1. Ecological Economics Lecture 08 13th May 2010 Rui Pedro Mota Tiago Domingos Environment and Energy Section Department of Mechanical Engineering

2. World Bank’s Genuine Savings

4. Criteria for Sustainability, Pezzey (2004) EDE An economy is sustainable at time t if and only if the representative agent’s current utility does not exceed the maximum level of utility which can be sustained forever from t onwards. One-sided sustainability test: un-sustainable development. Multisector results in real terms. –Real Net Income, –Genuine Saving, – Consumption Investment Variation in Real Net Income Variation in Welfare

5. Small Open Economy Include –stocks of commercial forests, –welfare costs of air emissions, The capital stocks are : –Domestic man-made capital, –Net foreign capital held privately or by the government, –Stock of commercial natural resources Production r – interest rate

6. Small Open Economy Households’ utility function depends on material consumption rate and (negatively) on the flow of emissions The vector of emissions depends on production and abatement expenditure. Maximize welfare subject to the above relations and having as controls consumption,, all forms of extraction,, abatement expenditure and trade balance. Conventional (SNA) NNI: Green Net National Income: Genuine Saving (Adjusted Net Saving):

7. Small Open Economy – Table of symbols Consumption rate at time t Utility Rate of emissions of air pollutants Production function Abatement expenditure Extraction of natural resources for domestic use, exports and from imports. Imports - Exports Constant nominal interest rate Stock of resources Man-made capital, Resource price Constant real interest rate Cost of extraction of resource Marginal cost of abatement = Marginal damage cost Marginal cost of abatement Net foreign capital

8. Small Open Economy Starting from conventional SNA aggregates: –Deduct the damage from flow pollution emissions, –Deduct (add) the value of rents from resource depletion (or not),

9. GNNI and GS in Portugal – Air Emissions How to value a unit of emissions? –Marginal benefit of avoided emission, –Marginal cost of emission (MDC), or –Marginal abatement costs? Marginal cost of emission per emitted pollutant [€2000/ton]: [€2000/t] Best Low High SO 2 6872 34729972 NH 3 7399 369910999 NO x 2040 11403040 VOC 1150 4501550 PM2,5 44000 2200064000

10. Models point to measure emissions at the –Marginal cost of abatement (MCA), or –Marginal social cost (MSC) = Marginal benefit of abatement (MBA), a.k.a. Marginal Damage Costs (MDC) Measurement away from the optimum –c, over-polluting (assumed current state) => a is upper bound –d, under-polluting => b is lower bound Social costs vs Marginal abatement Constant MDC

11. GNNI and GS in Portugal – Air Emissions

12. GNNI and GS in Portugal – Forests National Forest Inventory 2005/06 Average Volumes: Conifers Eucalyptus 95/9805/06 [m 3 /ha] 88.5 55 82.5

13. GNNI and GS in Portugal – Forests The depreciation of commercial forests in Portugal is on average 10% of the contribution of forestry to national product (around 4%).

14. Forest Depletion in Genuine Savings Net Forest Depletion = Net Rent / GNI * 100 Net Rent = (Production - Increment)*Unit Rent Stock Changes = Increment – Production Unit Rent = Price – unit cost Whenever depletion is positive the WB assumes it to be zero. Bias towards unsustainability.

15. GS in Portugal Without the value of time – Decreasing tendency throughout the period and negative GS after 2002. With the value of time – Decreasing tendency until 2001, but GS are always positive.

16. In 1993, SO2 costs of emissions, which represent around 30% of total emission costs, decreased substantially. Increases welfare but does not counteract the loss of production. Sustainability Message

17. What’s Missing? The depletion of water resources. The depletion of biodiversity. Depletion of stocks of fish. Inclusion of the value of ecosystem services. Soil quality. Distributional issues (intragenerational concerns). Other assumptions...