Policy Options

Topics Political issues: how do we overcome political barriers? Political issues: how do we overcome political barriers? General design principles General design principles Policy sequence Policy sequence Policy tools Policy tools Places to intervene: leverage points Places to intervene: leverage points

Opening Policy Windows Problem stream Problem stream Defining existing condition as a problem Defining existing condition as a problem Getting policy makers to accept definition Getting policy makers to accept definition Policy Stream Policy Stream Develop consensus around policies necessary to solve problem Develop consensus around policies necessary to solve problem Politics stream Politics stream National mood; leading politicians accept gravity of problem and willing to implement necessary policies National mood; leading politicians accept gravity of problem and willing to implement necessary policies

General design principles for policy 1. Every independent policy goal must have an independent policy instrument 1. Every independent policy goal must have an independent policy instrument 2. Attain necessary degree of macro control with minimum sacrifice of micro- level freedom and variability 2. Attain necessary degree of macro control with minimum sacrifice of micro- level freedom and variability Market mechanisms Market mechanisms

General design principles for policy 3. Uncertainty and irreversibility requires considerable safety margin 3. Uncertainty and irreversibility requires considerable safety margin Precautionary principle Precautionary principle Which is more precautionary: quotas or taxes? Which is more precautionary: quotas or taxes? How does this relate to positive feedback loops? How does this relate to positive feedback loops? 4. Start from historical conditions 4. Start from historical conditions Market economy and market mechanisms Market economy and market mechanisms

General design principles for policy (cont.) 5. Adaptive management 5. Adaptive management How can we adjust feedback loops to cope with increasing strength of impacts? How can we adjust feedback loops to cope with increasing strength of impacts? How does this relate to quotas? How does this relate to quotas? 6. Principle of subsidiarity: Institutions at the scale of the problem 6. Principle of subsidiarity: Institutions at the scale of the problem Who should be making policy decisions? Who should be making policy decisions? How does this relate to feedback loops? How does this relate to feedback loops?

Policy sequence Scale Scale Determines how much there is to be distributed/allocated Determines how much there is to be distributed/allocated Distribution Distribution Pareto optimal outcome possible from any initial distribution Pareto optimal outcome possible from any initial distribution Decided before allocation Decided before allocation Allocation Allocation

Policy Tools Prescription Prescription Payments Payments Penalties Penalties Property rights Property rights Persuasion Persuasion Power Power

How Can we Change Complex Systems Leverage points Leverage points Where can we have the most impact? Where can we have the most impact? See Meadows, Donella “Places to Intervene in a System,” Whole Earth, winter issue. See Meadows, Donella “Places to Intervene in a System,” Whole Earth, winter issue.

Where should we intervene? Where can our interventions have the most impact? Where can our interventions have the most impact? We need to understand how the ecological, social and economic objectives influence one another We need to understand how the ecological, social and economic objectives influence one another Where is intervention the most feasible? Where is intervention the most feasible? “the minimum that is ecologically necessary is greater than the maximum that is politically feasible” GORE “the minimum that is ecologically necessary is greater than the maximum that is politically feasible” GORE

Candidates for intervention Critical variables (strong influence on others, strongly influenced by others) Critical variables (strong influence on others, strongly influenced by others) Active variables (influence others, but are not influenced by others) Active variables (influence others, but are not influenced by others) Buffer variables (absorb impacts without passing them on) Buffer variables (absorb impacts without passing them on)

10 Leverage Points 10. Numbers (subsidies, taxes, standards). 10. Numbers (subsidies, taxes, standards). Standard economists stuff Standard economists stuff Can still be powerful Can still be powerful 9. Buffering capacity 9. Buffering capacity E.g. acid rain and calcium carbonate E.g. acid rain and calcium carbonate 8. Material stocks and flows. 8. Material stocks and flows. E.g. replacing transportation system, E.g. replacing transportation system,

10 Leverage Points 7. Regulating negative feedback loops 7. Regulating negative feedback loops Feedback has to be proportional to problem Feedback has to be proportional to problem Markets and feedback loops Markets and feedback loops 6. Driving positive feedback loops. 6. Driving positive feedback loops. Slow them down, let negative feedbacks do their thing Slow them down, let negative feedbacks do their thing E.g. Financial crisis E.g. Financial crisis 5. Information flows. 5. Information flows. E.g. publicizing pollution, labeling, etc. E.g. publicizing pollution, labeling, etc.

Feedback loops as leverage points Can we increase the strength of negative feedback loops? Can we increase the strength of negative feedback loops? Can we slow down/halt positive feedback loops? Can we slow down/halt positive feedback loops? Can we create appropriate feedback loops where none exist? Can we create appropriate feedback loops where none exist?

Can we increase the strength of negative feedback loops? Strength of loop has to correspond to strength of impacts they are designed to correct Strength of loop has to correspond to strength of impacts they are designed to correct What has happened to strength of impacts in the system over time? What has happened to strength of impacts in the system over time? How have external factors affected this? How have external factors affected this?

Can we increase the strength of negative feedback loops? Time lag must be appropriate Time lag must be appropriate How could we reduce the time lag? How could we reduce the time lag? Can we speed up information flows? Can we speed up information flows? Role of communication/education Role of communication/education How could we improve information flows? How could we improve information flows? Can we create information flows that are more direct? Can we create information flows that are more direct?

Slowing/breaking positive feedback loops Slowing the loop Slowing the loop Breaking the loop Breaking the loop

Information and feedback loops Electric meter example Electric meter example Unique to human systems Unique to human systems

Creating appropriate feedback loops Role of education Role of education Price mechanism as a feedback loop Price mechanism as a feedback loop Taxes Taxes Subsidies Subsidies Quotas Quotas Community values as a feedback loop Community values as a feedback loop Relationship with price signals Relationship with price signals Regulations as feedback loops Regulations as feedback loops

What characteristics should key indicators have? Minimal time lag Minimal time lag Key indicators of change in the system Key indicators of change in the system Passive variables (weak influence on others, strongly influenced by others) Passive variables (weak influence on others, strongly influenced by others) Critical variables (strong influence on others, strongly influenced by others) Critical variables (strong influence on others, strongly influenced by others) Change is a constant. We need to adapt. Change is a constant. We need to adapt.

10 Leverage Points 4. The rules of the system 4. The rules of the system Democratic control over the commons, the media, and the problem of macroallocation Democratic control over the commons, the media, and the problem of macroallocation Cooperative provision/management of non- rival resources, including information Cooperative provision/management of non- rival resources, including information Return the right to seigniorage to government Return the right to seigniorage to government Just distribution of resources provided by nature and society Just distribution of resources provided by nature and society 3. The power of self-organization. 3. The power of self-organization. Maintain diversity Maintain diversity

10 Leverage Points 2. The goals of the system. 2. The goals of the system. What is socially and psychologically desirable? What is socially and psychologically desirable? Shared vision of a sustainable and desirable future. Shared vision of a sustainable and desirable future. Continuous economic growth is undesirable Continuous economic growth is undesirable Doom and gloom doesn’t win converts Doom and gloom doesn’t win converts

10 Leverage Points 1. The mindset or paradigm out of which the goals, rules, feedback structure arise. 1. The mindset or paradigm out of which the goals, rules, feedback structure arise. What is biophysically possible? What is biophysically possible? Economy is sustained and contained by the global ecosystem Economy is sustained and contained by the global ecosystem Continuous economic growth is impossible Continuous economic growth is impossible Macroallocation is central problem Macroallocation is central problem Humans are social animals, not homogenous globules of desire, etc. Humans are social animals, not homogenous globules of desire, etc.

10 Leverage Points 0. The ability to transcend paradigms 0. The ability to transcend paradigms

Policy and property rights Excludability and property rights Excludability and property rights Property rights as a bundle Property rights as a bundle Changing conditions and the need for changing property rights Changing conditions and the need for changing property rights

Command and control regulations (standard setting) for negative externalities Typical approach to pollution control Adequate agricultural practices, BAT Setting effluent level/limiting channelization Political factors involved in setting standards Economically inefficient Does not respond to economic conditions, i.e. increases or decreases in abatement costs

Command and control (cont.) Not cost effective Not cost effective Different marginal abatement costs for different polluters Different marginal abatement costs for different polluters No incentive to reduce emissions below standard No incentive to reduce emissions below standard no incentive not to increase pollution in attainment areas no incentive not to increase pollution in attainment areas little incentive to develop new technologies little incentive to develop new technologies

Marginal costs of restoring floodplains.

Channelization with smooth cost curves

Pigouvian tax tax

Marginal costs of restoring floodplains.

Pigouvian taxes and subsidies Cost effective Efficiency requires full knowledge of costs and benefits Issues with taxes Politically difficult May be higher cost to farmers than alternatives, though cost effective for society Not possible for international problems

Pigouvian taxes and subsidies Issues with subsidy Issues with subsidy May lead to more entrants into industry May lead to more entrants into industry Ignores polluter pays principle (negative externalities) Ignores polluter pays principle (negative externalities) Excellent for activities with positive public good externalities Excellent for activities with positive public good externalities May be most feasible alternative for some international problems May be most feasible alternative for some international problems Addresses allocation first, scale and distribution only indirectly Addresses allocation first, scale and distribution only indirectly

Channelization quotas quota

Marginal costs of restoring floodplains.

Tradable channelization quotas Cost effective Cost effective Distribution of permits Distribution of permits Grandfather Grandfather Auction Auction Equity based Equity based

Tradable channelization quotas Purchase of permits by downstream communities public goods problem Problems with market thinness Spatial issues Erosion damage: local problem--impacts on downstream farm Flood damage: Lewis creek watershed problem Phosphorous emissions: Lake Champlain watershed problem Pollution quotas: CO2, SO2, Mercury

Tradable quotas Addresses scale first, distribution second, allocation third Actual results SOx permits in US CBA financed by industry vs. actual costs Fisheries quotas Kyoto protocol Problems with distribution

What should quota be? Renewables (forests, fisheries, etc.) Renewables (forests, fisheries, etc.) Cannot exceed rate of renewal In general, balance between structure and function, raw materials and ecosystem services, stock-flow and fund-service Waste absorption capacity Waste absorption capacity Cannot exceed ecological constraints Cannot exceed ecological constraints Must also focus on human impacts Must also focus on human impacts Non-renewables Non-renewables What would be a just distribution across generations? What would be a just distribution across generations? set quota so that price stimulates creation of substitutes before resource is exhausted set quota so that price stimulates creation of substitutes before resource is exhausted Must not leave future worse off than it would have been in absence of resource Must not leave future worse off than it would have been in absence of resource

Tax or quota?

With a tax, you can theoretically get right amount, but amount will change with economic change With a tax, you can theoretically get right amount, but amount will change with economic change Is it better to let prices vary (economic) than amount of resource to be used (ecological) Is it better to let prices vary (economic) than amount of resource to be used (ecological)

Impacts of shift in MNPB under taxes and quotas quota tax

Impacts of shift in MNPB under taxes and quotas quota Shift in MNPB

Distribution issues Increasing price of resources leads to increase in price of consumer goods, so regressive. Increasing price of resources leads to increase in price of consumer goods, so regressive. But, rich consume more than poor, so receive a higher subsidy from the future But, rich consume more than poor, so receive a higher subsidy from the future gov’t gets more money, can get rid of more regressive taxes. gov’t gets more money, can get rid of more regressive taxes. If resource prices are kept low, resources must inevitably run out. Who will this affect more, the rich or poor? If resource prices are kept low, resources must inevitably run out. Who will this affect more, the rich or poor?

Other policies

Financial assurance bonds Polluter pays precautionary principle Polluter pays precautionary principle Potential forms: Potential forms: Bonding Bonding Insurance Insurance Why is this needed? Why is this needed? Can these handle uncertainty? Can these handle uncertainty? Uncertain outcomes Uncertain outcomes Uncertainty regarding cause and effect Uncertainty regarding cause and effect Could there be any role for these in Lewis Creek? Could there be any role for these in Lewis Creek?

ICMS Ecologico Ecological value added tax Ecological value added tax Municipalities (counties/townships) are rewarded for their provision of ecosystem services Municipalities (counties/townships) are rewarded for their provision of ecosystem services Promotes competition for resources Promotes competition for resources Helps address subsidiarity problem Helps address subsidiarity problem Could this work for Lewis Creek? Could this work for Lewis Creek?

Conservation easements Separating the property rights bundle into individual sticks Separating the property rights bundle into individual sticks Are these similar to a tax, quota or neither? Are these similar to a tax, quota or neither? Net present value of an annual subsidy Net present value of an annual subsidy Impact on land values Impact on land values Tax implications Tax implications Legal costs Legal costs Strictness and cost Strictness and cost

Macro goals, micro freedo m Precautionary principle Starting from historic al conditio ns Adaptive managem ent Subsidiarity Taxes/ subsidies StrongOK WeakLocal, state and federal Tradable quotas Strong OKStrongDepends Conservation easements OK StrongOKDepends Financial bonding OKStrongOK Depends ICMS ecologico StrongOKStrongOKStrong

ScaleDistributionEfficiency Taxes/ subsidies OKPolluter pays, OK strong Tradable quotas StrongCan be strongStrong Conservation easements Can be strongOKdepends Financial bonding OKPolluter paysOK ICMS ecologico Can be Strongbeneficiary pays, OK Strong Summary

The Macro-allocation problem How many resources should be devoted to market goods, and how many to public goods? How many resources should be devoted to market goods, and how many to public goods? Can translate into quotas for ecosystem goods/services Can translate into quotas for ecosystem goods/services Decision cannot be made by market Decision cannot be made by market How can this decision be made? How can this decision be made?

Distribution policies

4 sources of income human capital (wage) human capital (wage) built and financial capital (interest) built and financial capital (interest) natural capital (rent) natural capital (rent) entrepreneurship (profit) entrepreneurship (profit)

Human capital (wages) Minimum wage Minimum wage Job training Job training Maximum wage? Maximum wage?

Built capital ESOPs: building a capitalist society ESOPs: building a capitalist society CSOPs: building capitalism while internalizing negative externalities CSOPs: building capitalism while internalizing negative externalities Financial transaction taxes Financial transaction taxes Stock taxes Stock taxes

Natural capital Capturing rent: Capturing rent: eliminating perverse subsidies eliminating perverse subsidies land rent land rent royalties (non-renewables) royalties (non-renewables) natural dividend (renewables) natural dividend (renewables)

Social capital Land rent Land rent Patents Patents Luxury tax? Luxury tax? Wealth tax? Wealth tax?

Slowing/breaking positive feedback loops Positive feedback in the news Positive feedback in the news What happens when positive feedback loops run their course? What happens when positive feedback loops run their course?