Next class: Mid term test (2 hours)
20 multiple choice questions (30%)
ALL readings (anything is fair game from the readings)
Spencer Well’s (from Pandora’s seed)
&
Robbins et al,
Chapter 1,2,3 & 4
3 essays questions relating the readings and to what we’ve discussed in class (70%)
Market based Environmentalism
& “Institutions and the commons”..
The prisoner’s dilemma
• A theoretical game in which a particular action would benefit all, but
individuals behaving selfishly will create a situation that is not optimal for everyone.
I know the bugger & his buddy
did it, but I need hard evidence to
make them do “hard” time
Interrogator has evidence that you committed one crime, but suspects strongly that you and your “partner in crime” were
responsible for many more.. (you are being kept in isolation and have no way of communicating with partner).
Current situation:
You will spend 1 year in prison for the crime committed., unless..
If you “provide evidence” against your colleague on the other crimes, you can get a reduced sentence (probation: no prison)
Your colleague will do the hard time (5 years of prison)…
What do you do?
Figure 4.1: The prisoner’s dilemma
The best outcome for the two prisoners involved? Shut up and “cooperate”
TOTAL TIME IN PRISON 2 years (1 year each)
If both pursue “self interest” assuming
that the other doesn’t..
Worst case scenario..
Best rational outcome for either prisoner: Rat out the colleague, other one shuts up
TOTAL TIME IN PRISON 5 years (5 years for one, 0 for the other)
And if both “rat out” their partner… worst case scenario for them, right?
Total time in prison 10 years (5 years each)
The tragedy of the commons
• The ecologist Garrett Hardin theorized the tragedy of the
commons as a particular type of prisoner’s dilemma
This is a situation where individuals acting independently and rationally according to their own
self-interest behave contrary to the best interests of the whole by depleting some
common resource.
Providing a bit of context:
Main stream economics: Adam Smith
18th century economist
Free market capitalist promotes economic prosperity for all..
If everyone works hard to promote their own self interest,..
through markets and exchange, everyone benefits..
“Ethical foundation for capitalism???”
Adam smith makes reference to the “invisible hand” of
free markets, as a metaphor to describe unintended social
benefits resulting from individual actions.
The tragedy of the commons
An example of a type of market failure
clear contradiction of “Adam Smith”..
Prior to the 19th century:
Custom in many English village to let their cattle, livestock graze
freely on the “commons”
The term “commons” derives from traditional English legal term of
“common land”
This land might have been owned “collectively” by the village or by
“the crown” without clear ownership or regulation..
For millennium, farmers/peasants would graze their livestock, hunt,
collect wild plants, etc..
THE PROBLEM:
Everyone has access to a commonly held pasture
No rules about sustainable numbers for grazing
Each herder benefits more from adding more animals (cost to farmer is zero)
Nobody has an “private” incentive to stop overgrazing,.. In fact, if you don’t use it, your neighbor will..
The land belongs to everyone, so in a sense it belongs to nobody..
Over the longer term: land can no longer sustain grazing animals, and everyone loses..
Nice place for a hike, with nice views..
1000 years ago, the UK was covered with forest
Major deforestation due to “pastoral agricultural” which continues through to the present..
Common Access Resources:
Shared and unregulated resources available to all, but owned by none?
No private ownership, and no system for managing the resource..
Fish in the sea?
Forests?
Atmosphere?
Note:
11% of Canada’s land mass
is privately owned..
Rivers, lakes?
The following video clip is put together by an “economist” with an interest in
Markets and the Environment
Elaborates on the problem: “The Tragedy of the Commons”..
In this video, he distinguishes between:
Private costs for a producer of a good, service, or activity which includes the costs the firm pays to purchase
capital equipment, hire labor, and buy materials or other inputs.
External costs, costs which are not reflected on firms’ income statements or in consumers’ decisions, but very real
nevertheless! These external costs remain important to society overall, regardless of who pays for them.
E.g. a Company saves money by not installing water pollution control equipment.
Because of the firm’s actions, cities located down river will have to pay to clean the water before it is fit for drinking,
the public may find that recreational use of the river is restricted, and the fishing industry may be harmed.
Social costs include both the private costs and any other external costs to society arising from the production or
consumption of a good or service. Social costs of production” (i.e. private costs & externalities)
Don’t worry about the technicalities/diagrams here in terms of economics in this clip..
https://www.youtube.com/watch?v=NZAwGoIAFgM
Fisheries (as an example of the “Tragedy of the Commons”
Let’s consider Newfoundland’s Cod Fisheries..
Basque and Portuguese Fishers,
evidence going back as far as the 15th
century
Employed 1000s of Newfoundlanders, from the
19th century onward!!
Until the 1950s, largely smaller scale operations..
Sustainable & labour intensive..
1960s onwards: Trawling fleets from around the world.
Most vessels came from North America and Europe – primarily the Soviet Union, Spain, France,
and Portugal – although smaller numbers also arrived from Asia, the Caribbean, and elsewhere.
Technologies evolved with massive engine power vessels and frozen food compartments aboard ships. Engine power vessels had
larger nets, larger engines, and better navigation. The capacity to catch fish became limitless. In addition, sonar technology gave an
edge to catching and detecting fish. Sonar was originally developed during World War II to locate enemy submarines, but was later
applied to locating schools of fish. These new technologies, as well as bottom-trawlers that destroyed entire ecosystems, were vastly
different from old techniques used, such as hand lines and long lines.
Thinking of the fisheries:
Private costs were low and the cod were treated like a
“global commons”
Demand was increasingly driven by a world wide market
Population and “demand” increases, so too does price, and
hence: more fishing..
Trawlers (1960s onwards) from the Soviet Union and its satellite
countries, Great Britain, Spain, Portugal, Japan, and Canada
Note: Canada (via a UN treaty) extended a 200-mile limit in 1977,
limiting the fisheries to solely Canadian fishers in parts (yet not all)
the Grand Banks
But,.. Too late!
Complete collapse of the fishery, because of “little regulation”,..
.. Tragedy of the commons..
Various competing interests, yet nobody taking into consideration
the true social costs of fishing.. Which includes its long term
sustainability..
Added complication:
Ignorance and Politics: Nobody really had a clear sense
as to how “limited” the resource might be… How
sustainable were current practices..
Even among those that are highly concerned and
informed:
“UNCERTAINTY” among “scientists” and “experts”>>>
-> leading to a lack of political will.
Moratorium on fishing cod within Canadian waters since about
1992
This lead to one of the largest industrial closure in Canadian
history. In Newfoundland alone, over 100,000 persons (fishers,
plant workers & their families were directly impacted and it had a
devastating impact on over 400 coastal communities..
Scientists, the public, fishers and politicians debated what the limit to “catches” might
be right to the end.. & all grossly overestimated the capacity of our oceans to sustain
heavy fishing
The tragedy of the commons:
Hardin’s solutions
• Hardin says that since people will act in their own
interested, there are only two solutions:
1. Privatization
2. Enforcement of regulations/restrictions (coercion?)
• Hardin prefers privatization
• individuals have incentive to manage property sustainably,
they are the only ones hurt by their actions
• Hardin’s theory is widely accepted, so many
environmental issues are managed either through
strict regulation or privatization
• Let’s consider another example, while thinking of potential “market
based” interventions to deal with the problem
The “atmosphere” as our “global commons”..
Greenhouse gases as “externalities” since most polluters (individuals and industry) do not consider them as part of
their “private costs”..
Why do we consider the atmosphere as our “global commons”?
Obviously: Carbon dioxide does not stay in place
Emissions come from a set of locations, but the impacts are shared (unevenly) by all
Owned by all, but by no one..
How do we control carbon?
How can cooperation be achieved?
Controlling carbon?
Though long promised, the Harper Government refused to impose greenhouse gas regulations
on the oil sands – the fastest growing source of emissions – or indeed on any industrial source
other than coal-fired power. Why?
Direct quote:
“In fact, Mr. Speaker, nobody in the world is regulating
their oil and gas sector. I would be delighted if they did.
Canada would be there with them. However, we will not
impose unilateral penalties.”
Won’t act without uniform actions south of the boarder (U.S.)
Similar position on China, India, among other major emitters..
Harper’s logic for doing nothing
1. Canada is a “resource based economy” (including energy!!), and we must build on our strengths..
(obviously, not everyone agrees with this assessment).
2. More fundamentally, Canada acts unilaterally on “greenhouse gases” our economy faces a “competitive
disadvantage”..
Assume Government regulates:
… all production must convert as quickly as possible to cleaner forms of energy and cleaner technology..
Inevitably:
“Costs” to producers increases in Canada as we are also considering the social costs of production (i.e. the long term
sustainability of economic activity, given the potential risks & costs of climate change”
Recall: Fossil fuels (Oil, Natural Gas, Coal) all tend to be much cheaper than “renewable energy” (wind; solar).
Canada’s economy suffers relative to any other country that fails to consider the “social costs” of energy use.
Production (which has a lower cost to its energy).
Harper is obviously downplaying (or ignoring) the longer term “social costs” to Canada and the World economy..
Returning to a bit of “game theory”
(Prisoner’s dilemma was an example of game theory)
Let’s consider the two world’s largest GHG polluters,..
.. And two largest economies
Returning to a bit of “game theory” (Prisoner’s dilemma was an example of game theory)
Both pay the same for energy
(full social costs)
BEST CASE SCENARIO
LONG TERM SUSTAINABLE ECONOMIES
China has the economic advantage
The U.S. economy takes the hit due to
higher energy costs..
BAD SITUATION, BUT NOT AS BAD
AS IF CHINA DID NOTHING
LONG TERM COSTS GREATER THAN
BEST CASE SCENARIO
U.S. has the economic advantage
China’s economy takes the hit due to
higher energy costs..
BAD SITUATION, BUT NOT AS BAD
AS IF THE U.S. DID NOTHING
LONG TERM COSTS GREATER THAN
THE BEST CASE SCENARIO
Both pay the same for energy
(ignore the social costs)
WORST CASE SCENARIO
LONG TERM ECON/SOCIAL DISASTER
HENCE: VERY DIFFICULT
TO ESTABLISH INTERNATIONAL
AGREEMENTS ON REDUCING
EMISSIONS..
Market environmentalism
• Environmental problems can be solved by the (free) market economy
(this seems to be consistent with Hardin’s position)
• Emphasizes the use of market-based instruments to internalize environmental
externalities and other sources of market failure
• Examples of approaches:
• Green taxes
• Green consumption
• Trading and banking (such as cap and trade)
GREEN TAXES: refers to taxes intended to promote environmentally friendly activities via
economic incentives/disincentives.
EXAMPLES:
Carbon taxes: extra cost in using fossil fuel (coal, gasoline, oil, natural gas)
Several countries have introduced this, including Sweden, Ireland, Finland, Great Britain. Canada
has introduced such taxes in BC, Alberta & Quebec, although to date they have been rather small
Specific taxes on technologies/products/services which are associated with substantial
negative externalities (example: higher taxes on gas guzzling vehicles or air travel)
-Some jurisdictions in Canada/USA have taxes on gas guzzling vehicles
Green taxes
Waste disposal taxes and refundable fees (municipality charge more for households that throw out more waste).
Duties (or taxation) on imported goods that are produced in countries that do not have the same sort
of environmental standards (interesting idea?)
Advantage of “green taxes”..
Can directly address the failure of free markets to consider “environmental impacts” (i.e. the market
prices not only reflect “direct production costs” but also the “social costs” of producing specific goods
and services..
Perhaps easier to implement that “regulatory approaches”, i.e. no need for enforcing standards, as you attempt to
modify behavior and systems through the marketplace..
Think of Julian Simon: If prices rise, forces society to “innovate”, increase efficiencies and potentially substitute…
An additional “revenue” for governments, that can then be used to finance further “environmental initiatives”
e.g. tax carbon, and then subsidize the development of green energy.
Disadvantage: potentially increases costs for those that can least afford it..
e.g. non-competitive struggling industries
poor persons, ..
BUT, as a rebuttal: “green taxes” can be potentially “revenue neutral” (i.e. overall tax revenue could remain
unchanged, with governments implementing a “tax shift”: e.g. reduce other taxes on human labour, renewable
Resources and more “sustainable” products/services, tax breaks/credits for lower income households, etc.
Green consumption:
Individuals choose goods or services based on their environmental impact (often certified in some manner)..
No coercion: i.e. nobody is being told what to buy, & persons are free to continue to purchase “non-certified” products.
E.g. Provide persons with the choice to purchase produce that is grown with
more sustainable agricultural products (certified organic)
https://www.youtube.com/watch?v=KwNJhw9tAW4
Triclosan is toxic to aquatic bacteria at levels found in the
environment. It is highly toxic to various types of algae and has
the potential to affect the structure of algal communities,
particularly immediately downstream of effluents from
wastewater treatment facilities that treat household
wastewaters
Environmental groups have called for to be banned. "And it's
certainly not saving wildlife."
Major disadvantage is Greenwashing
green marketing is sometimes deceptively used to promote the
perception that an organization's products, aims or policies are
environmentally friendly.
Market environmentalism
One last policy option that is an example of a market based solution to an environmental problem
“Cap and Trade” -> reduce GHG’s / other atmospheric pollutants.
Involves “regulation”, but more importantly, attempts to use the market place to reduce environmental impact..
“Combined regulatory /market based approach”..
• Cap and trade –
• Eg. Quebec/California currently are commited.
• Ontario is seriously talking about it..
• Quebec is setting out to reduce its total emissions by about 20% by the
year 2020, by pricing carbon and generating what is called a “carbon
market”..
Politically popular in that it targets solely the larger polluters who are subject to
regulations that set a maximum for pollution emissions
i.e. Businesses that emit 25,000 metric tons or more of CO2
equivalent a year are subject to the cap-and-trade system.
First step: Price carbon!!!
CO2 is priced (releasing a ton of CO2 is equivalent to 1 emission unit)
1 emission unit is worth $10.75
70,000,000 tons of CO2 annually in Quebec is said to be costed at theoretically: $752,500,000!!
How does it work?
Second step:
After an 2013 inventory was taken, firms were allocated FREE “emission units” equivalent to their 2013 total
emissions.
An emission unit allows you to continue to pollute a ton of carbon..
E.g.
Firm A is responsible for 1,000,000 metric tons of CO2, they are provided
1,000,000 free emission units worth 10.75 each (value: $10,075,000)
Firm B is responsible for 2,000,000 metric tons, so they were allocated
1,000,000 free units (worth $21,150,000)
This is the starting point, but for each of the next five years, they will be supplied 3% fewer emission units each year.
If they pollute more than what their emission units allow them to pollute, they pay the difference…
Next step:
Quebec government says that all firms must reduce emissions by 3%, i.e. all companies are given 3%
fewer emission units.
If a Firm fails to reduce CO2 by 3%, they must pay the difference:
For example, in 2015 they had 1,000,000 emission units covering 1,000,000 metric tons
In 2016 they are allocated 970,000 emission units (3% fewer) covering only 970,000 metric tons..
The company must either reduce total emissions by 30,000 tons
Or pay 30,000 X $10.75 = about $300,000 dollars…
Note: if the company can reduce its carbon by footprint for less than $300,000
then this is a major incentive to clean up their act, as they can pocket their “emission units”
& sell on the carbon markt.
If a company can’t afford it!! doing nothing over years costs millions!!
but they can buy “carbon permits”.. to “pollute”..
A direct “cost” is placed on “carbon”!!! & this creates a “market for carbon”..
Why is it called “cap” and “trade”?
So far I’ve explained the “cap” which gradually reduces the amount of emissions that all companies can release into the
Atmosphere
“Cap” and “trade” allows a company to save and potentially sell its “emission credits’.. A carbon market is being produced.
Example, a company reduces its emissions far beyond the target (3%), they have surplus emission targets, which can then
be sold on the “carbon market”.
Why is this beneficial?
Why is this beneficial?
Consider two companies:
1st company is capable of reducing emissions at a cost of 5$ a ton, whereas
the second company requires 15$ a ton to do
Traditional regulatory approach: all companies
Must reduce by 30%
Cap and Trade: Same outcome: 30% reduction but
credits can be traded.
Each company initially produces 100 tons
But Note: Why
would Company A
bother to reduce
its
Emissions beyond
30 tons?
100 tons initial
Reduces by 30 tons
30 tons X 5$ = $150
100 tons initial
Reduces by 30 tons
30 tons X 15$ = 450$
Outcome: total reduction for both companies is 60 tons
Cost to both companies combined ($150)+($450) = $600
100 tons initial
Reduces by 60 tons
60 tons X 5$ = $300
100 tons initial
Reduces by 0 tons, but
purchases 30 tons worth of
emission units from
company A to cover its costs
($150)
Outcome the same: total reduction is 60 tons but..
Cost to both companies combined is less
(300-$150)+(0+$150) = $300
There is an
Incentive!
By creating a market on carbon permits, you can create incentives for companies to reduce CO2
by more than what they might have using the regulatory approach..
Again consider the same two companies:
1st company is capable of reducing emissions at a cost of 5$ a ton, whereas
the second company requires 15$ a ton to do
Traditional regulatory approach: all companies
Must reduce by 30%
100 tons
Reduces by 30 tons
30 tons X 5$ = $150
100 tons
Reduces by 30 tons
30 tons X 15$ = 450$
Outcome: total reduction for both companies is 60 tons
Cost to both companies combined ($150)+($450) = $600
Company A could have sold its excess permits at 8$ a ton (more than its cost to
reduce emissions 5$ a ton), and still both companies would be better off with
the same reduction in carbon
100 tons
Reduces by 60 tons
60 tons X 5$ = $300
100 tons
Reduces by 0 tons
But purchases 30 tons worth of
emission units from company A at 8$
a permit to cover its costs ($240)
Outcome: total reduction for both companies is 60 tons
Cost to both companies combined ($300-240)+($0+240) = $300
($60) + (240) = 300
Company A gets a competitive advantage by reducing more than
required (total cost to Company A is $60 after selling $240 worth of permits)
Advantage:
Politically easier to push through & looks promising in terms of reducing emissions..
Doesn’t target individual consumers..
Disadvantage relative to the “carbon tax”..
Involves much more regulation and administration