SUSTAINABILITY MANAGEMENT

PREFACE

What is sustainability?
- Economy, society and environment
- Carbon neutral businesses
- Ecologically responsible
- A lot of green washing
- Meeting the needs of future generations
- Long term viability
- CSR
- Everybody is concerned by it nowadays

1 Movements towards sustainable development, sustainable economies, and

sustainable businesses

There are three different movements:

1. The Sustainable Development Goals

Development which meets the needs of the current generation without compromising the ability
of future generations to meet their own needs.

There are 17 interconnected, sustainable development goals:

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 2. The Paris Agreement
Its central aim is to strengthen the global response to the threat of climate change by keeping a
global temperature rise this century well below 2°C above pre-industrial levels and to pursue
efforts to limit the temperature increase even further to 1.5°C.

3. The European Green Deal

It is about improving the well-being of people. It is to protect human lives, animals and plants.
Making Europe climate-neutral and protecting our natural habitat will be good for people, planet
and economy. No one will be left behind.

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What is important to all of these movements is emerging from a diversity of discipline;
economics, finance, architecture, sociology, …

2 Three pillars of sustainability

1. Economic
2. Ecological
3. Ethical

We need to transform the way we build, to create jobs and business opportunities, to create safe
and affordable housing, investment in public transport, green public spaces.

We need new ways of thinking about how we should live, how we should manage our business,
and how we should shape our economies.

Why do we have to re-design and re-conceptualize businesses?

- To meet global needs
- Businesses do not operate in isolation (increasingly integrated global economy)
- Economic activities transgress the biophysical boundaries of our planet. We are
producing too much, which is leading to global warming.

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 CHAPTER 1: THE COMING AGE OF SUSTAINABLE BUSINESS

1 Introduction

1.1 The world’s challenges

 Extreme poverty

It is declining, but the progress is even. Half of the people living in extreme poverty in 2015 can
be found in just 5 countries.

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 Food security

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  Political repression and war

Freedom in the world 2019:

 Population growth

The world’s population continues to grow, albeit at a slower pace than at any time since 1950.

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 - Population growth represents a challenge for sustainable development.
- The 47 least developed countries are among the world’s fastest growing
- Compounded by climate change, climate variability and sea-level rise

 Globalization

A global value chain (GVC) breaks up the production process across countries. Firms specialize
in a specific task and do not produce the whole product.

GVCs increase income, create better jobs, and reduce poverty. The gains from GVCs are not
equally shared, and GVCs can hurt the environment.

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  The Earth’s biosphere is under threat

- Depletion of natural resources

- Species extinction
- Emissions of our waste products (local and global impact)

 Economic activities are needed, integrated with social and political leadership
 Not economic growth

1.2 How to shape our businesses?

- Economically vibrant:
- Ecologically informed: knowing the impact they have on the environment.
- Ethically sensitive: has to be conscious about the choices that it makes. The choices will
have impact.
 Is it a pessimistic or optimistic outlook? It could become very pessimistic because of the
covid, but we can be creative and think about solutions to face these challenges.

1.3 A new business paradigm

The old business paradigm

- All about growth and profitability
- Ethical and ecological consideration are a burden
- Laws restrict businesses
- Economics and ecology are a zero-sum game
- Continually thriving for growth

The new business paradigm

- Many ways to pursue profitability. There are multiple ways to pursue goals.
Businesses depend on natural resources.
- Environmental responsibility is not a side-constraint
- Self-interest and ethical responsibility do not conflict, our own self concern to
take care of the environment.

There are current misguided assumptions:

- Economic growth will solve our challenges
- Businesses can operate independent of environment and ethical concerns

 The alternative: integrating economics, ecology and ethics

2 Economics, ecology, ethics

Economics is concerned with the ways in which human beings produce and distribute the goods
and services that they need and desire.

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Ecology is concerned with the relationships by humans (and other living beings) interact with
their natural environment.

Ethics is concerned with the basic question of how humans ought to live their lives. How should
we live, what choice should we make?

Those 3 pillars are connected. Economics should not be value neutral.

All directed at: What are the best ways for human beings to live and flourish within the
biosphere that is their only home?

3 Individuals, government, business

Another misguided assumption

- Values of individuals are given; businesses and governments merely respond to their
demands.
- Public policy should prepare for an ever-growing demand.
- The government chooses how that demand is fulfilled through subsidizing different
sectors.
- Businesses have a passive role to play.

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4 Economic growth: problem or solution?

Consumer demand is given. Do we demand, desire too much? The quantity or quality of that
demand is not questioned.
A bigger economy is a better economy.

Should we grow forever (unregulated) and hope that the poor will get a high living standard and
that there is no ecological destruction? Neglect the poor? Or create business that meet the
world’s needs without destroying the biophysical environment?

5 The sustainability paradigm

Sustainability involves three dimensions

Businesses have three goals
 Economically vibrant, ecologically informed, ethically sensitive

The problem is not economic growth itself; it is unqualified and undirect economic growth.

Economic growth VS economic development

= Getting bigger VS getting better
 To chooses which type of business should grow

How to address increasing energy demand?

- Economic questions: which types of tech are available, how much does it cost, wan we
use energy in a profitable way?
- Ecological questions: can we produce energy without CO2 emissions?
- Ethical questions: what is the place of energy in our life? How are to make sense of the
ways in which energy is produced, distributed, used and disposed of? How do such
actions relate to what we consider to be right or good? There is no neutral ground.

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6 Sustainability as social justice

6.1 Social justice

Definition of sustainable development, as defined in the Brundtland Commission in 1987:

“Development that meets the needs of the present without compromising the ability of future
generations to meet their own needs”.

Distributive justice: equal opportunity to attain the ends for which resources are used/to secure
their equal rights to life and liberty.

The conception of justice:

- It is the right of the poor and the right of future generation to have access to the
appropriate natural resources and use them for their own needs.
- When our actions deny others this equal opportunity, we have an obligation to
compensate them for these losses.
- It is our duty to invest in the technology that is needed to maintain equal opportunities
(= not having equal number of resources).
- It is our duty to conserve and not to waste resources.

6.2 Two important considerations in regard to the justice of sustainability

1. To live off of interests rather than savings

We should consider natural capital as a stock. A stock is the foundation of any system.
Stocks are natural element that you can see, feel, smell, touch, count, or measure at any
given time.
Ex.: a store, quantity, accumulation of material or information that has built up over time,
water in a bathtub, a population, books in a bookstore, wood in a tree, the money in the
bank, your own self-confidence.

Natural capital is the environmental stock or resources of Earth that provide goods,
flows and ecological services required to support life. Natural capital has financial value
as the use of natural capital drives many businesses.
Ex.: geology, soils, air, water, and all living organisms.

Under current business practices, development patterns, environmental modifications;

exploitation of resources from other countries and government policies are degrading or
decreasing the stocks of natural capital.
This not only has financial implications, but also environmental implications as services
provided by ecosystems are damaged and unable to function effectively which causes
flow on effects.
Ex: greenhouse gas emissions

We have to control economic growth. If economic and societal development is allowed to

grow uncheck, stocks of natural capital will continue to decline, resulting in problems for

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 natural life support systems, increased market prices and a decrease in the quality of
human life.
Not all services or products provided by natural capital can be replaced by technology
and some alternatives are either expensive or inefficient.

2. Distinguishing between needs and desires

Well-being:
 Maximizing pleasure and minimizing pain (hedonic school of thought)
 Related to the concept of utility: the poverty of any object that tends to produce the
happiness of the party whose interest is considered
 Maximizing utility: (infinite) preference satisfaction through market consumption ->
income/GDP (objective measure)
 An ethical void: any consumption behavior is justified in terms of individual well-
being
 Paves the way to increased economic activity to become the primary national policy
goal

 The enabling of humans to reach their highest potential within the context of their
society:
o Not a subjective experience
o What one can do or be in one’s life
o Individual is put in a broader context of her (future) society
o Life satisfaction (subjective) or HDI (objective)

6.3 Human needs

There are a finite number of needs that are self-evident (universal), satiable (at a certain point,
you’re hungry/cold anymore), irreducible, non-substitutable, non-hierarchical.

Goal: minimally impaired participation in social life.

Risk: being considered paternalistic and externally imposed.

The means to satisfy human needs are culturally, socially and temporally flexible. A gain in the
level of satisfaction of one need can hinder the satisfaction of other needs.

 Enables the inclusion of environment limits and limits to consumption

 Allows for a systemic analysis

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Four approaches to energy efficiency measures:
- Conversion device
- Passive system
- Service control
- Service demand

7 Two caveats

- Sustainability is a popular word -> a changed culture and a changed economy is needed.
- The concept of sustainability applies only at more general and systematic levels.

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 CHAPTER 2: THE BIOSPHERE: FACTS AND VALUES

1 Introduction: The Biosphere

The biosphere is the earth’s environmental sphere. The planet is unique within our solar system.
It is the place where there is life, where there are different species.

1.1 Human life

- 70% of the Earth’s surface is covered by water
- Human life can only exist within narrow areas of the biosphere
- Human life depends on the atmosphere, the hydrosphere and the lithosphere. We need
the biosphere to survive, we need to protect it.

1.2 Ecosystems

An ‘ecosystem’ is a complex and dynamic combination of plants, animals, micro-organisms and

the natural environment, existing together as a unit, and depending on one another.

There are several ecosystems services:

 Provisioning services: supply of the goods themselves, we use that biosphere for our
food, water, timber and fiber.
 Regulating services: govern climate and rainfall, water (ew: flooding), waste, and the
spread of disease.
 Cultural services: cover the beauty, inspiration and recreation that contribute to our
spiritual welfare.
 Supporting services: include soil formation, photosynthesis and nutrient cycling, which
underpin growth and production.

1.3 The biosphere: functions

 Makes sure that can live in a stable environment

 Provide adequate food, water, and breathable air
 Maintain a stable atmosphere and a moderate climate, shelter life from solar radiation
 Provide energy to fuel all these activities, humans need to be fueled as well.
 Provide materials out of which these activities will be produced
 Be capable of absorbing the wastes produced by these activities

2 I=PAT

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A = Affluence: consumption of products and services per capita

Those 3 people all focused on specific aspects on the relationship between socio. Environmental
problems and their underlying causal factors. They came up with this equation in 1970.
This equation has been criticized on the fact that it is too simplistic as if all these elements are
not interrelated, and doesn’t take into account any social aspects.

Other models:

3 DPSIR

Change in the state of the environment will have an impact. It can also result to economic
damage.
As a society, we should seek responses to all these different elements, to understand how we can
organize the economy differently so that the pressure emissions are reduced, that we use less
resources.

This model has been criticized as well, a little like the IPAT model. It doesn’t really show all the
complexities within each of these elements. Nevertheless, all these types of models already make
a step to our system thinking.

4 System thinking

4.1 What is it?

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Systems thinking means understanding a system by examining the linkages and interactions
between the elements that compose the entirety of the system.

It is a common concept for understanding how causal relationships and feedbacks work in an
everyday problem, understanding the connections and relations between seemingly isolated
things.

Mental modelling, i.e. to explicitly map the understanding of the problem and making it
transparent and visible for others through Causal Loop Diagrams (CLD).

4.2 Why do we need system thinking?

- Understanding a cause and an effect enables us to analyse, sort out and explain how
changes come about both temporarily and spatially in common problems  to see
patterns and trends.
- Recognizing how a system’s structure causes its behavior
- Surfacing and testing assumptions
- Finding where unintended consequences might arise
- Finding leverage point to change the system
- Resisting making quick conclusions
- Seeking to understand the big picture

4.3 Examples

1.You wonder how you can stop feeling tired every day.

If not a system thinker:

 decide to drink more coffee to increase energy

If a system thinker:
 Will list all factors that are involved with your tiredness.
 Diagram how drinking coffee affects your energy as well as sleep
 Identify that coffee interferes with your sleep and that makes you more tired
 Decide to stop drinking caffeine

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The more you sleep, the more energy you have, the less coffee you need.

2.

The relationships between the different components define the behavior of the system.

3. Bike

A system is a network of multiple variables that are connected to each other through causal
relationships. We can only understand its dynamic behavior and interaction by viewing it as a
whole.

Only if one sees someone riding a bicycle one gains understanding of the functionality of the pile
of metal welded together and connect its use in a broader term to transport or leisure.

4.4 Dynamic complexity

System thinking is not about understand detailed complexity, but dynamic complexity.

All behavior in a system is a consequence of its structure. The structure of a system determines
its development, success, and failure. You cannot solve all problems within a defined boundary
because a system always contains subsystems and is embedded with a larger system.

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What we consider a car is the sum of functions and interactions between all of the cars’
components. The car maintains its functions through feedback processes of all its properly
places components.

We have a good understanding of how the car behaves as a system when we drive. Not because
we understand all the details but how its system behavior is. We do not have to know all the
details of the car to understand how the system behaves. We need to understand the dynamic
complexity.

There is food, climate and energy in the state of the biosphere.

5 Food

This system has gone through different agricultural revolutions.

5.1 Growing concerns

Thomas Malthus
 1798: an essay on the principle of population, as it affects the future Improvement of
society
 Population was fast outpacing food production
 poverty, famine, disease, and conflict would inevitably result, unless population is controlled

Club of Rome
 1972: Limits to growth
 Prediction of dire consequences if trends in resource use, population, pollution and
industrialization remained unchanged

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 Food and materials production kept pace with population. Ability of human creativity
was neglected.  Increase in productivity can continue indefinitely

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5.2 A sustainable food system

 The objective:
All people have a right to adequate food that not only to meet the minimum requirements for
survival but is also nutritionally adequate for health and well-being.

The challenge:
The overarching challenge for agriculture and food systems is to meet the increasing and
evolving dietary needs of a growing population in a sustainable way, in the context of climate
change and increased pressure on natural resources, paying specific attention to the rights and
needs of the more vulnerable groups.

5.3 Limitations of the food system

The World populations is growing – can current food system be maintained?

 1/3 of the world population suffers from malnutrition, such as hunger/limited access to
minerals and vitamins and People overeat/obese  Health impacts: type II diabetes

 The food quality is bad, indeed there is too much fat, sugar, salt and meat and it is getting
less diverse  Health (hart) and environmental impact (GHG emission)

 Food is wasted: 1/3 is not consumed

 Environmental impact: the water quantity/quality is under pressure, the soils are
degraded, the forests are disappearing, the is a biodiversity loss  This is intensified by
climate change

5.4 A system perspective

We need that system approach to:

- re-design the major components of the food system to become more sustainable and
prevent the high level of negative externalities that currently characterize the food
system.
- Identify where the trade-offs between social, economic and environmental goals of
sustainability arise and to feed these insights into the policy cycle.

5.5 The components of the food system

There are 3 constituent elements of food systems, as entry and exit points for nutrition: food
supply chain, food environment and consumer behavior.

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5.6 Food supply chains

5.7 Food environments

- Food availability and physical access (proximity)

- Economic access (affordability)
- Promotion, advertising and information
- Food quality and safety

Food environment refers to the physical, economic, political and socio-cultural context in which
consumers engage with the food system to make their decisions about acquiring, preparing and
consuming food.

5.8 Consumer behavior

Choosing where and what food to acquire, prepare, cook, store and eat.

5.9 Sustainable diets

When we put all 3 together: sustainable diets

Sustainable diets are those with low environmental impacts which contribute to food and
nutrition security and to healthy life for present and future generations.

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Sustainable diets should be protective and respectful of biodiversity and ecosystems, culturally
acceptable, accessible, economically fair and affordable; nutritionally adequate, safe and healthy,
while optimizing natural and human resources.

It is reflected towards our needs. Our needs are not the coca or tomato itself, but a diet. To reach
that diet, we need to make sure that it is in a sustainable way.

Outcomes and impacts:

5.10 Water, land and soil need to be well managed

Major concerns:
 Overpumping of water tables (quality and quantity)
 Pesticide use

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  Degradation of the productivity of cropland and range land due to erosion, soil
compaction, salinization, decline in soil fertility, toxic substances build up, water-logged
soil
5.11 Pesticide use

Glyphosate: the world’s most used pesticide to kill weeds.

 Arguments for banning the use of glyphosate:

- Harmful to humans and the natural environment
- The precautionary principle
- Monsanto has manipulated scientific studies upon which regulatory bodies base their
decisions
- There are alternatives `

 Arguments for not banning the use of glyphosate:

- Population is growing. It is vital not only to feed a growing population with reliable food
supplies at affordable prices (EU farmers)  productivity/farmers’ income
- It was given a positive assessment by both the European Food Safety Authority (EFSA),
and the European Chemicals Agency (ECHA)
- There is no alternative product (EU-farmers, Bayer – Monsanto)
- Trade barrier (US, Canada)

The role of CETA (Comprehensive Economic and Trade Agreement)

 In the EU-Canadian free trade agreement CETA regulations regarding plant health, food
safety, animal welfare and pesticide use are being discussed
 From the outset Canadian diplomats tried to use CETA to pressure the EU into full
glyphosate-admission
 The whole precautionary principle that is the basis for EU-policy is a trade barrier in the
eyes of Canadian policy makers.

5.12 Lifestock production systems

On an industrialized scale, the lifestock production systems cause damages to the environment
and human health, through groundwater pollution, mistreatment of animals, overgrazing, E.coli,
salmonella, and mad cow disease (large slaughterhouses and processing plants) and the use of
agricultural land to grow animal feed rather than human food.

5.13 Other drivers

 Technological, innovation, infrastructure:

Preservation, processing, plant-based proteins, GM (to increase crop yield), transport
infrastructure

 Political and economic:

To design and implement guidelines, to overcome power imbalances in current food systems.
Trade and globalization; specific food policies such as food-based dietary guidelines and

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subsidies, food prices and price volatility; policies on land tenure and use; water and fisheries
policies.

 Socio-cultural
 Demographic

5.14 Taking measures considering food system typology

Do not have to know by heart:

 Traditional food systems

o Consumers rely on minimally processed seasonal foods, collected or produced
for self-consumption or sold mainly through informal markets.
o Food supply chains are often short and local, thus access to perishable foods such
as animal source foods (ASF) or certain fruits and vegetables can be limited or
seasonal.
o Food environments are usually limited to one’s own production and informal
markets that are daily or weekly and may be far from communities.

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 Mixed food systems
o Food producers rely on both formal and informal markets to sell their crops.
o Highly processed and packaged foods are more accessible, physically and economically,
while nutrient-rich foods are more expensive.
o Frequent branding and advertising accompany everyday activities, seen on billboards
and in print publications, while food labelling is sometimes provided in markets.
o Even when food-based dietary guidelines are available, most consumers have little or no
access to this information. Food safety and quality standards exist but may not always be
followed by producers.

 Modern food systems

o More diverse food options all year long, and by processing and packaging to extend
food’s shelf life.
o These systems include both formal and easily accessible markets in high-income areas
and food deserts and food swamps in low-income areas.
o While the cost of staples is lower relative to ASF and perishable foods, specialty foods
(e.g. organic, local) are more expensive.
o Consumers’ access to detailed information on food labels, store shelves, and menus and
food is highly promoted.
o Food safety is monitored and enforced, and storage and transport infrastructures
(including cold chain) are generally prevalent and reliable.

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5.15 On the EU level

In spring 2020, the Commission will present a Farm to fork strategy (European green deal) to:

- Cutting our food consumption footprint by at least 30% by 2030 (from a 2020 baseline)
- Achieving land degradation neutrality by 2030
- Reducing CO2 and non-CO2 emissions from agriculture by 45% by 2030 and 60% by
2050 (from a 1990 baseline)
- Achieving good status for farmland biodiversity (including pollinators) by 2030
- Improving nutrients use efficiency across the full chain by 50% by 2030 (from a 2020
baseline)
- Managing 50% of the EU’s agricultural area through agroecological systems (inclu.
Organic farming) by 2050
- Cutting methane and ammonia emissions by 33% and 25% respectively (compared to
2005 levels) by 2030
- Reducing fertilizers, pesticides, and antibiotics use by 50% and the level of the
Harmonised Risk Indicator by at least 30% by 2030 (from a 2020 baseline)
- Cut food loss and waste from the harm to the fork by 50% by 2030 (compared to 2014
levels)

6 Climate

6.1 Global warming

The term climate change or global warming refers to the effects of emissions of greenhouse
gases into the atmosphere.

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Greenhouse gases act as a blanket and warm the surface of the earth. As we put more
greenhouse gas in the atmosphere, we in effect put on a thicker blanket, warming the planet
more. The primary greenhouse gas is carbon dioxide, which we emit when we use of fossil fuels.

The Earth’s temperature is determined by the relationship between the energy the Earth
absorbs from the Sun and the energy it emits back. These two have to be in balance for the
temperature to remain stable.

Without an atmosphere, the resulting balance of incoming and outgoing energy would mean that
the average temperature of the Earth's surface would be about -20°C — too cold to support life.
The reason the Earth is not actually this cold is that it is blanketed by the atmosphere.

The absorption of infrared radiation is due to only minor elements in the atmosphere — the
greenhouse gases. It is only a trace element in the atmosphere, comprising now only about 395
parts per million (ppm), but it has strong effects. Carbon dioxide occurs naturally in the
atmosphere. Pre-industrial concentrations were about 280 ppm.

China, US and EU are the main emitters of CO2.

6.1.1 Global warming: the problem

Increases in mean temperature in most land and ocean regions (high confidence), hot extremes
in most inhabited regions (high confidence), heavy precipitation in several regions (medium
confidence), and the probability of drought and precipitation deficits in some regions (medium
confidence).

By 2100, global mean sea level rise is projected to be around 0.1m lower with global warming of
1.5C compared to 2C (medium confidence).

On land, impacts on biodiversity and ecosystems, including species loss and extinction, are
projected to be lower at 1.5C of global warming compared to 2C. Limiting global warming to
1.5C compared to 2C is projected to lower the impacts on terrestrial, freshwater and coastal
ecosystems and to retain more of their services to humans (high confidence).

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Climate-related risks to health, livelihoods, food security, water supply, human security, and
economic growth are projected to increase with global warming of 1.5°C and increase further
with 2°C.

6.1.2 Global warming: the objective

The Paris Agreement central aim is to strengthen the global response to the threat of climate
change by keeping a global temperature rise this century well below 2°C above pre-industrial
levels and to pursue efforts to limit the temperature increase even further to 1.5°C.

If we reduce CO2 emissions, we will end up in the blue area. If not, we will end up in the purple.
You want to reach 1.5°C.

6.2 Linking global warming to the food system

Production system: technical mitigation actions

- to reduce CH4 emissions from livestock derived from enteric fermentation during the
digestive process, through selective breeding programmes;
- to reduce emissions from manure by anaerobic digestion, which produces biogas that
can be used to generate electricity on farm, for example;

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 - to reduce emissions from agriculture soil by optimising fertiliser application rates, for
example by precision farming;
- to increase carbon capture in the soil by improving soil management techniques.

6.3 Global warming: adaptation

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6.4 Global warming: food/health

By 2050, climate change would lead to

-  a 3.2 % per person reduction in global food availability,
- a 4 % reduction in fruits and vegetables and a 0.7 % reduction in red meat consumption.
- 529 000 climate-related deaths worldwide.

7 Energy

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The goal: to ensure access to affordable, reliable, sustainable and modern energy for all.

7.1 Energy and the EU

The ambition is to build an energy union that gives EU consumers, households, and businesses
secure, sustainable, competitive, and affordable energy.

Five dimensions of the energy union:

 Security, solidarity and trust: diversifying Europe’s resources of energy and ensuring
energy security through solidarity and cooperation between EU countries.
 A fully integrated internal energy market: enabling the free flow of energy through the
EU through adequate infrastructure and without technical or regulatory barriers.
 Energy efficiency: improved energy efficiency will reduce dependence on energy
imports, lower emissions, and drive jobs and growth.
 Climate action, decarbonising the economy : the EU is committed to a quick ratification of
the Paris Agreement and to retaining its leadership in the area of renewable energy.
 Research, innovation and competitiveness : supporting breakthrough in low-carbon and
clean energy technologies by prioritizing research and innovation to drive the energy
transition and improve competitiveness.

7.2 Energy justice

Availability, accessibility, and affordability

Also, a low-carbon transition has the potential to distribute costs and benefits unequally.

Examples:
 Electric vehicles: not everyone can pay for those kinds of vehicles. They require
batteries, which require raw materials, metals, which have to be extracted.
 Nuclear power production
 Hydropower production: could impact the lives of farmer for ex. Their agricuute act
could be affected by the way this hydro production is conducted.

We should not only mitigate environmental impacts of energy production via socio-technical
change but doing so in an ethical way (without shifting burdens).
Energy justice should be framed as a core concern for wider society. So, if you want to manage
our energy system in a sustainable way, you should look to energy justice.

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7.3 Energy services/needs

Energy: not energy products but services

Energy services (ES): vital satisfiers of human needs

Useful property of energy:

- Transport
- Sustenance
- Hygiene
- Thermal comfort
- Communications
- Illumination

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How the energy system could be structured:

We have to see these energy services as a set of limited ends which people demand from energy.
The means by which the energy services are delivered varies between societies and over time.

Human needs are universal whereas satisfiers are cultural specific.

This way of thinking allows for:

- Identifying a wider range of potential efficiency improvements
- Possibilities of decoupling energy use from human well-being. How can we do well with
a limited amount of energy.

7.4 Efficiency improvements

 Technical efficiency improvements in conversion devices (limited)

 Improvements in passive systems
 Service control: development of smart technologies where you can clearly indicate when
to use the energy
 Service demand
o Change in the nature of the service required (short term components of energy
demand – how we behave (ex: how we switch off the light when we leave a
room) behavioral/cultural)
o Change in the level of the service required (long term components of energy
service demand) by better insolating the house, we can reduce the amount of
energy, switch to an electric car, switch from diesel to gaz,…

Example: transport as an energy service:

 For the satisfaction of health as a human need
 Improvements in
o Conversion system (Increase efficiency of engines)
o Passive systems (light weighting the friction of cars and buses)
o Service control (traffic control measures)

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 o Service demand (localized clinics/telemedicine)
7.5 Provisioning systems

 Physical provisioning systems:

Analysis of physical characteristics (infrastructure and technology).

 Social provisioning systems:

Analysis of social and cultural aspects, economic institutions (market logic), and socio-political
institutions.

Decoupling opportunities are likely to be found on a community level, and not at an individual
level.

Using the community as the unit of analysis, will enable individuals within it to use less energy
to satisfy their needs.

7.6 Energy poverty

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8 Values and the biosphere: pragmatism and diversity

8.1 Environmental values

 Self-interest :
o Environmental and political boundaries do not match: the biosphere and the resources it
provides are common goods
o Short and long term concerns
o Local and global concerns
 Intrinsic value of natural objects, not valued in a market:
o Ethical considerations (towards animals)
o Aesthetic values
o Spiritual and religious values
o Historical, cultural, symbolic value
 Interest of future generations: we should not deny them the earth’s biological and
natural diversity

Natural resources should not be merely treated as resources to be used for economic growth. It
would destroy their immense value.

8.2 Environmental decision making

There is no single ethical theory of principle that can guide our environmental decision making.

We fail to behave ‘consistently’. Indeed, people tend to suggest that environmental values are
not compatible and therefore relativistic. So, the non- economic values are ignored. 
Controversy

Should we ground environmental responsibility in self-interest? ‘The business case for

sustainability’?  Tenuous and untrustworthy?

Conserve for sustained use

Preserve

Focus to what is practical. Acknowledge that there can be multiple, and conflicting reasons for
our decisions (sustainability and profitability can go hand in hand).

Reason about what we ought to do (= practical rationality): How to organize a business in a

sustainable way?
Do not reason about what is true (= theoretical rationality): How does a truly sustainable
business look like?  there is not a single answer to that question.

 Different sustainable practices can be equally valid

36
Does the pluralistic and pragmatic solution provide any guidance? The concept of sustainable
development does:
- The biosphere is considered a home of resources to be used
- Yet, the values that make life worth living are recognized

Example exam question:

Systems thinking in the energy sector. Systems thinking offers a structured approach to tackling
a complex challenge. It can uncover how changes in one or more element(s) and the
relationships between them will affect system behavior.
1. Based on the document attached to this exam, draw a flow chart that shows how the
different elements of the energy system are connected (elements: consumer needs/
resources/ perspectives/ relationships/ vectors/ actors and motivation).
2. In Flanders, 70% of domestic properties use gas for heating. To decarbonize the heating
sector, switching from gas to electricity by installing heat pumps could be a potential
solution. Imagine that you are a Flemish policy maker. You want to understand the
impacts of such a switch on different system elements, the interventions that are needed
to make such a switch, and the potential occurrence of unwanted side-effects.
i. Identify 3 relations in your flow diagram that you would find important to
investigate to increase your understanding. Explain why you think these
relations are important.
ii. Describe what type of information you would gather to increase your
understanding about these relations.
iii. Describe the type of analysis you would make to increase your understanding
about these relations.

37
 CHAPTER 3: ECONOMIC GROWTH, FREE MARKETS, AND BUSINESS
RESPONSIBILITY

1 Introduction

Convention wisdom is a dominant paradigm, a default position: economic growth will save us all,
economic growth is the best solution, economically, ethically and ecologically.
For businesses, it means that the organization maximizes profit within the law.

1.1 The assumptions

Why economic growth is so dominant? Why do we want economic growth?

- It leads to more prosperity for all
- Measurement for a success of a country
- It is measured by the change in GDP
- There is no alternative to economic growth
- More production and more consumption lead to more well-being
- Economic growth is needed to reduce poverty
- Positive correlation between GDP and life expectancy
- Economic growth is sustainable
- Economic growth is needed to protect the environment
- Economic growth creates jobs
- Economic growth is needed to finance the welfare state

2 Economic growth as the economic good

Economic growth = economic good.

Economic growth = change in GDP. GDP is the total monetary or market value of all the finished
goods and services produced within a country’s borders in a specific time period.

To reduce poverty, the economy must grow. To keep pace with rising population, the economy
must grow. To provide adequate food, the economy must grow.

Therefore, we rely on the workings of a free and competitive market, meaning that free
individuals, seek their own self-interest, left alone within a marketplace, will consistency seek to
improve their own position and thereby improve the overall well-being of society.
It’s across countries that people and firms specialize and that they can produce cost efficiency.
Specialization directed by comparative advantages improves the efficiency on a global scale.

3 Free market environmentalism

Environment problems are economic problems and therefore solvable by economic means.

38
If you want to produce a clean and livable environment, we have to allocate efficiently the costs
and benefits of scarce resources = the market approach.

 Non-renewable resources: not a problem

Why? There will be back up technologies. The idea is that we can deplete nonrenewable
resources, when supply goes down, prices will increase. At a certain point of time, we will create
alternatives to enter the market. The assumption is that resources are substitutable.

 Resources that are less substitutable (e.g. clean air, knowing that we pollute): a problem
that can be solved by the workings of the market.

Why? We seek for an optimal level of pollution.

MAC: marginal abatement cost

P: marginal benefit
The higher the MAC, the more the P is decreasing.

 Conflicting demands for scarce resources: a problem that can be solved by the workings of
the market.

Why? There is a market for each use. Allocation of the scarce resource in the most optimal way,
to those who value it the most. The idea is that a person that is willing to pay the most for a

39
specific area, receives that area to organize its economic activities, knowing that there will be a
demand for the products that are produced.

 Common pool resources (e.g. fish): a problem that can be solved by the workings of the
market.

Why?. There is a rivalry. If I fish, there will be less fish for someone else. Solution: Privatization,
allocate property rights.

4 Free market ethics

Why is the market approach to economic and environmental challenges considered ethical?
It is based on two aspects:
- Utilitarian principle of maximizing the overall good (collectivist ethics, consequences to
all)
- Individual rights to liberty and private property

4.1 Utilitarianism

What are the consequences that follow from actions taken?

Producing good means producing happiness, welfare, utility. If it’s beneficial to all impacted
parties, then that act is justified. If an act produces greater overall (for the greatest number)
good than the alternatives, it is ethically justified.

By competitive markets, society is structured such that individual egoism translates into the
greater good.

4.2 Individual rights

The inherent dignity of each individual should be protected by individual rights. It is

complementary to the utilitarian approach, not rival.
We should promote the great overall good, as long as no individual rights are violated in the
process.

Two important individual rights:

- The right to private property
- The right of individual liberty: it is the right to be free from interference of others
(negative liberty), each individual is free to make its own decision. You don’t want any
government to interfere, that’s how it translates to a free market with minimal
governmental interference.

5 Corporate social responsibility and the standard model

=(The classical model of corporate social responsibility)

40
The primary responsibility of a business is to maximize profits within the law. Indeed, resources
are allocated to those uses that are most valued by a society. Also, the competition must be open
and free, no fraud allowed.

Expanded view: to obey the law and adopt some “ethical customs” (e.g. the moral duty to cause
no harm, a moral minimum). It’s not a positive duty to do good. We cannot expect altruism.
Three ethical imperatives:
- To cause no harm
- To prevent harm, and to do good  ethical obligation
- Duty to stockholders overrides these ethical concerns  less strict

Utilitarian ethics:
By pursuing profits, businesses serve the utilitarian goal of satisfying consumer demand and
thereby maximizing the overall social good.

Protection of individual rights:

The utilitarian goal is constraint by the duties that one has to persons (stakeholders) affected by
these activities.

6 Corporate environmental responsibility

The environmental concern is a side-constraint.

You do not have to do good (positive duty) to contribute to long-term ecological and
environmental well-being.

Ethical goals do not determine either the direction or the substance of business activity, the way
businesses do, how they organize themselves.

Businesses passively respond to the demands of the market. It is up to consumers to let

businesses know what they like best. It’s not the responsibility of the business.

It is the society that sets the agenda (market and legislation). A business has no special social or
environmental responsibility.

Going beyond the moral minimum cannot be expected of business. No individual firm is causing
such harms to the biosphere as global warming, species extinction. Acting to counter such harms
is beyond the moral minimum. The government should act to prevent such harms through
legislation. If this is not required by law, business has not obligation to do good.

This understanding of ethical responsibility is too narrow. This view misrepresents the latitude
business and managerial discretion. As if there is a conflict between self-interest and ethics.
However, there are many good business reasons to move towards sustainability.

41
 CHAPTER 4: THE FAILURE OF MARKET-BASED POLICIES

1 Introduction

Adequate environmental ethics:

Environmental responsibilities should not be left to the undirected workings of competitive
markets. Environmental responsibility should shape the nature of how business is conducted.

 The idea is that businesses can and should take responsibility to do good.

2 Critique of growth-based market model: internal challenges

Which ones are part of GDP?

Economic transaction needed to clean pollution, to adapt to climate change, to repair cars after
an accident,… they all contribute to economic growth and GDP.

2.1 Market failures

Different types of market failures:

- Existence of externalities: the emission of CO2, environment cost is not valued in the
market and that is governmental intervention.
- Absence of markets
- Distinction between individual decisions and group consequences (public goods)

Standard response:
- Legislation
- Adequate system of property rights

42
2.2 Why the standard response is not appropriate

- Ad hoc attempts to repair market failures

- Passive and reactionary strategy. We sacrifice the first generation.
- Regulatory capture

- Many regulations and inefficient economies. Business is in a better position to take steps.
- Business influences governmental regulation and consumer demand.
- Laws are inadequate to prevent harm because they are general and ambiguous: whatever
is not illegal, is socially responsible.
- Global economy: few international agreements/ corrupt countries

3 Critique of growth-based market mode: external challenges

3.1 Economic activities: the standard model

Problems:
- Natural resources are undifferentiated from other factors of production
- Economic growth has no bounds
- This model faces challenges (poverty, population growth, environmental resources are
finite)

43
3.2 Biological, physical limits to growth

Herman Daly (ecological economics)

Economic development (quality) Economic growth (quantity)

Ecological economics Neo-classical economics

The difference with the standard model is that the economy is a subsystem with the Earth’s
biosphere. It is to develop an economic system that uses resources at a rate can be sustained
over the long term.

- The biosphere is finite. Neither matter nor energy can truly be “created”. It can only be
transferred
- Energy is lost at every stage of economic activity
- Natural resources come from the biosphere (differentiated from other factors of
production)
- Wastes are produced at each stage of economic activity and dumped back into the
biosphere

3.2.1 Thermodynamics

Thermodynamics is a branch of physics which deals with the energy and work of a system.

 First law of thermodynamics (quantity):

Energy cannot be created or destroyed. Implication for the science of economics: we cannot
make something from nothing.

When the economy grows in physical dimensions, it incorporates matter and energy from the
rest of the ecosystem into itself. It must, by the law of conservation of matter and energy,
encroach on the ecosystem, diverting matter from previous natural uses. More human economy
(more people and commodities) means less natural ecosystem.

 Second law of thermodynamics: entropy

It is the tendency for all energy to disperse, to spread out from concentrated forms to less
concentrated forms, and to become less useful  each time we convert energy, there is always a
part that is wasted.

In a closed system, all useful energy will become so dispersed that the system essentially dies.
Within a closed system, more highly concentrated forms of energy can be created, but only for
the short term and only with the expansion of other sources of energy.
Example: with a car, if you have fuel, you can drive. But when the energy is used (fuel) you
cannot drive anymore. You put energy back into it to drive again.

44
The founder of entropy: Nicholas Georgescu-Roegen:
Economic activity uses low-entropy energy available in raw materials and transforms it to useful
products and services
 Economic activity cannot create new forms of productive matter or energy. It can only
use available matter and energy in a way that inevitably converts into less useful forms.

It is often represented in an hourglass:

 Closed system: no sand is entering or leaving
 Amount of sand is constant
 Upper chamber: concentrated, low entropy, ready to work
 At the bottom, after falling: dispersed, high entropy, not useful anymore

3.3 Economic activities: the ecological economics model

45
46
We have to deal with a biosphere that is limited. How should we better organize that?
Sustainable development. To organize our economy such that the biosphere can produce
resources indefinitely and absorb wastes indefinitely.

 To find the rate and type of economic activity is the ultimate environmental responsibility of
business.

4 The ethics of the conventional model

4.1 The conventional model is not ethical

More goods and services would mean more resources to satisfy human desire, which would
result to more happiness. By pursuing profits, there will be more happiness.
The only limitation is individual rights, the moral minimum should not be violated. However, the
goal of economic efficiency lacks a coherent, ethical basis.

4.1.1 Why the utilitarian ethic does not hold?

Does economic efficiency provide the greatest good for the greatest number?
An efficient market is a market where more people get more of that for which they are most
willing to pay.
Why is the satisfaction of individual preferences the overriding goal? To have happiness, well-
being, welfare.

Happiness is not always correlated with increased wealth and consumer satisfaction. As
consumer we sometimes live in a rate race. Work, eat, sleep, repeat.

Some of the world’s happiest countries have high GDP per capita, and most of the least happy are
very poor. But the correlation is far from perfect. Social support, life expectancy, freedom to
make life choices, generosity, and freedom from corruption (quality of life), and not just material
wealth, plays a huge role in happiness.

47
Why should we seek optimal satisfaction of consumer preferences?
There is no reason for “accepting preference satisfaction” as an ethical goal. Smoking, drug use
could hardly be considered as an ethical goal for instance.

4.1.2 The duty-based ethic does not hold: autonomy

Business only has a negative duty to do no harm. An individual should not force another
individual to do good. However, a business institution are not individuals. It is means to an end.
Businesses are human institutions designed and created to serve human ends.
Human beings created the business and established its legal and ethical duties. Those duties can
and need to be rethought.

4.1.3 The duty-based ethic does not hold: value-relativist claim

Society lacks consensus on the nature of the good and therefore the right has priority over the
good.
What if the principles of ‘sustainability’ reflects the nature of the good? The good has priority
over the right?

Example exam question: why could “sustainable growth” be considered as a contradiction in

terminis?

48
 CHAPTER 5: ECOLOGICAL ECONOMICS

1 Introduction

The choice between profit and environmental responsibility. It is easy to dismiss the latter. What
is the purpose of business?

Examples:
 L’Oréal: has set itself the mission of offering all women and men worldwide the best of
cosmetics innovation in terms of quality, efficacy and safety. By meeting the infinite
diversity of beauty needs and desires all over the world.
 Bank of America: its mission statement is “To offer lending and investment products
that: Serve low- and moderate-income individuals and families, improve underserved
low- and moderate-income communities, and create sustainable practices for the long
haul.”
 Novo Nordisk: its mission statement is “we are dedicated to creating value for patients
by changing diabetes – changing how it is treated, how it is viewed around the world,
and how the future of the disease evolves”.

A business should figure out what people really want and value.

Profitability is ‘a means’, not ‘an end’. To pursue profit in a way that contributes to sustainability.

Ecological Economics provides a framework for understanding the responsibilities of the firm
within a sustainable society

2 Ecological Economics

2.1 Concept

It studies how ecosystems and economic activities interrelate

It is a multidisciplinary approach to a range of problems at the intersection of ecology and
economics.

The Ultimate question/challenge:

How to create an economy that is sufficiently robust to address the real needs of an increasing
population, but which does not grow so big that it overshoots the carrying capacity of the
biosphere? OR
How to create an economy that can continue as a vibrant and productive force into the indefinite
future?

Questions concerning the flow of resources into the economy:

 Challenge: not to be depleted at an unsustainable rate

Questions concerning the flow of waste out of the economy:

 Challenge: not to be produced at rates which the biosphere cannot absorb

49
Questions concerning the appropriate and best practices to transform resources into products
and services:
 Challenge: to meet the needs of the present and future generations, efficiently and justly

2.2 Metaphors

2.2.1 Kenneth Boulding: the economics of the coming spaceship Earth.

Earlier people thought that the Earth was without limit. It could supply natural resources
infinitely. Earth was ‘Open Access’ – i.e.:
 Anyone can use the natural resources
 No problem of disposal of wastes
 Natural resources can be exploited without limits, as they were infinitely available

Kenneth Boulding calls this as the “Cowboy Economy”

 Humans were exploitative and destructive
 After using and wasting an area, they would move to new areas to exploit
 They did not bother about natural resources depletion, because new areas are always
available
 They did not bother about pollution, for when one area is polluted, they can move to a
new place
 More and more consumption is regarded as a good thing, so also more and more
production.
 Assuming that natural resources are available infinitely, then this is possible
 Also, it is assumed that the Earth can dispose of the wastes created by production and
consumption

Kenneth Boulding pointed out that the Earth is limited:

 The total stock of natural resources on this Earth is finite
 All economically available areas on Earth are occupied
 There a no new areas to conquer and exploit
 It is not possible to have the “Cowboy” type of economy – of using and discarding land
and resources.

Kenneth Boulding pointed out that the Earth is a closed system:

In a closed system, all inputs and outputs are interconnected.
 Nothing comes from outside, except sunshine
 Nothing can be thrown outside the Earth into Space
 The economies of the Earth should sustain themselves with the available resources of
the Earth
 The wastes also have to be retained on this Earth

Kenneth Boulding pointed out that the world economy can be thought of as an “Econo- sphere”
 It is a subset of the Global system
 Inputs: production adds to stock of economic goods

50
  Outputs: consumption which subtracts from it
 Natural resources flow into the economic system and wastes flow out, but do not enter
the economic system

Kenneth Boulding pointed out that the Earth is a closed system, circulating in space, like a
“Space ship”
 It is completely self-reliant
 Only solar energy comes from outside
 Humans cannot dispose of their wastes outside
 There is no ‘outside’

 Spaceship Economy
 All natural resources have to be recycled to sustain economies
 Stock of natural resources should be kept constant and not wasted
 Necessary to reduce output and reduce consumption
 Minimization, not maximization
 Technological change should aim at the maintenance of a given total stock of output (not
growth)
 Develop technology that can recycle wastes

 Kenneth Boulding: the spaceship Earth

 Ecological Economics: management of that spaceship

2.2.2 Herman Daly: a steady-state economy

Throughput: the combination of matter and energy that moves through the economic subsystem
of the biosphere. We need to put limits to the physical scale of that throughput We want to keep
the throughput constant and seek for qualitative improvement. Not growth of throughput =
sustainable development.
 Acknowledging the laws of thermodynamics

Herman Daly: Plimsoll line

The Plimsoll line is a reference mark located on a ship's hull that indicates the maximum depth
to which the vessel may be safely immersed when loaded with cargo.

51
2.3 Scale, distribution, efficiency

Ecological Economics: scale, distribution, efficiency

Neoclassical Economics: distribution, efficiency

 Optimal scale
Economic activity such that the need of the population are met without subverting the Earth’s
ability to provide the resources and absorb the wastes of that economic activity.
It is judged by economic, ethical, and ecological criteria.

 Distribution
 Who gets what is produced, according to the principles of justice
 Just distribution: whatever results from free exchanges within open and competitive
markets. A fair and equal opportunity to participate in the economy
 Involves ethics, justice, and public policy
 Reliance on political mechanisms and public policy

 Efficient allocation
 Allocation: What gets produced from the resources that enter the economy
 Efficiency: a criterion by which we judge a good allocation. Production factors should be
allocated to their most efficient use. Neoclassical economists believe that relative prices
achieve an efficient allocation
 Reliance on prices (free market)

Example: carbon pricing

 Optimal scale: emission cap
 Distribution: freely distributed emission allowances, auctioned emission allowances
 Efficient allocation: trading of emission irghts

3 Policy implications of ecological economics

3.1 Accounting for natural capital

3.1.1 Treat natural resources as capital (and not income)

Appropriate scale: how to treat and account for natural capital in the global economy?

52
3.1.1.1 Different forms of capital

 Natural Capital is any stock or flow of energy and material that produces goods and
services. Natural capital is the basis not only of production but of life itself.

 Human Capital consists of people's health, knowledge, skills and motivation. All these
things are needed for productive work. Enhancing human capital through education and
training is central to a flourishing economy.

 Social Capital concerns the institutions that help us maintain and develop human capital
in partnership with others; e.g. families, communities, businesses, trade unions, schools,
and voluntary organizations.

 Manufactured Capital comprises material goods or fixed assets which contribute to the
production process rather than being the output itself – e.g. tools, machines and
buildings.

 Financial Capital plays an important role in our economy, enabling the other types of
Capital to be owned and traded. e.g. shares, bonds or banknotes.

3.1.1.2 Natural capital vs. Natural income

Natural capital: the source or supply of resources and services that are derived from nature.
Examples: forests, mineral deposits, fisheries and fertile soil. Air and water purification are just
two of many services provided by natural capital.

Natural Income is the annual yield from such sources of natural capital. Examples: timber, ores,
fish and plants, respectively, relative to the examples above.
Natural income is also the services provided by the natural capital (provisioning, regulating and
cultural services). Forests, for example, are not simply wood production units. They also prevent
soil erosion, absorb rainwater and provide flood control, they provide habitat for a diversity of
plant and animal species which may serve as foods or medicines for other species, they absorb
the natural wastes of these diverse life forms, they generate oxygen and sequester carbon from
the atmosphere, they affect the microclimate of their area, they are a key component of the
hydrologic cycle, as well as providing aesthetic enjoyment and spiritual inspiration.

53
3.1.1.3 Natural income: products + services

Why is this distinction between product and service functions important?

To understand the relationship between the physical size of the economy and the ecosystem's
capacity to support life.

The same ecosystem provides both products and services as forms of natural income. However,
only resource extraction, which generates large amounts of material throughputs, is identified in
economic theory and practice. Most policies focus is on lumber production rather than on the
full range of natural income provided by ecosystem services.

It is the magnitude of these ecosystem service losses, rather than resource depletion, which are
the greatest threats to life on the planet.

3.1.1.4 To use natural capital at as sustainable scale

Well-managed capital produces a steady stream of income without depleting the store of capital.
The point at which the amount of natural income used up reduces the capacity of natural capital
to continue providing the same amount of natural income in the future, is the point at which
sustainable scale has been exceeded.

Whether the process is with money or natural capital, as long as the draw down exceeds the rate
of replenishment, the amount available will eventually shrink to zero - sustainability is
destroyed.

3.1.1.5 Characteristics of a sustainable scale perspective

 Accepting limits (to live off the income of natural capital and to preserve the natural
capital)
 Limits do not mean deprivation (limits are a bio-physical reality)
 Limits do not mean authoritarian control (also within the limits, the free market can
operate)
 Limits are commonplace

 Guidelines for respecting limits

3.1.1.6 Guidelines for respecting limits

 Questions concerning the flow of resources into the economy

 Challenge: not to be depleted at an unsustainable rate

To harvest renewable resources below the natural regeneration rates of all critical ecosystem
services associated with specific throughput activities: Cutting nature some slack, consider all
relevant services.

54
Any use of non-renewable resources should be coupled with investment in replacing the non-
renewable resource with renewable alternatives, or coupling the non-renewable usage with a
renewable offset: Prioritize those most harmful, durability, recycling, human needs.
 Questions concerning the flow of waste out of the economy
 Challenge: not to be produced at rates which the biosphere cannot absorb

Sinks as important as sources. There is no production of wastes which cannot be broken down
and absorbed (e.g. plastics). Seek substitutes.

 Questions concerning the appropriate and best practices to transform resources into
products and services
 Challenge: to meet the needs of the present and future generations, efficiently and justly

Sustainability also involves social and ethical issues: Justice and safety guidelines.
 To consider future generations and current generations living in poverty.
 Sharing resources derived from the income of natural capital alone becomes necessary
to achieve social justice as well as ecological sustainability. (Continued economic growth
within biophysical limits is not possible)
 Preserving biodiversity, thereby respecting the rights of non-human species, and
recognizing the delicate and intricate interdependencies of the web of life, of which
humans are a part.
 Identifying an Adequate Safety Margin which requires:
o A review of the scientific knowledge available concerning the ecosystems
affected by human activities and the criticality of the services they provide
o An appreciation of the irrevocable nature of ecosystem change beyond a certain
point, and the associated loss of life supporting ecosystem services
o Special precautions for making decisions about critical life support functions
under conditions of uncertainty -Identification of at least the minimum
information required to make a safe decision
o Ensuring adequate monitoring and enforcement mechanisms are in place to
ensure that sustainability and social justice standards are respected
o Ensuring that an informed public participate in the determination of the above
justice and safety issues.

Guidelines for respecting limits:

Description of the components of optimal scale, but no description of what the optimal scale
should be for any given human activity. The process of identifying optimal scale will be a
complex political, social and scientific process, and undoubtedly entail many bumps and starts
along the way. Given that many human activities are already unsustainable, the need to begin
this process is urgent.

3.1.2 Invest in the limiting factor

3.1.2.1 Investing in the limiting factor

A firm can only be as productive as allowed by the least productive factor of production.

55
3.1.2.2 To invest in natural capital

Natural capital should not be treated as a free and inexhaustible income. Natural resources are
part of the capital stock from which income is generated. The supply of that capital is dwindling
 To increase the productivity of that capital (short term)
 Invest in increasing the supply of natural capital (long term)

If a manufacturing plant manages water pollution as part of regulatory obligations, future

approaches may include natural water purification methods such as constructing wetlands, thus
providing additional biodiversity benefits whilst reducing costs.

3.1.3 Weak vs. strong sustainability

3.1.3.1 Substitution

If natural and non-natural resources are substitutable, then natural capital will never become
the limiting factor.

Weak sustainability thesis: As long as the total amount of all resources does not shrink,
economic activity can remain sustainable.

Strong sustainability thesis (ecological economists): Natural resources and the other factors of
production are complements rather than substitutes. Each is needed.

3.1.3.2 Weak sustainability

Based on the Neo-classical principle of substitution of capital (Hartwick, Solow, Dasgupta)

Objective of the weak sustainable theory: To maintain non-declining per capita human welfare
over time.

Welfare W = f(U); U=f(C); C=f(Y); Y=f(K)

K=KM +KN
 K is homogeneous
 The same amount of welfare (income) can be generated and maintained either by K M or
KN
 To achieve intergenerational equity, technology will find solutions.
 As Y increases, KM increases but KN gets depleted. To maintain the same level of income,
total K should be kept constant

56
  If total K is constant, Y is also constant, and welfare will remain constant

Limitations:
 K is not homogeneous and so KM and KN are not substitutes
 KM is complementary to KN
 Pollution impacts are ignored
 Assumes all types of environmental degradation can be measured in monetary terms
 Based on economic sustainability: present patterns of economic development should
continue Ecological sustainability is not discussed: depletion is ok
 Intra-generational equity is not discussed

3.1.3.3 Strong sustainability

Eco-centric point of view: species as well as ecological systems should be sustained for their
intrinsic value.
Natural resources are essential inputs in economic production, cannot be substituted. Within K N
some level of substitution is possible.
Some environmental components are unique and some environmental processes may be
irreversible.

There are 2 theories:

 Pearce and Atkinson

Certain keystone species should be kept constant to achieve sustainable development. Develop
some shadow projects to preserve the keystone species. The environmental costs associated
with an economic project should not exceed the environmental benefits of a shadow project.

Limitations:
- Measures environmental costs and benefits in monetary terms
- Constant monetary value
- Geographical factors could be different
- Justification of misuse

 The Safe Minimum Standard Theory (SMS)

- Ciriacy-Wantrup and Bishop

- Decision making under uncertainty, as society is unsure about the future
- KN should not be depleted below a certain safe minimum standard, to be identified for
each species, or the depletion of natural capital KN should not exceed the SMS of that
resource
- When there is uncertainty, society can either deplete the resource or leave the resource in
its present state (SMS)
- Choose the strategy that causes minimum loss
- Depletion is permitted only if the Social Opportunity Cost is exceptionally large

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 - If the value of the preserved resource is smaller than the benefits of an economic project,
then the species can be exploited

Limitations:

- Environmental costs and benefits can be measured in monetary terms

- Ignores distribution of the costs and benefits
- Determination of which costs are high or low, depends on political and social pressures

3.1.4 National and international accounting

Accounting for growth or for development?

GDP: measuring spending, not measuring factors as health, infant mortality, illiteracy,
environmental destruction, topsoil productivity, ...

The total market value of all goods and services is expanding (=GDP). To every product valued is
a physical quantity attached. Although GDP is not perfectly correlated with throughput, the
potential for decoupling GDP and throughput is limited. GDP reflects quantitative growth and
not qualitative development, and it reflects both harmful and beneficial activities.

3.1.4.1 Beyond GDP

 Enlarged GDP indicators

Start from GDP but adjust for some of its limitations to deliver a more comprehensive overview
of a country’s wealth or well-being.
Examples: Genuine Progress Indicator / Index of sustainable economic welfare

Computation usually begins with estimates of personal consumption expenditures, which are
weighted by an index of inequality in the distribution of income to reflect the social costs of
inequality and diminishing returns to income received by the wealthy.

Additions are made to account for the non-market benefits associated with volunteer time,
housework, parenting, and other socially productive time uses as well as services from both
household capital and public infrastructure.

Deductions are then made to account for purely defensive expenditures such as pollution related
costs or the costs of automobile accidents as well as costs that reflect the undesirable side effects
of economic progress. Deductions for costs associated with degradation and depletion of natural
capital incurred by existing and future generations are also made at this stage.

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  Social indicators

Give insights into a broad range of social issues, concerns and trends such as life expectancy,
poverty rates, unemployment rates, disposable income, and education levels, etc. They are also
used to give insights into broader notions of social progress.

Examples: Genuine Progress Indicator / Index of sustainable economic welfare / Human

Development Index / Happy planet index / EU set of sustainable development indicators /
World Happiness index ...

The HDI serves as a frame of reference for both social and economic development. It is a
summary measure for monitoring long-term progress in a country’s average level of human
development in three basic dimensions:
- a long and healthy life
- access to knowledge
- a decent standard of living

The HDI was introduced in 1990 to emphasize that people and their capabilities should be the
ultimate criteria for assessing the development of a country, not just economic growth.
The IHDI adjusts the HDI for inequality in distribution of each dimension across the population

 Environmental indicators

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Cast light over the state and development of issues such as natural resources, environmental
pollution and waste, as well as related issues such as human health.

Examples: Genuine Progress Indicator / Index of sustainable economic welfare / Ecological

footprint/ Happy planet index / EU set of sustainable development indicators

The Ecological Footprint is a measure of how much biologically productive land and water an
individual, population or activity requires to produce all the resources it consumes and to
absorb the corresponding waste, all using prevailing technology and resource management
practices.

Marks the date when humanity has exhausted nature’s budget for the entire year. Earth
Overshoot Day 2019 fell on July 29. For the rest of the year, we are maintaining our ecological
deficit by drawing down local resource stocks and accumulating carbon dioxide in the
atmosphere.

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  Well-being indicators

Are used to broadly illustrate people’s general satisfaction with life or give a more nuanced
picture of well-being in relation to their jobs, family life, health conditions, and standards of
living.

3.1.5 Accounting for natural capital on a business level

3.1.5.1 The global reporting initiative

GRI is an independent international organization that has pioneered sustainability reporting

since 1997. GRI helps businesses and governments worldwide understand and communicate
their impact on critical sustainability issues such as climate change, human rights, governance
and social well-being.

3.1.5.2 Sustainability reporting

It is published by a company or organization about the economic, environmental and social

impacts caused by its everyday activities.

A sustainability report also presents the organization's values and governance model, and
demonstrates the link between its strategy and its commitment to a sustainable global economy.

It helps organizations to measure, understand and communicate their economic, environmental,

social and governance performance, and then set goals, and manage change more effectively.

A sustainability report is the key platform for communicating sustainability performance and
impacts – whether positive or negative.

3.1.5.3 Different types of reports

Major providers of sustainability reporting guidance include:

- GRI (GRI's Sustainability Reporting Standards)

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 - The Organisation for Economic Co-operation and Development (OECD Guidelines for
Multinational Enterprises)
- The United Nations Global Compact (the Communication on Progress)
- The International Organization for Standardization (ISO 26000, International Standard
for social responsibility)

Addison et al. assessed the top 100 of the 2016 Fortune 500 Global companies’ (the Fortune
100) sustainability reports to gauge the current state of corporate biodiversity accountability.
Almost half (49) of the Fortune 100 mentioned biodiversity in reports, and 31 made clear
biodiversity commitments, of which only 5 were specific, measureable, and time bound:
Walmart, Hewlett Packard, AXA, Nestle, and Carrefour.

A variety of biodiversity-related activities were disclosed (e.g., managing impacts, restoring

biodiversity, and investing in biodiversity), but only 9 companies provided quantitative
indicators to verify the magnitude of their activities (e.g., area of habitat restored).
No companies reported quantitative biodiversity outcomes, making it difficult to determine
whether business actions were of sufficient magnitude to address impacts and were achieving
positive outcomes for nature.

Quantitative indicators:
Habitats protected or restored: Hitachi reported the number of ecosystem preservation
activities implemented.
The proportion of commodities that have been sustainably sourced: Carrefour reported on the
percentage increase in sales of certified seafood.
The avoidance of protected areas: Glencore reported on their operations that are located in,
adjacent to, or that contain protected areas

Commitments:
The only specific, measurable, and time-bound biodiversity commitment made was Walmart’s
commitment: “To conserve one acre of wildlife habitat for every acre of land occupied by
Walmart United States through 2015.”

Some high biodiversity risk sectors, like resource extraction (oil and gas, electricity, and mining)
and agriculture, have direct impacts on biodiversity and will require approaches that focus
business understanding of risks and impacts at site-level operations when developing
commitments, actions, and performance measures.

Other high biodiversity risk sectors, like food retailers, will require approaches that trace the
biodiversity impacts of commodities through sometimes long supply chains.
Finally, medium biodiversity risk sector companies, like finance and insurance firms, will
require approaches that can capture indirect biodiversity impacts (e.g., through financing third
parties and projects) to address biodiversity performance (e.g., through risk management).

No consistent approaches to reporting biodiversity information. Some businesses disclosed

information about the activities they undertake to address their impacts. However, few provided
details of the magnitude of these activities or quantified whether they are adequate to address
the scale of the negative impacts the business is having on biodiversity.

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The general failure to report on the magnitude of negative impacts versus beneficial activities
and their outcomes for biodiversity makes it enormously difficult for stakeholders and
shareholders to obtain a complete and transparent view of a company’s biodiversity
performance and at worst could be camouflaging unsustainable business practices.

3.2 Globalized trade and finance

3.2.1.1 Globalized trade

Globalization is a process of international economic integration.

Compared to the 80s, there is an increased trade, freer trade, faster and freer flow of capital and
information, and increased consolidation of market power (TNCs). The role of nation-states is
limited.
Global value chain changes, which makes it difficult for nations to have an impact on the firms.
The downside of freer trade is that transnationals companies that are quite large with a lot of
market power. TNCs have a lot of control, large part of market, which makes it difficult for
nations to impact them.

There are international trade agreements:

• The European Union: free movement of persons and goods.

• International loans from the World Bank: The World Bank provides low-interest loans,
zero to low-interest credits, and grants to developing countries. These support a wide
array of investments in such areas as education, health, public administration,
infrastructure, financial and private sector development, agriculture, and environmental
and natural resource management.
• Monetary policies by the IMF: freer flow of capital.
The International Monetary Fund (IMF) is an organization of 189 countries, working to
foster global monetary cooperation, secure financial stability, facilitate international
trade, promote high employment and sustainable economic growth, and reduce poverty
around the world.

The world’s economies are interdependent.

If china put a ban on plastic, it will also impact our economies because we don’t know where to
send our waste.

How market power is concentrated:

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The neoclassical model: strong support for free trade

Ethics: free and open competition will allocate resources efficiently to their most highly valued
uses and distribute those resources in ways that will produce the greatest good to the greatest
number of people (=the market argument, utility related paradigm). The pursuit of profit
through efficiencies will lead to specialization through the comparative advantage that different
countries and regions enjoy.

 Economic growth is thought to be the most effective way to improve the well-being of
impoverished people in the world. The benefits of the economic growth will trickle down to the
poorest.
 Economic integration is a major impediment to conflict

Critics:

Although freer trade and freer markets have decreased the number of people living in extreme
poverty, it does not mean that economic growth is the most rational path to sustainable
development/best approach.

- Economic growth: apparent success in China and India / no success in Africa (Ethiopia
was considered successful, but these countries are still very vulnerable)  because of
political and social stability, geographical factors, and conditions of local environments
- Market based paths to development cannot be generalized
- A justice challenge
- Race to the bottom

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Development must be guided by an active and conscious awareness of environmental and
ethical factors.

3.2.1.2 A justice challenge

Utilitarian justice: the goal is the overall, collective welfare of a society. Poverty is decreased
when overall GDP and per capita income increase.

 doesn’t consider any distributive question (who is winning or losing land for example).
 The challenge is that overall benefits should not be sought at the expense of individual rights
(equality, fairness, liberty).

Case of exporting toxic waste:

 Utilitarian justice: this is fair
 Most other theories of justice: this is unfair and unjust

Seek overall benefits without harming individual rights. Example: export of waste: European
waste (mainly plastic waste) was transported to China, and within that utilitarian justice
perspective, that would be considered as fair because in China they can process that waste more
efficiently than we do. But in Africa it would be unfair to transfer our problem to other parts of
the world.

3.2.1.3 Race to the bottom

There is an economic incentive to send socially undesirable jobs, practices, wastes to the poorest
countries and regions. These countries have little alternatives but to accept these imports. These
countries enjoy their comparative advantage because they do not impose costly regulations
(barrier to trade, impede economic growth). An incentive is created to lower standards.

A sustainable approach:
There are harmful and ethical consequences that are market failures on an international level 
Governmental regulation is needed. They don’t see it as competitive advantage, they see it as
harmful consequence. Example: ban on plastic in China

3.2.1.4 The role of TNCs

In the face of insufficient environmental agreements and regulations, dominance poses a threat
to sustainability. For instance, companies that are able to set barriers to entry in a sector can
stifle sustainable practices and technological innovation in general.

TNCs impose low prices on suppliers, which reduces suppliers’ capacity to diversify and can
force them into monocultural practices (particularly in the agricultural sector). TNCs often lobby
regulators to weaken environmental and social standards to the benefit of their own businesses.
There exists skepticism towards businesses as sustainability leaders given two decades of
relative ineffectiveness of voluntary corporate social responsibility. They are the ones that cost
environmental damage, why should we now trust them in CSR?

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Market concentration and corporate power are often regarded as roadblocks limiting social
progress given the business priority of economic profit over nonmarket values. Concerns have
also been raised about viewing business as the solution to the problems they themselves took
part in creating.

Reasons to be more positive towards TNC:

Toward corporate biosphere stewardship: use their power to make their value chain more
sustainable:

Alignment of vision. Mindsets and values across society are now changing, recognizing that
global environmental change concerns the viability of humanity’s own future. There is mounting
evidence that new norms are emerging among some of the largest brands and corporate
initiatives are achieving reductions of greenhouse gas emissions. Companies are becoming more
and more aware

Mainstreaming sustainability. Society needs guiding frameworks to define a problem space,

within which innovation can flourish to find sound solutions. Global political agreements like the
Sustainable Development Goals (SDGs) or the Convention on Biological Diversity are examples
of normative frameworks that are defined by science but can be magnified by engaging with
corporations. In 2017, four in ten of the world’s largest companies engaged with the SDGs in
their corporate reporting; in a sample from 2018, more than 70% of some 730 global companies
mentioned the SDGs and 27% included them in their business strategy.

License to operate. Transformative change towards biosphere stewardship can be facilitated

by clarifications of a corporate global license to operate in a democratic, ethical and sustainable
manner. Governments increasingly mobilize to regulate TNCs in this direction.
For example, the United Kingdom’s Modern Slavery Act requires companies to disclose
measures adopted to address slavery and human trafficking. The French Corporate Duty of
Vigilance Law (adopted in 2017) created a legal requirement for large companies to identify and
prevent abuses on human rights and the environment related to their activities and those of
their subsidiaries, subcontractors and suppliers applied to entire global supply chains.

Financing transformations. Sustainability concerns are gaining attention from the financial
sector. Major pension funds and other institutional investors are starting to redirect capital
away from unsustainable practices and towards biosphere stewardship.

Radical transparency. Novel technologies are dramatically enhancing transparency within and
among TNCs, as well as throughout supply chains that are central to the operation of TNCs.
Digitalization of our economy allow firms to be more transparent about their practices and
investigate the impact they might have.
For example, open access database platforms with information on all fishing vessels carrying an
Automatic Identification System (AIS), along with smart algorithms to identify vessel behaviour,
have radically improved global monitoring of fisheries. Similarly, complex global trade flows are
becoming increasingly traceable and transparent thanks to novel technologies

3.2.1.5 Finance: the conventional model

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In theory:
Huge loans to governments that are targeted for large infrastructure projects and industrial
development that create the conditions for economic growth. Through these infrastructure
projects, jobs and other benefits will trickle down to the country’s poorest citizens.

In practice:
Large foreign debts for the world’s poorest countries. To repay these debts, countries need to
acquire hard currencies.
- This in turn requires economies to focus on export (raw material, consumer goods).
- The goods and services needed by the poor are produced secondarily, so these plants
that are constructed with these loans, are operating to export their goods and not for the
local markets.
- Centralization of industry and jobs (migration to cities: not enough jobs available and
fewer opportunities for self-efficiency)
- Little financial aid reaches the poorest people

3.2.1.6 World bank and IMF: criticism

Democratic governance
- Structural underrepresentation of the global South
- Undermining democratic ownership, meaning that if the IMF and world bank impose
liberalization and privatization, democracy is on their mind. The government cannot
decide what kind of policy they can have in their own country.
- Effective impunity from harms caused to local people. That harm is not acknowledged
and not resolved.

Human rights
- Local people don’t really have a voice
- Restricting the macroeconomic environment for human rights
- Causing major harms through development projects
- Lacking evidence for positive impacts...
- ...while not measuring harmful impacts

Environment
- Growth based model (unsustainable)
- Continued fossil fuel investment
- Focus on mega-projects
- No protection of vital ecosystem services

Examples:

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68
3.2.1.7 Finance: microcredits

Alternative: give loans of microcredits to local people. It extends loans at low interest rates to
people for self-employment and entrepreneurial projects. It is directed to poor people
themselves. It increases self-sufficiency  it is bottom-up approach instead of top-down.
Microcredit institutions: e.g. Grameen Bank of Bangladesh.

Basic idea: by giving a very small loan to someone living in a poor country, you could help them
expand a small business, develop their own business, which would lift their family out of
poverty. When they pay back the loan, the money can be cycled to more borrowers, getting more
families out of poverty.

Criticism:
- Appropriate interest rate?
- Poverty reduction?
- Harming people

But still, microcredits are important in the lives of the poor:

- Gives the poor a greater number of options in how to navigate their financial lives
- Use of microcredit for day-to-day needs

4 Ecological Economics and corporate environmental responsibility

Goal = long-term sustainability

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Profits are a prerequisite for business, not a purpose. Business has an ethical responsibility, even
when it is not required by law and not demanded by consumers. Business should not be
prohibited to cause harm but should be obliged to prevent harm / obliged to do good. Business
should be guided by this ethical responsibility. Business managers are capable of taking positive
actions. They should pursue those actions that meet the needs of present customers without
jeopardizing the ability of future customers to meet their needs.

5 Example of exam question

The koala bear population in Australia is falling rapidly, leaving them currently considered
vulnerable in Queensland and Southern Wales. This is primarily due to loss of their natural
habitat, and source of food, which consists mainly of eucalyptus trees. The koala’s natural
habitat has been destroyed and cleared, largely by private landowners, on whose land most of
their habitat lies, assumingly for the landowners’ “economic” benefit. Koala tourism is an
approximately $1.1 billion industry and contributes upwards of 9000 jobs to Australian
economy. The eucalyptus trees, which compose the koala’s habitat, have been noted and studied
for their resilience and ability to remove and store large amounts of CO2 from the environment.

- How would an ecological economist manage this conflict for land? In your answer, use
the terms: natural capital and sustainable scale.
- How is this approach different from a neo-classical approach? In your answer, use the
terms: “full world” and “empty world”.

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 CHAPTER 6: THE BUSINESS CASE FOR SUSTAINABILITY

1 Introduction

Sustainability and business is not a zero sum game. Both can co-exist. There are plenty of ways
to pursuit profitability:
- You can decide whether operations will be environmentally sensible or whether you will
operate your business in a more environmentally risky way.
- Regulation and compliance model is not always preferred: the reason is that business
know themselves best, they have most knowledge on how to change their business in a
more sustainable way.

Ethical responsibilities are in the self-interest of business: stable businesses are needed to deal
with the world’s challenges.

Businesses need to make profit and be environmentally responsible.

2 The business case for sustainability

Why do we need sustainable enterprises? There is an increasing social demand for goods and
services, and there is pressure on the biosphere.
Businesses can play a crucial role in creating a more sustainable future, because they can use
biological processes as basis. By using those, this enables the process to generate themselves,
become more circular and to improve efficiency.

Skepticism:
Sustainability co-opted by business (greenwashing). Business can be accused of green washing.
Could we judge whether we want a particular type of business? These are choices that we can
make that we can have control over.
Not every business should survive into a sustainable future.  What will business become in the
future? How can a business become sustainable?

Self-interest will always conflict with moral considerations: if businesses will always produce,
self-interest comes first. To tackle that criticism, doing the right thing is also doing what is in the
best self-interest of a business.

2.1 Green washing

Examples of green washing:

- Commercial on VW, diesel
- Certificates but when you look deeper on these, there is not really a good organization
behind these. They are not well monitored. They are not good certificates.
- Thermostat, when consumers check it and found at that they can live up to that claim.
- Decomposable coffee but it turns out that it is compostable only by industrial plant. You
cannot throw it away in your backyard.

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Examples to detect greenwashing:
- Companies that don’t give any proof, that don’t quantify
- Green products vs. dirty company
- Irrelevant claims
- Use a fluffy language, don’t make it specific
- Outright lies
- Imaginary friends (like certificates -> we are certified, but they are not good certificates)
- Best-in-class
- Designations that are just not credible
- Presenting suggestive pictures: having green tires on a race car is a suggestive picture.

2.2 An activist company: Patagonia

Patagonia itself acknowledges that the company has negative impacts. Every product will have
an impact.

Patagonia thoroughly investigates its impacts. How do employees feel in our stores? Do they
have health issues? Those health issues had to do with how the clothing was processed;
Patagonia has been seeking in the problems in health issues and tried to do something about it.

Patagonia doesn’t only invest in natural capital but also human capital. They try to calculate the
exact impact they have. Employees can take some time off to devote time and muscles to use that
effort to more social purposes.

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Patagonia is also a company that doesn’t always stimulate consumption. On Black Friday, they
made an advertisement with clothes saying “don’t buy this jacket”.

2.3 Reasons to move to sustainability

In huge market, billions of people are in need, they face unmet needs on a daily basis, they are
in poverty, environmental damages that should be avoided. We need these economic activities to
meet, to solve challenges that we are facing. We need to be environmentally sustainable to
survive.

Cost savings: If you use less energy, it results in cost savings and efficiency increases.

Competitive advantage: Target green market, consumers who want to buy environmentally
friendly products. Target labor market: Anticipate governmental regulations. If companies know
that the use of plastic will be banned, businesses will change their production process now,
knowing it will be banned.

Avoid future legal liability to prevent problems. Managing their risks, and extended producer
responsibility.

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2.4 Extended producer responsibility

This was developed by Thomas Lindqvist (Sweden, 1990).

EPR = a strategy that makes the producer responsible for the entire life cycle of a product with
special attention to take-back, recycling and final processing. It is a policy tool.

EU Legislation:
- The EU Directive on waste (or ‘Waste Framework Directive’)
- The Packaging and Packaging Waste Directive (PPWD)

2.4.1 EPR in Flanders: policy instruments

• Obligation to accept
The producer is obliged to accept the discarded products offered to him by the consumer free of
charge. In practice, this take-back often takes place via the end-sellers (distribution), the
recycling parks and / or other collection points.

• Obligation to take back

The take-back obligation makes the industry responsible for the collection and processing of
packaging waste. Producers have to pay for that.

• Collective plan
The obligation to draw up a collective plan always applies to all producers and importers who
place a certain product on the market. Those producers should draw up a common plan defining
how to implement the specific objectives that the legislation imposes on them in terms of waste
management.

2.4.2 EPR: criticism

Collection and recycling targets: Static collection targets of implemented EPR systems do not
fully internalize external costs of waste management and reduce the incentives for waste
prevention and green product design.

3 Models for sustainability

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3.1 Natural capital

There are 4 guiding principles:

3.1.1 The productivity of NR must increase: eco-efficiency

3.1.1.1 Increase productivity of NC

Radically increase the productivity of natural resources through radical changes to design,
production and technology, natural resources can be made to last much longer than they
currently do.

The resulting savings in cost, capital investment and time will help to implement the other
principles.

3.1.1.2 Eco-efficiency

Eco-efficiency is a more general expression of the concept of resource efficiency – minimizing

the resources used in producing a unit of output – and resource productivity – the efficiency of
economic activities in generating added value from the use of resources.

Fewer use of resources results in a decrease in energy demand. If you need less fuel, the energy
demand will decrease.  The Jevon’s Paradox

Is eco-efficiency ideal? As long as human beings are regarded as “bad”, zero is a good goal. But to
be less bad is to accept things as they are, to believe that poorly designed, dishonorable,
destructive systems are the best humans can do. This is the ultimate failure of the “be less bad”
approach: a failure of the imagination. Doing less bad doesn’t automatically means that you’re
doing good.

3.1.1.3 The Jevons’ paradox

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Is energy efficiency working? Conventional wisdom:

Energy efficiency 

Energy efficiency increases, the demand for fossil fuels decreases which creates CO2 emissions.

A factor is not taken into consideration: the “rebound effect”. This makes the potential energy
savings produced by an energy efficiency improvement not to become (totally or partially)
effective.
“Backfire” happens when the efficiency improvement paradoxically leads to an increase of the
energy consumption  Jevons’ Paradox

“...It’s wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a
diminished consumption. The very contrary is the truth...every improvement of the engine when
effected will only accelerate anew the consumption of coal...”

There are two rebound effects: direct and indirect.

• Direct: energy efficiency increases, you save cost on energy bill but because of these cost
savings, you will use more energy. Cost reduces, energy cheaper, less motivated to turn
off the light, you will use more energy.
• Indirect: cost savings but you will not consume more energy. You will use those cost
savings to consume other products. However, those products could have another
environmental impact.

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3.1.1.4 Example of company using rebound effect

Kering

• Since 2012: measures and monitors impact using the Environmental Profit & Loss
(EP&L) account.
• integrates findings into day-to-day operational decisions and strategy overall
• informs product design, sourcing decisions, manufacturing research and development.
• Continues to enhance EP&L coverage and scope of supply chain due to improved data
collections and analysis methods.
• is a 360°approach within its own operations and throughout the supply chain

They look into the full value chain and impact they have on different environmental categories.

The EP&L intensity has decreased but revenues have increased. Although the eco-efficiency
improved (impact per product decrease) there is a large increase in sales.

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3.1.2 Biomimicry/closed-loop designs

It aims to eliminate waste by transforming it into biologically beneficial elements.

Challenges of business design:
Shift to biologically inspired production models and materials - Natural capitalism seeks to
eliminate the concept of waste by modelling closed-loop production systems on nature’s designs

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where every output is either returned harmlessly to the ecosystem as a nutrient or becomes an
input for another manufacturing process.
Closed loop = waste is used again as an input. Mimic biological processes.

Examples:

• Shinkansen Bullet Train

The Shinkansen Bullet Train was the fastest train in the world, traveling 200 miles per hour. The
problem? Noise. Air pressure changes produced large thunder claps every time the train
emerged from a tunnel, causing residents one-quarter a mile away to complain.

Eiji Nakatsu, the Shinkansen 500 train’s chief engineer and an avid bird-watcher, asked himself,
“is there something in the nature that travels quickly and smoothly between two very different
mediums?” modeling the front-end of the train after the beak of kingfishers, which dive from the
air into bodies of water with very little splash to catch fish, resulted not only in a quitter train,
but 15% less electricity use even while the train travels 10% faster.

• Eastgate Building

We generally think of termites as destroying buildings, not helping design them. But the Eastgate
Building, an office complex in Harare, Zimbabwe, has an internal climate control system
originally inspired by the structure of termite more about the relationship between mound
structure and internal temperature, and could influence additional building designs as our
understanding grows.

The operations of buildings represent 40% of all the energy used by humanity, so learning to
design them to be more sustainable is vitally important. Architect Mick Pearce collaborated with
engineers at Arup Associates to design Eastgate, which uses 90% less energy for ventilation than
conventional buildings its size and has already saved the building owners over $3.5 million in air
conditioning costs.

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3.1.3 From products to services

Move from producing products to deliver services. Move to a “service-and-flow” business model.
Providing value as a continuous flow of services rather than the traditional sale-of-goods model
aligns the interests of providers and customers in a way that rewards resource productivity.

You align your interest with the interest of customers. It will also increase resources
productivity.

Services: lightning, entertainment, movements

The performance economy: a business model in which manufacturers retain control over
products throughout their life cycles and handle their maintenance and recovery. The customer
doesn’t own the product. You pay to use the product, but the manufacturer remains the owner.
Manufacturers benefit by establishing a steady stream of revenue related to a single product and
potentially keeping them in circulation longer, which saves on energy, materials and other
resources associated with the manufacturing process. Customers benefit because they only pay
for what they need. The owner has to make sure that the product lasts as long as possible.

Product redesign:
- To rethink how a "thing" is used over its lifetime
- More durable
- More easily recyclable

Examples: Philips sell light as a service, Cambio car sharing

3.1.4 To reinvest in natural capital

NC becomes the limiting factor:

• Seeking substitutes for nonrenewable resources
• Integrate biological processes

Reinvest in natural capital: As human needs expand and pressures on natural capital mount, the
need to restore and regenerate natural resources increases.

3.1.4.1 The bio-economy

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Opportunities and challenges of the bio-economy:

Economy
 Creation of jobs
 Creation of new businesses: agriculture (trees are grown to be used not only for energy
but also for the production of chemicals), marine sector, in industry
 Significant investments are needed to transform existing production processes

Socio-economic
 Changes in the price of food, land, commodities
 Changes in farmer’s revenues

Resource use
 Renewable but it remains a finite resource whose availability is limited primarily by the
amount of available land and water. You cannot grow more biomass than there is.
 Cascading use of biomass (optimized use). A variety of products could be produced in
integrated units, for instance integrated biorefineries producing fuels, chemicals,
plastics, heat and electricity
 Competition for land and water: food vs fuel

Climate, environment and human health

 Reduction in GHG
 Negative environmental impacts (deforestation, biodiversity loss, water quality)

3.2 Industrial ecology

It is the study of material and energy flows through industrial systems. Focusing on connections
between operators within the ‘industrial ecosystem’, this approach aims at creating closed-loop
processes in which waste serves as an input, thus eliminating the notion of an undesirable by-
product.

Industrial ecology adopts a systemic point of view, designing production processes in

accordance with local ecological constraints whilst looking at their global impact from the
outset, and attempting to shape them so they perform as close to living systems as possible.

Rejection of linear manufacturing processes  should move on to a circular pattern of industrial

production

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3.2.1.1 The circular economy

Ecovative offer an alternative to expanded polystyrene packaging. Their home compostable

solution offers the same protective capabilities as EPS and is able to compete on cost.
Mushrooms are used to replace polystyrene. It is a waste product that is not easy to recycle.
Huge amount of this type of waste and we have large volumes of this type of waste circulating. A
company replaced it based on mushrooms.

Ecovative produce packaging products that are fully compostable alternatives to synthetic
materials. They are made of mycelium – the “roots” of mushrooms – grown in and around
agricultural by-products with low economic value, acting thereby as a glue, and can take any
shape needed. At the end of use, the packaging can be composted at home.

3.2.1.2 Eco-industrial parks

An eco-industrial park involves a network of firms and organizations, working together to

improve their environmental and economic performance. Some planners and researchers of
EIPs have used the team "industrial ecosystem" to describe the type of symbiotic relationships
that develop amongst participating firms.

Eco-industrial park: examples

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Wissington:
Picture showing how these different operations are connected

Better example is Kalundborg in Denmark:

Different firms are interlinked and calculate the economic impacts and environmental savings,
reduced emissions.

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Other element of circular economy: keep products and materials in use as long as possible. You
design the products in a modular way.

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Other example of circular economy: growing plants, remove nutrients from the soil. Wastewater
are recovered.

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4 Models for sustainable business

4.1 The natural step

A methodology for organizational planning. What do you face as a firm? There are less and less
resources available, resources are becoming more costly. But there is increasing societal
demand for resources.
 A funnel with two converging sloping lines

How can we use it when organizing our business? Take a forward approach:
- Projecting environmental trends (similar to price trends)
- Start with future visions and try to imagine your business. Then back-cast and identify
trends and steps needed to arrive at that destination.
- Individual transformations

ABCD process: aware that is narrowing because there is an increased demand but declining
resources. Also aware of the current reality, then you set yourself a clear vision for sustainability
and then you back cost the steps you need to take to reach that goal.

4.2 Cradle-to-cradle

(William Mc Donough and Michael Braungart)

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Focused on deigned failures: Not only on products but also on production processes. To
eliminate waste instead of reducing waste. Each product has a life cycle, typically: cradle to
grave.
Aim: cradle-to-cradle, waste from process 1 is input to process 2. You use the product after you
discard.

A design philosophy considering all material involved in industrial and commercial processes to
be nutrients, of which there are two main categories: technical and biological.

The Cradle-to-Cradle framework focuses on design for effectiveness in terms of products with
positive impact and reducing the negative impacts through efficiency.

Cradle to Cradle design perceives the safe and productive processes of nature’s ‘biological
metabolism’ as a model for developing a ‘technical metabolism’ flow of industrial materials.
Product components can be designed for continuous recovery and reutilisation as biological and
technical nutrients within these metabolisms.

Eliminate the concept of waste. “Waste equals food.” Design products and materials with life
cycles that are safe for human health and the environment and that can be reused perpetually
through biological and technical metabolisms. Create and participate in systems to collect and
recover the value of these materials following their use.

Power with renewable energy. “Use current solar income.” Maximize the use of renewable
energy.

Example:

Jules Clarysse Infinite Bath towels – Cradle to Cradle certified silver: The Jules Clarysse Infinity
bath towels are Europe’s first C2C-certified towels and one of the continent’s first 100%
compostable and biodegradable bath linens. The soft and absorbent towels are made from 100%
pure organic cotton and non-harmful dyes.

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Criticism on eco-efficiency
- 3R’s and eco-efficiency do not touch upon the bad design of products/processes
- Eco-efficiency is not a solution if what we make is itself harmful

Hopeful towards the future, properly designed products will,

- be composed of materials that are nontoxic and degradable into biological nutrients
- or can be completely recycled back into industry as technical nutrients

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4.3 Upcycling vs. downcycling

 Upcycling increases value

On the left, black polyester scraps from the end of a bolt of cloth.
On the right, brown scrap leather cut from the edge of a hide.

The excess is upcycled into a backpack that has more value than the original materials.

 Downcycling diminishes value

By contrast, downcycling occurs when waste material is converted into something of lesser
value. Instead of upcycling the polyester excess into a backpack, let’s melt it and downcycle it
into yarn.

This is considered downcycling because the yarn is of lesser value than the piece of cloth it came
from. Recycling plastics is often downcycling because the end product is a lesser-quality plastic.

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 CHAPTER 7: TECHNO-ECONOMIC ASSESSMENT (TEA)

1 What is Techno-Economic Assessment?

Questions to be answered
• How much does our process/product cost?
• What is the viability of a process/product to implement?
• What is the economic feasibility of our process/product?
• What are key factors influencing the economic feasibility of our process/product?
• Who is interested in our process/product?
• Who are other players (suppliers, customers) in the market?
• What is the minimum price that we should ask for our process/product?

Techno-Economic Assessment combines technical process modeling and economic evaluation.

Goal: Analyzing the impact of changes in technical and economic parameters on the financial
viability of a new process/product.

How economy and technology are combined:

TEA is a relatively new methodology. They chose the word “assessment” instead of “analysis”
because “assessment” refers to evolution, while “analysis” is rather understanding different
parts. We prefer “assessment” in order to really evaluate.

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2 How it the TEA performed?

You start with a market study, then you define the process flow, then economic analysis (where
we calculate NPV, evaluate the economic feasibility) and then you do the uncertainty analysis (if
we change certain parameters, what are the impacts).

Full value chain is also important.

2.1 TRL = Technology Readiness Level

Barometer:

Each step up, technology is improved. As a certain point, the product is ready for the market.

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2.2 Why starting with a TEA from the very beginning? (low TRL)

• Stepwise approach with increasing level of detail;

• Helps to identify parameters that do matter;
• Helps to define the broader context (market).

Stage-gates = ‘Go/No-Go’- decisions

At the very beginning, the NPV will be negative. But it’s not because it is negative that you have
to stop the process.

The more the technology is matured, there will be an increasing level of detail. Looking for the
right data costs time and money. Therefore, choose wisely on which parameters you need a high
level of detail.

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2.3 Advantages of TEA

• Helps to ask the right questions

• Helps to select the right tests/needed information
• Helps to steer research to a commercial process
• Helps to make the right decisions
• Looks at processes from different angles
• Stimulates cooperation between researchers.

2.4 Pitfalls

It is wrong to think that it is a monodisciplinary method.

You start performing when it is only just research.
Dynamic, you always update a TEA with research, output,…

3 TEA-approach

You just talk with researchers to understand how the process looks like, how does it work, what
questions we as a firm want to have answers.

Then you start with the first preliminary model. Basic structure, very often it is just “these are
inputs, these are outputs, these are elements of the process”.

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Then you discuss with managers, R&D people. You, as a manager, have to understand the
processes, technicalities. But the researchers can check the model with you.

3.1 4 steps

3.1.1 Market study

3.1.1.1 Business model Canvas

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In a market study, you can create a business model canvas. You give your value proposition, you
want to know the customers, the suppliers, how much are they willing to pay, what kind of
relationships do you have with them, what channels do you use to reach your customers? You
also need to determine the key activities that are needed to be done. Who will be my suppliers in
my value chain, how much does it cost to produce certain products?

3.1.1.2 Value proposition design

Take a viewpoint of your customers. It is very customer focused.

3.1.1.3 Case: Algal-based biorefinery

Production of fertilizers.

Example: 2 types of species

To understand the techno economic feasibility of these production process.

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Compared 3 alternatives:

- A basic scenario
- Intermediate scenario
- Advanced scenario: pond are replaced by photo bio reactor. Water and salt are recycled.
It takes less space and consumers consume less water and salt.
- Alternative scenario: other type effect of fertilizer is produced.

Market study: example

β-carotene: Provitamine A, Anti-oxidant

• Applications: Food supplement, Feed pigment

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 • Current producers: India, China, Israel, Australia, 70-80% synthetic
• Product price: ~€500/kg (synthetic), €1000/kg (natural)
• Legal aspects: Approved for human consumption in Europe (E160a)
• Market size: ~€ 250 M/year, Dunaliella salina:1200 tonnes/year, Compound annual
growth rate: ~1.8% - ~3.1%

Astaxanthin: Anti-oxidant
• Applications: Food supplement, Feed pigment
• Current producers: USA, India, Israel, Sweden, 95% synthetic
• Product price: ~€ 2000/kg (synthetic), ~€ 7000/kg (natural)
• Legal aspects: Approved in Europe as a food additive (E161j)
• Market size: ~€ 200 M/year, Haematococcus pluvialis: 300 tonnes/year

Fertilizer: product price: ~€ 0,390/kg

3.1.2 Technical

You make a scheme of all the different components of your process. You see the different inputs.

3.1.2.1 Process flow diagram: how to?

The development of a design project proceeds in a logical, organized sequence requiring more
and more time, effort and expenditures as one phase leads into the next!
Include all major processing operation units, all necessary auxiliary equipment such as pumps
and compressors and all material and energy streams.

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Preliminary process synthesis begins with creating flowsheets involving just:
- Reaction
- Separation
- Temperature
- Pressure
- Process equipment

You have inputs to the process, then you define the byproduct and the product, and you define
where are the emissions and where are certain waste streams.

Example:
(Not that important)

• Basic scenario

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 • Intermediate scenario:

• Advanced scenario:

Ponds will be removed and replaced by a photo bio reactor.

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 • Alternative scneraio: New type of energy:

3.1.2.2 Mass and energy balance: how to?

Putting numbers on the process flow diagram.

• One of the fundamental laws of physics states that mass can neither be produced nor
destroyed, i.e. mass is conserved.
• Equally fundamental is the law of conservation of energy. Although energy can change in
form, it cannot be created or destroyed.
• Amount that comes into should = amount that comes out. Want to know how much is
wasted and how much is produced.

Example:

Much more water is needed in basic than all the others.

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Process simulation (software): to help you build that flow diagram:

• Model steady-state chemical processes within your TEA  some commercial process
simulation tools are available (ASPEN Plus or CHEMCAD)
• Information on mass/energy flows can be available in existing literature at the level of
detail required for your study
• Simplify and focus

3.1.3 Economic

Economic calculations are directly coupled with technical calculations!

 Change in technical parameter is translated into economic impact.

Standard calculations:
• PBP (payback period) and DPBP (discounted payback period)
• NPV
• IRR
But, other calculations can be performed as well. E.g. €/permeate

Net cash flow in year t = CFt =Rt –Ct

With: Rt = incoming cashflow in year t and Ct = outgoing cashflow in year t

You look at the annual costs and annual revenues.

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If it’s positive, the investment can start to be paid back.

3.1.3.1 Payback period

Payback period: I0 / CF
 100/5 = 20 years

3.1.3.2 Net present value

Net present value (NPV) =

T = project life time

CF = cash flow in every year (revenues – costs)
I0 = investment in year 0
r = discount rate

When the NPV > 0, the project is acceptable.

What is challenging: selection of appropriate discount rate (r):

Private analysis (company level)

• Weighted average cost of capital (WACC)
o Savings/loans : 0-5%
o Own capital (share holder value): 9-15%
• Sector dependent
• The higher the discount rate, the lower the actual value

Societal analysis:
• Considers future generations and the environmental impact

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 • Societal discount rate, which often lower than private discount rate. Private is more in
the range of 9 to 15%
• European union: 4 %

Example:

The government invest in an environmental project with a cost of 1 million euro. The project
generates positive externalities for 5 years. The annual environmental benefit equals 0.5 million
Euro. The selected discount rate is 3%. Should this investment take place?

= 1.289.853

3.1.3.3 IRR

IRR = discount rate for which NPV = 0

For conventional investment:
1. Calculate IRR
2. Compare IRR with desired rate of return (= cut-off rate).
If > project acceptance

IRR = highest interest rate that investor can pay, without losing money, if all funds for financing
are lend and the loan would be paid back directly with incoming cash flows.

Example of IRR:

It is possible that the IRR is negative: rate at which you are losing money

It is possible that the IRR does not exist or that more IRR exist  NPV is preferred

Other disadvantages of IRR:

- No variable discount rate possible
- IRR does not consider scale

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The question that has to be answered, determines the data that is needed.
Some examples:
• What should the minimum price of the product be, in order to compensate the costs of
the process? (i.e. how much does the production process costs?)
• How much operating costs have to be saved, in order to compensate the higher
production cost?
• How much money can be saved for a company if they will be using our technology?
• What should the minimum price of the product be, in order to compensate the costs of
the process?
o Total investment cost
o Operational cost (e.g. personnel, maintenance, energy, inputs,...)
o Revenue needed? (e.g. X EUR/g)
o Additional investment cost
o Operational cost in comparison to current situation
o Revenue in comparison to current situation
o All information needed from the company! (probably not 1ste stage calculation)

Where do we put our boundaries for the analysis?

3.1.4 Capital cost estimation

Capital cost estimation:

• Adjustment for changes in capacity
• Adjustment for changes in time

Estimate the costs to have an idea, based on the limited information, on previous cost data.

• Class 5 – Order of magnitude [-20-50%;+30+100%]

 very limited information, previous cost data
• Class 4 – Study estimate [-10-30%;+20+30%]
 knowledge of the major equipment needed

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 • Class 3 – Preliminary estimate [-10-20%;+10+30%]
 prepared for budget authorization (most process data are defined and preliminary
engineering)
• Class 2 – Definitive estimate [-5-15%; +5+20%]
 almost complete data but before completion of engineering drawing and specs
• Class 1 – Detailed estimate [-3-10%;+3+15%]
 drawings and specs complete

Detailed item estimates

 requires list of specific equipment, materials, ...
 difficult in early stages of process or product development

Percentage of delivered equipment cost

 Lang factors

Capacity factored estimates

 Six tenth rule

Parametric cost estimation

 meta-analysis: C = aQx+bTy+cLz (with Q = quantity, T = technology, L = location)

Example of how a lang factor should be used:

Implementing a new process doesn’t only require additional equipment, it can also require new
buildings,… You can thus add certain percentages.
Lang factors: percentage of delivered equipment cost.

3.1.4.1 Six tenth rule

Where:
CB = approximate cost of equipment with size SB
CA = approximate cost of equipment with size SA

N component: can vary between 0.3 and 0.8. Often used is 0.6.

Example:
A new plant will be built with an area of 50 m2. We know that the cost for a plant of 100 m 2 is
€92,000. What would the cost be of the new plant applying the sixth tenth rule?

92 000 * (50/100)^0.6
= 60 697.36

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3.1.4.2 CEPCI

M&S (Marshall and Swift process Industry Index)

CEPCI (Chemical Engineering Plant Cost Index)
• Introduced in 1963 and published in every issue of CE.
• 1957-1959 = 100
• Construction costs for chemical plants

CEPCI – Example:
The cost of a pump in 2010 was €10,000. What would the cost be of the new plant (in 2013)?

Six tenth rule + CEPCI: Example

A new plant will be built with an area of 50 m 2. We found a cost of € 92,000 for a plant of 100 m 2
that was built in 2010. What would the cost be of the new (2013) plant?

= 62 516

First apply the index (correction of time), then you make the scale correction

3.1.5 Economic analysis: Algae Example

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3.1.6 Risk analysis

Scenario-analysis

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 • Worst case scenario: Most pessimistic value for each uncertain variable
• Base case scenario: Most probable value for each uncertain variable
• Best case scenario: Most optimistic value for each uncertain variable

If the NPV> 0 in the worst-case scenario  invest!

Alternative scenarios (e.g. Climate change): business as usual (BAU), ...

Uncertainty on data used  Sensitivity analysis

Which parameters have the highest influence on the economic viability?

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 CHAPTER 8: DECISION MAKING UNDER UNCERTAINTY

1 Decision quality

A decision is not an outcome. The quality of a decision cannot be judged by looking at the
outcome. It must be judged at the moment of the decision

 A decision is an irreversible allocation of resources

 A good decision is a logical decision, one based the uncertainties, values, and preferences of
the decision maker
 A good outcome is one that is profitable or highly valued

2 Evaluation tools

- NPV analysis
- Sensitivity analysis
- Real options analysis
- Decision tree analysis

3 The decision to invest under uncertainty

- NPV analysis
- Sensitivity analysis

3.1 The traditional NPV approach

NPV analysis

Shortcomings:
• NPV is a static approach: now or never
• Deals with uncertainty by means of a sensitivity analysis: “there is a 50% probability of a
positive NPV”
• Does not integrate flexibility

3.2 Sensitivity analysis

Monte Carlo sensitivity analysis

1. Identification of uncertain parameter values

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 2. Probability distribution for each parameter
3. 10 000 (or more) iterations where parameter value is selected and NPV recalculated
4. Probability distribution for the NPV

NPV < 0 (no go) or NPV > 0 (go)

Sensitivity analysis: probability that NPV > 0

3.3 Real options approach

- Irreversible: once the investment is made, you cannot come back

- Uncertainty about impact and consequences, uncertain about costs, about revenues
- Flexibility: different from NPV approach. Firms can be flexible and can wait to an optimal
timing to make the investment. Also, flexibility to abandon your project. Flexibility to
switch input products, output products, to scale up, scale down.

3.4 Decision tree analysis: the value of learning

A two-period case: decision tree

• Irreversible decision
• Uncertain outcome
• You learn about the outcome
• You know the time at which you have learned about the outcome (≠ real options)

To develop or conserve a natural area

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Value of development in period 1?

Expected outcome:
Rdev= Rdev1 + E(Rdev2)
Rdev= 100 + 0/4*(-400) + 0.6*(300)
Rdev = 100 + 20 = 120

Value of conservation in period 1

Rcons = Rcons1 + max[Rcons2, E(Rdev2)]

Rcons = 0 + max [0,20] = 20

Based on this decision rule, the area will be developed in the first period if the value of
development is larger than the value of conservation.

Rdev= Rdev1 + E(Rdev2) > Rcons = Rcons1 + max[Rcons2, E(Rdev2)] ?

Rdev =100+20 = 120

Rcons = 0 + max[0, 20] = 20

 Decision = develop

Assume that at present the decision maker knows that at the end of period 1, information about
the outcome in period 2 will become available.
The fact that information will be revealed should be taken into account in the decision analysis.

At present, the decision makers knows:

• The value of period 1 (100% certain)
• The possible outcomes in period 2
• And the associated probabilities

At the end of Period 1, the decision maker knows:

• The outcome in period 2

 Value of development in period 1?

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Rdev = Rdev1 + E(Rdev2)
Rdev = 100 + 0.4*(-400) + 0.6*(300)
Rdev =100+20 = 120

Development is irreversible.

Value of conservation in period 1?

New decision rule

Only develop in period 1 if
Rdev = Rdev1 + E(Rdev2) > Rcons = Rcons1 + E{max[Rcons2, E(Rdev2)] }

Situation A: -400 < 0,  0 p(A) = 0.4

Situation B: 300 > 0,  300 p(B) = 0.6

New decision rule:

Rdev = 100+20 = 120
Rcons = 0 + 0.4*0 + 0.6*300 = 180
Rdev < Rcons  To postpone development

Quasi-option value
1st decision rule: develop if Rdev > €20
2nd decision rule: develop if Rdev> €180

The quasi-option value reflects the value of holding an option to invest open until more
information is revealed, given that the decision to develop is irreversible. How much is the
quasi-option value?

Quasi-option value = €160

= the value of postponing development,
= the value of waiting for new information to arrive.

If uncertainty can be resolved by additional information, then postponement of a development

(=precautionary) can improve the quality of the decision.

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3.5 Another case study example: geothermal energy development

Real options-like approach:

Technical uncertainty stimulates investment

Example: geothermal energy extraction

 a two-period case
 the time at which you have learned, is predefined.

3.5.1 Geothermal energy extraction

Multiple sources of uncertainty

• Market uncertainty: energy prices
• Geological uncertainty (= technical uncertainty)

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On s’est arrêté ici
Experts:
Independent, academic background, well acquainted with deep geology in BE, not directly
involved in the setting up of the methodology and processing of results.

Inquiry:
2 reservoirs targeted (Campine Basin and Mons basin)

The reservoir concept is described by the probability distributions for 10 parameters:

- the geotechnical failure of the reservoir,
- depth,
- total thickness,
- productive thickness,
- the geothermal gradient,
- transmissivity,
- flow rate,
- effective porosity,
- the distance between doublets and the wells.

Probability distributions of the estimated values for borehole depth, water flow and
temperature resulting from the expert questionnaires (for the Balmatt site).

Stage-gate-system
• Exploration phase
• Development phase
Geological uncertainty resolves

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Flexibility after learning:
• The option to abandon the project
• If development: choice in different types of geothermal development

NPV analysis + Monte Carlo simulation

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Value with learning + flexibility

(3) HT Heat 54.63% € 6,780,975

NPV < 0 19.55%
NPV > 0 35.08%

Value without learning and flexibility

(3) HT Heat 100% € -2,887,482  €779,896

NPV < 0 64.5%
NPV > 0 35.5%

4 Conclusion

How to deal with uncertainty?

• Economic analysis is not always needed
• Sensitivity analysis
• Decision tree analysis
• Real options analysis

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