Assignment Questions - Environmental, Business and Economic
Boludo
QUESTION7.pdf
Environmental issues as market
problems
LECTURE 7
Environment and Policy
Dr Aideen Foley [email protected]
Environmental issues as market problems How can market-based reduce environmental harm by correcting market signals? What are the challenges and benefits of such an approach?
Key concepts
▪ Environmental externalities
▪ Price-based & rights-based
instruments
▪ Extended producer responsibility
▪ Environmental valuation and
commodification
▪ Trading schemes
Why does this matter?
If we consider environmental issues to
arise out of a lack of valuation of
environmental ‘goods’, we need to
consider how these externalities could
be corrected, in order to represent the
environment within econocentric
decision-making.
1. Market-based approaches: theory and practice
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Market-based economy
Quantity
£ Actual equilibrium
Efficiency (when
functioning): little wasted
product
Innovation:
required to create demand
Choice:
consumers act according to
preference
5Quantity
£ Actual equilibrium
Ideal equilibrium
Negative externalities: e.g. pollution
Incentive or market-based regulation
▪ Uses economic policy instruments.
▪ Use benefits of market and correct omissions (externalities).
▪ Price-based: offer incentives to encourage/discourage certain activity.
▪ Rights-based: set cap & let actors figure it out.
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Pigouvian Tax
Tax applied to activity that is generating negative externalities.
Equals social cost of those externalities.
Incentive for sustainable innovation?
There are many important aspects of welfare that lie outside an economist’s purview, religious experience, domestic harmony-or disharmony -patriotic feeling, appreciation of music and art and fine scenery, the pleasures of physical fitness, athletic achievement.
Pigou (1954)
7 Pigou, A.C., 1954. Some aspects of the welfare state. Diogenes, 2(7), pp.1-11.
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What is Pigou saying here?
Extended producer responsibility
[EPR] is an environmental protection strategy to reach an environmental objective of a decreased total environmental impact of a product, by making the manufacturer of the product responsible for the entire life-cycle of the product and especially for the take- back, recycling and final disposal.
Thomas Lindhqvist in a report to the Swedish Ministry of the Environment (1990)
Moves costs of managing problematic products from local government to producers.
Incentivises producers to reduce toxicity and waste.
Polluter pays, but cost can be reflected in price of goods/services.
Who pays?
Implications…
Deposit- refund systems
Most commonly used with beverage containers.
Incentives returning item for recycling.
Reduces illegal dumping and evading the costs is difficult.
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Reverse vending machine in an Aldi supermarket in Germany.
Design & production
Packaging & distribution
Use & maintenance
Disposal
Extraction of raw
materials
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Extended producer responsibility (life-cycle)
Natural resources
Incineration & landfill
Design & production
Packaging & distribution
Use & maintenance
Disposal
Extraction of raw
materials
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Natural resources
Incineration & landfill
Recovery
Recycling materials &
components
Reuse
Reduce
Reduce
Extended producer responsibility (life-cycle)
Broadening of the PPP
Clean-up costs
Strict
Broad
Pollution prevention &
control
Product impacts over lifetime
Pollution prevention &
control Clean-up costs
Pollution prevention &
control
Extended responsibility
Charge or levy E.g. Plastic bag charge
Transparency and clarity can be issues.
Many stores donate to charity, but legislation does not state that stores must pass on money raised.
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Changes in observed bag use
Poortinga, W., Sautkina, E., Thomas, G.O. and Wolstenholme, E., 2016. The English plastic bag charge: Changes in attitudes and behaviour. Cardiff : Welsh School of Architecture/School of Psychology, Cardiff University.
Number and type of bags used by shoppers when exiting four different supermarkets in Cardiff and Bristol in July 2015 and July 2016, respectively.
‘Latte levy’
2.5 billion coffee cups used in UK each year.
Even ‘recyclable’ ones technically aren’t as they require specialist recycling plants of which there are only two in the UK.
25p levy proposed.
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16Quantity
£ Actual equilibrium
Ideal equilibrium
Positive externalities: e.g. discount for using a reusable cup
Subsidy, tax cuts, etc.
▪ Lowers price, which encourages demand for some preferred, environmentally-friendly product or service.
▪ Corrects market by paying for positive externalities (social benefit)
▪ May help change preferences in the long run.
▪ But, consumers & businesses may come to rely on subsidy.
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Only 2% of Starbucks customers bring their own cup, despite 25p discount incentive.
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What reasons might there be for this?
While a charge on disposable coffee cups also helped to promote the use of reusable cups, a discount for not using disposable cups did not appear to be effective. These results are in line with prospect theory, which suggests that people are more sensitive to losses than to gains when making decisions. Customers may therefore be more likely to avoid paying a charge on a disposable cup (a loss) than to try to obtain a discount (a gain) by bringing a reusable cup, even if the pricing structure for the two are the same.
Poortinga, W. and Whitaker, L., 2018. Promoting the Use of Reusable Coffee Cups through Environmental Messaging, the Provision of Alternatives and Financial Incentives. Sustainability, 10(3), p.873.
“Are people ‘rational’ actors?
Theorises that people weigh all the options against a well- defined set of preferences to choose the one that is the most valuable to them.
Are people ‘rational’ actors?
Theorises that people weigh all the options against a well-defined set of preferences to choose the one that is the most valuable to them.
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‘Integral’ emotions: feelings directly related to choice.
Consumer well-being (CWB): extent to which a particular consumer good or service creates an overall perception of the quality-of-life impact of that product.
Links with self-image congruence and brand- community belongingness.
Grzeskowiak, S. and Sirgy, M.J., 2007. Consumer well-being (CWB): the effects of self-image congruence, brand-community belongingness, brand loyalty, and consumption recency. Applied Research in Quality of Life, 2(4), pp.289-304.
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“Well first I used to go to Starbucks almost exclusively … to me, Tim Hortons was more of the blue-collar kind of working man’s kind of place, so I dismissed it. So one day a girlfriend of mine said, ‘Do you want to go for a coffee? Do you want to go to Tim Hortons?’ and I just thought, ‘Tim Hortons! I don’t think I can go in there’.”
Bookman, S., 2013. Coffee brands, class and culture in a Canadian city. European Journal of Cultural Studies, 16(4), pp.405-423.
Are people ‘rational’ actors?
Theorises that people weigh all the options against a well-defined set of preferences to choose the one that is the most valuable to them.
As an aside…
How ‘rationally’ do we assess brands that are perceived as in-line with environmental goals?
“Conservation through consumption”
[Whole Food Market’s] framing of “conservation through consumption” also draws the citizen consumer towards the commodification of nature – a process critiqued for perpetuating a social construction of nature that is superficial, anthropocentric, and unsustainable…WFM products are consistently presented as “natural” and “kind” to the environment, regardless of whether they are locally sourced or produced according to organic processes…
Johnston, J., 2008. The citizen-consumer hybrid: ideological tensions and the case of Whole Foods Market. Theory and Society, 37(3), pp.229-270.
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Consumer vs. citizen
‘Consumer’ preferences: personal, private
‘Citizen’ preference: from point of view of society as a whole.
Estimated willingness to pay may not be a reliable way to capture public preferences.
E.g. higher willingness to pay for forest conservation reported by those who attach higher social than personal importance to forest.
What might this mean in the context of the latte levy/cup discounts?
Low payers
High payers
Mill, G.A., Van Rensburg, T.M., Hynes, S. and Dooley, C., 2007. Preferences for multiple use forest management in Ireland: Citizen and consumer
perpectives. Ecological Economics, 60(3), pp.642-653.
Summary
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1
Market-based policy creates incentives for more environmentally- friendly behaviour, either by rewarding activity with a social benefit (e.g. wind farms) or making activity with a social cost bear the ‘cost’ of harm/damage.
2
Price-based schemes offer certainty of cost. Businesses can then work out whether it is more efficient to pay the cost or innovate other solutions.
3
Human behaviour is always a variable – people may not change their behaviour even when the incentive/disincentiv e makes it ‘rational’ to do so.
Break 15 mins
2.Market-based approaches & climate change
Carbon pricing or taxing
Price-based tool (Pigouvian tax).
E.g. UK Climate Change Levy: tax on energy to non- domestic users, includes nuclear & renewables (counterintuitive?).
Fuel duty escalator (FDE), a tax on retail petroleum products, has reduced due to lack of political support (currently frozen for 6th year).
https://cleantechnica.com/2015/05/15/wri-report-outlines-us-carbon-pricing-alternatives/
Trading schemes
▪ Rights-based policy tool.
▪ Limit on total quantity of emissions allowed, but regulator does not try to determine allocation between sources.
▪ Businesses are free to choose most cost- effective route (innovating vs. paying for allowances).
▪ Acts as incentive to innovate better tech, but only if price of permit makes innovation more cost-effective.
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Leftover allowance for sale
CAP Excess emissions
Allowances
Money
Emission reduction credit system
Examples of emission reduction credit systems
▪ Canada’s Pilot Emission Reduction Trading (PERT) project
▪ Canada’s Greenhouse Gas Emission Reduction Trading (GERT) project
▪ EPA (US) Emissions Trading Program
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CAP Excess emissions
Allowances
Money
Leftover permits for sale
CAP & TRADE PERMIT SYSTEM
Examples of cap & trade permit systems
▪ EU Emissions Trading Scheme
▪ CFC Trading
▪ SO2 Allowance Trading Scheme
▪ RECLAIM (reducing nitrous oxide & sulphur dioxide in LA)
▪ Chilean TSP (total suspended particulate) Tradeable Permits
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Cap & trade Emissions certainty
Carbon tax Price certainty
£
GHG emissions reductions and costs for 36 different measures that UW was considering.
The wider the bar, the greater the GHG reduction achieved in the target year.
The height of each bar is proportional to the cost per unit of GHG reduced.
University of Washington MACC (Source: http://hammerschlag.org/maccs/)
How should carbon be priced?
(effects both tax and C&T)
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▪ Social cost of carbon estimated using integrated assessment models, like DICE, FUND and PAGE.
▪ Combines socioeconomic projections, climate response, and models benefits and damages.
▪ Uses discounting to value future benefits and costs in today’s money. Assumes people value benefits they will get today more than benefits they’ll get in the future, and converts future expected costs & benefits into a present value amount using a discount rate.
▪ Future damages tend to dominate SCC estimates, because CO2 persists in the atmosphere for thousands of years and damages increase as temperatures rise.
▪ Low discount rate (as in Stern Report) implies that future costs & benefits are highly valued in decision- making today. High discount rate implies opposite.
▪ How can we value non-market impacts, such as loss of species and habitats?
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The social cost of carbon … has been estimated by a U.S. government working group at $21/tCO2 in 2010. That calculation, however, omits many of the biggest risks associated with climate change, and downplays the impact of current emissions on future generations. Our reanalysis explores the effects of uncertainty about climate sensitivity, the shape of the damage function, and the discount rate. We show that the social cost of carbon is uncertain across a broad range, and could be much higher than $21/tCO2. In our case combining high climate sensitivity, high damages, and a low discount rate, the social cost of carbon could be almost $900/tCO2 in 2010, rising to $1,500/tCO2 in 2050.
Ackerman, F. and Stanton, E., 2012. Climate risks and carbon prices: Revising the social cost of carbon.
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UK Climate Change Levy: tax on energy to non-domestic users, but includes nuclear & renewables so not a carbon tax.
Fuel duty escalator (FDE), a tax on retail petroleum products, has reduced due to lack of political support.
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CAP Excess emissions
Allowances
Money
Leftover permits for sale
EU EMISSIONS TRADING SCHEME Cap & trade permit system
EU Emissions Trading Scheme
‘Grandfathering’
Permits are given out for free initially -> cheaper compliance for industry in the early stages (they only pay for extra permits)
Petherick, A., 2011. Third time lucky. Nature Climate Change, 1(7), p.342.
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Offsets
Excess emissions
Mitigation Solutions that minimise
emissions elsewhere
Sequestration Trees taking CO2 out of the
atmosphere
Offset by…
Offset by…
Purchasing allowances
Another producer is under its baseline
EU does not allow credits under to be obtained from sinks.
The Clean development mechanism
CDM: defined in the Kyoto Protocol
Provides for emissions reduction projects which generate Certified Emission Reduction units (CERs) which may be traded in emissions trading schemes.
Payment for ecosystem services (PES) Valuing benefits of environment: E.g. keeping land undeveloped has value that is not captured.
What ‘values’ seem most and least difficult to assess?
U se
v a
lu e
Direct use value: value of natural products (e.g. food, raw materials)
Indirect use value: value derived from ecosystem services (e.g. flood control)
Option value: value of future potential of a complete, healthy environment (e.g. genetic resources)
N o
n -u
se v
a lu
e
Legacy value: Value of leaving environment intact for future generations
Intrinsic value: value of nature and beauty by and for itself.
Costa Rica’s national PES system
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Costa Rica boasts the world’s only national PES system. Introduced in 1996, it rewards landowners for conserving forests through reforestation and maintenance of existing areas. Industries compensate their carbon emissions through a tax on fossil fuels and purchase of carbon offset certificates, the revenue from which helps fund the PES programme. Initial support was received from the World Bank and the Global Environmental Facility (GEF). The scheme now covers some 10 per cent of the country and benefits around 8000 landowners engaged in forest protection, management and reforestation over 500 000 hectares, at a cost to date of US$120 million (Zbinden and Lee, 2004; Karaousakis, 2007).
Hall, A., 2008. Paying for environmental services: the case of Brazilian Amazonia. Journal of International Development: The Journal of the Development Studies Association, 20(7), pp.965-981.
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Valuation and commodification
Economic framing
Monetization (pricing)
Appropriation (rights creation)
Commercialization (sale & exchange)
Gómez-Baggethun, E. and
Ruiz-Pérez, M., 2011. Economic valuation and the commodification of
ecosystem services. Progress in Physical Geography, 35(5), pp.613-628.
The Yasuni ITT initiative
Ecuador’s plan to leave oil in the ground, but only if half the $7.2bn value of the reserve could be raised by the international community by 2023.
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The collapse of the Yasuni ITT initiative is a devastating blow for activists who are trying to save one of the world's most biodiverse regions from development and pollution … President Rafael Correa blamed the failure on the lack of foreign support, after a trust fund set up to manage the initiative received only $13m (£8.3m) in deposits, a tiny fraction of the $3.6bn goal.
"The world has failed us," Correa said in a televised address on Thursday night. "I have signed the executive decree for the liquidation of the Yasuni-ITT trust fund and with this, ended the initiative."
Watts, J., 2013. Ecuador approves Yasuni national park oil drilling in Amazon rainforest. The Guardian, 16.
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The most intuitive and general critique posits that for ethical reasons some things ought not to be for sale … A second line of criticism concerns the
alleged effect of commodification as complexity
blinder and mystification. This is manifested
by the masking of critical processes underlying
the production of ecosystem services behind
the homogeneity of monetary figures, thereby
transforming a symbolic value into an objective
and quantifiable relationship.
Gómez-Baggethun, E., & Ruiz-Pérez, M. 2011. Economic valuation and the commodification of ecosystem services. Progress in Physical Geography, 35(5), pp.613-628
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Offsetting projects can have negative environmental & social impacts Barro Blanco was registered under the CDM (eligible for carbon credits), but Panama withdrew the project’s registration under public pressure in 2016.
EU Emissions Trading Scheme
Phase III changes
overall EU cap, with allowances then allocated to EU members
limiting “banking” of allowances between Phases II and III
move from free allocation to auctioning
tighter limits on use of “offsets”
Petherick, A., 2011. Third time lucky. Nature Climate Change, 1(7), p.342.
Summary
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Carbon taxes or prices are a price-based approach to
limited CO2 emissions. Cap and trade systems are a rights-based approach.
Rights-based schemes offer certainty of outcome (in
theory) in terms of how much pollution will occur, but impacts on individual
businesses are not so certain.
Carbon trading approaches can have unintended
environmental and social impacts (e.g. off-setting).
Commodifying ecosystem services (e.g. PES as part of
CDM) may mask system complexity and obscure
cultural context.
Discussion questions
With your neighbour, complete a grid like the one below to summarise the environmental, economic and social pros and cons of carbon tax vs cap-and-trade as a policy option.
Environmental
Economic
Social
Carbon tax Cap-and-trade
