1 Lecture 10: Topics on environment and economy Theories of Ecological Economics M.Sc. EnviNatResEcon. Sem 1/ August 2007

2 topics Pollution and economic development –The environmental Kuznets Curve (EKC) Trade and environment –Pollution Haven Thesis –Environment as non-tariff trade barrier Accounting for Nature in the economy –green accounting etc. Environment and the Firm –Triple Bottom Line

3 Pollution and development Development=more output, more consumption And more waste Or not, because of regulation, production structure, abatement technology etc. So, what are the facts and what are the explanations?

4 facts Stylised facts: as shown in World Bank Annual report 1992 See chart:

5 Explanations? Theoretical model Stern: simple curve fitting, but not explanation

6 Models? Simple analytics:

7 And it looks like this..

8 Revisionist- empirical critique Stern: review Econometric critique Lack of theory-

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10 A go at theorising- Decomposition of EKC into components

11 Trade and Environment An issue at the WTO trade talks Extensive literature has developed Main issues: –Pollution Haven Thesis –Environment as non-tariff barrier –Trade in environmental products Environmental services Trade in endangered species (CITES) The carbon trade Biotech products

12 Pollution Haven Thesis Connects to location of production Do companies look for location with low environmental standards? So far, not proven With outsourcing, may not be so important any more -- Convergence of national standards may not happen, but international voluntary standards may apply – ISO 14000, green supply chain, etc. China Toy recall case as example!

13 Environment as NTB Importer country sets standard, compliance with WTO – Most Favoured Nation(MFN), national Treatment (NT) rules Can increase cost for exporter, checking, quality certification, But usually not negotiable, because rule is applied with non-discrimination between national and foreign suppliers- Example: WEEE, REACH of the EU

14 Trade in environmental products Endangered species-CITES –Orchids, animals, ivories etc. –Control and reporting Environmental services- –Under GATS, as part of trade in service –Related to mode 3: commercial presence, FDI by foreign companies with advanced technologies

15 The carbon trade Under the Kyoto Protocol Emission commitment (CAP) and Flexibility Mechanisms (TRADE) system See next slide EU directives – Emission trading and Linking Directives Voluntary Market in non-Kyoto countries, US and Australia?

16 emissi on year KP target Actual emission

17 Emission Reduction P Demand Domestic Action Joint Implentation CDM C- ET

18 RGGI: a Regional CO 2 Program for Power Sector Sonia Hamel Office for Commonwealth Development Presentation to the Electricity Restructuring Roundtable June 17, 2005

19 Overview Overview of the RGGI Process Quick Cap-and-Trade Primer Status of the Work to Date Observations on the Process Next Steps

20 Goal Design a Regional Cap-and-Trade Program Initially Covering CO 2 Emissions from Power Plants

21 Statistics 3rd Largest World Economy 14% US GHG Emissions 3.2% of World GHG Emissions (  Germany)

22 Context: Early Movers on Climate Change History of Regional Cooperation on Air Quality -- Ozone Transport Commission NJ First to Take Official Target New England Governors/ E. Canadian Premiers Plan (2001) (sets a target) NY Greenhouse Gas Task Force (2001) Now state plans in CT/RI/MA and ME (also set targets)

23 Cap-and-Trade Program Goal: Achieve a Reduction in Emissions through a Flexible, Market-based Approach Identify Sources to be Covered Determine Total Emissions from Covered Sources Set Cap Issue Allowances (1 per ton) & Allocate Allowances to Sources Trade

24 Why Cap-and-Trade? Have Proven to Provide Benefits at Lowest Cost Simple compared to Alternatives Flexible, Market-Based Incentive to Reduce at Source of Emissions Leads to New Innovation

25 Regional Cap-and-Trade Program Each State: –receives a budget (as agreed in MOU) –distributes allowances to its sources –agrees to accept allowances originating in other states State to State Reciprocity Allows Trading Key: Ensure Uniform “Currency” and Free Flow of Allowances across State Lines Regional Cap Individual State Budgets Each State Allocates Allowances Trade

26 Why a Regional Program? Moving together provides economy of scale Greater reductions possible More options for lower cost reductions Larger the market, the larger the incentives for innovation More states = greater influence on future policies

27 RGGI Design Principles Build on Past Success of NOx Budget Program Maintain Electricity Affordability, Fuel Diversity & Reliability Make RGGI Expandable to Other States Achieve Least Cost Reductions Stimulate Innovation w/ Clear Market Signals

28  Stakeholder Process  Technical Groundwork  Data Assembly and Analysis  Energy and Economic Modeling  Resource Panel  Website contains materials at: RGGI Progress to Date

29 Stakeholders: 24 organizations and companies at the table and over 30 more observing Electric generators (from across the geographic area, includes all fuel types) Electric distribution companies Energy efficiency & renewable energy interests Energy users (industrial, commercial) Consumer interest organizations Environmental organizations Stakeholder Group

30 Emissions Data by State

31 Carbon emissions Other emissions Electricity prices Total electricity system costs Fuel use and diversity Reliability Imports and exports of electricity Quantitative Impacts of a Regional Carbon Cap

32 Policy Consultation and Decision Making Stringency of the Cap How to set state budgets Flexibility mechanisms for companies Offset Credits (External to Cap) Regional Greenhouse Gas Registry RGGI Progress to Date

33 Agreed on Model Reference Case (base case) Considered factors in setting cap levels to model and, ultimately, to recommend Seek to minimize implementation costs Decide which reductions from external sources (not covered by the cap) could qualify for credit? –How to guarantee that these offsets are real reductions? Key Issues

34 Stringency: looking at 10% below current levels and stabilization at current levels by Offsets: Would reduce costs and expand benefits. Decisions to be made about what geographic area to include. Simplicity of design: Inspire others to follow, strict accountability and flexibility Essential Components

35 Complete Modeling and Evaluate Reasonable Cap Level from what we have learned. Complete a draft Model Rule Determine Cap Size and Mechanics Determine State Emissions Caps Begin State-by-State Decision making and Implementation Plan ongoing Cooperation between states RGGI Next Steps

36 Add Additional States to Emissions Market Add Offset Categories to Program Over Time Possible Expansion to Major Stationary Sources in Other Sectors DEMONSTRATE SUCCESS RGGI Future Goals

37 Accounting for environment Green accounting for the macro-economy What to count? Changes in stock of Natural capital UN methodology for national income accounting, environment as satellite account, physical account, but not yet valuation

38 The environment and the firm

39 The issues More stringent environmental requirements for company operation Regulations, taxation, environmental markets Green consumerism Impact on company strategy and competitiveness Triple bottom line

40 Impact on company operation Higher cost due to :- Product requirement Labelling requirement Higher Standards to meet Increased competition-loss of competitiveness

41 Examples? Green products Green companies Green wash ?

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44 Examples again…………. Measures: compliance ISO certification WEEE REACH Advantage:? Share price Image

45 Triple bottom line Financial Social Environmental Corporate Social responsibility

46 Conservation Finance

47 The Issues Benefit of conservation is external to the firm So no action on conservation How to capture the benefit is the key How to pay for conservation? PES example-are incentives perverse? Green Investment – do they make money?

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