Topics in Economics and Environment (Jour) PDF

Topics in Economics and Environment (Jour) Philippe Roman ICHEC Brussels Management School 2024-2025 Topics in Economics and Environment (HD) 2024-2025 1 1. Economics and the environment Topics in Economics and Environment (HD) 2024-2025 2 1...

Topics in Economics and Environment (Jour) Philippe Roman ICHEC Brussels Management School 2024-2025 Topics in Economics and Environment (HD) 2024-2025 1 1. Economics and the environment Topics in Economics and Environment (HD) 2024-2025 2 1.1. Where is the environment? Topics in Economics and Environment (HD) 2024-2025 3 Where is the environment? Source: Mankiw (2017), p. 23 Topics in Economics and Environment (HD) 2024-2025 4 Where is the environment? (2) here Topics in Economics and Environment (HD) 2024-2025 5 The conventional view of the economy Topics in Economics and Environment (HD) 2024-2025 6 1.2. From classical to neoclassical thought Topics in Economics and Environment (HD) 2024-2025 7 The first economists and the substance of value William Petty (1623 – 1687) Labour and Land are “the father and mother of wealth”. Topics in Economics and Environment (HD) 2024-2025 8 The first economists and the substance of value The Physiocrats François Quesnay (1694 – 1774) Stresses the role of nature (land) The net product, difference between what nature gives and what nature receives, is cropped by the peasants. This net product is distributed through economic exchanges to the “sterile classes” (which consume as much as they produce). General project of Physiocrats: government by nature (which would supersede politics) Topics in Economics and Environment (HD) 2024-2025 9 The classical economists and labour David Ricardo (1772 – 1823) Focus on labour rather than land Three classes : Capitalists Workers Land owners Rent = diff. between the value of the land and the marginal land Profit = diff. between land marginal return and subsistence “wage” Topics in Economics and Environment (HD) 2024-2025 10 The classical economists and labour In classical theory, land is the framework within which the economic process operates with the determination of the distribution of profit. Land, Nature ENCOMPASSES the economy. The notion of nature is though idealised, emptied from its concrete reality. ≠ Physiocrats : land has its own life, might by eroded or deteriorated. Ricardo : land is a technical characteristic, return/rent on a surface. Topics in Economics and Environment (HD) 2024-2025 11 Political economy in the 19 th century Karl Marx (1818 – 1883) William S. Jevons (1835 – 1882) Topics in Economics and Environment (HD) 2024-2025 12 Karl Marx Marx pushes the labour theory of value of Ricardo to the extreme: theory of exploitation. He applies the labour value to itself → he shows the surplus (plus-value), diff. between the value produced by one hour of labour and what labour requires to be (re-)produced. Marx is also interested in peasants and in the urban-rural opposition. Impressed by Liebig’s work on soil erosion → Marx was aware that the end of a circular organic agriculture threatens its own fertility. Rural exodus separates food production places and food consumption places → the organic waste does not feed the soil with nutriments anymore; instead, they become pollution. “Metabolic breaking generated by capitalism” Topics in Economics and Environment (HD) 2024-2025 13 William Stanley Jevons 19th century economy in England is changing: industrial revolution The organic economy (depending on the living resource provided by the biosphere) becomes mineral (depending on the resources extracted from the soil, carbon). 1860s: England fears to lose its trading and industrial supremacy if carbon is depleted. “The Coal Question” (1865) Jevons questions the technical, economic and geological aspects of coal. Topics in Economics and Environment (HD) 2024-2025 14 William Stanley Jevons He calculates the costs of production, prices, quantities, etc. What he shows: coal exploitation both contributes to the expansion of production and to technical progress (steam engine). He oscillates between a stress on the absolute limits to production (because of a limited quantity of available carbon); and the fear of stagnation (regarding other countries) due to growing exploitation costs. Topics in Economics and Environment (HD) 2024-2025 15 William Stanley Jevons For Jevons, mineral resources appear as a key actor in economic history. The search for resources fuels the economic process: Directly by providing the energy needed to produce. Indirectly: the problems and difficulties faced during the extraction and transportation process stimulate technical innovation. So: resources set limits to economic processes BUT ALSO generate structural mutation within the economy. Topics in Economics and Environment (HD) 2024-2025 16  Conservation vs preservation: Pinchot vs Muir G. Pinchot (1865 – 1946) John Muir (1838-1914) Influential Scottish-American naturalist, author, environmental philosopher, botanist, zoologist, glaciologist, and early advocate for the preservation of wilderness in the United States First head of the united States Forest Service of America. “Father of the National Parks” Promotes a reasonable use of resources (forests in West America). and co-founder of the Sierra Club, a prominent environmental organization. The aim: to reach a maximum sustainable production – make commercial use for humans last longest possible. Pinchot saw conservation as a means of managing the nation’s natural resources for long-term sustainable commercial use. As a professional forester, his view was that “forestry is tree farming”, without destroying the long-term viability of the forests. Muir valued nature for its spiritual and transcendental qualities. Topics in Economics and Environment (HD) 2024-2025 17 The Neoclassical Turning Point Carl Menger Classical economics: focus on production costs, research on the material determinants of production; interest in relations between social classes ≠ Neoclassical school: stress on the utility received from production and consumption. Shift to the psychological, subjective conditions of the valuation of commodities Classical economics: interest in the dynamic of Alfred Marshall accumulation ≠ neoclassical focus on the notion of equilibrium Method: shift from empiricism to theoretical speculation NATURE DISAPPEARS FROM ECONOMICS UNTIL WW2… Léon Walras Source : Wikimedia Commons Topics in Economics and Environment (HD) 2024-2025 18 Hotelling (1885 – 1973) Is the exploitation rhythm by private actors too high regarding social optimum? With Hotelling: Nature does not affect economic dynamics ; issue = how to capture Nature’s value at its best? The natural resource is a form of “capital”. Theoretical lens: similar to management of a financial portfolio. Maximising profit by comparing 1° extracting the resource and selling it now to get the market interest rate from the extracted rent, or 2° keeping the resource underground Source : Wikimedia Commons waiting for a better price later. → The competitive equilibrium has it that the scarcity rent (market price net of extraction costs) should evolve at a growth rate equal to the interest rate. Topics in Economics and Environment (HD) 2024-2025 19 Realities of nature disappear Neoclassical method, its stress on equilibrium conditions, psychological theory of value → occults nature’s specificities Economic process is conceived as an autonomous system, which only refers to itself and does not need any material basis. Topics in Economics and Environment (HD) 2024-2025 20 The Keynesian Turning Point Keynesian thought perfected the dematerialization of economic theory The influence of Keynes strengthens an aggregated vision of the economy, reduced to monetary flows. The economic system is perceived as a monetary flows network, and the materiality of these flows does not matter much. The material content of production is not important Resources that underpin production are not accounted for and disappear from the visible side of the economy. Such analysis is “disembedded” from material processes Topics in Economics and Environment (HD) 2024-2025 21 Mid-20th Century: Is Nature back? Arthur C. Pigou (1877 – 1959) Ronald Coase (1910 – 2013) Source : Wikimedia Commons Topics in Economics and Environment (HD) 2024-2025 22 Arthur C. Pigou (1877 – 1959) Extending Marshall’s intuition, Pigou was the first to dedicate attention to the concept of “externality” (Welfare Economics, 1932). He examined the mechanisms implying externalities: market failures. “Environmental externality” Advocated solution: creating a tax (now called ‘Pigovian tax’) that corresponds to the difference between the private cost and the social cost effectively incurred by the public. Such a tax should allow the price system to provide better signals and incentives to agents → the principle is to internalize externality. Topics in Economics and Environment (HD) 2024-2025 23 Ronald Coase (1910 – 2013) The Pigovian tax is rejected by Coase (The Problem of Social Cost, 1960) Let’s assume a chemical factory and a laundry using water coming from the same river. The waste rejected upstream the river by the factory prevents the laundry (situated downstream) from using the water. There is a conflict and an externality because property rights on the river (vector of externality) are not well defined. Topics in Economics and Environment (HD) 2024-2025 24 Ronald Coase (1910 – 2013) For Coase, if property rights were better delimited, the firms could engage in negotiation. As a consequence, a price for the right to use the river would be determined, and the externality would be internalized. Beside property rights, Coase stresses the high transaction costs which effectively prevent such arrangements from occurring. Coase’s statement is the following: if property rights are defined and allocated, then “the ultimate result (which maximises the value of production) is independent of the legal position if the pricing system is assumed to work without cost”. Topics in Economics and Environment (HD) 2024-2025 25 Limits of Coasian bargaining “... if many people are harmed and there are several sources of pollution, it is more difficult to reach a satisfactory solution through the market. When the transfer of rights has to come about as a result of market transactions carried out between large numbers of people or organizations acting jointly, the process of negotiation may be so difficult and time-consuming as to make such transfers a practical impossibility... As a practical matter, the market may become too costly to operate. In these circumstances it may be preferable to impose special regulations... Thus the problem of smoke pollution may be dealt with by regulations […].” Coase (1959, p. 29) Topics in Economics and Environment (HD) 2024-2025 26 From first best to second best… The previous two approaches (Pigovian taxation and Coasean negotiation) entail the endogenous achievement of a socially optimal balance. → Pigovian taxation redresses ‘economic’ (external) harm through ‘economic’ means (a tax equal to the monetary value of pollution). Once taxation is introduced (and the externality internalised), the optimal level of pollution is achieved. → Coasean negotiation achieves social optimum where the optimal level of pollution is, as well, endogenous to economic interactions and transactions. In this approach, no external pollution standard is given. “Optimal pollution”, or the socially desirable level of pollution, is determined by economic reasoning. → We are in a so-called “first best world”. Topics in Economics and Environment (HD) 2024-2025 27 Second-best solutions to pollution issues Kneese and Bower (1968), Baumol and Oates (1971): taxing to attain a predetermined standard Dales (1968): negotiable permit system These new instruments abandoned the idea of achieving an optimal level of an externality, and rather tried to reach a fixed level of the exogenous externality (in this case, pollution) at the lowest possible cost for society. → Less ambitious than Pigou / “Coase theorem” → Strict separation between political ends and economic means Topics in Economics and Environment (HD) 2024-2025 28 1.3. Environmental economics Topics in Economics and Environment (HD) 2024-2025 29 Economics and the environment: very brief clarification Environmental economics (or Economics of the environment) → Mainstream (neoclassically-minded) approach to pollution problems Natural resources economics → Mainstream (neoclassically-minded) approach to resource depletion problems Ecological economics →Heterodox/non mainstream galaxy of approaches to the relationships between economic and ecological systems. In this section, we are talking essentially about environmental economics. Topics in Economics and Environment (HD) 2024-2025 30 Environmental economics Environmental economics is only the application of general neoclassical economic theory to a new object. The integration of Nature in economics consecrates the extension of the neoclassical logic. In the classical theory, Nature was the framework that shaped the evolution of the economic process. From then on, nature only becomes one element of the economic system, only insofar as it contributes to exchanges and to value creation. Topics in Economics and Environment (HD) 2024-2025 31 Environmental economics (continued) The stylised market becomes the cornerstone for assessing all the possible forms of regulation, be they market-oriented or commandant-and-control. The market is therefore a norm. O. Godard: it is a “procedural” way of taking account of the environment, since there is an environmental problem only if the state of the environment is associated with a kind of regulation displaying a market failure. So, addressing the issue consists in remedying the failure, and NOT in reaching a certain state of environmental quality. The criterion for the existence of an environmental problem is purely internal to the theory of market regulation. → Such an approach is inherently incapable of taking an outside look at the effects of the market logic on the environment. Two-sided reference to the market: 1° The market is used to characterise the anomalies, or imperfections (or ‘failures’) which underlie environmental problems. 2° The solution to these problems is calibrated from the idea of a perfect market. Topics in Economics and Environment (HD) 2024-2025 32  Topics in Economics Source : Managi and Kuriyama, (2017),andEnvironmental Environment (HD) 2024-2025 Economics, Routledge. 33 Environmental economics (continued) “In order to realize sustainable society, it is first necessary to evaluate the environment and the economy with the same criteria. […] If costs of environmental destruction are not made clear, then concrete environmental policies cannot be advanced. Therefore, environmental economics provides methods to assess the monetary price of the environment to be used within modern environmental policy frameworks.” Managi and Kuriyama, 2017, p. 3. “Market mechanisms are incapable of efficiently functioning for a natural environment that possesses no defined market value (e.g. an environment that is “free”). Further still, there are costs involved in protecting the environment, and people may choose not to bear the burden of these costs if someone else might in their stead. What this means is that market economics, when relied upon solely, could not only fail to produce adequate solutions, but could also exacerbate existing problems.” Ibid., p. 5 Topics in Economics and Environment (HD) 2024-2025 34  The representation of pollution in environmental economics → The “social” marginal cost of production (MCS) is higher than the private cost of production (MCP) → Due to the externality, Qm (market quantity produced) is not optimal ; Q* is. Source: Tietenberg & Lewis, 2015, Environmental & Natural Resource Economics, Pearson. Topics in Economics and Environment (HD) 2024-2025 35  The “optimal” quantity of pollution in environmental economics → Optimality is reached when the marginal cost of controlling pollution equals the marginal cost of pollution damage on society. → Optimal pollution results from a cost- benefit balance of more or less of it. Source: Tietenberg & Lewis, 2015, Environmental & Natural Resource Economics, Pearson. Topics in Economics and Environment (HD) 2024-2025 36  Why trading emissions theoretically reduces overall costs → Let’s say we want to reduce total emissions by 15 units. → Compare total costs in each of the following cases: 1) Source 1 reduces by 8 and Source 2 by 7 2) Source 1 and Source 2 trade rights to emit until gains of trade are used up (their MC are equal) Source: Tietenberg & Lewis, 2015, Environmental & Natural Resource Economics, Pearson. Topics in Economics and Environment (HD) 2024-2025 37 Topics in Economics and Environment (HD) 2024-2025 38 Topics in Economics and Environment (HD) 2024-2025 39 Topics in Economics and Environment (HD) 2024-2025 40 1.4. Alternatives to environmental economics Topics in Economics and Environment (HD) 2024-2025 41 An alternative view of the economy-environment relationships: The Limits to Growth Analysis developed by system science experts, published in a book for the Club of Rome. Systemic approach to the economy, that is put in relation with other non-economic variables. The model integrates feedback loops and natural limits. If economic activity and population keep on growing (‘standard run’ of the model), the systems heads towards collapse. Topics in Economics and Environment (HD) 2024-2025 42  A stable economy requires steady state use of resources and non-growing pollution and output… The approach was harshly criticised by mainstream economists in the 1970s, in particular by William Nordhaus, for being “bad economics”. But academic debates are still alive about the relevance of this approach: some say the last decades have mimicked the ‘standard’ run. Others draw inspiration from the model to propose alternative/better models… Topics in Economics and Environment (HD) 2024-2025 43  New approaches to modelling the macroeconomy https://people.unipi.it/simone_dalessandro/eurogreen-model/ https://exchange.iseesystems.com/public/petervictor/lowgrow-sfc/index.html#page2 Topics in Economics and Environment (HD) 2024-2025 44 Modelling the energy transition toward a low carbon economy: MEDEAS model Topics in Economics and Environment (HD) 2024-2025 45 Some ‘heterodox’ approaches Pollution comes from “successful cost transfers” (Joan Martínez-Alier) rather than accidental failures. → Reduction of ‘externalities’ implies power relationships between polluters and polluted (see theory of the environmentalism of the poor) Externalities are the norm rather than the exception, they are pervasive, and they result from capitalist firms’ strategies (Karl William Kapp). The economy as a machine transforming matter and energy into goods and services; importance of thermodynamic laws; ‘externalities’ are a fatal side-product of any production process (Robert Ayres). The economy is an entropic process (Nicholas Georgescu-Roegen). The economy displays an optimal scale. The issue of (sustainable) scale precedes that of (fair) distribution, which precedes that of (efficient) allocation (Herman Daly). Topics in Economics and Environment (HD) 2024-2025 46 Ostrom and the commons Aside the mainstream, work has been done on common pool resources following Elinor Ostrom (1933 – 2012). She contradicts the mainstream economic approach to fisheries (Hardin, 1968, “The Tragedy of the Commons”) where emphasis is put on the definition of individual property rights in order to avoid overexploitation and depletion of resources exploited in common. Ostrom challenges the dichotomy between private and public Source : Wikimedia Commons kinds of regulation. There are a lot of in-between solutions! Ostrom shows that communities create institutional arrangements allowing for a sustainable use of common resources. Topics in Economics and Environment (HD) 2024-2025 47 Ostrom and the commons Resources are not only the basis of property rights, sources of externalities or a capital to grow… … they have the capacity to influence the social world through the way they are specifically managed, which adapts to their characteristics. Natural resources are the basis on which negotiations are built. Institutions and resources enter into a dynamic relationship of co- construction: The evolution of resources generates new rules/norms. At the same time, these new rules shape the dynamics of resources. Topics in Economics and Environment (HD) 2024-2025 48 Ostrom and the Commons Nature finds back a key role in the analysis. The question is not to know whether institutions allow for extracting a maximum value of the resource, but whether the exploitation preserves the resource and promotes sustainability. Topics in Economics and Environment (HD) 2024-2025 49 Ostrom’s principles for managing a commons 1. Define clear group boundaries. 2. Match rules governing use of common goods to local needs and conditions. 3. Ensure that those affected by the rules can participate in modifying the rules. 4. Make sure the rule-making rights of community members are respected by outside authorities. 5. Develop a system, carried out by community members, for monitoring members’ behaviour. 6. Use graduated sanctions for rule violators. 7. Provide accessible, low-cost means for dispute resolution. 8. Build responsibility for governing the common resource in nested tiers from the lowest level up to the entire interconnected system. Topics in Economics and Environment (HD) 2024-2025 50 1.4. Ecological economics Topics in Economics and Environment (HD) 2024-2025 51 Where to find overviews of ecological economics ❖ https://www.exploring-economics.org/en/orientation/ecological-economics/ ❖ https://booksandideas.net/What-Can-We-Learn-From-Ecological.html Topics in Economics and Environment (HD) 2024-2025 52 K. William Kapp (1910 – 1976) After WW2, economists contest the neoclassical framework. For K.W. Kapp, externalities are inherent to capitalism. → “Externalities” are better called “social costs of enterprise”. The pursuit of profit maximizing entails producers to externalize the costs of their activity (to remain competitive). Topics in Economics and Environment (HD) 2024-2025 53 Kenneth Boulding (1910 – 1993) The Economics of the Coming Spaceship Earth (1965) “As long as man was small in numbers and limited in technology, he could realistically regard the earth as an infinite reservoir, and infinite source of inputs and an infinite cesspool for outputs. Today we can no longer make this assumption. Earth has become a spaceship... In a spaceship there are no sewers.” Boulding (1965, p. 1) Topics in Economics and Environment (HD) 2024-2025 54 Georgescu Roegen (1906 – 1994) He is a mathematical economist… criticising the use of mathematics in economics. Criticism of the material “desembeddedness” of neoclassical economics comes from “inside” the economic discipline. Original theoretical proposal: the economy should be viewed and analysed as a thermodynamic process which irreversibly transforms and degrades energy (and matter as well). 1971, The Entropy Law and the Economic Process Has open the way to numerous models and calculations of the energetic metabolism of economies, how to limit entropy generation, how to represent the economy in energetically-coherent ways etc. Is also one of the forefathers of the degrowth movement. Topics in Economics and Environment (HD) 2024-2025 55 Herman Daly (1938 – 2022) Steady-state economics: rich economies should degrow until they reach a steady state (no more material/energetic growth) at a sustainable level. “Sustainable scale” should come first, then “fair distribution”, and only thereafter “efficient allocation” (of goods and services). He proposed practical principles for strong sustainability (see later in the course). The market is still viewed as the best way to allocate resources in an efficient way. Topics in Economics and Environment (HD) 2024-2025 56 Doing economics in and for a full world… (A representation of contemporary rich economies by H. Daly) Topics in Economics and Environment (HD) 2024-2025 57 The ecological economics’ view: the economy embedded Common and Stagl, (2005), Ecological economics. An Introduction, Cambridge University Press. Topics in Economics and Environment (HD) 2024-2025 58 Topics in Economics and Environment (HD) 2024-2025 59 From “sustainable development” to a realistic representation of “the-economy-in-society-in-the-biosphere” Topics in Economics and Environment (HD) 2024-2025 60 Ecological Economics: some defining traits In the broad sense, this movement aims to provide an alternative to the mainstream conceptualization. The repercussions of economic activities on “extra-economic” objects, Nature in particular, and the retroactions, are not treated as exceptions anymore, that would be external to the market system. The economy is embedded in a network of material extractions and flows, transformation and rejections. Behind the monetary flows are the energy and material flows that anchor economic activity into the lithosphere (mineral) and biosphere (ecosystems). Topics in Economics and Environment (HD) 2024-2025 61 Ecological Economics: some basic tenets The economy is included in the bio-geo-chemical cycles that ensure the Earth regulation. It is not nature that is apprehended in economic terms, but the economy that is analysed through the lenses of nature. Nature becomes both the source of economic flows and the lenses through which they can be measured. EE favours physical measures on monetary measures Multi-criteria analysis of environmental projects are preferred (or at least do complement) cost-benefit analyses. This is premised mainly on recognition of complexity, uncertainty and value plurality. The use of more than one criterion entails a strong emphasis to value conflicts that might arise in the evaluation of projects. → Nature reveals tensions that cross the social world. Topics in Economics and Environment (HD) 2024-2025 62 Ecological Economics: a few research streams How to value ecosystems so that we take better care of them? → Deliberative multicriteria valuation with precautionary parameters. How to represent and model the economy and its relations with ecosystems so that we can better thin about sustainability? → Macroecological modelling (e.g., MEDEAS, LOW GROW, Eurogreen models – see slide above) How to understand and unlock pathways to sustainability? → Quali-quanti work on individuals and groups (multilevel) with realistic assumptions; representation of transition pathways as contested narratives and actions implying plural world visions and vested interests. Topics in Economics and Environment (HD) 2024-2025 63 Topics in Economics and Environment (HD) 2024-2025 64 Mainstream vs Ecological Economics Topics in Economics and Environment (HD) 2024-2025 65  Lawn (2016), p. 43 Topics in Economics and Environment (HD) 2024-2025 66 Re-conceptualising the economy? Provisioning systems Fanning et al. (2020) define a provisioning system “as a set of related elements that work together in the transformation of resources to satisfy a foreseen human need. In this definition, each need satisfier can be mapped onto a provisioning system that is made up of a set of related elements.” They add: “Resources are used to satisfy human needs through a set of provisioning systems made up of interacting ecological, technological, institutional, and social elements. Such systems can (and do) fail to use resources sustainably, and they can also fail to satisfy human needs.” The big issue when it comes to provisioning systems is: “how can human needs be satisfied at sustainable levels of resource use?” Topics in Economics and Environment (HD) 2024-2025 67 Topics in Economics and Environment (HD) 2024-2025 68  How do we organise our provisioning systems to improve social outcomes while reducing biophysical resource use? Provisioning systems are devised to provide specific need satisfiers. → Ex.: The purpose of energy provisioning systems is to provide “affordable, reliable, sustainable, and modern energy for all”, i.e. Sustainable Development Goal 7. Appropriating systems: a set of related elements that work together in the transformation of resources to extract rent. Rent is defined as an economic reward that arises from the recipient’s control of strategic assets which exceeds the proportionate compensation of their labour. Topics in Economics and Environment (HD) 2024-2025 69 Concluding discussion Topics in Economics and Environment (HD) 2024-2025 70  What do you think are the respective views of ecological economists and (mainstream) environmental economists about the SCC? How come environmental economists and ecological economists have so different views about the SCC? → Provide arguments along Steps 1 to 4 Source: Resources for the Future, 2019, Social Cost of Carbon 101 Topics in Economics and Environment (HD) 2024-2025 71