If it's Good for the Environment, is it Bad for the Economy?

1. If it's Good for the Environment, is it Bad for the Economy?

4. “Climate change - everyone's business”Report of the CBI Climate Change Task Force "This report makes clear that in the future, business needs to be green to grow,“ said the CBI's director general, Richard Lambert. “To manage their costs and to maintain the trust of their customers, they will need to build carbon management into their corporate DNA.” Business has already made significant progress in responding to the climate change agenda. It is well placed to make an early and decisive contribution to finding and implementing solutions to the challenge of climate change.

5. Priorities • Incorporate climate change policies into its DNA. Consumer demand will stimulate competition to produce greener alternatives to current products and services, and reward those businesses that take a lead. In the low carbon future, companies will have to be green to grow. • Redouble efforts to improve energy efficiency, by focusing on areas such as transport and buildings. • Work with employees and the supply chain to reduce emissions, and adapt the current workplace to cope with the climatic and other changes that are already likely as a result of past CO2 emissions. • Measure its carbon footprint, and develop reporting systems to benchmark performance. • Provide consumers with the reliable communications and product developments they will require.

6. The Environmental Problem

7. The environmental problem • Use of the environment as: • an amenity • a source of primary products • a dump for waste

8. The economy and the environment Labour Goods and services Waste Amenity value Resources (Clipart for the environment: e.g. countryside scene)

9. The environmental problem • Use of the environment as: • an amenity • a source of primary products • a dump for waste • Conflicts between these uses • productive resource v. amenity value • dump for waste v. amenity value • dump for waste v. productive resource

10. The environmental problem • Population pressure / limited resources • Problem of diminishing returns • Absorptive capacity ofenvironment • Accelerated degradation

12. Accelerating environmental damage Total damage Environmental damage O W1 Waste

13. The environmental problem • Population pressure / limited resources • Problem of diminishing returns • Absorptive capacity of environment • Accelerated degradation • Cause for optimism? • Increased price of non-renewables

14. Oil prices (Brent crude)

15. The environmental problem • Population pressure / limited resources • Problem of diminishing returns • Absorptive capacity of environment • Accelerated degradation • Cause for optimism? • Increased price of non-renewables • Technological developments • Public opinion • Green business • Government attitudes/action • BUT growing damage

16. The OECD environmental 'traffic lights'

17. Increase in car ownership Italy Germany W Germany USA Belgium Sweden Cars per thousand population UK Spain Energy and Transport in Figures (EC, 2007); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

18. An Optimum Use of the Environment

19. An optimum use of the environment • Different approaches to sustainability • The free-market approach • Prices reflect scarcity of resources • The social efficiency approach • Market failures: can be corrected • The conservationist approach • Care for environment for its own sake: importance of sustainable development • The Gaia approach • Deep green approach: environment has rights

20. Optimum level of an activity that involves pollution MSC MSC1 MPC1 Q3 Q1 Marginal pollution externality S = MPC Costs and benefits (£) Gaia maximum output D = MSB Socially efficient output Conservationist approach Q2 Q4 O Free-market outcome Output of good

21. Market effects for green companies • Short term • Often higher costs • BUT can reduce costs in some cases (e.g. reducing plastic bags) • Loss of competitive advantage • BUT changing consumer tastes • Fair trade movement • Ethical investment movement • Environmental auditing • Long term • Regulations are likely to get tighter around the world • Growing stakeholder pressures around the world • Consumers, shareholders, employees, local communities • Competitive advantage from investment in green technology

22. “Climate change - everyone's business”Report of the CBI Climate Change Task Force • Market forces will drive big changes, but they will not by themselves be enough to do the job. The full range of public policies must be deployed to create the right incentives. • Government priorities must include • promoting an effective market price for carbon • revenue-neutral tax reform (such as changes to business rates and council tax) to reward greener behaviour • bigger, more focused R&D programmes to finance new technologies and solutions until they become commercial.

23. Market Failures

24. Market failures • Environment as a public good • The global ‘commons’ • Features of a public good • Non-excludability • BUT rivalry • Over use at a zero price • Externalities • External costs from pollution • External benefits from ‘green’ activities • Problems of identifying and measuring • Ignorance • Inter-generational problems

25. Government Policy towards the Environment

26. Government Environment Policy • Environmental (‘green’) taxes, chargesand subsidies • Taxes on goods and services • The optimum tax rate

27. A socially efficient green tax MSC P P – t Optimum green tax S = MPC Costs and benefits (£) D = MSB Q2 Q1 O Output of good

28. Green tax revenues as a % of GDP

29. Green tax revenues as a % of GDP

30. Government Environment Policy • Environmental (‘green’) taxes, chargesand subsidies • Taxes on goods and services • The optimum tax rate • Subsidies for R&D • Problems with green taxes and subsidies

31. Government Environment Policy • Non-market-based policies • Command-and-control systems • Alternative standards • Technology-based standards • Ambient-based standards • Social impact standards • Effects on business • Advantages • Disadvantages • Voluntary agreements • Education

32. Government Environment Policy • Tradable permits • Permit to emit • Credits can be traded • Market price for permits • Efficient solution? • Use in USA • The EU carbon trading system • Effects on business • Basis for international agreements? • Quotas for emissions or use of resources

33. Government Environment Policy • Can we rely on governments? • Short-termism • The free-rider problem • The weakness of international agreements

34. If it’s good for the environment, is it bad for the economy? • Possibly, but not necessarily. • Environmental challenges offer challenges to business and the government. • Some will gain; some will lose. • Is it another case of survival of the fittest? • Or is it survival of the greenest? • Can Britain gain a competitive advantage?

35. To access these slides, go to: www.economicsnetwork.ac.uk/archive/A-level_Dec07