1. ECONOMICS AND THE ENVIRONMENT

2. How much is clean air worth?
Can you charge somebody for damaging your air?
How much are you willing to pay for clean air?
Should you have to pay for clean air?

3. Have you ever caught a fish off the UST pier?
Is cutting down the rainforests efficient?
What market incentives are there for research on the environment?
How can the environment be priced and sold?
Does Hong Kong have any mechanisms for valuing its environment?

4. Lecture Objectives:
Review Advantages and Limitations of Market Economics
Understand how economics is creating new principles and guidelines for business activity.

5. Comparing: Neo-classical Economics Environmental Economics
Ecological Economics
To reveal policy implications

6. What is an economy supposed to do?
What is the Neo-classical approach?

7. What is a market?
A system of exchange

8. What is exchanged?
Resources: land, labor, capital (ie. goods or services in some form)

9. How does the market work?
Matching of supply and demand

10. Why is the market such a good system?
Optimal use of resources: buyers force competition on suppliers; greatest return for the efforts of suppliers
Pareto efficiency: “a situation where it is impossible to make one person better off without making anyone else worse off”
Meaning: allocation of resources to the uses that will bring the greatest overall increase in production and monetary value by matching producers with the highest bidders

11. What enables the market to work?
Price or Value setting
Profit motive
Private property
Government and other regulating institutions

12. Does the market operate perfectly?
1. General Market Failures:
Monopoly;
information asymmetry;
missing markets;
transaction costs.

13. Market Failures What company did you buy your air from?
How much did you pay for your air? How was that price set?
How clean was the air you bought? How do you know?
How can a company stop other companies from dirtying its air? What can you do if someone makes your air dirty after you bought it?
What rate of return should a company expect to get from investing in air quality?

14. 2. Environmental Market Failures:
Failure to value the environment:
unpriced use values; option values; existence values; bequest values
Lack of information
Externalities
Common Access Resources/Sinks
Discounting the future
Missing Markets

16. Externalities
“An unintended cost or benefit of production or consumption that is not reflected in the price of the related transactions. Externalities are often borne by people who are not parties to the transactions that create them.”

17. Externalities
Define the externalities of your company: who are the parties to the monetary transaction and who or what pays for the impacts of the transaction

18. Discounting the Future with Net Present Value (NPV)
NPV = x/(1+.10)nyrs
X + your present money value
.10 = the discount rate
nyrs = the power of how many years down the future you are looking at
NPV of 100 dollars in five years with a discount rate of 10% is 100/(1+.10)5 or $62.09

19. Environmental & Ecological Economics
Why should CLP pay for pollution controls in Guangdong rather than in Hong Kong?
Are there any economic tools we can use to value Hong Kong’s environment?
Are air-conditioned shopping malls reasonable substitutes for clean air and clean beaches?
What impact would the use of the Mai Po conservation area for building houses have on Hong Kong’s net worth?

20. Cleaner air on horizon by year's end: Liao Improvements to Guangdong power plants will cut pollution, says minister
Guangdong's biggest cluster of power plants, at Humen in Dongguan - which are blamed for much of Hong Kong's air pollution - are being equipped with desulphurisation devices to cut emissions.
In the longer term, Dr Liao hopes a cross-border emission trading scheme can be set up to  assist other power plants in Guangdong to cut emissions in a more cost-effective manner.
In the meantime, the government has started talks with CLP Power and Hongkong Electric on emission reduction and an emission trading scheme.

21. Hong Kong administration states preference for system to be used in cross-border emissions trading
…the government says a "cap and trade" method is best for Hong Kong.
Under this system, the government would set an emissions cap as well as a timetable for this to be lowered. The capped quantity of emissions would then be distributed to sources of air pollution, including power plants and large factories, in the form of emission allowances or permits.
Polluters who fail to meet the requirements of the cap would have to buy emissions reduction credits from others who could successfully lower their emissions below the capped level

22. Environmental Economics: From Market Failure to Government Failure
Limited information of how to deal with specific environmental problems (of area or industry) and of firms’ capability to deal with or hide environmental impact
Limited resources to regulate, monitor and enforce
Command and Control regulations: uniform standards and technologies

23. 1. Cost effectiveness: example, emission trading credits
Policy Guidelines from Environmental Economics: I. Benefits of Using the Market (as opposed to CAC)
1. Cost effectiveness: example, emission trading credits
2. Substitution and technological advance: example, green taxes
3. Other institution/market based schemes: deposit refund schemes, environmental bonds, transferable quotas, transfer of development rights.

24. For: Better Cost-Benefit Analysis, regulations, fines
Policy Guidelines from Environmental Economics II. Better Valuation of Non-market Valued Assets
1. Financial Costs
2. Averting Behavior
3. Travel Cost Method
4. Hedonic Pricing
5. Contingent Evaluation
For: Better Cost-Benefit Analysis, regulations, fines

25. Environmental Economics and Ecological Economics
Weak vs. Strong Sustainability

26. Environmental Economics and Ecological Economics: Weak vs
Environmental Economics and Ecological Economics: Weak vs. Strong Sustainability
Efficiency standard vs. ecological standard
Discount rate (growth) driven vs. discount rate (growth) limiting
Resources as inputs & outputs of unlimited economic system vs. economic system as limited subsystem of ecosystem
Substitutability vs. complementarity

27. The Environmental Economics Trade-off

28. Neo-classical Empty World
Environmental Economics World S
Recycle?
Recycle M M M M
Economy H S
Economy E E E E
Ecosystem
Ecosystem
Ecosystem H
S = solar energy H = heat M = matter E = energy
natural capital
man-made capital
Figure 1: The Economy as an Open Subsystem of the Ecosystem
(Daly 1996:49).

29. Economy H M E S
Recycle
Environmental Economics World
Ecological Economics
Full World
Figure 1: The Economy as an Open Subsystem of the Ecosystem
(Daly 1996:49).
S = solar energy H = heat M = matter E = energy
natural capital
man-made capital
Ecosystem

30. Substitutability vs. Complementarity
Manufactured capital depends on natural capital
Uniqueness, uncertainty and irreversibility
Ecosystem services
Growth outpaces substitution
Ecosystem fragility
Manufactured and knowledge capital for natural capital
Land, labor and capital substitutability
Same service by different product
Technological fixes
Ecosystem resilience

31. Policy Influences from Ecological Economics
Strict demands for environmental protection reflected in:
Environmental impact assessment
Natural preservation areas (parks, reserves)
Absolute limitations on chemicals

32. Policy Guidelines from Ecological Economics
1. Daly Rule
2. Index of Sustainable Economic Welfare (ISEW)
3. Ecological tariffs on free trade
4. Community based sustainability through self-sufficiency and diversification

33. Policy Guidelines from Ecological Economics
1. Daly Rule: "Never reduce the stock of natural capital below a level that generates a sustained yield unless good substitutes are available for the services generated."

34. Index of Sustainable Economic Welfare
ISEW=
total output
+ unpaid work
- environmental destruction and degradation
- environmental improvement measures
- depreciation of human-made capital
+/- welfare distribution effect

35. Free Trade Limitations
Regional specialization obscures view of resource exploitation, depresses ecological and social laws, weakens terms of trade and impoverishes landholders
Externalities from the shipping of goods around the world
Therefore, tariffs to compensate or reduce free trade

36. Community Based Development
Community rather than corporations or government creates social conditions (wants and needs) that limit impacts
Greater self-sufficiency through decentralized control
Local synergies for recycling and energy reduction
Ethical bonds amongst business community

37. Summing up: Market success in exchange efficiency
Market failures in: valuation, common access, externalities, and discount rate
Environmental economics guidelines: cost effectiveness and market-based incentives
Ecological economics guidelines: limiting growth to within global and local ecosystems
*therefore reducing throughput of economy within ecological carrying capacity