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Economy of Natural Resources and Environment Prof. Manuel Coelho Prof. Joana Pais Sustainable Energy Systems 4 of January 2008 Slide 2 What is sustainable development? 2 Sustainable Energy Systems sustainable development, which implies meeting the needs of the present without compromising the ability of future generations to meet their own needs Report of the World Commission on Environment and Development, United Nations, 1987 sustainable development, which implies meeting the needs of the present without compromising the ability of future generations to meet their own needs Report of the World Commission on Environment and Development, United Nations, 1987 Slide 3 Agenda Weak Sustainability Concept Indicators Strong Sustainability Case Studies 3 Sustainable Energy Systems Slide 4 Production function Q=Q(L,K,N) Natural resource (N) essential to production of Q Average production of natural capital does not have an upper bound Production function Q=Q(L,K,N) Natural resource (N) essential to production of Q Average production of natural capital does not have an upper bound Growth theory with limited resources Assumptions 4 Sustainable Energy Systems Success drivers to a non-decrease consumption Elasticity () of substitution between produced capital (K) and natural capital is (N) is greater than 1 is equal to 1 and the interest rate of the produced capital is higher than the valorization of the natural resource is not constant but is there a technology improvement or Solows model, 1974 Slide 5 From growth theory to weak sustainability Hartwick rule 5 Sustainable Energy Systems Weak sustainability Given a degree of substitutability between produced capital and natural resources returns from non renewable, scarcity rent should be reinvested in produced capital. Sustainability is equivalent to non-decreasing or increasing total capital stock In a mathematical formulation: Total capital K=K h +K m +K n K h Human capital K m Produced or manufactured capital K n Natural capital Total capital K=K h +K m +K n K h Human capital K m Produced or manufactured capital K n Natural capital Slide 6 Weak sustainability 6 Sustainable Energy Systems Produced capital Natural capital Time Capital C0C0 The pinch from the shrinking natural capital is countered by the services and technology from the enlarged produced capital stock Slide 7 Possible to evaluate the sustainability each year What is happening to total capital? Is it declining or increasing? Possible to evaluate the sustainability each year What is happening to total capital? Is it declining or increasing? Weak sustainability an workable theory 7 Sustainable Energy Systems Information about the amount to be reinvested All the scarcity rent must be invested Information about the amount to be reinvested All the scarcity rent must be invested Slide 8 Weak Sustainability Indicators 8 Sustainable Energy Systems Elasticity of Substitution Technological Progress Scarcity Rent Environmentally-adjusted Net Product Slide 9 Elasticity of Substitution 1/2 9 Sustainable Energy Systems An high elasticity of substitution value can say, that this resources is not very essential and can be easily replaceable. Sustainability Elasticity between Kn and Km 1 Slide 10 Elasticity of Substitution 2/2 10 Sustainable Energy Systems Open questions Tendency to overestimate or underestimate real value Potential problems What is the elasticity of substitution of air? And biodiversity? Difficulty to calculate the real value of the Elasticity of Substitution Difficulty in the cases where the resource is essential to life support How evaluate Kn(t)? How to apply to some resources? Slide 11 Technological Progress 1/2 11 Sustainable Energy Systems Sustainability HHS Model Technological Progress Rate > Population Growth Rate Technological Progress Rate > Population Growth Rate Slide 12 12 Sustainable Energy Systems Technological Progress 2/2 Difficulties Is not easy to measure the technological progress Indicator limitations The production functions dont have the capacity to incorporate, at same time, the technological progress and the elasticity of substitution. Indicator with a very limited scope The priority is given to the elasticity of substitution Slide 13 Scarcity Rent 1/3 Sustainable Energy Systems Mercantile Natural Capital Non renewable resources, and some renewable forests Mercantile Natural Capital Non renewable resources, and some renewable forests Non Mercantile Natural Capital Renewable resources - air and environmental services Non Mercantile Natural Capital Renewable resources - air and environmental services Slide 14 Scarcity Rent 2/3 Mercantile Natural Capital Definition A Rarity rent (final use cost) is the difference between the shadow price of the natural resource (opportunity cost) and the marginal cost of its extraction. How to allocate a shadow price to the natural resource? The price attributed can be insufficient in the sustainability point of view Potential difficulties The externalities associated to the use and extraction of the resources (negative externalities) for the future generation are not included in the calculation of the opportunity cost. Sustainable Energy Systems Slide 15 Scarcity Rent 3/3 Characteristics How determinate the shadow price? No market price No access costs Unlimited resources in quantity, that are not under any system of property law Free access Unlimited resources in quantity, that are not under any system of property law Free access Difficulties Sustainable Energy Systems Non Mercantile Natural Capital Slide 16 5 th Framework Programme Environmentally-Adjusted Net Product 16 Sustainable Energy Systems Environmentally-Adjusted Net Product eaNNP = GDP K p K n Correction of the national balance sheet taking into account the issues of the environment and sustainable development GDP - Gross Domestic Product K m - Depreciation of manufactured capital K n - Depreciation of natural capital ( resource depletion + environmental degradation ) GDP - Gross Domestic Product K m - Depreciation of manufactured capital K n - Depreciation of natural capital ( resource depletion + environmental degradation ) Slide 17 Problems with the WS 17 Sustainable Energy Systems The need of a new sustainability concept emerged: Strong Sustainability (SS) The need of a new sustainability concept emerged: Strong Sustainability (SS) One condition must be fulfilled Super-abundance Elasticity of substitution Technological progress Natural resources must be available in an abundant quantity Value of elasticity must be equal or greater than one natural resources are substitutable Existing technology must increase the productivity of natural capital faster than its depletion Is it? One example: Oil One example: Oil Slide 18 Agenda Weak Sustainability Concept Indicators Strong Sustainability Case Studies 18 Sustainable Energy Systems Slide 19 The creation of the SS concept 19 Sustainable Energy Systems strong sustainability, sees sustainability as nondiminishing life opportunities. This should be achieved by conserving the stock of human capital, technological capability, natural resources and environmental quality Brekke, 1997 strong sustainability, sees sustainability as nondiminishing life opportunities. This should be achieved by conserving the stock of human capital, technological capability, natural resources and environmental quality Brekke, 1997 Slide 20 There were developed 3 theories 20 Sustainable Energy Systems Similarity to the WS Conservationist London School Ecological- economical TheoriesDescription Created by Daly in the early 90s Is the most radical theory which states that to achieve sustainability, the natural capital must remain constant Developed in the 90s over the model of Barbier and Markandya Is an intermediate theory stating that a minimum amount of natural capital must be maintained Created by Ruth in 1994 Is a theory where the economical agents must know and apply the limits imposed by environmental factors Slide 21 Stationary state - base for Conservationists 21 Sustainable Energy Systems Interest rate /compound interest is null Elasticity of substitution between natural and physical capital is null Technical progress has limited impact on natural capital Management of natural capital should be done by regulatory agents Main hypothesis Economic and demographic growth rates must be null Economic activity must be determined by the capacity to regenerate and assimilate The shadow price of natural capital may achieve the infinite Is this economically and socially sustainable? Slide 22 London Schools natural capital categories 22 Sustainable Energy Systems Categories DivisionDescription Mercantilism of capital Substitutability of capital Mercantile natural capital Non mercantile natural capital Substitutable natural capital Critical natural capital The division of these two forms of capital is based on the possibility to trade a certain asset Non mercantile natural capital is multifunctional and so, harder to substitute This hierarchy is established considering the natural capitals substitutability by other forms of capital Critical natural capital should not decrease below a minimum value so the system can be sustainable Slide 23 Modeling the critical natural capital 23 Sustainable Energy Systems Maintenance of minimum level of critical capital lower threshold not to be crossed K n * - Critical natural capital The Barbier and Markandya model of 1990 However, is very difficult to create measures to assess the value of natural capital This value ends up to be measured monetarily (resembling to the WS) However, is very difficult to create measures to assess the value of natural capital This value ends up to be measured monetarily (resembling to the WS) Utility optimization Existence of a minimum value for environmental assets Hamiltonian Slide 24 The 3 corners of Ecological-Economical view 24 Sustainable Energy Systems Economy Thermo- dynamics Ecology Opportunity costs Substitutability Temporal preferences Definition of the system and its boundaries Fluxes of energy and mass Distinction of different systems Material cycles Energy fluxes Complexity of environment/systems interactions Main concepts Thermodynamic serves as a tool to understand how economy and ecology should relate to each other Slide 25 Ecological Footprint 25 Sustainable Energy Systems Ecological Footprint measures how much land and water area human population requires to produce the resources it consumes and to absorb its wastes under prevailing technology. http://www.footprintnetwork.org Ecological Footprint measures how much land and water area human population requires to produce the resources it consumes and to absorb its wastes under prevailing technology. http://www.footprintnetwork.org Slide 26 26 Sustainable Energy Systems Ecological Footprint Biocapacity varies each year with ecosystem management, agricultural practices (fertilizer use and irrigation), ecosystem degradation, and weather Average per person resource demand (Ecological Footprint) and per person resource supply (Biocapacity) in Portugal. Slide 27 Agenda Weak Sustainability Concept Indicators Strong Sustainability Case Studies 27 Sustainable Energy Systems Slide 28 Case Studies The Physical Destruction of Nauru Forest Management in Nepal Water resources in Austria 28 Sustainable Energy Systems Slide 29 The Physical Destruction of Nauru 1/4 29 Sustainable Energy Systems Weak Sustainability Small island located in the central pacific; < 20 km; 1900 one of the highest grades of phosphate rock (primary ingredient in commercial fertilizers ) ever found was discovered; 90 years of mining caused devastation of 80% of the island; Elevated plateau - Topside Slide 30 The Physical Destruction of Nauru 2/4 30 Sustainable Energy Systems Weak Sustainability Scraping of the surface soil; Removing of the phosphate between the walls of an ancient coral; Mined out areas: - Disappearance of species; - Inaccessible to humans; - Unusable for habitation; - Unusable for crops, Loss of vegetation on Topside: - Hotter and drier micro climate. Slide 31 The Physical Destruction of Nauru 3/4 31 Sustainable Energy Systems Weak Sustainability High level of GDP in 1993; Trust fund done with the income from the phosphate mining; Interests from this trust fund should have insured a substantial and steady income and thus the economic stability of the island; The Asian financial crisis, among other factors, has cleared out most of the trust fund; Biologically impoverish island; The money traded has vanished; Trade with the outside world is now essential for Nauruans to get the necessities no longer available locally. Slide 32 The Physical Destruction of Nauru 4/4 32 Sustainable Energy Systems Weak Sustainability People all over the world are making this kind of decisions and with the same ultimate result as in the case of Nauru; But the consequences are easier to see in a small island nation; The development of Nauru followed the logic of weak sustainability, and shows clearly that weak sustainability may be consistent with a situation of near complete environmental devastation; Slide 33 Forest Management in Nepal 1/5 33 Sustainable Energy Systems Strong Sustainability The basic principal of the strong sustainability is being applied in different parts of Nepal for the forest management at the local community level; Nepal has vast ecological resources ranging from subtropical to alpine climatic ranges; - 118 forest ecosystems; - 75 vegetation types; - 35 forest types; 90% of the population lives in the forest areas; Forest is a major resource: timber, fuel wood, medicinal plants, Slide 34 Forest Management in Nepal 2/5 34 Sustainable Energy Systems Strong Sustainability Forest depletion in Nepal: - Fuel wood collection; - Grazing; - Illegal logging; - marginal expansion of agricultural areas; Food deficit, because people sell firewood at the local market to purchase food items Slide 35 Forest Management in Nepal 3/5 35 Sustainable Energy Systems Strong Sustainability In 1999, the total forest area was 29% of the total area of Nepal; In 1988 it was 37%; 50 years ago it was more than 50%; Deforestation rate 1.7% per year; Forest Act in 1993; Forest regulations in 1995 lead to the creation of FUGs Forest Users Group Slide 36 Forest Management in Nepal 4/5 36 Sustainable Energy Systems Strong Sustainability The FUG is responsible to manage the forest; Constitution and operation plan approved by the District Forest Officer; FUGs could: - initiate plantation of crops, such as medicinal herbs; - Fix prices of forestry products; - Establish forest-based industries; - And use surplus funds in any kind of community development work, but such activities should not hamper main forest stock; - 25% of the revenue used to enhanced natural capital Slide 37 Forest Management in Nepal 5/5 37 Sustainable Energy Systems Strong Sustainability Land ownership remains with the state, but the land use rights along with the forest resources except wildlife products, soils, sands, etc. belong to the FUGs; In 2003 there were 12,079 FUGs (15% of total forest area); Reverse the tragedy of the commons; 61% of the total forest area; People are experiencing the resilience of the local ecosystem over the period of one decade. Slide 38 Water Resources in Austria 1/3 38 Sustainable Energy Systems Strong Sustainability Austria is a rich country regarding water resources; Protect the quality and quantity of the water resources by one of the most stringent legal frameworks Wasserrechtsgesetz, 1959; Critical regions: - Where large amounts of water are extracted; - Agricultural production and industrial waste sites; Water in a sustainability context can be regarded as a regional (national) resource; Slide 39 Water Resources in Austria 2/3 39 Sustainable Energy Systems Strong Sustainability Within a naturally given catchment area the yearly extraction should not exceed the yearly renewal rate of the water resource; The organic and inorganic load into the water resource should not exceed the regeneration capacity (carrying capacity); The seasonal differences between water supply and demand should be taken into account; Imports or exports from one region to another are only sustainable if previous principles are fulfilled. Slide 40 Water Resources in Austria 3/3 40 Sustainable Energy Systems Strong Sustainability Austria has one of the most stringent water pollution acts in Europe; Every use of water, be it the extraction of groundwater or the discharge of sewage, has to be limited according to the state of the art in control technologies to minimize eventually harmful uses; Groundwater has to be protected in its natural state; Polluter-pays-principle and avoidance principle are the leading objectives.