Lecture 10: Topics on environment and economy

1. Lecture 10: Topics on environment and economy Theories of Ecological Economics M.Sc. EnviNatResEcon. Sem 1/2007 28 August 2007

2. topics • Pollution and economic development • The environmental Kuznets Curve (EKC) • Trade and environment • Pollution Haven Thesis • Environment as non-tariff trade barrier • Accounting for Nature in the economy • green accounting etc. • Environment and the Firm • Triple Bottom Line

3. Pollution and development • Development=more output, more consumption • And more waste • Or not, because of regulation, production structure, abatement technology etc. • So, what are the facts and what are the explanations?

4. facts • Stylised facts: as shown in World Bank Annual report 1992 • See chart:

5. Explanations? • Theoretical model • Stern: simple curve fitting, but not explanation

6. Models? • Simple analytics:

7. And it looks like this..

8. Revisionist- empirical critique • Stern: review • Econometric critique • Lack of theory-

10. A go at theorising- • Decomposition of EKC into components

11. Trade and Environment • An issue at the WTO trade talks • Extensive literature has developed • Main issues: • Pollution Haven Thesis • Environment as non-tariff barrier • Trade in environmental products • Environmental services • Trade in endangered species (CITES) • The carbon trade • Biotech products

12. Pollution Haven Thesis • Connects to location of production • Do companies look for location with low environmental standards? • So far, not proven • With outsourcing, may not be so important any more -- • Convergence of national standards may not happen, but international voluntary standards may apply – ISO 14000, green supply chain, etc. • China Toy recall case as example!

13. Environment as NTB • Importer country sets standard, compliance with WTO – Most Favoured Nation(MFN), national Treatment (NT) rules • Can increase cost for exporter, checking, quality certification, • But usually not negotiable, because rule is applied with non-discrimination between national and foreign suppliers- • Example: WEEE, REACH of the EU

14. Trade in environmental products • Endangered species-CITES • Orchids, animals, ivories etc. • Control and reporting • Environmental services- • Under GATS, as part of trade in service • Related to mode 3: commercial presence, FDI by foreign companies with advanced technologies

15. The carbon trade • Under the Kyoto Protocol • Emission commitment (CAP) and Flexibility Mechanisms (TRADE) system • See next slide • EU directives – Emission trading and Linking Directives • Voluntary Market in non-Kyoto countries , US and Australia?

16. emission Actual emission KP target year

17. DomesticAction P Joint Implentation CDM C-ET Demand Emission Reduction

18. RGGI: a RegionalCO2 Program for Power Sector Sonia Hamel Office for Commonwealth Development Presentation to the Electricity Restructuring Roundtable June 17, 2005

19. Overview • Overview of the RGGI Process • Quick Cap-and-Trade Primer • Status of the Work to Date • Observations on the Process • Next Steps

20. Goal Design a Regional Cap-and-Trade Program Initially Covering CO2 Emissions from Power Plants

21. Statistics 3rd Largest World Economy 14% US GHG Emissions 3.2% of World GHG Emissions ( Germany)

22. Context: Early Movers on Climate Change • History of Regional Cooperation on Air Quality -- Ozone Transport Commission • NJ First to Take Official Target • New England Governors/ E. Canadian Premiers Plan (2001) (sets a target) • NY Greenhouse Gas Task Force (2001) • Now state plans in CT/RI/MA and ME (also set targets)

23. Cap-and-Trade Program Goal: Achieve a Reduction in Emissions through a Flexible, Market-based Approach Issue Allowances (1 per ton) & Allocate Allowances to Sources Determine Total Emissions from Covered Sources Identify Sources to be Covered Set Cap Trade

24. Why Cap-and-Trade? • Have Proven to Provide Benefits at Lowest Cost • Simple compared to Alternatives • Flexible, Market-Based • Incentive to Reduce at Source of Emissions Leads to New Innovation

25. Regional Cap-and-Trade Program Individual State Budgets Each State Allocates Allowances • Each State: • receives a budget (as agreed in MOU) • distributes allowances to its sources • agrees to accept allowances originating in other states • State to State Reciprocity Allows Trading • Key: Ensure Uniform “Currency” and Free Flow of Allowances across State Lines Regional Cap Trade

26. Why a Regional Program? • Moving together provides economy of scale • Greater reductions possible • More options for lower cost reductions • Larger the market, the larger the incentives for innovation • More states = greater influence on future policies

27. RGGI Design Principles • Build on Past Success of NOx Budget Program • Maintain Electricity Affordability, Fuel Diversity & Reliability • Make RGGI Expandable to Other States • Achieve Least Cost Reductions • Stimulate Innovation w/ Clear Market Signals

28. RGGI Progress to Date • Stakeholder Process • Technical Groundwork • Data Assembly and Analysis • Energy and Economic Modeling • Resource Panel • Website contains materials at: www.rggi.org

29. Stakeholder Group • Stakeholders: 24 organizations and companies at the table and over 30 more observing • Electric generators (from across the geographic area, includes all fuel types) • Electric distribution companies • Energy efficiency & renewable energy interests • Energy users (industrial, commercial) • Consumer interest organizations • Environmental organizations

30. Emissions Data by State

31. Quantitative Impacts of a Regional Carbon Cap • Carbon emissions • Other emissions • Electricity prices • Total electricity system costs • Fuel use and diversity • Reliability • Imports and exports of electricity

32. RGGI Progress to Date • Policy Consultation and Decision Making • Stringency of the Cap • How to set state budgets • Flexibility mechanisms for companies • Offset Credits (External to Cap) • Regional Greenhouse Gas Registry

33. Key Issues • Agreed on Model Reference Case (base case) • Considered factors in setting cap levels to model and, ultimately, to recommend • Seek to minimize implementation costs • Decide which reductions from external sources (not covered by the cap) could qualify for credit? • How to guarantee that these offsets are real reductions?

34. Essential Components • Stringency: looking at 10% below current levels and stabilization at current levels by 2024. • Offsets: Would reduce costs and expand benefits. Decisions to be made about what geographic area to include. • Simplicity of design: Inspire others to follow, strict accountability and flexibility

35. RGGI Next Steps Complete Modeling and Evaluate Reasonable Cap Level from what we have learned. Complete a draft Model Rule Determine Cap Size and Mechanics Determine State Emissions Caps Begin State-by-State Decision making and Implementation Plan ongoing Cooperation between states

36. RGGI Future Goals • Add Additional States to Emissions Market • Add Offset Categories to Program Over Time • Possible Expansion to Major Stationary Sources in Other Sectors • DEMONSTRATE SUCCESS

37. Accounting for environment • Green accounting for the macro-economy • What to count? • Changes in stock of Natural capital • UN methodology for national income accounting, environment as satellite account, physical account, but not yet valuation

38. The environment and the firm

39. The issues • More stringent environmental requirements for company operation • Regulations, taxation, environmental markets • Green consumerism • Impact on company strategy and competitiveness • Triple bottom line

40. Impact on company operation • Higher cost due to :- • Product requirement • Labelling requirement • Higher Standards to meet • Increased competition-loss of competitiveness

41. Examples? • Green products • Green companies • Green wash ?

44. Examples again…………. Measures: compliance ISO certification WEEE REACH Advantage:? Share price Image

45. Triple bottom line • Financial • Social • Environmental • Corporate Social responsibility

46. Conservation Finance

47. The Issues • Benefit of conservation is external to the firm • So no action on conservation • How to capture the benefit is the key • How to pay for conservation? PES example-are incentives perverse? • Green Investment – do they make money?