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A Question of Interest. Economics and Sustainability:. James Stodder, (Economics PhD., Yale 1990) Lally School of Management & Technology Rensselaer Polytechnic Institute at Hartford. If a man takes no thought about what is distant, he will find sorrow near at hand .

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economics and sustainability

A Question of Interest

Economics and Sustainability:

James Stodder, (Economics PhD., Yale 1990)

Lally School of Management & Technology

Rensselaer Polytechnic Institute at Hartford

If a man takes no thought about what is distant, he will find sorrow near at hand.

- Confucius (551-479 BC)

Sustain

two kinds of interest

I. Interest as Self-Interest:

  • Is maximizing Shareholder Valuesustainable?
  • Is accurate Carbon Pricing sustainable?

II. Interest as Social-Discounting:

  • Is maximizing Expected Present Value sustainable?
  • Can we Balance current needs with long-term survival?
Two Kinds of Interest

Sustain

max shareholder value not enough

Shareholders = low commitment, demand high returns regardless of long-term effects.

  • GM a glaring example: failed to make the long-term investments of Japanese, Germans, or Ford (family).
  • Other systems ensure larger stakeholder voice: German banks and co-determination; Japanese Kereitsuand Lean Management promote-from-within.
Max Shareholder Value: not enough

Sustain

us energy independence
US Energy ‘Independence’

http://www.worldenergyoutlook.org/publications/weo-2012/

Sustain

2 right externality pricing not enough

GE considers US carbon pricing necessary for economy, but does Cradle-to-Cradle (C2C) anyway.

  • Mercedes GLK-Class first car in the world to receive Environmental Certificate from TUV* (Technical Inspection Association), setting EU standards for LCA.
  • Right Pricing is necessary, but it is notsufficient.
2) RightExternality Pricing: not enough

* http://www.tuv-sud.com/home_com

Sustain

slide6

http://www.daimler.com/Projects/c2c/channel/documents/2003772_Environmental_Certificate_Mercedes_Benz_GLK_Class.pdfhttp://www.daimler.com/Projects/c2c/channel/documents/2003772_Environmental_Certificate_Mercedes_Benz_GLK_Class.pdf

Sustain

slide7

Two Kinds of Sustainability

Stock ↓

C > R:

C = R(S)

Consumption (C), Regeneration (R)

Stock ↑

C < R:

Stock (S)

Sustain

slide8

Two Kinds of Sustainability

Maximum

Yield

Consumption (C) Regeneration (R)

Stock (S)

Sustain

slide9

Two Kinds of Sustainability

Maximum

Sustainable

Welfare

Maximum

Yield

Consumption (C) Regeneration (R)

Stock (S)

Sustain

slide10

Two Kinds of Sustainability

Max EPV (C)

“Enlightened

Selfishness”

Consumption (C) Regeneration (R)

Max Sustainable

Social Welfare

“The Green

Golden Rule”

Stock (S)

Sustain

green golden rule

Formalizing the

Green Golden Rule

http://www.amazon.com/Valuing-Future-Geoffrey-Heal/dp/0231113072

Sustain

slide12

Stability of Green Golden Rule

Maximum

Sustainable

Welfare

Maximum

Yield

Stock ↑

Consumption (C) Regeneration (R)

Stock ↓

Stock ↓

Stable

S1

S2

Stock (S)

Sustain

slide13

Stability of Max Sustainable Yield

Stable

Consumption (C) Regeneration (R)

Stock ↓

Stock ↓

Stock (S)

Sustain

slide14

Stability of Green Golden Rule

Maximum

Sustainable

Welfare

Maximum

Yield

Consumption (C) Regeneration (R)

Stock ↑

Stock ↓

Stock ↓

Stable

S1

S2

Stock (S)

Sustain

slide15

Viable Balance between Efficiency & Resilience (Goerner, Lietaer, Ulanowicz, Ecol. Econ., 2009)*

* http://www.sciencedirect.com/science/article/pii/S0921800909003085

Sustain

slide16

Two Different Discount Rates

New Econ:

Max EPV(C, S)

r = 0

Old Econ:

Max EPV(C)

r > 0

“Dictatorship

of the

PRESENT”

Consumption (C) Regeneration (R)

“Dictatorship

of the

FUTURE”

Stock (S)

Sustain

example of interest rate conflict debate on the stern review

Dictatorship of the Future:

The Stern Review (2006): r = 0.1%

  • Dictatorship of the Present:

Nordhaus Critique (2007): r = 3% → 1%

Example of Interest Rate Conflict:Debate on the ‘Stern Review’

Sustain

a saudi arabia of waste
A ‘Saudi-Arabia of Waste’

http://www.worldenergyoutlook.org/publications/weo-2012/

Sustain

avoiding extinction equal treatment of the present and the future

Graciela Chichilnisky, Economics E-Journal (2009):

  • The “Chichilnisky Criterion”
    • Starts with a focus on sustainable consumption, gradually shifts toward sustainable welfare.
    • Requires a gradual transitionfrom r > 0 to r = 0 (thus becoming more ‘future oriented’).
    • There is evidence that this is how most people naturally discount the far future anyway.
“Avoiding Extinction: Equal Treatment of the Present and the Future”

Sustain

slide20

Evidence on discounting from anthropology, animal behavior, and experimental psychology:

http://evolution-institute.org/sites/default/files/external_docs/The%20evolution%20of%20hyperbolic%20discounting-%20Implications%20for%20truly%20social%20valuation%20of%20the%20future.pdf

Sustain

slide21

“Management is not about maximizing profits or share-holder value in the short term. That may be relatively easy to do if the corporation is willing to sacrifice its future. Nor is management about

investing everything into the long-term prospects. It may be impossible to survive the cash flow constraints or the risks and uncertainties of making investments without seeming rewards.” (p. 341)

Sustain

tying it all together

Efficient Carbon Pricing, Maximizing Shareholder Value, Maximizing Expected Present Value – all are insufficient for sustainability if not based on Green Golden Rule.

  • Because of this insufficiency, firms aiming at very long-term success will go beyond what is currently required.
  • A Falling-Discount rate is “nature’s rule” in successful ecosystems. Most traditional cultures of spirituality and stewardshipalso foster the Green Golden Rule.
  • Similarly, a contemporary path to the Green Golden Rule must build a social and moral consensus toward the future. (If forced, that could be a real dictatorship!)
Tying it all together

Sustain

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