agec5001 sustainable development

Earth Summit 1992

• Rio de Janeiro, June 1992

• 1878 represented countries

• a UN conference on environmental development (focused on sustainable dev!)

sustainable dev

a type of dev that meets the need of the present population without compromising the ability of future generations to meet their own needs

key components of sustainable dev:

• intergenerational equity

• meeting current needs

• preserving future capacity

• balancing between dev & conservation

strengths of the definition of “sustainable dev”

• broad appeal

• flexible framework

• unifying concept

• adaptable to contexts

weaknesses of the definition of “sustainable dev”

• lack of precision

• difficult of operationalize

• can mean different things

• hard to measure

4 potential scenarios of human welfare:

A. decline to zero welfare

B. initial growth, then decline to a steady state

C. growth to a steady state (sustainable)

D. continued to exponential growth

3 key dimensions of sustainability

1. the existence of positive sustainable welfare levels

2. the magnitude of sustainable welfare vs. current levels

3. sensitivity to current actions

market imperfections that threaten sustainability

• open-access resources

• intertemporal externalities

• market power (ex: climate change)

efficiency vs. sustainability — key finding

restoring efficiency is neither necessary nor sufficient for sustainability

3 scenarios for efficiency vs. sustainability

1. inefficient but sustainable

   1. already sustainable w/out efficiency

   2. ex: traditional fishing villages using low-impact methods

2. inefficient and unsustainable

   1. quotas makes the market more efficient → efficiency achieves sustainability

   2. ex: an overfished, open-access fishery

3. inefficient and unsustainable

   1. efficiency can maximize profits, however it’s not sustainable long-term

   2. ex: oil fracking

the Hartwick rule (1977)

sustainable constant consumption requires investing ALL scarcity rent from depletable resources in capital

implications of the Hartwick rule

• zero net savings from resource depletion

• build capital to offset resource decline

• markets with positive discount rates violate this rule

• additional policies needed beyond efficiency

the environmental Kuznets curve (EKC)

• initial phase: growth increases pollution

• later phase: growth reduces pollution

• **mixed results: only applies to some pollutions

potential problems to trade & envi

• pollution havens

• a “race to the bottom”

• exploitation for weak regulations

• pressure on resources

potential benefits to trade & envi

• tech transfer

• economic growth → envi protection

• efficiency gains

the North American Free Trade Agreement (NAFTA)

• took effect in 1994

• lowered tariff barriers & promoted the free flow of goods & capital

• integrated the US, CA & MX into a single, giant market

findings & surprises of the NAFTA

findings:

• no pollution haven effect

• industry shifts away from pollution-intensive sectors

• scale effect dominated (doubled emissions)

surprises:

• envi spending fell 45%

• income reached the EKC turning point

• no policy response materialized

problems with GDP as a measure of welfare

• includes depreciation (use net domestic product instead)

• affected by inflation (uses real values)

• ignores distribution

• treats natural capital depletion as income

Hicksian income

the max value one can consume during a period of time, and still be as well off at the end compared to the beginning

alternative indicators to using GPD to measure human welfare

physical & adjusted economic measures (ecological footprint & GPI) and human dev focus (HDI)

GDP alternative, physical & adjusted economic measures: ecological footprint

definition: a physical measure of how much of the Earth’s resources we use, expressed in “global acres” (ie. shows how many Earths we would need if everyone lived in a given country); highlights physical limits to growth

6 tracked components: carbon footprint, cropland, grazing land, forest land, fishing grounds, built-up land

global status: humanity currently uses resources at a rate of 1.7 Earths = we’re overshooting

GDP alternative, physical & adjusted economic measures: genuine progress indicators (GPIs)

definition: an adjusted economic indicator that measures personal consumption, while adding benefits & subtracting costs that GDP ignores; measures real welfare and not just economic activity

• adds: value of unpaid work, benefits from public infrastructure

• subtracts: envi degradation costs, costs of crime & inequality

key takeaway: since the 1970s, GDP growth has not translated to genuine well-being progress for humanity as a whole

GDP alternative, human dev focus: human dev index (HDI)

definition: a composite index measuring average achievement in 3 basic dimensions of human dev (life expectancy at birth, education & GNI per capita) on a scale of 0-1

• top: Norway (0.954) → high health, education, & income

• bottom: Niger (0.377) → low health, education, & income

limitations: HDI doesn’t capture inequality within a country, envi sustainability & political freedom

key insight: HDI moves beyond GDP to measure capabilities & opportunities, but not wealth

Bhutan’s approach to gross national happiness

9 dimensions: psychological well-being, time use, community vitality, culture, health, education, envi diversity, living standards & governance

findings: 49% of men were happy vs. 33% of women

results: education & time are key barriers to happiness

Kahneman & Deaton (2010) case study

2 types of well-being:

• emotional well-being

  • definition: day-to-day happiness (how often you experience positive & avoid negative emotions)

  • findings: plateaus at an annual income of $75000

  • reasoning: once basic needs are met, extra money won’t significantly improve daily moods

• life evaluation

  • definition: overall satisfaction with your life

  • findings: continues to rise with income, even beyond $75000

  • reasoning: high income provides status, comfort, opportunities & a sense of achievement

the Hartwick rule when converting resource wealth to sustainable capital

key idea: if a country extracts non-renewable resources, it should invest the profit (ie. scarcity rent) into long-lasting productive assets (factories, education, tech)

in practice:

• year 1: $1M profit from oil fracking, invest all $1M into factories & education

• year 2: less oil left, however factories are now producing income (total wealth unchange)

• year 3: maintain the same level of consumption even after oil runs out

scarcity rent

the additional profit earned from controlling a scarce & finite resource (ex: oil from oil fracking)

the discount rate problem

• discount rate: how much we value money today vs. the future

• markets use a positive discount rate (5%), meaning that $1 today is work more than $1 next year

• leads to people consuming more money today instead of investing it for the future

how the discount rate problem violates Hartwick’s rule

Hartwick’s rule assumes r = 0% (future generations’ welfare = present), while markets use r = 5% (future generations’ welfare < present)

→ results in markets under-investing resource rents

ex: Norway (a success, only spends returns & preserves wealth) vs. Nigeria (a failure, consumes revenue & invests very little)