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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’ regardless of long-term effects.

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

Sustain


2 right externality pricing not enough

  • GE regardless of long-term effects. 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


http:// regardless of long-term effects.www.daimler.com/Projects/c2c/channel/documents/2003772_Environmental_Certificate_Mercedes_Benz_GLK_Class.pdf

Sustain


Two Kinds of Sustainability regardless of long-term effects.

Stock ↓

C > R:

C = R(S)

Consumption (C), Regeneration (R)

Stock ↑

C < R:

Stock (S)

Sustain


Two Kinds of Sustainability regardless of long-term effects.

Maximum

Yield

Consumption (C) Regeneration (R)

Stock (S)

Sustain


Two Kinds of Sustainability regardless of long-term effects.

Maximum

Sustainable

Welfare

Maximum

Yield

Consumption (C) Regeneration (R)

Stock (S)

Sustain


Two Kinds of Sustainability regardless of long-term effects.

Max EPV (C)

“Enlightened

Selfishness”

Consumption (C) Regeneration (R)

Max Sustainable

Social Welfare

“The Green

Golden Rule”

Stock (S)

Sustain


Green golden rule

Green Golden Rule

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

Sustain


Stability of Green Golden Rule regardless of long-term effects.

Maximum

Sustainable

Welfare

Maximum

Yield

Stock ↑

Consumption (C) Regeneration (R)

Stock ↓

Stock ↓

Stable

S1

S2

Stock (S)

Sustain


Stability of Max Sustainable Yield regardless of long-term effects.

Stable

Consumption (C) Regeneration (R)

Stock ↓

Stock ↓

Stock (S)

Sustain


Stability of Green Golden Rule regardless of long-term effects.

Maximum

Sustainable

Welfare

Maximum

Yield

Consumption (C) Regeneration (R)

Stock ↑

Stock ↓

Stock ↓

Stable

S1

S2

Stock (S)

Sustain


  • Viable Balance between regardless of long-term effects.Efficiency & Resilience (Goerner, Lietaer, Ulanowicz, Ecol. Econ., 2009)*

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

Sustain


Two Different Discount Rates regardless of long-term effects.

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 regardless of long-term effects.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’ regardless of long-term effects.

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

Sustain


Avoiding extinction equal treatment of the present and the future

Graciela regardless of long-term effects.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


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

Sustain


“Management is not about maximizing and experimental psychology: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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