Growth and environment, and how to measure welfare

2

Economic growth and environment

Does economic lead to a deteriorating environment?

Is economic growth a necessary precondition for a good environment?

Can we use economic theory to understand and explain the relationship between growth and environment?

Sustainable development, how do we know?

3

What is this?

0

200

400

600

800

1000

1200

1400

1600

1800

2000

År

Inde

x, 1

900=

100

GDP

CO2

SO2

4

Pessimist I

Thomas Robert Malthus, Essay on population (1798)

Human population grows faster than food production

time

Population

Food production

5

Pessimist II

population

natural resources

emissions

1900 21002000

Club of Rome. Limits to growth, Meadows, m.fl. (1972)

6

Pessimist assumptions

Club of Rome (and Malthus) predictions were based on e.g.:– Given land area for agricultural production– Upper limit for agricultural production per hectare– Upper limit for the ability of the ecological system to

assimilate leftovers from consumption and production. Hard to include technical progress in this type of

model– e.g. growth in telecom in relation to copper demand

7

The Environmental Kuznets Curve (EKC)

“The view that greater economic activity inevitably hurts the environment is based on too static assumptions about technology, tastes and environmental investments”.

World Development Report 1992, The World Bank

Emissions

Income

At low income levels emissions are increasing with income

At high income levels emissions are decreasing with higher income

8

Production possibilities

emissions, z

production, Q

Q1

Q2

Q3

z0

Q = Q1(z0)

Q = Q2(z0)

Q = Q3(z0)

Technical development means that we can produce more with the same resources, alternatively produce the same amount with less resource use.

9

Preferences (taste)

utility, U

consumtion, QQ0

2 * Q0

U0

U1

U(Q)

disutility, -U

emissions, z

-U0

-U1

z0

2 * z0

(a) (b)

Consumtion of goods (Q) increase utility (U), but at a decreasing rate (second pizza slize not as good as the first)

More emissions increase disutility

10

Consumption or environment?

emissions, z

consumtion, Q

U1

U2

emissions, z

consumtion, Q

U1

U2

Q(z)

a

b

U2 > U

1

Indifference curves U1 and U2 show different combinations of consumption and emissions that give the same utility (U2 higher than U1)

Point b is the combination of consumption and emissions that gives the highest utility and is possible.

11

Growth and environment

emissions, z

Consumption (income)

U1

U 2U 2

U 2

Q 1(z)

Q 2(z)

Q3(z)

Q 4(z)

Technical development means that the production function shifts upward. We can consume more, have a better environment or both.Depending on preferences it can imply that we reduce consumption in favor of a better environment.

Source: Brännlund & Kriström (1999)

12

EKC in realityCO2 och NOx

koldioxid nitrogen monoxide

0 10 20 30 40

BNP per capita, 1000-tals US $

0

5

10

15

20

25

Uts

läp

p a

v k

old

ioxi

d,

ton

pe

r c

ap

ita

Sc h we izSv e rig e

USA

22 02,085,084,1 BNPBNPCO

2008,019,414 BNPBNPNOx

0 10 20 30 40

BNP per capita, 1000-tals US $

0

30

60

90

120

150

Sv e rige

USA

Be lg ien

13

EKC in realitySO2

22 012,045,243 BNPBNPSO

0 50 100 150 200

BNP per capita, 1000-tals k r

0

30

60

90

120

150

SO

2,

kg

pe

r c

ap

ita

1 9 7 1

14

Conclusions

Economic growth does not have to imply reduced environmental quality

Depending on preferences technical development can actually improve environmental quality

However, the existence of an EKC does not mean that growth policy can solve all environmental problems.

15

What are national accounts and why do we have them?

A systematic way to keep track of the economic activity of a country

Five main tasks– To describe economic activity– To give an image of how income changes affect

consumption and other parts of the economy– To give the basis for structural (macro) analyses of the

economy– To give the basis for the government budget– To give the basis for forecasts of the economic activity

16

GDP as a welfare measure

What is GDP?

GDP = Consumption + Gross investment + Export - Import (”expenditure side”)

GDP = Profits + wages (”income side”)

GDP = Sum of value added (”production side”)

Gross investment = new investment + reinvestment

Is GDP a good measure of welfare?

17

GDP as welfare measureGross and net investmentsThe capital stock, K, in period t is equal to:

K d K It t t ( )1 1

Net investment, or the change in the capital stock, is then:

d = capital depreciationIt = Gross investment

K K I d Kt t t t 1 1i.e., equal to gross investment minus capital depreciation

Gross investment is then equal to:

I K K d Kt t t t ( )1 1i.e., equal to net investment + capital depreciation

GDP as welfare measure

18

Assume that Ex = Im = G = 0:

GDPt = Ct + It

Through the expression for I we get that:

GDP can increase although the capital stock is decreasing. Does this mean that welfare has increased?

Depends on how welfare is defined

• If welfare only depends on the consumption in period t, the welfare has increased

• But if welfare also depends on the consumption in period t+1, t+2, etc. then welfare doesn’t necessarily increase if GDP increases. How come?

1 1( )t t t t tBNP C K K K

GDP as welfare measurea simple example

An economy with one resource, oil. Consumption is equal to the extraction of oil

The capital stock is equal to the amount of oil in the ground

We then has that:

GDPt = Ct + It = Ct - Ct + Ct = Ct

GDP in a certain period is equal to the oil extraction.

GDP measures the activity in a certain period 19

1t t t tK K h C Change in capital stock, net investment

1t t t t t tI K K C C C Gross investment

GDP as welfare measure

But if welfare depends on future consumption?

We should ask the question if GDP = C is a sustainable level?

Consumption possibilities in the long run depend on net investments. A unit of oil extracted today is a unit less to use in the future.

We are depreciating the capital with C in every period.

We then get that Net National Product is equal to:

NNP considers capital depreciation and hence reflect welfare better20

1 1t t t t t t t tK K I K C C C C

1 1 0t t t t t t t tNNP C I K GDP K C C

21

GDP as welfare measure

GDP = C + Gross investment

NNP = GDP – Capital depreciation

NNP takes capital depreciation into account (net investment).

NNP is therefore a better welfare measure since future consumption is considered

GDP and NNP in the ”oil economy”

GDP = C

NNP = GDP – capital depreciation = C - C = 0

22

Green accountingProblems with GDP and NNP

• Home work (unpriced) is not included

• The distribution of income in society is not considered

• The value of leisure time is not included

• Consumption of many environmental goods and services are not included (the ones who are unpriced, or who has the ”wrong” price)

• Investments in natural capital are not included (only investment in buildings and machines are included)

GDP and NNP does not measure activity and welfare in the correct way

23

Green accountingEnvironmentally adjusted accounts

From the present GDP we must:

1. subtract the value of environmental damages

Green GDP = GDP – value of environmental damages

Green NNP = NNP – value of environmental damages + net investment in natural capital

From present NNP we must:

1. Subtract the value of environmental damages

2. Add net investment in natural capital

24

Sustainable development, what is the meaning?

In the UNCED:s report "Our Common Future" from 1987 (the Brundtland commision) sustainable development is defined as: "...meets the needs of the present without compromising the ability of future generations to meet their own needs"

25

Sustainable development defined Sustainable development can imply that…

1) …welfare, or consumption does not diminish (Solow, 1974)

2) …the natural capital stock does not diminsih. Limited room for replacing (substituting) natural capital with manufactured or human capital.

3) …a positive yield from different capital stocks is achieved.

4) …the sum of welfare over all generations does not diminish (Dasgupta and Mäler, 2000, 2001)

5) …the value of net changes of all assests does not diminish (genuine saving)

1) and 5) are the definitions that are closest to the original idea in the Brundlandt commission

26

How to measure sustainable development

Environmentally adjusted GDP– Does not consider future consumption possibilities,

capital depreciation is not included Environmentally adjusted NNP

– Considers future consumptions possibilitites, takes capital depreciation into account

Genuine saving– Value of net change in all capital stocks.– A measure closely related to NNP.

Genuine saving, Sweden(million kr, 1913 prices)

27

Genuine saving% of GDP

28

29

Environmentally adjusted accounts: The green gold of the forest

Finland1991

Sverige1987

Sverige1991

Virkesvärde 18,0 25,3 21,3

Insatsvaror från andra sektorer -2,6 -4,3 -4,3

Tillväxt av skogsförråd 3,3 5,6 5,7

Skogsvård -2,4 -2,1 -2,0

Delsumma 16,3 24,5 20,7

Bär 0,1 0,7 0,4

Ätbar Svamp 0,01 0,3 0,3

Lav 0,4 0,6 0,7

Jakt: köttvärde - 0,7 0,8

Delsumma 0,5 2,3 2,2

Biodiversitet -0,6 -1,7 -1,5

Koldioxidbindning 5,3 3,0 2,8

Förlust av utbytesbara katjoner - -1,0 -1,0

Förlust av lavproduktionsförmåga - -0,03 -0,06

Delsumma 4,7 0.4 0.3

Totalt nettovärde (skogsinkomst) 21,7 27,3 23,2

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Genuine Savings

Resursutömning Brutto-

sparande Avskriv-ningar

Netto-sparande

Invest utbildn

Energi Mineraler Skog (netto)

Koldioxidskador

Genuint sparande

Irland 33,1 9,2 23,9 5,1 0,0 0,1 0,0 0,3 28,6 Japan 30,5 15,8 14,7 5,8 0,0 0,0 0,0 0,1 20,4 Holland 26,3 11,7 14,6 6,0 0,1 0,0 0,0 0,2 20,3 Belgien 22,3 10,1 12,2 4,9 0,0 0,0 0,0 0,2 16,9 Österrike 23,5 12,9 10,6 4,9 0,1 0,0 0,0 0,1 15,3 Finland 24,6 16,7 7,9 7,2 0,0 0,0 0,0 0,2 14,9 Spanien 21,4 11,4 10,0 4,8 0,0 0,1 0,0 0,2 14,5 Sverige 21,3 13,3 8,0 6,6 0,0 0,1 0,0 0,1 14,4 Italien 22,3 12,4 9,9 4,2 0,1 0,0 0,0 0,2 13,8 Tyskland 22,4 13,2 9,2 4,4 0,1 0,0 0,0 0,2 13,3 Kanada 21,5 12,5 9,0 6,1 1,5 0,4 0,0 0,4 12,8 Frankrike 19,7 12,9 6,8 5,0 0,0 0,0 0,0 0,1 11,7 USA 16,0 10,7 5,3 5,8 0,7 0,0 0,0 0,4 10,0 UK 15,1 10,4 4,7 4,5 0,8 0,0 0,0 0,3 8,1 Australien 20,7 14,6 6,1 4,7 1,2 1,5 0,0 0,4 7,7

Källa: Urval av Hamilton, K. I OECD Frameworks to Measure Sustainable Development, s.74 ff. Anm: Procent av BNP per land 1997, sorterat efter genuint sparande

Genuine savings

31

Region Average 1970-79

Average 1980-89

1990

1991

1992

1993

Sub-Saharan Africa 7.3 -3.2 -3.8 -1.2 -0.6 -1.1 Latin America/Caribbean 10.4 1.9 5.5 4.1 4.7 6.1 East Asia/Pacific 15.1 12.6 18.6 18.7 18.7 21.3 Middle East/NorthAfrica -8.9 -7.7 -8.8 -10.8 -6.6 -1.8 South Asia 7.2 6.5 7.6 6.3 7.1 6.4 High-Income OECD 15.7 12.4 15.7 14.5 14.0 13.9 Income Category Low Income 9.8 3.3 5.7 7.5 9.0 10.5 Middle Income 7.2 2.9 10.0 9.7 7.8 8.1 High Income 15.2% 12.3% 15.9% 14.6% 14.1% 14.1% Source: Hamilton, K. and Clemens, M. (1998)