of AR4, IPCC, 2007
Millennium Ecosystem Assessment (2006)
Economics of Eco-System and Biodiversity (Kumar, 2010)
Stern’s Report (2006) move from high CO2 to low CO2, advantages of low CO2, promotion of low carbon and SD.
Therefore, “Green Economy Path to SD and Poverty Eradication”
by Rio+20 in 2012.
Slide169Green Economy and Climate Change
Brown Economy Model and its Impediments:
Green Economy coined first “Blueprint for a green economy” by Pearce,
Markandaya
and
Barbier
.
Various Development Models
Brown economy Model means not SD resulting increasing land, water and atmosphere use.
Increase and inequitable consumption of CO2 emission.
Change in precipitation and
occurance
of extreme events
Slide170Green Economy and Climate Change
Co
2
Emission and Primary Energy Consumption
Slide171Green Economy and Climate Change
Dimensions of Ecological, Carbon and Water Footprints
Slide172Green Economy and Climate Change
Impediments:
First, irreversibility characteristic of natural capital, as a result of that increase in fuel price, food and commodity price, and consumer price index have been taking place.
Second, unrecognized values of ecosystem services and non-existence of markers for them, leading to over exploitation of natural resources.
Third, the world is running low on drinking water and productive land and hence the threat to food security.
Four, due to loss in natural capital, multiple crises such as climate change, energy and food insecurity, financial meltdown, and increase in disasters, and social, political and ethnic conflicts, etc, are coming together making and the poor more vulnerable and less resilient.
Slide173Green Economy and Climate Change
Impediments:
Five, cooperative institutional mechanism is vanishing.
Six, More capital is poured into real estate and property, fossil fuels and structural financial assets but relatively little capital was in-vested in renewable energy, energy efficiency, public transportation, sustainable agriculture, ecosystem and biodiversity protection and land and water conservation, may not call it misallocation, but certainly not socially justifiable.
Eight, excessive depletion and degradation of natural capital, which includes endowment of mountain natural r.
esources
and ecosystems
Slide174What is new in Green Economy Model?
Balancing between growth and sustainable use of NR
Destruction of neo-classical economic theories
Holistic approach putting together individual, community and natural world.
Drivers under Green Economy Models
First, a new strategy on investment to reduce carbon emissions and pollution.
Second, create a market for ecosystem services to empower people on their rights to development; employment and governance are to be ensured.
Slide175What is new in Green Economy Model?
“The Future We Want”
takes some steps.
First, reducing or eliminating environmentally harmful or perverse subsidies,
Secondly, green public procurement and balance between the public and private investments.
Third, design of compelling/committing global interest, in investment at least 2 percent of global GDP in greeting the economy.
Slide176Challenges in Developing Countries
First, Shall be developing world will get enough potential investors for green investment?
Keeping reduction of carbon emission in mind, would the potential investors look for investment opportunities in renewable and low-carbon energy in developing countries?
This will be possible for the economy where, (a) country is having high in carbon intensity and suffering from brown economic model,
(b) Country have all essential infrastructure, such as transport, communication and market to invest,
(c) where the returns or turnover is higher.
Second, the most challenging areas on establishing a system of payment for ecosystem services (PES) at the global level.
This is not only a challenge in economics but also global-political and international relation arena.
Third, the demographic dividend is not sure for the developing world.
Slide177Theoretical Underpinning EKC and its deviations
There is no peak for developing countries
Valuing ecosystem services and enhancing flow of ecosystem is important.
Ecosystem services are not valued or undervalued.
Just price model for ecosystem is missing
Comparison between two types of goods
Ecosystem goods and all other goods
Slide178Mean of per capita CO2 emission in various countries (metric tonne/per capita)
Slide179Green Economy Model
1.At B, production =consumption
No price or undervalued price,
Brown economy model
Illegal trade and external demand increases.
2. For Developing Economy
Countries may ask for better price for low CO2 or using ecosystem services.
Start better trade
3. Production of ecosystem shall go up to A.
Production greater than demand or consumption
Surplus ecosystem services
Trade federation negotiation can be developed
PES organization to be set up.
Regulatory Boards on ecosystem
Trying up green investment to track in ecosystem and green goods.
Buy back on ecosystem services
Slide180The link between green investment and Green Trade
Low CO2 able to bargain and get better prices
Not easy for win-win situation
No free lunch
Low carbon economy should have
Right prices for ecosystem services
To establish compensatory system with green trade.
Slide181Environmental RegulationsL-1
Sanatan Nayak
DE/SAS/BBAU
Slide182Legal and Economic Aspects of Environmental Regulations
Legal Approaches
Liability Laws
Property Rights: Coasian Approach
Emissions standards
Economic Approaches
Imposition of Taxation and Subsidies: A.C
Pigou
Governing the Commons: Beyond State or Market by
Elinor
Ostrom
Effluent Charges
Transferable Emissions Credits (TEC)
Slide183The Economic Theory of Pollution Control
Socially optimum level of pollution or environmental damages
Pollution prevention (abatement) cost or Pollution damage cost function depends on economic, technological and ecological factors.
The Determinants of Pollution Control and Damage Costs
Minimisation of total waste disposal cost
Total Waste disposal Cost= Total Pollution control cost (abatement) + total Pollution Damage Cost
Slide184Pollution Control Cost (Abatement)
Private
vrs
. Public cost
PCC is direct monetary expenditure is to improve environmental cost: expenditure on sewage treatment, smokestacks, soundproof, walls, catalytic converters on passenger cars.
Nature of Marginal Control Cost (MCC): it increases with the increase in quality
Example: water treatment plant (WTP) and for more quality improvement chemical and biological treatments are required.
MCC increases at an increasing rate as the higher level of clean up.
Benchmark or total number of unit of waste: from right to left.
Technological factors that determine the MCC: switching from coal with high sulfur content to low sulfur coal.
PCC are explicit to externality: no difference in
pvt
and social costs.
Slide185Marginal pollution- control cost
$
200
50
5 15 20 Quality of Waste Emitted
MCC
Slide186Determinants of Pollution Damage Costs
The volume of waste crosses the assimilative capacity of environment.
Monetary value of adverse environmental effects are called Pollution damage cost (PDC)
Depend on nature and amount of waste: biodegradable
vrs
non-biodegradable waste.
Eutrophication: biodegradable waste-
seware
and detergents
Non-biodegradable waste: lead, mercury, radioactive waste, inorganic compounds.
Transcend present action (TPA): Nuclear energy and its impact on future generation.
PDC are included the losses to plants and animals and their habitats, aesthetic impairments, rapid deterioration of infrastructure, and harmful effects on human and animal health.
Slide187Characteristics of MDC
It measure of social cost of the damage to environment in monetary terms.
It is an increasing function of pollution emissions have positive relation ship with quantity of pollutants.
It is outcome of externalities.
It is often complicated especially irreversible ecological change.
Slide188Marginal Pollution Damage Cost
$
500
50
0
10 15 Quality of Waste Emitted
Slide189Optimal level of Pollution
Minimisation of TDC
Total Disposal cost= Pollution control cost and Pollution damage cost.
What exactly meant by optimal level of pollution and minimisation of TDC.
Bench mark level of waste w*
Socially optimal level of waste=MCC=MDC=TDC is minimum
Deviation of Wk (either
Wj
or
Wi
) is not automatically adjusted.
Whether this equilibrium is automatically or not.
It needs to be adjusted with some sort of legal and economic measures.
Slide190Optimal Level of Pollution
MCC
MDC
$
W
j
W
k
W
i
W
*
Waste Emission
L M
S
R N
Slide191An Ecological Appraisal
Two approaches:
Human preferences (WTP)
Pollution clean up than pollution prevention.
Slide192Alternative Look at Market Failure
$
0 W
k
W
*
Waste Emission
MCC
MDC
S
Slide193Legal Approaches
These criteria deter to abuse the environment legally.
Each of these criterion is evaluated based on efficiency, compliance (transaction cost) cost, fairness, ecological effects and ethical and moral considerations.
Liability Laws
Property Rights: Coasian Approach
Emissions Standards
Slide194Liability Laws
One of the earliest way of public policy to internalise the externality.
Polluters are liable to pollution they create.
Liabilities laws are used as means of internalising the externalities.
How effective liability laws are in internalising externalities?
Example: Paper Mill and Fish Hatchery .
There will be over production of paper (hence waste) and an underproduction of fish considering the social optimal point.
Polluters should pay in direct proportion to the damage caused to the pollutes
.
Slide195Liability Laws
Assumptions
:
Court sets level of compensation on the basis of damage cost function.
Court has information on damage cost relevant to the two firms.
Benchmark for compensation is equal to monetary value of damage cost under MDC.
Compensation is direct proportion to the damage cost.
Firm can reduce its fine to
Wj
from W*.
Net saving area due to reduction of waste discharge is the area W*URT.
Is it optimal point? No.
The optimal reduction of waste is We (MCC=MDC).
Therefore,
liability laws could force polluters to pay for an environmental service that would consistent with its scarcity (social ) value.
Slide196Optimal Level of Pollution
$
O W
e
W
j
W
*
Waste Emission
MCC
MDC
T
R
S
Slide197Liability Laws
The optimal level of pollution is not determined by govt but the level of financial disincentives.
How effective are liability laws as an instrument for regulating the use of environmental resources?
Advantages:
It gravitate towards socially optimal level of pollution.
Liability laws operate on the principles of economic incentives.
It tends to have moral appeal.
Polluter’s pay principle is strictly applicable.
Disadvantages:
Legal remedies are slow and costly.
It is burden on the victim to suit the case.
If the number of polluters and pollute are very large, then it is difficult to know who harmed, whom and what extent?
Slide198The Coasian Approach or Property Rights
Ronald
Coase
(1960):
He was a British Economist born in 1910 and
Died in Sept, 2013 at 102 years.
Educated at University of London and London School of Economics.
He was for much of his life the Clifton R. Musser Professor Emeritus of Economics at the
University of Chicago Law School
, where he arrived in 1964 and remained for the rest of his life.
Nobel prize in Economics in 1991.
Important Contributions:
The Nature of Firm (1937) regarding Transaction Cost
The Problems of Social Cost (1960) regarding Property Rights
Field: Law and Economics
Slide199The Coasian Approach
Assignment of property rights is the essence of this theory.
Who should own the property rights of environmental goods? Whether the polluters or victims?
It suggest the optimal level of pollution can be achieved by an arbitrary assignment of property rights to either the polluter(s) or pollute (s).
The assignment of property rights to either of the party does not have an effect for optimal level of pollution.
Transaction costs is zero.
Transferring property rights from one party to other does cause either party to cease function.
Slide200Assignment of Property Rights
Example: Paper Mill and Fish Hatchery
Property rights is assigned to fish hatchery, then what will happen?
Then FH will not wish PM to release waste.
Will it be a stable situation? No.
PM will bribe the FH as long as MCC>MDC
When MCC=MDC, negotiation will cease.
Optimal outcome is completely independent of the two parties who have right to the rivers.
Property rights is assigned to PM, then what will happen?
Here, MDC>MCC,
FH have an financial bribe to PM
.
Thus optimal level of pollution is again reached at We.
Slide201Assignment of Property Rights
MCC
MDC
$
30
50
45
15
S
20
0 70 W
e
140 200
(110) Waste Emission
Slide202Assignment of Property Rights
Profound implications of
Coase
Theorem are a follows:
Thus pollution problems can be solved by
arbitrary assignment of Property Rights.
Reduces the role of public regulators to a mere assignment of enforceable ownership rights.
Optimal level of pollution can be attained by voluntary negotiation of private parties, which is consistent with the spirit of the market price.
Slide203Weakness of the Coasian Approach
In real world, things are not as simple as
Coase
Theorem reveals.
1. Transaction costs in case of pollution or externality are very high (
Randell
, 1987).
2. Source of pollution are multifaceted and their impacts are quite diffusing. Therefore, measurement of damage caused by externality is very difficult.
Exa
. Acid rain, global warming, ozone depletion.
3. Coasian Approach support the ethos that ‘end justifies the means’. It counter to the conventional wisdom of
polluter pays principles.
4. It does not speak about income distribution. The income position of the party empowered with property rights is positively impacted. Therefore, in terms of total societal income, the gain of the hatchery is offset by the loss of the paper mill.
Slide204Weakness of the Coasian Approach
5.
Starrett
and
Zeckhauser
(1992) pointed that Coasian approach will not yield unique and optimal solutions. Because, when property rights is FH, if PM leaves out of business.
6. Both Liability laws and Coasian Property rights are decentralized approach of pollution control. Either court has the role to set the fine or compensation to polluters, whereas, in case of PR, whereas government has the role to set the property rights.
Reference
Coase
, R.H. (1960), The Problems of Social Costs, Journal of Law and Economics, Vol.3, No.1, pp:1-44.
A.M
Hussen
(2009), Principles of Environmental Economics and Sustainability,
Routledge
, UK.
Slide205Emission Standards
Derived from the previous chapters,
Environmental resources are externality ridden.
Socially optimum level of pollution can not be achieved private market players.
Public intervention are required to control market failures.
Three important policy instruments are used for regulating waste emission into the environment.
Emission standards,
Effluent charges and
Transferable emission credits.
Emission standards (a) set and enforced through legally mandated laws, (b) favours a centralised or command or control approach.
Effluent charges and transferable emission credits are used to correct price distortions (pollution taxes) out of environmental externality. These are decentralised or market based form of pollution control policies.
Slide206Emission Standards
ES is a maximum rate of effluent discharges that is legally permitted.
Standard is expressed in the form of
Quantity or volume
of waste material released into the ambient environment per unit of time.
Exa
. Waste of 100 tons released into the river per week.
Performance standards
mandate environmental outcomes per unit of products. It includes process changes, reduction in output and changes in fuels or other inputs.
Overall quality
of a more diffuse environment or setting an ambient standards on the basis of an allowable concentration of pollution. CO2 in ambient air in terms of PPM or O2 in water in terms of PPM.
Technology standards
mandate specific pollution abatement technology production methods that polluter must use to meet an emission standard. Technological standards are often used as one of the alternative means of attending ambient air and water quality.
Slide207Features of Emission Standards
ES serves public interest at large.
Violators are subjected to legal prosecutions in terms of financial penalty or even imprisonment.
Hence, Emission Standards is managed by command and control policies.
It is based on polluter pay principles. It is based on legal philosophy that polluters are accountable for the damage they cause to the environment (
Boumoul
and Oats, 1992).
In most of the countries including India, Central, State and local governments have separate agencies for setting emission standards, however, state and local agencies’ standards can not be less stringent.
Slide208Economics of Emission Standards
Assumptions:
Authority has full information on MDC and MCC.
Amount of waste without the government interventions is 300 units, socially optimum level of pollution is 150 fixed by public authority.
Effects:
Cost of controlling under the MCC is W*
FWe
. If there is no standards, polluters would have avoided entire control cost.
Public authority is having full information on MDC and MCC.
Is this assumption absolutely necessary? No.
Socially optimum level of pollution is 150 units at We.
Therefore, based on the available information, if the government fix emission standards at 100 unit, it will create anger on polluters (stringent rule).
Slide209Economics of Emission Standards
If it is at 175 units, it will be challenged by the advocates of environment.
Socially optimum pollution standard is established through trial and error method and competing voices of various special interest groups.
Social optimum level of pollution has flexibility and public authority could set socially optimum point at the long run.
Hence, ES principle is based on flexibility, well informed and responsive regulators.
Slide210Emission Standards as a Policy Control
$
MCC
MDC
F
0 100 W
e
175 W
*
(150) (300) Waste Emission
Slide211Advantages of Emission Standards
ES can be simple and direct having numerical and technological objectives.
They can be effectively used by keeping away extremely harmful pollution such as DDT and industrial toxics. Here, command and control approaches are applied keeping long run ecological and human health effects.
Pollution tends to be politically popular because they are moral appeal. Therefore, activities of polluters are subject to considerable public scrutiny.
Slide212Flaws of Emission Standards
They are set by government fiat. They are highly
intervenist
and departed from the free market spirit.
They are controlled by administrative laws and large scale bureaucracy to administer. Hence, lot of transaction costs.
The administrative laws are likely to benefits the firms. Regulators and firms have tendency to co-operate.
The administrative and enforcement cost is very high, regulatory authority do not generate their own revenue except occasional collection of fines and taxes.
ES could have the potential to undermine firms incentives to invest in new pollution control equipment.
Or firms would have incentive to hide technological change from the regulatory authority.
Slide213Flaws of Emission Standards
The administrative process sometimes neglect
economic efficiency
i.e., hide either damage or control cost.
Economic efficiency requires for setting emissions standard when both MCC and MDC are taken in to consideration. However, most of the time either of the two is considered looking into local influences.
Emission standards are applied uniformly across emission sources. That may not possible always because (a) circumstances are different, (b) uniform circumstances are less.
There are several emitters with wide range of technological capability, therefore, pollution control policy based on uniform emission standard will not be cost effective (Freeman and
Kolstard
, 2006;
Titenberg
, 2006).
Slide214Why Uniform Emission Standards is not Cost Effective?
Let us assume, there are only two firms, producing output. Emission standard is set at 200 unit of waste to be controlled by the two firms.
What is uniform policy, equal unit of waste treatment, i.e., 100 units. Under this, principles, total area of control is M and (K+L+N) respectively.
Is this cost effective control of pollution? No
Unless firms under consideration operate using identical waste processing technologies, pollution control policy based on uniform emission control will not be cost effective.
Several emitters have wide range of technological capabilities.
Suppose, government order firm 2 to clean up only 75 unit of waste.
Total control area is K+L+N, which is minimum at MCC1=MCC2
Slide215Cost Effectiveness of Emission Standards
MCC
1
MCC
2
N
M
L
K
0 75 100 200 Emission: Firm 1
200 125 100 0 Emission: Firm 2
Slide216Why Uniform Emission Standards is not Cost Effective?
The total cost of controlling (cleaning up) a given amount of waste is minimized when MCC are equalized.
The main problem with uniform waste control policy is that government do not provide polluters with incentives to search for a better approaches with innovation.
Therefore, the debate is whether emission standards or market based instrument are preferable for regulating environmental abuse should be regulated environmental abuses at on a case to case basis.
Slide217Development of Emission Standards in India
Stockholm Declaration of 1972 was the first major attempt to protect the human environment at the international level.
In
India, some constitutional articles such as 39, 42, 47, 48 and 49 are indirectly dealing with the subject of environmental pollution and protection in the
form
constitutional law of India.
While, Indian
Parliament
incorporated two articles
, i.e
.,, 48A
and 51A in the Constitution of India in 1976
,
Article 48A of the
Constitution rightly
directs that the State shall
endeavor
to protect and improve the
environment and
safeguard forests and wildlife of the country
.
Article
48-A is related to the imposed a responsibility on every citizen in the form of fundamental duty of the
state.
Slide218Conti…..
and it also includes fundamental duties for every citizen in article 51-A(g) as well as to protect and improve the natural environment including forests, lakes and wildlife and to have compassion for living creature.
Environmental
protection is a practice of protecting the natural environment at individual, organizational or governmental levels, for the benefit of the natural environment and humans
.
Due to the pressures of population and technology, the biophysical environment is being degraded, either partially or permanently. This has been recognized, and governments have begun placing restraints on activities that cause environmental degradation.
Since the 1960’s, movements for the protection of environment have created awareness about the
various
environmental
issues.
Slide219Pollution Control Acts of India
Acts
Brief Features
The Wild Life (Protection) Act, 1972
For the protection of wild animals, birds and plants and aimed of this act was rational and modern wild life management.
Water (Prevention and Control of Pollution) Act, 1974
:
To provide for the prevention and control of water pollution, and for maintaining or restoring of wholesomeness of water in the country. It provides for the establishment of pollution control boards at Centre and States to act as watchdogs for prevention and control of pollution.
The Forest (Conservation) Act, 1980
Aimed to check deforestation, diversion of forest land for non-forestry purposes, and to promote social forestry.
Slide220Conti……
Water (Prevention and Control of Pollution) Cess Act, 1977
:
It provides for a levy and collection of a cess on water consumed by industries and local authorities. It aims at augmenting the resources of the central and state boards for prevention and control of water pollution.
Air (Prevention and Control of Pollution) Act, 1981
It provides for the prevention, control and abatement of air pollution in India. It is a specialised piece of legislation which was enacted to take appropriate steps for the preservation of natural resources of the earth, which among other things include the preservation of the quality of air and control of air pollution.
The Environment (Protection) Act, 1986
This legislation provides for single focus in the country for protection of environment and aims at plugging the loopholes in existing legislation.
This is an umbrella legislation that consolidated the provisions of the Water (Prevention and Control of Pollution) Act of 1974 and the Air (Prevention and Control of Pollution) Act of 1981. Within this framework of the legislations, the government established Pollution Control Boards (PCBs) in order to prevent, control, and abate environmental pollution.
Slide221Conti………
Motor Vehicle Act, 1988
This act deals with control of automobile emissions and specifies vehicular emission standards. The act replaced Motor Vehicles Act, 1939 consolidates and amends the law relating to motor vehicles. It was felt that in this act changes in the road transport technology, the pattern of passengers and freight movements, developments of the road network in the country and better techniques in the motor vehicles management should improve in this act.
Public Liability Insurance Act (PLIA), 1991
provides for mandatory insurance for the purpose of providing immediate relief to person affected by accidents occurring while handling any hazardous substance.
National Environnent Tribunal Act, 1995
The act provided strict liability for damages arising out of any accident occurring while handling any hazardous substance and for the establishment of a national environment tribunal for effective and expeditious disposal of cases arising from such accident, with a view to give relief and compensation for damages to persons, property and the environment and for the matters connected therewith or incidental thereto.
Slide222Conti…….
The Ozone Depleting Substances (Regulation and Control) Rules, 2000
This act deals with prohibition on new investments with ozone depleting substances, Regulation of import, export and sale of products made with or containing ozone depleting substances along amid Monitoring and reporting requirements for the same.
The Biological Diversity Act, 2002
To provide for conservation of biological diversity, sustainable use of its components and fair and equitable sharing of the benefits arising out of the use of biological resources, knowledge and for matters connected therewith or incidental thereto.
The legislations are directed towards ensuring the sovereign rights of countries over their genetic and biological resources and the acceptance of the need to share benefits flowing from the commercial utilization of biological resources with holders of indigenous knowledge.
The National Green Tribunal Act, 2010
This act seeks to give effect to the promise made at Rio and to provide for the effective and expeditious disposal of cases related to environmental protection, forests and natural resources and provide relief and compensation for damages.
Slide223Who are the Regulators in India?
Central Board
Slide224Reference
A.M
Hussen
(2009), Principles of Environmental Economics and Sustainability,
Routledge
, UK.
Slide225Economic Approaches
Imposition of Taxation and Subsidies: A.C
Pigou
Effluent Charges
Transferable Emissions Credits (TEC)
Governing the Commons: Beyond State or Market by
Elinor
Ostrom
Slide226Pigouvian Taxes and Subsidies
Arthur Cecil
Pigou
:
8 November 1877 – 7 March 1959) was an English Economist.
As a teacher and builder of the School of Economics at the
University of Cambridge
.
He studied economics under
Alfred Marshall
, whom he later succeeded as professor of P
olitical Economy
.
His work covered various fields of economics, particularly
welfare economics
, but also included
Business cycle
theory, unemployment,
public finance
,
index numbers
, and measurement of
national output
.
Contributions: Externalities,
Pigou
Effects, Taxation and Subsidies,
Pigou
Club.
Wealth and Welfare
(1912),
The Economics of Welfare (
1920)
Slide227Pigouvian Taxes and Subsidies
Pigou
-1962
He argued taxes & subsidies can be used to encourage economics agents to internalize the externalities.
Negative Externality
Producer must compensate the affected parties
To be taxed by the extent of Marginal Private Cost (including taxes) =Marginal Social Cost (including externality)
the tax should be fixed at exactly the level of marginal cost
Positive Externality
Subsidy could be made to producer to compensate the amount of Positive Externality
.
Subsidy =Marginal Social Benefit (MSB)
Slide228Example and the Diagram
Example: Chemical
Fertiliser
industry polluting the air
Use the Figure
Is curtailing of
fertiliser
production the socially optimum way to reduce pollution?
Answer is NO
Air pollution could be reduced by outfitting
fertiliser
industry with special precipitators.
So, MPC will increase and SMC will decline
Slide229Effects of a Negative Externality on Private Production
Price
X
0
XX
*
X
C
MSC
MSC
*
MPC
*
MPC
D
C
A
B
Slide230Criticism of Pigouvian Approach
Both Theoretical and practical Grounds
Theoretical Ground
Follower opined that the imposer of harmful externality should bear all the cost.
Coase
showed that an efficient level of externality could be attained without assigning responsibility to either party.
Practical problems
Setting the tax at just the rate needed to equate private and social costs is unrealistic.
Policy makers have no way of knowledge precisely or even broadly the optimal level of externality.
Slide231Reference
Pigou
(1962), The Economics of Welfare (1920 reprint), London, the English Language Book Society & Macmillan.
Singh
Katar
and Anil
Shisodia
(2007), Environmental Economics: Theory and Applications, Sage Publications, Chapter 4.
Slide232Governing the Commons: Beyond State or Market
Elioner
Ostrom
:
Elinor
C.
Ostrom
(August 7, 1933 – June 12, 2012) was an American Political Economist.
She associated with the New Institutional Economics and the resurgence of Political Economy.
She served on the faculty of
Indiana University
.
She was a lead researcher for the Sustainable Agriculture and Natural Resource Management Collaborative Research Support Program (SANREM CRSP).
Contributions:
She had demonstrated how
common property
could be successfully managed by groups using it.
Her work is called as theory of common-pool resources and collective
self-governance
is now located;
Governing the Commons (1990):
Nobel prize in Economics in 2009
Slide233Design principles for Common Pool Resource (CPR) institutions
Ostrom
identified eight "design principles" of stable local common pool resource management
Clearly defined (clear definition of the contents of the common pool resource and effective exclusion of external un-entitled parties);
The appropriation and provision of common resources that are adapted to local conditions;
Collective-choice arrangements that allow most resource appropriators to participate in the decision-making process;
Effective monitoring by monitors who are part of or accountable to the appropriators;
A scale of graduated sanctions for resource appropriators who violate community rules;
Mechanisms of conflict resolution that are cheap and of easy access;
Self-determination of the community recognized by higher-level authorities; and
In the case of larger common-pool resources, organization in the form of multiple layers of nested enterprises, with small local CPRs at the base level.
Slide234Governing the Commons
Governing the Commons (1990) explain how to govern the CPR?
Community based institutions
Collective action for sustainable use of natural resources
Legal based institutions are not the only
organisation
for CPR
Slide235Governing the Commons cont …..
Social property or community property (CPR) needs fair and well defined procedures for management.
Successful CPR management system:
Clear boundaries to exclude outside parties.
Arrangement to involve all beneficiaries in decision making process.
Effective policing.
A scale of graduated sanctions for those who violate community rules.
Simple mechanism of conflict resolutions
The need for community self regulation to be recognized by higher level of authorities.
Slide236Bacteria also avert tragedy of commons
One article in Science, 12
th
October, 2012.
Bacteria in human body live in colony and individual communicate them.
Quorum (cell to cell combination) generate and control the production of public goods (production of enzyme, easily absorbable material).
Extra cellular enzyme (cheater) can free load personal benefit but leads to tragedy of commons.
Elinor
could have delighted had this article was published earlier how bacteria know about her book “Rules, Games and CPR” (The Hindu, 29
th
Nov., 2012).
Slide237References
Ostrom
, E., (1990), Governing the Commons, Cambridge University Press.
Ostrom
, E., et al., (1997), Rules, Games and CPR, The University of Michigan Press,
Mukherjee
, P., (2015), “The world Beyond State and Market”, in Verma M.K. (
ed
), Globalisation and Environment,
Rawat
Publications.
------- (2012), Rules, Games and CPR, The Hindu, 29
th
Nov., 2012.
Parthasarathy
R. and
Jharana
Pathak
(2006), “The Guiding Visible Hand of Participatory Approach to Irrigation Management”, in Reddy V.
Ratna
and S.
Mahendra
Dev (eds.), Managing Water Resources: Policies, Institutions and Technologies, Oxford University Press, New Delhi.
Slide238Effluent Charges
It is a tax or fee imposed on polluters by the government authority in money terms.
It is based on the quantity and quality of waste (ecological impacts or toxicity).
It has long history and is used to solve a wide variety of problems.
Addressing to the global climate change issue, several scholars have been proposing for a global carbon tax (
Mankiw
, 2007).
It is less interventionist than Emission standards and operate on the basis of financial incentives or disincentives.
It is easy to administered.
It provides firms incentives to reduce pollution by improving technology.
Slide239Effluent Charges
How does effluent charge approach works?
Cost minimising point or
equi
-marginal point at 150 unit of waste (cleaning of 250 units).
MCC=
Tk
=Rs.20
If MCC=Rs.30 >
Tk
=Rs.20, then Effluent charges would be cheaper than the technological charges of MCC.
If discharge of waste is more than 150 unit, then Effluent charges would be dearer than MCC. Then, form would cease to control its waste.
It has two implications.
Effluent charges reduce pollution because it recognise pollution costs the firm money. It also shows that Effluent charge internalise the externality.
Treated part is C and Untreated part is A+B, Rs. Rs.3000. hence, total cost of the firm is control cost + effluent charge, i.e., A+B+C area. Effluent charges enable to generate tax revenue that could be for other social objectives.
Slide240Pollution Control Through Effluent Charges
$
30
(Rs. 20)
t
k
MCC
Effluent
Charge
0 100 150 400 Waste Emission
Slide241Effluent Charges
If the firm does not clean any waste, then effluent tax would be A+B+C+D, Rs400X20=Rs.8000/. This will be net loss to the firm of Area D.
Optimum level of Effluent Charges
It should represent the social cost per unit basis to environment, when assimilate or store waste.
EC represent as the shadow price of environmental services to internalise the externalities.
MCC is the aggregate MCCs of all firms.
Te=MCC=MDC, i.e., uniform tax imposed to all firms by public authority.
Collectively, all the firms will not discharge more than We.
This level of waste and EC is achieved by considering all MCC and MDC form society perspectives.
Slide242Socially Optimal Level of Effluent Charges
$
0 W
0
Emission (tons)
MCC
MDC
t
e
Slide243Effluent Charges
In the short run government charges it on trial and error basis based on damage and control costs.
In the long run, EC is based on best possible information of MCC and MDC. Therefore, it require carefully crafted trial and error process and flexible administrative programmes.
Roberts and Spence rejected the above idea and said, Government normally imposes EC based on MCC. Difficult to judge MDC. Therefore, Social Optimality may turn to be inefficient.
Advantages
It automatically guide the private concern once it set. It is one of the major advantages of EC.
Total cost of cleaning up is minimised, when the MCCs are the same for all the firms engaged in pollution control activities.
Why effluent charge is cost effective?
When more than one firm, the optimal point is
Slide244Effluent Charges
MCC1=MCC2=.......=
MCCn
= Total cost of Cleaning up is minimum. Therefore,. EC is cost effective.
However, a cost effective allocation of resources among private concern does not necessarily imply social optimality.
Therefore, Te is not equal to TK. It does not imply social optimality.
How firm adopt new technology for cleaning up waste.
If the adoption of new technology is substantially cost saving than paying EC. It has two implications.
If it has potential cost savings.
EC provides greater incentives to producers for pollution control technology.
Effluent revenue at Rs. 1000 per unit is area D, E and F and Control Cost is G and H. Therefore, total cost is D, E, F, G and H (both Effluent tax and Waste Processing Charge.
Slide245Effluent Charges may promote Incentive to invest on new pollution control Technology
MCC
1
MCC
0
O 400 Wk
1500 Waste Emission
(1,000)
$
Effluent tax per unit of emission
($5)
t
k
D F G
E H
Slide246Effluent Charges
When the new technology is adopted, the cost saving area is F and G.
Is it enough to adopt new technology? However, EC provides better incentives for new technology to producer than emission standards.
G represents cost saving of the firm due to adoption of new technology.
Tax saving correspond to the area E and F. E is clean up area and therefore, F is the net saving of the firm.
Under the effluent charge regime, firm’s cost saving is limited not only to the efficiency gain in its waste processing plants, but also by what the firm is obliged to pay to the government authorities in the form of effluent tax.
Slide247Advantages and Disadvantages of EC
Advantages:
1. They are relatively easy to administer.
2. They are generally cost effective.
3. They generate revenue while correcting price distortions.
4. Provides incentives to firm to invest on pollution control through new technology.
Disadvantages:
Monitoring and enforcement cost may very high.
Who actually ends up in paying the tax? Consumer or producer?
They could be disproportionate effect on income distribution.
They do not condemn the act of polluting on purely moral basis.
Firms are against any form of taxes, when price increases and an uncertain business environment.
Environmental organisation opposes it because it provides license to pollute.
Slide248Transferable Emission Credits (TEC)
To create a market for pollution rights.
It is in terms of unit of a specific pollutants.
Basic Postulates.
It is to obtain a legally sanctioned right to pollute.
These rights are clearly defined.
total and initial credits are defined.
They freely transferable and traded in market place.
.
Slide249Transferable Emission Credits
Government has tree functions:
Determining total credits.
Mechanism to allocate the initial emission credits to polluters.
Monitor and enforce and the compliances.
How do regulatory authority determine total credits?
It through both MDC and MCC.
It is based on available technology standards.
Socially ideal level of environmental quality
How distribution mechanism is evolved? Equity
vrs
efficiency
It is independent of initial allocations.
Slide250Transferable Emission CreditsTEC is a legally sanctioned rights
Rights are clearly defined.
Total and credits and distributions are defined by authority.
Pollution credits are freely transferable.
Slide251Efficient allocation: Theoretical Frame
Initial proposition: Equal Credits
vrs
unequal MCC, 150 units each and total 300 units.
Unequal credits
vrs
Equal MCC.
Which is cost effective.
Second one is Pareto improvement and MCCI=MCC2
E is the efficient points or cost effective point for two reasons.
MCC of the forms are equal. Moving from R to E is Pareto improvement point, where no one is worse of and negotiation is mutual.
Under this new regulatory regimes, free exchange of credits provides the flexibility and incentives needed for firms to find low cost compliances (technology ) options.
It works better when the number of parties (polluters) involved in the exchange system increases.
Slide252How transferable emission permits work
MCC1
MCC
2
O
100 150 300 Tons
of SO
2
per year by Firm1
$
2500
1000
500
S
R
E
U
300 200 100 0 Tons of SO
2
per year by Firm2
Slide253Advantages of TEC
It needs a clearly defined property rights, i.e., pollution credits.
Actual market prices are also created, i.e. Rs. 1000.
Three different emission trading policies are required to create flexibility in the regulatory mechanism.
Bubble policy: it allow a factory to an imaginary bubble by treating all of its sources into one. One can emit more than others but the total compliances remain constant.
Banking policy: Pollution credits to be saved (not borrowed) for future use.
Offset policy: it is used when adding new sources into given areas or regions that is already under environmental stress. It is used at factory level as well country and regional level.
it has been spread in USA, Latin America and Europe.
Slide254Major Drawbacks
Transaction costs are significant, emission trade market may not be cost effective. TC is cited as major reluctance by many countries.
Cost effectiveness and Social Optimality: How the regulatory authority determine total credits
vis
-a
vis
environmental targets. It fails to capture MDC.
Equity issues associated with the allocation methods of the initial credits: mechanism of distribution is of questions. Grand fathering principles.
Market Power and Price distortions: creating to barriers to entry by new firms.
Moral dilemma of using markets to do some goods for the environment. Environment is treated as other marketed commodity.
Relocation effects and hot-spots: relocating the areas with less stringent pollution regulations.
Slide255Impact of Environmental Regulations on Macro Fundamentals such as Employment and Productivity
Relationship between Environmental Protection Expenditure (EPE) on Jobs: Negative and Positive Trade off
Negative Trade Off
EPE displace investment in new Plants and equipments
Environmental regulations require the use of additional labour and capital for compliance purposes for record keeping purposes resulted in decline of productivity and profitability.
EPE cause plant closures and relocations: relocations is due to lower wage and benefits of the firms.
EPE cause increase in business uncertainty.
Jobs created by EPE are often low paying and manual such as scrubbers, catalytic converters.
EPE contributes to economy wide productivity slow down and in so doing dampen economic growth and job creation.
Slide256Impact of Environmental Regulations on Macro Fundamentals such as Employment and Productivity
EPE and its Positive Trade Off
EPE allows the creation of new industries that provides new sources of environmental employments. Installation of scrubbers in smokestacks, installation of turbines or solar panels, drip irrigation, building greener storm water facility-bio-swales instead of culverts.
Pollution clean up is a labour intensive activity. These are special skilled jobs and likely to be high paying jobs because of high risk factors.
EPE could have the unintended effects of inducing firms to lower costs and provide a competitive edge.
EPE and its impacts are over estimated on the economy. MCC are normally
over estimated.
Slide257Reference
A.M
Hussen
(2009), Principles of Environmental Economics and Sustainability,
Routledge
, UK.
Slide258What is CBA
A way of assessing the desirability of a projects,
When it is important to take a long view (in the sense of looking at repercussions in the long future and near future also),
A wide view (in the sense of allowing for side effects of many kinds or many persons, industries, regions),
It implies the enumeration of all the relevant costs & benefits.
Slide259Nature of CBA
Public & Private Sector- CBA is public sector affair.
CBA weight up social benefits and costs as distinct from private benefits & costs, when making choice between alternate public sector policies.
Pvt. sector maximises profit and minimises costs.
Public sector deals in maximising public welfare, while assessing projects.
CBA takes into account of externality in assessing projects.
It is an exercise in applied welfare economics- Pareto Optimisation, K-H compensation theory,
Pigouvion
divergence,
Pvt
benefit & social costs.
Slide260Development of CBA
Article by Jules
Dupuit
:- “On the measurement of the utility of public works” Published in 1844. CBA of bridge, toll was charged not charged, consumer surplus concept developed later on path breaking idea by Marshalls & Hicks.
Major landmark of CBA
USA flood control Act, 1936
In 1950’s three major works to measure the benefits of water sector.
Otto Eckstein’s –Water resource development
Roland
Mckean’s
– Efficiency in govt. through system analysis.
John
Krutilla
& Otto Eckstein’s – Multi-purpose River development projects
3. During 50’s that in UK: CBA was applied in transport projects, high ways, road, bridge, railways and airport.
Slide261Development of CBA cont ......
Late 60’s – E.J.
Mishan’s
seminal work on CBA applied to CS, compensation test approaches of welfare economics
The concept of shadow prices in the areas of wages, capital & foreign exchange were developed by Feldstein,
Marglin
& others in 60’s.
Social rate of discount- (SRD)
Rigid methods for project appraisal in 1969’s .
Under OECD- Little &
Mirrlles
, i.e., L-M method “Manual of Industrial Project Analysis for Development countries”.
Slide262Development of CBA cont ......1972-UNIDO approach, “Guidelines for Project Evaluation –
Partha
Das Gupta, A K
Sen
& Stephen
Marglin
”
1975- WB approach, “Economic Analysis of Projects Lyn Squire and van
der
Tak
”
1979- L-M revised the works – Project Planning and Appraisal in Developing countries.
Slide263Scope of CBA
Irrigation & Flood control
Transportation – rail, sea, air, road
Education
Health
Tourism
Fisheries
Research & Development
Industrial Project- steel, fertilisers,
Environmental Impact Analysis
Slide264Issues in CBA
CBA study the essential difference between project expenditure
vrs
project costs; social costs
vrs
social benefits.
CBA deals with distribution of wealth among beneficiaries by comparing the consumption of different people in different period.
CBA studies positive and negative externality of projects.
Choice of Discount Rate
Social Justice
Slide265Steps in CBA
Value Judgement or Social Values of Concerns: CBA comes into the state of normative economics or welfare economics
Identify and measure the physical and biological changes
Estimates the costs and benefits of changes resulting from the programme
Compare the costs with benefits: present value of stream of benefits with the present value of stream of costs
Slide266Welfare Foundations of CBA
Principle I: Actual Pareto Improvement that no member in the society is worse off whereas at least on member is benefitted.
Principle II: Potential Pareto Improvement states that the gainers from the project can compensate the losers and still remain better off in their economic conditions than they were before.
Principle II does not require that compensation actually has to occur.
However, this criterion does not even pretend to address the income distribution effect of a project.
Slide267A Production Possibility Frontier representing Alternative choices b/w Conservation & Economic Growth
The Production
Possibility Frontier
M
K
N
G
0
G
1
F
0
F
1
Production of all other goods
Acres of Land Designated for Wilderness
Slide268Different Technical Evaluation Criteria
Slide269Net Present Value
The NPV of a project is the value after deducting both the benefits and costs at a specified discounted rate of the capital.
NPV must be zero or positive to be economically viable.
NPV=
NPV=0 means benefits enough to capture the investment
NPV= + means projects earns excess return
Slide270Internal Rate of Return
IRR is the discount rate, which results in a zero net present value for a project
A project can be justified if the discount rate equal or exceed the opportunity cost of the capital.
IRR=
IRR is the discount rate, which reduce the NPV to zero.
Two possible economic interpretations:
IRR represents the rate of return on the un-recovered investment balance in the project.
IRR is the rate of return earned on the initial investment made in the project.
Slide271Benefit Cost Ratio
BCR is a variant of the NPV, in which both benefits and costs are defined in terms of their present values.
BCR relates to present value of benefits to the initial investment.
BCR=
If BCR>1, NPV>0, then project is acceptable
If BCR<1, NPV<0, then project is rejected
BCR measures NPV per rupee of outlay, it can be discriminate between large & small investments, and hence BCR is preferable to the NPV criteria. It is adopted in India.
Slide272Comparison of BCR & NPV
Project
Cost
Benefits
B-C
(NPV)
B/C (BCR)
X
100
200
100
2.0
Y
50
110
60
2.2
Z
50
120
70
2.4
Slide273Comparison of BCR & NPV Cont....
According to NPV, Project is ranked X, Z,Y.
According to BCR, Project is ranked Z, Y, X.
NPV shows largeness of the present value, BCR shows the amount of output per unit of input.
Having advantage and disadvantages of both criteria project selection is based on certain other factors ,
viz
, discount rate, risk and uncertainly.
If NPV is adopted it is based on purely economic efficiency.
It does not focus on income distribution.
Slide274Discount Rate and its Rationality
1/(1+r)
t
represents the present value of a Rupee of net benefit coming at the end of t years.
1/(1.05)5 =78
paise
, similar, if time is 10 and 15, present value of one rupee would be 61 and 48
paise
.
If r>0, the present value of a rupee , the net benefit declines as time passes.
Why discounting the future benefits?
People prefer their benefit now rather in future because they are impatient or uncertain about the future.
Slide275Private vrs Public Project
Financial Appraisal or capital budgeting
vrs
CBA
Estimation of Pvt. And public differ significantly.
Benefits:
Pvt
sector is called revenue or cash flow
Public is sum of WTP: cash flow + consumer surplus
If not size of the project is very small, the approach would be different.
Public project are externally ridden and face lot of challenges.
Slide276The Total Values of Environmental Project(s)
Q
*
Q
1
Q
2
Air Quality Measured in Terms of Reduced SO
2
Emissions per Unit Time
D = MDC
A
C
B
Price ($)
P
1
P
2
Slide277Estimation of Costs
Private Project: Direct costs, monetary expenditure, financial in nature and market price. Do not reflect opportunity costs.
Public Projects: Both direct and indirect costs.
Double counting: Inflationary/ secondary impact to be avoided.
Only market value of the decline in real output of
lumper
should be counted.
Slide278Choice of Discount RateBoth use positive DR, r>0.
Difference:
Individuals are selfish and short sighted. Public projects are long term projects.
Individuals are more averse or uncertain about future.
What is difference between
pvt
and public DR?
Slide279NPV and DR
NPV= ∑(Bt-Ct)X
α
t
α
t
=
1/(1+r)
t
Longer the time, lower the value
Higher the DR, lower the value
If both
dr
and time increases at same time, the impact on at will be non-linear.
Slide280Computing the value of αt
T = Time
r =
0.01
r =
0.04
r =
0.05
r =
0.10
1
0.990
0.961
0.952
0.909
5
0.951
0.822
0.783
0.620
10
0.905
0.675
0.614
0.385
15
0.861
0.555
0.481
0.239
20
0.820
0.456
0.377
0.149
25
0.780
0.375
0.295
0.092
50
0.608
0.141
0.087
0.0085
85
0.429
0.036
0.016
0.0003
Where
t
= time in year, r= discount rate,
α
t
= 1/(1+r)
t
or
the present value of dollar coming in time t.
α
t
is the weighting factor for the flow of benefit or cost occurring in time, t.
Slide281Study Materials
Nayak, Sanatan (2005), Irrigation and Economic Development, Abhijeet Publications, New Delhi, Chapter-2.
Hussein, Ahmad (2013), Principles of Environmental Economics and sustainability,
Routledge
Publications, Chapter-8.
Gowdy
,