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13. Natural Resources & the Environment Sustainable Development Importance of Natural Resources Land, Natural Resources, & Environmental

Resources Petrol

Sustainable Development Importance of Natural Resources Land, Natural Resources, & Environmental

Resources Petroleum Dutch Disease

3

Natural Resources & the Environment (continued) Resource Curse Poverty & Environmental Stress Grassroots Environmental Action Market Imperfections, Policy Failures, &

Environmental Degradation

4

Natural Resources & the Environment (continued) Pollution Arid & Semiarid Lands Tropical Climates Global Public Goods: Climate & Biodiversity Policy toward Global Climate Change Limits to Growth Daly’s “Impossibility Theorem”

5

Natural Resources & the Environment (concluded) Natural Asset Deterioration, Adjusted Net

Savings, & the Measurement of National Income

Adjusting Investment Criteria for Future Generations

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Sustainable Development “Progress that meets the needs of the

present without compromising the ability of future generations to meet their own needs” The 1987 (UN (Brundtland) Commission on Environment and Development 1987).

More than survival of the human species. Maintenance of the productivity of natural,

produced, and human assets from generation to generation.

Can physical (produced) capital substitute for natural capital? (See Daly’s theorem).

7

Land, natural resources & environmental resources Land –Immobile, potentially renewable, &

nonproducible (with exceptions such as Boston & Mumbai’s landfills)

Natural resources--Mobile but nonrenewable Resource flows—renewable energy sources Environmental resources—resources

provided by nature that are indivisible

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Petroleum

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Response to 1973-74 & 2005 petroleum price increases Short run price elasticity of demand (%

change in quantity/% change in price) is close to 0.

Long run elasticities are much higher (slightly less than one)

DCs adjusted better in 2005 than 1973-74; however, LDCs were badly affected both times

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TABLE 13-1 indicates leading crude oil countries (by 2003 production and 2003 estimate proved crude oil reserves (billions of tons)

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TABLE 13-1. The World’s Leading Crude Oil Countries (by 2003 production and2003 estimated proved crude oil reserves, billion tons)

Country Production 2003 Reserves

Saudi Arabiaa 0.47 36.1

Irana 0.19 18.0

Iraqa 0.07 15.5

Kuwaita 0.11 13.3

United Arab Emiratesa 0.12 13.0

Venezuelaa 0.15 11.2

Russian Federation 0.42 9.5

Libyaa 0.11 4.7

Nigeriaa 0.11 4.6

USA 0.34 4.2

China 0.17 3.2

Mexico 0.19 2.3

Canada 0.14 2.3

Qatara 0.04 2.0

Brazil 0.08 1.5

Norway 0.15 1.4

United Kingdom 0.11 0.6

Other 0.73 13.3

Total world 3.70 156.7

Proved reserves of oil are “those quantities that geological and engineering information indicates withreasonable certainty can be recovered in the future from known reservoirs under existing economic and operatingconditions” (British Petroleum 2004:4).

aOPEC members.

Source: British Petroleum p.l.c. 2004.

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Dutch Disease A pathology resulting from the way a

booming resource export retards the growth of other sectors through unfavorable effects on the foreign-exchange rate and the costs of factors of production.

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Resource Curse Resource-abundant economies grow

slower than other economies (Sachs and Warner 1999; Lal and Myint 1996; Auty 2002),

Oil revenues increased average material welfare, widened employment opportunities, and increased policy options, but also altered incentives, raised expectations, distorted and destabilized nonoil output, frequently in agriculture.

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Resource curse A top Nigerian official in 1970s: Striking it

rich on oil was “like a man who wins a lottery and builds a castle [but] can’t maintain it and has to borrow to move out.”

Why? Exchange-rate, pricing, investment, and

incentive policies that Nigeria failed to take to counter Dutch disease (Chapter 6)

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Reverse Dutch disease Reverse Dutch disease from oil bust

severe, especially for those, such as Nigeria or Angola, that are highly dependent on oil

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Is the resource curse valid? Resource abundant economies more likely

to suffer growth collapse, due to higher wages obstructing industrialization.

Neumayer (2003) finds virtually no resource curse if you measure GNI accurately. Should subtract capital depreciation, natural resource depletion, and damage from carbon dioxide & particulate emissions from national savings (Figure 4-2).

“Curse” is partly result of unsustainable overconsumption in resource-abundant economies (as in Nigeria during its oil boom).

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Mineral export abundance & predatory rule Abundance of exportable minerals more

likely to be associated with poor governance. Resource exportables enabled warlords or

predatory rulers (Liberia’s Charles Taylor and Zaire’s Mobutu Sese Seko) to support private armies without providing public services.

Predatory economic behavior not viable in resource-poor economies, such as Togo.

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Poverty & environmental stress People living hand-to-mouth existence

more likely to destroy their immediate environment (e.g., Nepalese collecting firewood denuded forests on the hills & mountains).

Poor, landless people often forced to cultivate marginal lands.

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World Bank (1992) on environment & productivity

Adverse effect of environmental degradation on health and productivity:

(1) water pollution & scarcity contributes to poor household hygiene, added health risks, aquifer depletion, & limits on economic activity, contributing to millions of deaths yearly.

(2) excessive urban particulate matter responsible for 300 to 700 thousand premature deaths annually and for half of childhood chronic coughing.

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Environment, health, & productivity (3) Smoky indoor air affects 400 to 700

million people, mostly in poor rural areas. (4) Air pollution from factories and vehicles

affects forests & water through acid rain. (5) Solid and hazardous wastes & polluted

groundwater increase diseases. (6) Soil degradation reduces nutrition for

poor farmers on depleted soils and increases susceptibility to drought.

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Environment, health, & productivity

(7) Deforestation & flooding leads to death and disease, increased erosion, & reduced carbon sequestration.

(8) Reduced biodiversity reduces new drug and genetic resource potential.

(9) Atmospheric changes increase risks from climatic natural diseases, and increase diseases from ozone depletion

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Grassroots environmental action

Local participation to defend environment & livelihood can have effect

Poor with secure long-term user rights will behave responsibly toward environment (Broad 1994)

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Determinants of environmental degradation Market distortions – government does not

set conditions for efficient markets Defective economic policies – Misguided

government intervention in well-functioning markets

Inadequate property rights

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Why environmental degradation?

People maximize profits by shifting costs onto others, and appropriate common and public property resources without compensation.

“Ultimately, excessive environmental damage can be traced to ‘bad’ economics stemming from misguided government policies and distorted markets” (Panayotou 1993)

Growth should be derived from increased efficiency and innovation not by shifting environmental costs to innocent third parties.

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Determinants of environmental degradation Negative externalities – economic activities

conveying direct and unintended costs to other individuals & firms.

Common property resources – “tragedy of the commons” – just as herder’s cattle overgrazes pasture open to all, individuals exploit open access resource as if facing an infinite discount rate

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Determinants of environmental degradation Public goods – with nonrivalry & nonexclusion in

consumption Irreversibility – resource cannot be reproduced in

future if fail to preserve it now Undefined user rights – people will not pay for

resource without secure & exclusive rights. High transactions costs – Information,

coordination, bargaining, monitoring, & enforcement costs may be prohibitively high

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Coase’s theorem When property rights are well defined &

transactions costs not prohibitive, participants will organize their transactions voluntarily to achieve efficient (mutually advantageous) outcomes

Works less well with large numbers, or where subject to free riding

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Pollution Production and consumption create leftovers or

residuals that are emitted into the air or water or disposed of on land. Pollution of air and water is excessive not in an absolute sense but relative to the capacity of them to assimilate emissions and to the objectives of society.

Pollution problems result from divergences between social and commercial costs

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Pollution Hardin’s “tragedy of the commons” takes

something – trees, grass, or fish – out of the commons.

Reverse of tragedy is pollution, which puts chemical, radioactive, or heat wastes or sewage into the water, and noxious and dangerous fumes into the air. Without a clear definition of ownership and user rights and responsibilities, an economy “fouls its own nest” (Hardin 1968:1244–1245).

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PollutionUrban air pollution major form of

environmental degradation. Most serious health problems result from exposure to suspended particulate matter (SPM), consisting of small, separate particles from sooty smoke or gaseous pollutants. Finer particulates carry heavy metals, many of which are poisonous.

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Pollution Environmental Kuznets curve Water shortage caused by a low price

(Figure 13-2) Efficient level of pollution emissions based

on marginal social costs & benefits (Figure 13-3)

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Tropical climates Why is economic underdevelopment more likely to

occur in tropical climates? Kamarck (1976)1. No winter kill, so weeds, insect pests & parasitic

diseases that are enemies to crops, animals & people are not exterminated.

2. In the tropics, soil is damaged by the sun, which can burn away organic matter & kill microorganisms, and by torrential rains, which can crush soil structure & leach out minerals.

3. Tropics are hospitable to human disease. At least three-fourths of adult population is infected with some form of parasite. Infectious, parasitic, and respiratory diseases account for about 44% of deaths in LDCs but only 11% in DCs.

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Global Public Goods: Climate and Biodiversity Public goods are characterized by nonrivalry and

nonexclusion in consumption. Atmosphere & biosphere are global public

goods: nations cannot exclude other nations from the benefits of their conservation or from the costs of their degradation.

Cannot expect tropical regions to provide global public goods, forests, for biodiversity & carbon sequestration.

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Greenhouse gases Phenomenon by which the earth’s atmosphere

traps infrared radiation or heat. Smudgepot or greenhouse effect (Schelling).

(1993:465), warming the earth’s surface and keeping it from rising to be replaced by cooler air.

Greenhouse gases include carbon dioxide (CO2), methane, nitrous oxide, and water vapor, that keep the earth habitable, and chlorofluorocarbons (CFCs).

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Components of greenhouse effect (1990) Carbon dioxide (from coal, oil, natural gas,

and deforestation) 57%. CFCs depleting stratospheric ozone layer

25%. Methane (from wetlands, rice, fossil fuels,

livestock, & landfills) 12%. Nitrous oxide (from fossil fuels, fertilizers,

and deforestation) 6%.

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TABLE 13-2. Share of the World’s Total Carbon Dioxide Emission 1999

By Country (%)

United States 23.2

China 11.9

Russia 6.1

Japan 4.9

India 4.6

Germany 3.3

United Kingdom 2.3

Canada 1.9

Italy 1.8

South Korea 1.7

France 1.5

Australia 1.5

Brazil 1.3

Other 34

By Income Level (%)

High income 48.2

Middle income 35.2

Low income 10.3

Othera 5.6

a Other includes those not assigned by country, including those from bunder fuels and oxidation of nonfuel hydrocarbonproducts.

Source: U.N. Development Program 2003:300–303.

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Costs of global climate change from increased carbon emissions Consensus scientific forecast – increased

temperatures of 2.5-5.5 C (4.5-9.9 F) in 21st century depending on industrial growth & policy

LDCs’ parasitic disease, coastal & river flooding, drought, tropical storms, water contamination

Example: heat damage during rice, wheat, & corn flowering (>30 C/86 F). Yields may fall by 10% for 1C increase. Grains in India & perhaps Philippines already suffering from increased temperatures (Sheehy & UN Environmental Program)

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Policy approaches Green taxes to equate social marginal

abatement cost and social marginal damage Increases price & reduces quantity

produced of coal & petroleum, improving economic (social) allocation between resources (Figure 13-4)

Over time, environmental taxes (market correcting taxes) could be substituted for some income taxes

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Policy approaches International tradable emission permits

(based on “least cost” principles of abatement, preferable to Kyoto approach, based on physical targets)

U.S. needs to join Kyoto Treaty process again but insist on green markets with tradable emission permits based on market approach

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Will a shortage of natural resources limit economic growth in the next half century, especially in LDCs?

Yes or no?

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Limits to growth? Yes.- Daly’s impossibility theorem: a U.S.-style

high mass consumption economy is impossible for 6.5 billion people

- Present resource flows would allow U.S. living standard to 15% of world’s population

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Limits to growth? Yes

- Humans already use or destroy 25% of earth’s net primary productivity, total amount of solar energy converted into biochemical energy through photosynthesis of plants minus the energy these plants use for their own life (Postel).

- Georgescu-Roegen: producing luxury goods with high entropy shortens life span of human species.

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Limits to growth? No. Proven reserves, thought to be woefully short,

represent no more than an assessment of working inventory of minerals that industry is confident is available during its forward planning period (typically 8-12 years) & should not be used for making long-term projections.

Critics understate technological change (MIT study arbitrarily assumes nonexponential limits compared to exponential growth on demand side).

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International agencies need to subtract environmental degradation & resource depletion from GNI or GDP World Bank has estimated adjusted net savings, a

component of GNI (Table 13-3) Venetoulis & Cobb, using Daly, Cobb, & Cobb’s

framework estimate Genuine Progress Indicator (GPI), showing that GPI per capita peaked in 1976 (Figure 13-5). Despite large margins of error, including environmental & depletion variable will give us better measures of economic welfare

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Table 13-3 Toward Adjusted Net Savings 1999 (percentage of GDP)

Income and region

Grossdomesticsavings

- Consumptionof fixed capital

- Energydepletion

- Mineraldepletion

- Net forestdepletion

- Carbondioxidedamage

+ Educationexpenditure

= Adjustednet savings

By income

Low income 20.3 8.3 3.8 0.3 1.5 1.4 2.9 7.8

Middle income 26.1 9.6 4.2 0.3 0.1 1.1 3.5 14.3

Low and middleincome 25.2 9.4 4.1 0.3 0.4 1.2 3.4 13.3

High-income 22.7 13.1 0.5 0.0 0.0 0.3 4.8 13.5

By region

East Asia and Pacific 36.1 9.0 1.3 0.2 0.4 1.7 1.7 25.2

Europe and CentralAsia

24.6 9.1 6.0 0.0 0.0 1.7 4.1 11.9

Latin America and theCaribbean

19.2 10.0 2.8 0.4 0.0 0.4 4.1 9.6

Middle East and NorthAfrica

24.2 9.3 19.7a 0.1 0.0 1.1 4.7 1.3

South Asia 18.3 8.8 1.0 0.2 1.8 1.3 3.1 8.3

Sub-Saharan Africa 15.3 9.3 4.2 0.6 1.1 0.9 4.7 3.9

Note: Adjusted net Savings are equal to net domestic savings (calculated as the difference between gross domesticsavings and consumption of fixed capital plus education expenditure minus energy depletion, mineral depletion, netforest depletion, and carbon dioxide damage).

a Note that the energy depletion figure in the table is stated in terms of GDP. This translates to an annuals depletion rateof about 1 percent of proven reserve.

Source: World Bank 2003i: 17.

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Do we need to adjust investment criteria to consider future generations?

Markets may not recognize the rights of future generations.

Discount rates of 15% annually mean the present value of a dollar 33 years from now is only 1 cent.

Norgaard supports legislation to protect species, set aside land for parks & reserves, & establish conservation agencies to institutionalize protection of the rights of future generations.

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A rule of thumb is that preferences of future generations would be one where assets – natural, produced, and human capital – in each time period or generation must be at least as productive as that in the preceding period or generation.

Dasgupta stresses preserving the future generations’ options.