Download Valuation 2: Environmental Demand Theory

Valuation 10:
Ecological Footprints
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The critique
The alternative
Critique on the alternative
Avoidance costs
Last weeks we looked at
• The neo-classical approach to the monetary
valuation of environmental goods and
services that are not traded on the market
• We will look at two alternatives (ecological
footprints; avoidance costs)
• The second is ducking the issue, the first
challenges economic theory
The Critique
• The neo-classical theory of value is built on
two premises:
– Supply versus demand; or relative scarcity
– Human preferences; or what people want
• The implications are, of course, that
absolute scarcity is irrelevant, as long as
people do not care – and that, if it does not
matter to people, it does not matter
• There are, of course, also operational
objections, and misinterpretations
The Critique -2
• Nordhaus once said: As agriculture has a
share of only 3% of GDP, the impact of
climate change on agriculture in unlike to
exceed 3% of GDP
• Obviously, prices are a linear approximation
around the current situation, and should
only be used to evaluate relatively small
policy interventions
• Of course, policy is always tinkering at the
margin
The Critique -3
• Wackernagel and Rees raise the
interesting point that if a resource stock
falls, its price will increase, so that the
total value stays the same, so that nothing
is the matter apparently
• The math apart, W&R clearly confuse
stocks and flows – if a resource price rises,
further degradation is valued more, not
less
The Alternative
• So, what do W&R propose to do instead?
• The Ecological Footprint!
• Since its inception in 1995, the EF has
become tremendously popular, partly
because of the energy of W&R and partly
because it is a really simple indicator
• There a number of similar indices that are
less popular but try do the same thing, that
is, derive a superindicator measured in
physical terms
Il Orma Ecologica
• 57 mln Italians drink some 15 mln tonnes of
milk per year; an hectare yields some 500
kg milk, so that‘s 0.5 ha/cap
• They eat 26 mln tonnes of cereals, for
which they need 0.2 ha/cap – the energy
this takes comes later, the pesticides and
nutrients are omitted
• They eat about 5 mln tonne of meat per
year; this takes 0.8 ha/cap – this is not
just an average over space, but also over
time – what about eating diary cows?
Il Orma Ecologica -2
• 57 mln Italians use 29 mln tonne of timber,
26 of which is imported – with 2 kg/ha,
this take 0.25 ha/cap
• Wool .3 mln tonne, 15 kg/ha, so 0.3 ha/cap
• (Note that math is really not their
strongest point)
• Italians consume 12 GJ of coal; absorbing
the emitted carbon at 55 GJ/ha would take
0.2 ha/cap
• Finally, Italians have about 0.1 ha/cap of
build-up area
Il Orma Ecologica -3
• So, now we have ha/cap for agriculture,
forestry, energy and living
• We cannot just add these up, because
agricultural land is biologically more
productive than are forests (never mind
that this is because of human disturbance
and fertilizers)
• Multiplying space with the appropriate
indicators, Italians use 4.2 ha/cap
• But, they have only 1.3 ha/cap!
Il Orma Ecologica -4
• Italians use 4.2 ha/cap
• But, they have only 1.3 ha/cap!
• Note that the ecological footprint
implicitly condemns international trade – it
states that Italy uses 3 times its allocated
space, which is possible only because Italy
forcibly uses other countries‘ room
• This point becomes even more pugnant if
one calculates the EF for cities; e.g.,
London‘s footprint is 200 times the size of
the city
Ecological Footprints (ha/cap)
EF
Argentina
Australia
Bangladesh
Germany
Iceland
India
Indonesia
Singapore
USA
World
Av.Cap
Deficit
3.9
4.6
0.7
9.0
0.5
5.3
7.4
0.8
1.4
6.9
10.3
2.8
14.0
0.3
1.9
21.7
0.5
2.6
0.1
6.7
2.1
5.0
-0.2
-3.4
14.3
-0.3
1.2
-6.8
-3.6
-0.7
Ecological Footprint
• World consumption takes up about 2.8
ha/cap, whereas the world has only 2.1
ha/cap available
• This is only possible because we are using
up fossil resources – which is true for
energy, soil and water
• This is a recipe for disaster, unless one
considers that resource stock are being
replaced with capital and knowledge stocks
Tol‘s Footprint
• My footprint is about 20.4 (34.5) hectare –
if everyone were to live like me, we would
need 11.3 (19.1) Earths
• Although I am a vegetarian and generate
little waste, I do live in a big house far
away, commuting by car; I also fly a lot
• See the test on
http://www.earthday.net/footprint.stm
• This test may surprise you, shock you, or
make you think, please remain calm ... But
not too calm!!
Critique
• The used weights are presumably physical
and ecological – and therefore have little
relation to social or political priorities –
this may reflect a higher truth, but is not
handy for a decision analytic tool
• What to make of an assessment that
praises Iceland and Indonesia, while
condemning Bangladesh and Singapore?
• Part of this comes from using world
average productivity figures
Critique -2
• Why are crop land and roads equally
productive?
• Why are all forests equal, regardless of
how they are managed?
• A large share of the ecological footprint is
energy use – which is converted to land by
absorbing carbon in tree plantations – why
not biomass energy, or solar power? – both
would lead to substantially lower numbers
Critique -3
• Ecological footprints are as arbitrary as
the region to which they are applied
• Computing an EF for a locality implicitly
condemns trade – and the good things that
trade does for the economy and the
environment
• Most problematic, however, the EF has an
absolute measure of value – much like the
classical labour theory of value
Critique -4
• Most problematic, however, the EF has an
absolute measure of value – much like the
classical labour theory of value
• The labour theory of value found its grave,
in theory as well as in practice
• Absolute value theories may work as long
as the anchor is indeed dominant, but get
increasingly complex if that is no longer
the case
• Whether land dominates at present is, at
best, questionable
The Use of Valuation
• Valuation serves three purposes
• First, we want to determine the optimal
level of policy intervention
• Second, we want to value the total amount
of environmental pollution and degradation,
e.g., for inclusion in the national accounts
• Third, we want to calculate the
compensation polluters need to pay to
victims
• Some require marginal costs, others
consumer surpluses (well, CV or EV)
Avoidance Costs
• The avoidance cost method turns the first
purpose – optimal policy – on its head
• We know the (marginal) costs of emission
reduction
• We assume that the actual policy
intervention is optimal
• Therefore, we know the marginal benefit
of the optimal policy
• But, obviously, not the welfare change
Avoidance Costs -2
• With a marginal benefit point estimate, we
can meet the second and third purpose of
valuation (national accounts, compensation)
• But, not the first (optimal policy) – the
implicit assumption is that, even though the
valuation specialist is incapable of
estimating the marginal benefit curve, the
policy maker is able to, although apparently
unable to express this
Avoidance Costs -3
• Note the difference with travel costs and
hedonic pricing
• In both methods, we assume that the
consumer makes a trade-off between
environmental amenities and marketed
goods – and optimizes that trade-off
• However, we look at many consumers, so
that we not only can estimate the marginal
price curve but also average out
randomness and errors
• Avoidance costs is based on one decision