ENRE Lecture 1, Part 1 Environmental Policy Objectives Efficiency (static and dynamic); Sustainability; Equity (fairness); Non-conflict with other objectives.

Economy-Environment Interactions Economic activity has a material basis. It draws resources from the environment, and provides flows back into the environment. These flows must satisfy the laws of thermodynamics: First law: Conservation of mass/energy (materials balance principle) Second law: Entropy is non-increasing

Environmental resource services and functions Waste assimilation and re-processing by ecological systems Environmental systems support processes (air, climate, water, soil) Provision of productive inputs Provision of environmental amenities * that contribute to labour productivity * that contribute directly to well-being

Principles of ecology The ability of the environmental system to perform these functions depends on its “state of well-being”. Of relevance here are two central concepts: Ecosystem stability Ecosystem resilience

Environment and Ethics Utilitarianism There are important reinterpretations of that philosophy which allow for more that merely narrow self-interested “consumer” behaviour (see the work of Sen and Singer, for example). Alternative ethical frameworks also exist.

Required reading Perman, Ma, McGilvray and Common: Natural Resource and Environmental Economics (3rd edition) Chapter 1: An introduction Chapter 3: Ethics and the Environment

Sustainability and Sustainable Development WCED (1987) The most well-known phrase from this report: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Environment - Economy Interactions We are interested in: Reproducibility of each system over time (sustainability) Interactions between the two systems Predictability or uncertainty in the operations of these sub-systems

Economic sustainability Some “economic” concepts of sustainability: Sustainability is defined as... non-declining utility of a representative member of society for millennia into the future. A sustainable state is one in which utility (or consumption) is non-declining through time. The alternative approach [to sustainable development] is to focus on natural capital assets and suggest that they should not decline through time.

Some “interdisciplinary” concepts of sustainability: Preserving opportunities for future generations as a common sense minimal notion of intergenerational justice Sustainable activity is...that level of economic activity which leaves the environmental quality level intact, with the policy objective corresponding to this notion being the maximisation of net benefits of economic development, subject to maintaining the services and quality of natural resources over time.

CRITICAL ISSUES Critical to sustainability, however defined, seem to be: the degree of resource substitutability the rate of technical progress the degree of eco-system stability and resilience irreversibility of “investment” decisions

The degree of resource substitutability The assets available to society, now and in the future, comprise: Natural capital Physical capital Human capital (labour and embodied skills) Intellectual capital (disembodied skills & knowledge Some of these can be accumulated over time. Others cannot be – they are either finite, or there are limits to their accumulation. So, as we move through time, to what extent can those resources which can be accumulated substitute for those which cannot (or which are depleted)?

The rate of technical progress Important because technical progress implies we can get more output from given quantities of inputs. So limited resources can be stretched further. Technical progress may also impact on the extent of resource substitutability. And possibly also on the degree of eco-system stability and resilience.

The degree of eco-system stability and resilience Sets fundamental limits to all economic activity. Of recent interest in the research literature in this regard are: biodiversity decline and evolutionary capacity interference with natural ecosystems Various indicators may signal future stability/resilience. But can never know ex ante whether a system is stable and resilient. Changes are non linear, and path dependent (so dependent on initial conditions).

FEASIBILITY OF SUSTAINABILITY Is sustainability feasible? Is it possible for the economy to attain a state in which production and consumption track along non-declining paths (or grow at positive rates) over indefinite periods of time, in the presence of finite stocks of exhaustible resources and constraints imposed by natural environmental processes? Is a huge (and sometimes technically difficult) literature on this question. See, for example, the literature surrounding the so-called Hartwick savings rule.

Irreversibility Suppose that an asset is developed (or used) in some way. New information arrives and we change our mind about the desirability of that development. Is it possible to reverse the process so that we are back in the original position? Often this is NOT possible. In those cases, the decision is irreversible This gives us much less room for making mistakes. Important in resource valuation.

MODELS OF THE FEASIBILITY OF SUSTAINABILITY Much of this based on a neo-classical growth model with finite environmental resources – examines the possibility of constant consumption over unlimited time horizons. Not surprisingly, results depend on assumptions made about Resource substitutability Technical progress Population growth It is easy to get specific results for specific sets of assumptions. But these are of dubious validity as a guide to actual policy.

Required reading Perman, Ma, McGilvray and Common (3rd edition): Chapter 2: The origins of the sustainability problem Chapter 4: Concepts of Sustainability