Unit 1: Theoretical foundations

Lecture 4: Economics and ethics of

sustainability
Triple bottom line of sustainability
What’s wrong with the three pillars
approach?

• Watch this

• Watch this- trade-o

ffs
Is natural capital substitutable?
• Economic definitions of
‘sustainability: sustainability would
be achieved if capital is non-declining
• Consider human-made capital and
natural capital together (weak
sustainability) or separately (strong
sustainability).
• If they are counted together then
increases in human-made capital can
compensate for running down
natural capital
Can technology compensate for the loss of
natural resources?

• Weak sustainability assumes almost infinite substitutability by

technology and other human made capital
• Strong sustainability rule is ‘non-declining natural capital’
• Weak sustainability rule is ‘non-declining total capital’
Types of strong sustainability
• ‘Very strong sustainability’ assumes no substitutability and would not allow
any element of natural capital to be depleted.
example, it would not allow oil to be taken out of the ground

• Moderate ‘strong sustainability’ only allows natural capital to be depleted

when it is compensated
eg. increases in solar energy technology to compensate for the consumption
of oil reserves.
Eg. Compensatory
afforestation
• Under Forest Conservation Act 1980 any
diversion of forest land for non-forest use
condition for approval required compensatory
afforestation that is “trees for trees”
• Net Present Value of land diverted calculated
and to be paid by project proponents ;
depends on kind of forest
• For example in area classified as Tropical Wet
Evergreen Forest with Dense Forest amount is
Rs 939,000/- per ha, increases based on
whether it falls in a NP or WLS etc
• This NPV amount was deposited in the
Compensatory Afforestation Fund at the State
level, later to CAMPA
Types of weak sustainability
• Very ‘weak sustainability’ assumes infinite
substitutability and adheres to the total capital
rule.
• Moderate ‘weak sustainability’ conserves ‘critical
natural capital’.
• Andrew Steer ‘sensible sustainability’-would
maintain total levels of capital intact, but allow
depletion of natural capital as long as ‘critical’
levels of natural capital were kept
Weak substitutability of natural capital
• Firstly, how sensible it is to run down our stocks of nonrenewable resources without
explicitly investing in the development of substitutes.

• Secondly, how do we know what would be an ecologically ‘safe’ level of ecospheric

natural capital?

• Thirdly, weak sustainability might support the depletion or destruction of some kind of
natural capital that could later turn out to be vital in some as yet unknown way.

• Fourthly, the rule of the maintenance of total capital implies that it is valid to do
calculations of shadow prices comparing the net present value of say a wetland with the
net present value of a shopping mall to be built upon it.
 David Pearce
There are many environmental assets for which there
are no substitutes. No one has yet found a way of
(feasibly) recreating the ozone layer, for example. The
climate-regulating functions of ocean phytoplankton,
the watershed protection functions of tropical forests,
and the pollution cleaning and nutrient-trap functions of
wetlands are all services provided by natural assets and
for which there are no ready substitutes.
If man-made and natural capital are not so easily
substituted, then we have a basic reason for protecting
the natural assets we have. Technological advances
could of course one day advance the degree of
substitution between the two types of capital. Perhaps,
one day, we will not need the oceans for food or climate
regulation, or the nutrient values of the world’s coastal
margins, but that raises the issue of how to behave if we
cannot be certain that such substitution will take place
Can we manufacture
water?
Zeppelin the Hindenburg on fire at the mooring
mast of Lakehurst (United States of America), 6
May 1937
 • If an economy happens to be poor in
its resource base today, should it
Partha Dasgupta’s critique of the continue so in perpetuity?

strong sustainability approach • Concern should be present and

future well-being, and methods of
determining how well-being is
affected by policy.
• reasonable development paths
would involve patterns of resource
substitution over time, including
knowledge and skills.
• ‘What should be sustained?’
sustaining current well-being?
• some natural capital would have to
be conserved for a minimum level of
welfare for the future
• Preservation of an index of natural
capital ought to be derived from
considering the path of optimal
development
https://www.gov.uk/government/publications/final-report-the-economics-of-biodiversity-the-dasgupta-review
 Dasgupta- Ethical argument in
formulations of
sustainable development
• look at the total well-being of future generations over different paths of
development

• some index of capital ought to be preserved to sustain consumption, some

capital, like coal stocks, would probably be reduced, while others, like water
quality, might improve. So there would be a changing mix of capital stocks
along the chosen sustainable path

• notion of optimal policies, and the question of the distribution of wellbeing

across generations
 Idea of Environmental space
• Strong sustainability not so useful for policy making
• Does not consider exporting unsustainability eg.
natural capital counting in Scandinavia
• Sustainability in a global scale, not in one country
• concept of environmental utilization space first
appeared in a 1982 by a German economist
• Taken up and popularized by the Dutch economist
Hans Opschoor: what the size of the environmental
space actually is
Environmental space suggests the need to operationalize, to quantify how much space,
and so on. Space where? Space for whom? That sort of thing… You still have to say how
much nature you wish to protect, and that defines how much acid you allow to fall on
any hectare of land, for instance. You’re back at the question of making estimates of
things that arevery imprecisely known. And then if they are, how to relate to
theuncertainty? Do we make safe estimates, or do we make unsafe estimates?

If you accept the bare minimum structural approach to the environmental utilization
space, you’re not very far away from weak sustainability. So it’s a suggestion of
precision and accuracy which is there, and which I like to hang on to. And it’s also the
implicit notion which antagonizes a lot of people that you have to dematerialize also, at
least in the North
Carrying capacity
• Population growth
equations
• “Tragedy of
commons’
• Does not take into
account equity,
resource
management rules
and institutions etc.
 Ecological footprint
• The concept an of ecological footprint uses the idea of multiple constraints
• Six types of ecologically productive areas are distinguished in calculating the ecological
footprint:
• Land suitable for crops
• Pasture
• Forest
• Ocean
• Built-up land
• Fossil energy land (Assimilative capacity)
EF (C)= EF(P)+ (I-E)
Earth Overshoot Day
Ecological footprint critiques
• looks at the area of land a particular lifestyle uses, but its weakness
is that is unidimensional, considering only that area of land used.
• reasonable way of looking at topics like the food or paper
consumption of countries and the extent to which they import
resources,
• it is not good at dealing with other issues like global warming
• Perverse policy prescriptions
Carbon space
Environmental space as planetary boundaries
Sustainable consumption
Gro Harlem Brundtland

An average person in North America consumes almost 20 times as much as a

person in India or China, and 60 to 70 times more than a person in
Bangladesh. It is simply impossible for the world as a whole to sustain a
Western level of consumption for all. In fact, if 7 billion people were to
consume as much energy and resources as we do in the West today we would
need 10 worlds, not one, to satisfy our needs decoupling economic growth
from the consumption of resources.
 Critiques of environmental space
David Pearce in Blueprint 4

• consumption in the sense of use of goods and services and the consumption
of materials, energy and the assimilative capacity of the environment should
be differentiated
• Lost income in the North would not magically reappear in the South. Because
some of the consumption in the North spills over into demand for products
from the South, the South would be worse off, since it would lose a market.
• The really scarce resources are not materials and energy, he said, but the
assimilative capacities of the environment. Since they are shared globally,
damage is shared by everyone, both North and South.
• Move consumption patterns away from resource-intensive products towards
less resource-intensive products
Dematerialize economies by making energy and resource use much
more efficient even with existing technologies

In 1996, with Ernst- Ulrich von Weizsäcker and Hunter Lovins, Amory
Lovins published Factor Four, arguing that energy and resources
efficiency could be quadrupled with the widespread adoption of
existing efficient technologies that could already pay for themselves
through lower consumption of energy

Why ecoefficiency does not work?

What is a good measure of
sustainable development?

• GNP is flawed: just a measure of economic activity. It

indiscriminately counts all sorts of economic activity
• MEW (1972)Measure of Economic welfare :Nordhaus
and Tobin; all corrections except environmental costs
and benefits
• EAW (1981) Economic Aspects of Welfare: added rents
for resources extracted; but ignored sustainability
(Economic growth and declining social welfare could
co-exist)
• Herman Daly’s Index of Sustainable Economic Welfare
(ISEW): adjustments for depletion of natural capital,
the costs of pollution and social issues like increasing
unemployment and inequality
• the measure of ISEW increasing until the 1970s or early
1980s and then declining.
 GNH

• First coined by Bhutanese king in 1972

• Emerged in the context of a cohesive, isolated Mahayana
community
• Method of measurement –day reconstruction method (Kahneman
2000) only qualitative measurement
• Subjectivity questioned
• Used in tandem with Genuine Progress Indicator
 GPI

• From Waring, M (1980s) looking at UN system of national

accounts
• GPI will be zero if the increases social and environmental cost
equal the total rise in production of goods and services, ceteris
paribus
• Application: EC countries
 Measuring sustainable development

• Earth Summit (1992) called for a revised measure of GNP (GNP

assumes that there is only one form of capital – i.e. manufactured or
human-made) based on capital approach
• NNP is better than GNP since it takes care of capital depreciation
• After Weitzman (1976 ), Solow (1986 ), Hartwick (1990) and Maler
(1991)
• NNP is used as a SD indicator with depreciation of all resources taken
into account
• NNP = GNP – dM – dN – dH - dS
 Inclusive Wealth Index, IWI (2012)
• Inclusive Wealth Index, IWI) that measures the
wealth of nations by comprehensively analysing
a country’s capital assets, including
manufactured, human and natural capital, and
its corresponding values.

• By assessing changes in natural capital (such as

forests, watersheds, fossil fuels and fisheries)
over time, in addition to manufactured and
human capital, the concept of inclusive wealth
puts new emphasis on the changing state of a
country’s natural resource base and impact on
long-term economic and social sustainability.
Inclusive Wealth Report 2018 

rate of growth of per capita

inclusive wealth
1992-2014
Sustainable Development Index
• https://www.sustainabledevelopmentindex.org/#:~:text=The%20Sust
ainable%20Development%20Index%20(SDI,be%20achieved%20within
%20planetary%20boundaries.&text=Countries%20that%20achieve%2
0relatively%20high,boundaries%20rise%20to%20the%20top
.

• Each nation’s human development score (life expectancy, education

and income) divided by their ecological overshoot: the extent to
which consumption-based CO2 emissions and material footprint
exceed per-capita shares of planetary boundaries
Hickel, Jason. 2020. “
The Sustainable Development Index: Measuring the Ecological Efficiency of Hu
man Development in the Anthropocene
Putting prices on planet! • Root of unsustainability is
the absence of market
value for nature

• Private profit vs. public

costs
• Cost- benefit analysis:
calculate what a set of
environmental goods is
worth to people in
monetary terms
How to price environmental goods?

• Shadow prices
• assigns greater value to the
interests of the rich than to
those of the poor
• Contingent valuation
-Willingness to pay and
willingness to accept
• Stated preferences
• Discount rates

• Putting a price on nature

 How to internalize externalities?
-Market based PES mechanisms
Environmental taxes
• William Nordhaus, calculated in 1990 to reduce energy demand, it would be
necessary to increase taxes to discourage energy consumption

• carbon taxes by the European Commission and the Clinton Administration in the
early 1990s, but they failed.

• In 1991 modest carbon taxes were introduced in Sweden and Norway, but then
reduced because of opposition from business.

• The Netherlands introduced a carbon tax on households and small businesses in

1996
 William Nordhaus
RICE (Regional Integrated Climate-
Economy Model) and DICE (Dynamic
Integrated Climate-Economy) model
• Model to guide policymakers on
how best to address the costs and
benefits of limiting GHGs

Optimisation by choosing a carbon tax that balances benefits of polluting economic

activity against the costs of climate damages
Issues: Balancing diverse costs for rich, poor, today and futures, interconnectedness
and nonlinearity of economic systems
 “Do nothing about it”
“Rolling the ‘Dice’: An Optimal Transition Path for Controlling Greenhouse Gases
(1993): “A growing body of evidence has pointed to the likelihood that
greenhouse warming will have only a modest economic impact in industrial
countries, while progress to cut will impose substantial costs.”
A 3 degree C warming would cost the U.S. economy only 0.25% of national
income. Unquantifiable variables might affect that prediction, but only bring the
cost up to about 1% of national income.
1992: net economic damage of 3 degree C global warming is $5.6 trillion (about
$10.2 trillion in today’s dollars). IPCC estimates $69 trillion.
Carbon tax: An optimum tax on carbon at $31 a ton, which, is about three times
his too-low 1992 estimate.
• Nordhaus, (1991) “Climate change and global warming need not
be taken seriously, as it would affect mostly agriculture alone and
it forms only 3% of the GNP of USA”.
• Obviously, all GNP come from natural resources and even this
3% of GNP is so crucial that we may be able to live without the
rest but for this. (You can’t eat GNP)
Ecotaxation
Shift in the tax burden from labour to energy and raw materials
• the British government announced the Climate Change Levy, a tax on
industrial and commercial energy raising £1.8 billion (US$2.7 billion)
per annum from 2001, with the revenues to be recycled in reduced
national insurance contributions
• Improve efficient technology also, net tax neutral
• But political minefield! Lobbying, lack of awareness
• Non-competitiveness of high energy price
Emission trading
• Emissions trading for carbon dioxide was pioneered in national
schemes in a number of European countries, leading to the
establishment of the European Union’s Emissions Trading Scheme
• ‘tax’ is politically toxic.
• A second reason is that the higher costs involved in emissions trading
are not so obvious as with a tax, so do not arouse so much opposition
David Pearce
• The idea that you cannot put a value on global warming damage is
self evidently wrong because it’s been done. People may want to
argue with the results, but it’s been done… Why can’t you put a value
on global warming? I don’t understand why not. If I look at it very
simply, if I have global warming and I have sea level rise, then the
relationship between warming and sea level rise is a scientific issue. It
has nothing to do with economics
The Brundtland Commission argued that ‘[e]ven the narrow notion of
physical sustainability implies a concern for social equity between
generations, a concern that must logically be extended to equity within
each generation.

• If some people’s personal consumption fills up the atmosphere with

greenhouse gases that leads to climate change which drowns the
homes and livelihoods of people in Bangladesh or the Maldives, the
right to freedom from state intervention in the first group’s private
affairs outweigh the latter group’s freedom to live in their homes?