ENRE Lecture 1, Part 1

Environmental Policy Objectives

• Efficiency (static and dynamic);

• Sustainability;
• Equity (fairness);
• Non-conflict with other objectives.
 Economy-Environment Interactions

Economic activity has a material basis.

It draws resources from the environment, and provides
flows back into the environment.
These flows must satisfy the laws of thermodynamics:
•First law: Conservation of mass/energy (materials
balance principle)
•Second law: Entropy is non-increasing
Environmental resource services and functions

•Waste assimilation and re-processing by ecological

systems
•Environmental systems support processes (air, climate,
water, soil)
•Provision of productive inputs
•Provision of environmental amenities
* that contribute to labour productivity
* that contribute directly to well-being
Principles of ecology

The ability of the environmental system to perform these

functions depends on its “state of well-being”.
Of relevance here are two central concepts:

•Ecosystem stability
•Ecosystem resilience
Environment and Ethics

Utilitarianism
There are important reinterpretations of that philosophy which
allow for more that merely narrow self-interested “consumer”
behaviour (see the work of Sen and Singer, for example).

Alternative ethical frameworks also exist.

Required reading

Perman, Ma, McGilvray and Common: Natural Resource and

Environmental Economics (3rd edition)
Chapter 1: An introduction
Chapter 3: Ethics and the Environment
Sustainability and Sustainable Development
WCED (1987)
The most well-known phrase from this report:

“Sustainable development is development that meets the

needs of the present without compromising the ability of
future generations to meet their own needs.”
Environment - Economy Interactions

We are interested in:

•Reproducibility of each system over time (sustainability)

•Interactions between the two systems
•Predictability or uncertainty in the operations of these sub-
systems
Economic sustainability
Some “economic” concepts of sustainability:

Sustainability is defined as... non-declining utility of a

representative member of society for millennia into the future.

A sustainable state is one in which utility (or consumption) is

non-declining through time.

The alternative approach [to sustainable development] is to

focus on natural capital assets and suggest that they should not
decline through time.
Some “interdisciplinary” concepts of sustainability:

Preserving opportunities for future generations as a common

sense minimal notion of intergenerational justice

Sustainable activity is...that level of economic activity which

leaves the environmental quality level intact, with the policy
objective corresponding to this notion being the maximisation of
net benefits of economic development, subject to maintaining the
services and quality of natural resources over time.
 CRITICAL ISSUES

Critical to sustainability, however defined, seem to be:

 the degree of resource substitutability

 the rate of technical progress
 the degree of eco-system stability and resilience
 irreversibility of “investment” decisions
 The degree of resource substitutability

The assets available to society, now and in the future, comprise:

 Natural capital
 Physical capital
 Human capital (labour and embodied skills)
 Intellectual capital (disembodied skills & knowledge

Some of these can be accumulated over time. Others cannot be – they

are either finite, or there are limits to their accumulation.

So, as we move through time, to what extent can those resources

which can be accumulated substitute for those which cannot (or which
are depleted)?
 The rate of technical progress

Important because technical progress implies we can get more output

from given quantities of inputs. So limited resources can be stretched
further.

Technical progress may also impact on the extent of resource

substitutability.

And possibly also on the degree of eco-system stability and resilience.

 The degree of eco-system stability and resilience

Sets fundamental limits to all economic activity.

Of recent interest in the research literature in this regard are:

 biodiversity decline and evolutionary capacity

 interference with natural ecosystems

Various indicators may signal future stability/resilience.

But can never know ex ante whether a system is stable and resilient.

Changes are non linear, and path dependent (so dependent on initial
conditions).
 FEASIBILITY OF SUSTAINABILITY

Is sustainability feasible?

Is it possible for the economy to attain a state in which production and

consumption track along non-declining paths (or grow at positive
rates) over indefinite periods of time, in the presence of finite stocks
of exhaustible resources and constraints imposed by natural
environmental processes?

Is a huge (and sometimes technically difficult) literature on this

question.

See, for example, the literature surrounding the so-called Hartwick

savings rule.
Irreversibility

Suppose that an asset is developed (or used) in some way.

New information arrives and we change our mind about the
desirability of that development.
Is it possible to reverse the process so that we are back in the
original position?
Often this is NOT possible. In those cases, the decision is irreversible
This gives us much less room for making mistakes.
Important in resource valuation.
 MODELS OF THE FEASIBILITY OF
SUSTAINABILITY

Much of this based on a neo-classical growth model with finite

environmental resources – examines the possibility of constant
consumption over unlimited time horizons.

Not surprisingly, results depend on assumptions made about

• Resource substitutability
• Technical progress
• Population growth

It is easy to get specific results for specific sets of assumptions.

But these are of dubious validity as a guide to actual policy.
Required reading

Perman, Ma, McGilvray and Common (3rd edition):

Chapter 2: The origins of the sustainability problem
Chapter 4: Concepts of Sustainability