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If it's Good for the Environment, is it Bad for the Economy? AS AQA Edexcel OCR 1 Markets and market failure Markets – how they work The market system 2 The national economy Markets – why they fail Market failure and government intervention 3 Markets at work Managing the economy The national and international economy A2 AQA 1 Working as an economist 2 Business economics and the distribution of income Government policy, the 3 national and international economies Edexcel OCR Two from Industrial economics a. Economics of work and leisure b. Transport economics a. Labour economics: or c. Economics of Development b. Development economics d. The UK economy The UK in the global economy Economics in a European context “Climate change - everyone's business” Report of the CBI Climate Change Task Force "This report makes clear that in the future, business needs to be green to grow,“ said the CBI's director general, Richard Lambert. “To manage their costs and to maintain the trust of their customers, they will need to build carbon management into their corporate DNA.” Business has already made significant progress in responding to the climate change agenda. It is well placed to make an early and decisive contribution to finding and implementing solutions to the challenge of climate change. Priorities Incorporate climate change policies into its DNA. Consumer demand will stimulate competition to produce greener alternatives to current products and services, and reward those businesses that take a lead. In the low carbon future, companies will have to be green to grow. Redouble efforts to improve energy efficiency, by focusing on areas such as transport and buildings. Work with employees and the supply chain to reduce emissions, and adapt the current workplace to cope with the climatic and other changes that are already likely as a result of past CO2 emissions. Measure its carbon footprint, and develop reporting systems to benchmark performance. Provide consumers with the reliable communications and product developments they will require. The Environmental Problem The environmental problem Use of the environment as: an amenity a source of primary products a dump for waste The economy and the environment Labour Goods and services Resources Waste Amenity value (Clipart for the environment: e.g. countryside scene) The environmental problem Use of the environment as: an amenity a source of primary products a dump for waste Conflicts between these uses productive resource v. amenity value dump for waste v. amenity value dump for waste v. productive resource The environmental problem Population pressure / limited resources Problem of diminishing returns Absorptive capacity of environment Accelerated degradation Accelerating environmental damage Environmental damage Total damage O W1 Waste The environmental problem Population pressure / limited resources Problem of diminishing returns Absorptive capacity of environment Accelerated degradation Cause for optimism? Increased price of non-renewables Oil prices $ per barrel (Brent crude) 100 90 80 70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 The environmental problem Population pressure / limited resources Problem of diminishing returns Absorptive capacity of environment Accelerated degradation Cause for optimism? Increased price of non-renewables Technological developments Public opinion Green business Government attitudes/action BUT growing damage The OECD environmental 'traffic lights' PRESSURES ON THE ENVIRONMENT • Industrial point source pollution • Some air pollutants (lead, CFCs, CO, SOx) • Water use • Toxic emissions from industry • Hazardous waste generation • Energy production and use • Agricultural pollution • Over-fishing • Greenhouse gas emissions • Motor vehicle and aviation air pollution emissions • Municipal waste generation STATE OF THE ENVIRONMENT • Forest coverage in OECD regions • Surface water quality • Forest quality in OECD regions • Ozone layer integrity • Biodiversity • Tropical forest coverage • Fish stocks • Groundwater quality • Urban air quality • Climate change • Chemicals in the environment RESPONSES • ‘Green’ purchasing • ‘Green’ agriculture • Protected areas • Resource efficiency • Energy efficiency • Biotechnology • Forest plantations • Aquaculture • Energy and transport technologies • Waste management Source Environmental Outlook (OECD, 2002) Increase in car ownership Cars per thousand population 600 Italy Germany 500 W Germany USA Belgium Sweden 400 UK Spain 300 200 1980 1985 1990 1995 2000 Energy and Transport in Figures (EC, 2007); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm 2005 An Optimum Use of the Environment An optimum use of the environment Different approaches to sustainability The Prices reflect scarcity of resources The conservationist approach Care for environment for its own sake: importance of sustainable development The social efficiency approach Market failures: can be corrected The free-market approach Gaia approach Deep green approach: environment has rights Optimum level of an activity that involves pollution MSC Marginal pollution externality Costs and benefits (£) MSC1 S = MPC Gaia maximum output MPC1 D = MSB Socially Conservationist approach efficient output O Q4 Q3 Output of good Q2 Q1 Free-market outcome Market effects for green companies Short Often higher costs – term BUT can reduce costs in some cases (e.g. reducing plastic bags) Loss of competitive advantage BUT changing consumer tastes – Fair trade movement Ethical investment movement – Environmental auditing – Long term Regulations are likely to get tighter around the world Growing stakeholder pressures around the world – Consumers, shareholders, employees, local communities Competitive advantage from investment in green technology “Climate change - everyone's business” Report of the CBI Climate Change Task Force Market forces will drive big changes, but they will not by themselves be enough to do the job. The full range of public policies must be deployed to create the right incentives. Government priorities must include promoting an effective market price for carbon revenue-neutral tax reform (such as changes to business rates and council tax) to reward greener behaviour bigger, more focused R&D programmes to finance new technologies and solutions until they become commercial. Market Failures Market failures Environment as a public good The global ‘commons’ Features of a public good Non-excludability BUT rivalry Over use at a zero price Externalities External costs from pollution External benefits from ‘green’ activities Problems of identifying and measuring Ignorance Inter-generational problems Government Policy towards the Environment Government Environment Policy Environmental (‘green’) taxes, charges and subsidies Taxes on goods and services The optimum tax rate A socially efficient green tax Costs and benefits (£) MSC Optimum green tax S = MPC P P–t D = MSB Q2 O Output of good Q1 0 USA UK Sweden Spain Norway 1994 Weighted average Source: based on data in Environmentally related taxes database (OECD, 2006) Netherlands Japan Ireland Greece Germany France Finland Denmark Canada Belgium Austria Australia % of GDP Green tax revenues as a % of GDP 5 2004 4 3 2 1 0 USA UK Sweden Spain Norway 1994 Weighted average Source: based on data in Environmentally related taxes database (OECD, 2006) Netherlands Japan Ireland Greece Germany France Finland Denmark Canada Belgium Austria Australia % of GDP Green tax revenues as a % of GDP 5 2004 4 3 2 1 Government Environment Policy Environmental (‘green’) taxes, charges and subsidies Taxes on goods and services The optimum tax rate Subsidies for R&D Problems with green taxes and subsidies Government Environment Policy Non-market-based policies Command-and-control Alternative standards Technology-based standards Ambient-based standards Social impact standards Effects systems on business Advantages Disadvantages Voluntary agreements Education Government Environment Policy Tradable permits Permit Credits can be traded Market to emit price for permits Efficient solution? Use in USA The EU carbon trading system Effects Basis on business for international agreements? Quotas for emissions or use of resources Government Environment Policy Can we rely on governments? Short-termism The The free-rider problem weakness of international agreements If it’s good for the environment, is it bad for the economy? Possibly, but not necessarily. Environmental challenges offer challenges to business and the government. Some will gain; some will lose. Is it another case of survival of the fittest? Or is it survival of the greenest? Can Britain gain a competitive advantage? To access these slides, go to: www.economicsnetwork.ac.uk/archive/ A-level_Dec07