Department of European Economic Studies
Raimund Bleischwitz
Projektseminar
Europäische Umweltpolitik:
ökonomische Aspekte und
Einbeziehung der Lissabon-Strategie
BU Wuppertal 2007/08
... Heutiges Programm…
1) Marktversagen (kollektive Güter, externe
Effekte) als Theorie der Umweltpolitik
Vortrag
Präsentation: Claudia Hirtl “Kosten und Nutzen der EU Luftreinhaltepolitik“, aus Krankheitsgründen vertagt
2) Ökonomie ‚nachhaltige Entwicklung’
Vortrag
Präsentation: Ayse Yildrim, Andreas Suckow „Environmental
Kuznets Curve“: Findet in der EU eine Entkoppelung der
Umweltbelastungen vom BIP statt? Theorie und Empirie
Fahrplan
(am Fr vorher Entwurf der Hausarbeit, PPT-Präsentation und
Thesenpapier übersenden!)
5) Unternehmenstheorien,
Theorien der
Wettbewerbsfähigkeit und
Implikationen für die
Umweltpolitik
21.4.
Nachhaltige
Unternehmenskonzepte und
Umweltinnovationen:
Zertifizierungssysteme als
marktendogener Beitrag zur
Überwindung von
Informationsasymmetrien (Lit:
Silvia Kurte
Claudia Hirtl
Michael Conroy, Branded!, New Society
Publisher 2 0 0 7 )
6) Anreizinstrumente in
der europäischen
Umweltpolitik
21.4.
7) Die Strategie zum
nachhaltigen
Ressourcenmanagement
5.5.
8) Ökonomie der Klimaund Energiepolitik
1 ) K osten und Nutzen der
Ökosteuer (D)
2 ) S teuern auf Baustoffe
(UK) – ein Modell für die EU?
http://www.worldecotax.org.html
Nicht-erneuerbare Rohstoffe und
Nachhaltigkeit: Theorie, Status
Quo und und Perspektiven für die
EU
a) Kupfer
b) Phosphat (vgl. z.B. UBA-Text
vom IFEU Institut)
Der ‚Stern-Report’ zur Ökonomie
des Klimaschutzes: Darstellung,
Analyse (auch: Gegenargumente
von Skeptikern),
Schlussfolgerungen
Daniela Scheffels,
Nana Scholl
Maik Kickuth,
Mimonn Aoulad
Racha Ben Hay,
Andreas Frank
Why are market failures relevant?


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People respond to incentives!
Misleading price signals and inappropriate
property rights lead to overuse of nature
(natural resources and ecosystems)
Even if environmental technologies & more
sustainable patterns of production and
consumtion were developed (see ETAP, EU
SDS), any dissemination is faced with
information deficits, acceptance and other
barriers.
Theory of Collective Goods I

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Public goods: non rivalry in consumption, no
excludability, e.g. national defence, earth
atmosphere
Introduced by Samuelson (1954), Musgrave (1958),
further papers e.g. by by Olson (1966) on the ‘logic
of collective action’ and by Hardin (1968) on the
‘tragedy of the commons’
Problem: Everybody benefits, but no incentive to
invest in provision or maintenance
Provision of public goods is a public task!
Question to course participants: is the environment a
public good?
Theory of Collective Goods II
Common-pool resources: rivalry in consumption, no
excludability, e.g. congested roads, fish in the ocean
 Club goods: excludability, no rivalry in consumption,
e.g. a course at the CoE
 Status goods: limited access, benefit from
exclusiveness, e.g. whale watching
 Network goods: increasing returns with increasing
number of users, users are interconnected, e.g.
telecommunication
=> Common denominator: non-private goods. Collective
goods comprise public goods and other non-private
goods.

Economics of CPR

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An open-access resource can
be defined as a commonproperty resource that lacks
any system of rules governing
its use
Constant returns = additional
access (boats) increases total
production (Fish)
Diminishing returns =
additional access (boats)
increase total production but
diminishes individual
production (fishes)
Absolutely dominishing
returns = additional access
decrease total production
(overfishing)
Incentives
to overuse



Profitable business attracts new entrants
process of entry continues until average revenue
falls below the marginal cost of operating a boat
(1200 boats)
Such economic signal comes far too late—too late
for economic efficiency, and too late for ecological
sustainability.
Empirical evidence for
overuse



Fisheries have
collapsed (MEA 2005)
What if such changes
occur nonlinear?
A few examples for
nonlinear changes:





Eutrophication and
hypoxia
Disease emergence
Species introductions
and losses
Regional climate change
Maximum sustainable
yield needs
environmenal research
Problems ……………
o
o
o
o
Use as free rider ->
overuse
Poor incentives for
provision and
maintenance
under supply or even
no supply at al
.... But bureaucracy for
public provision may be
driven by self-interest
(=> over supply!)
(public choice)
and Solutions
Preference analysis: willingnessto-pay, contingent valuation etc.
 Optimal taxation (for public goods)
 Property rights (“why the cow is
not extinct”) for common pool
resources
 User fees (for cpr, club goods,
network goods)
 Regulated competition (for
network goods, natural
monopolies)
Others? What is the interest of firms
and individuals?

Coase Theorem




Option (a): damage costs exceed abatement
costs for the polluter -> polluter is likely to reduce
pollution.
Option (b): abatement costs exceed damage
costs -> polluter is likely to compensate the victim
Both options are efficient solutions according to
Coase (1960, and H. Demsetz, 1969)
Coase: negotiations among affected parties will
result in an efficient and invariant outcome under
the standard assumptions of competitive markets
(especially, that the costs of transactings are
zero), as long as property rights are well-defined.
Applying the Coase
approach


An efficient level of pollution as a result of freely
negotiated property rights
A right to pollute provided the victims are compensated
for their damages.
• Optimal level of
pollution when the
marginal benefits to the
company balances the
marginal costs to the
community imposed
through pollution.
Free market
environmentalism? No!
Assignment of property rights
 Costs to negotiate (transaction
costs)
 Free riding
 Holdout effect
 Public choice if the number of
parties is high
 Equity issues / organisation of
weak interests

Discussion Questions
Consider the EU SDS. How are the
environmental elements related to
collective goods? What are the
characteristics of these elements?
 Remember the DPSIR framework.
For which elements is it essential
to analyse collective goods in more
detail? Why?

Discussion questions


Would a good policy for fishery management aim at
obtaining the maximum sustainable yield? Why or
why not? When we speak of an optimal equilibrium
from an economic point of view, will this equilibrium
also be generally ecologically sound? What might
cause economic and ecological principles to conflict in
fisheries management?
Discuss the effects of technological improvement in
an industry that uses a common-property resource.
For example, consider a technological improvement in
fishing equipment that cuts the costs of a fishing boat
trip in half. Technological progress usually increases
net social benefit. Does it do so in this case? How
would government policies relating to this industry
affect your answer?
Relevance for EU
environmental policy
Very high! State of the
environment can be considered to
be a collective good.
 Climate policy intends to maintain
a public good, resource policy
intends to maintain CPRs
 Methods also relevant for collective
action problems

Conclusions on collective goods


Many challenges to approach sustainability
can be explained with analytical framework on
collective goods.
Since pure public goods are rare, some
private interest in the provision of
sustainability may exist! Governments are as
important as private actors and social groups.
Task is to set incentives and to enable
collective action (incl. implementation), i.e.
more than to design optimal public policies
(and complain about weak implementation)
=> corporate and civil actors are at least as
important as politicians!
Externalities and External Effects

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

Externality = the impact of one person‘s action on the well-being of a
by-stander outside price mechanism
Papers written by Coase (1960) and Kapp (1952/1954).
An externality may exist whenever the welfare of some agent, either a
firm or a household, depends directly on his or her activities and on
activities under the control of some other agent as well.
An externality exists when the consumption or production choices of
one person or firm enter the utility or production function of another
entity without that entity’s permission or compensation.
Example: a power station that generates emissions of SO2, causing
damage to building materials or human health, imposes an external
cost. This is because the impact on the owners of the buildings or on
those who suffer damage to their health is not taken into account by
the generator of the electricity when deciding on the activities causing
the damage.
Externalities and External Effects
Positive and negative externalities
 Negative externality = social cost exceed production cost, e.g.
environmental pollution
 Positive externality = production cost exceed social cost, e.g.
education
Characteristics from negative externalities:
 Non-rival: when A is suffering from pollution, others will not suffer
less (e.g. ambient air pollution)
 Non-excludable: there is no intention to harm but no agent can be
excluded from consuming the bad

Negative Externalities
pc
sc
p
Positive Externalities
p
pc
o
sc
e
e
o
q
e = production cost (pc) lower than social
cost (sc) => too much of a bad thing
q
e= production cost higher than social cost
=> under-provision of a good thing
Elements for analysing externalities




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Potential damages in physical terms (impacts
on health, mortality, accidents, ecosystems
both on an inter-temporal and inter-regional
scale)
Directly or indirectly affected persons and their
perception about the damages
Monetary analysis on damage costs,
willingness-to-pay for compensation, avoidance
costs
Driving forces for causation: certain
technologies and legal persons (e.g. firms)
Dealing with risks, uncertainties, perception,
stakeholders’ self-organisation
Internalisation of External Costs:
Two Approaches
©
©
©
©
©
©
©
Private solution (Coase): bilateral
bargaining among polluters and
victims.
May even work without markets or
states.
Task: defining property rights (access,
use, compensation etc.)
E.g. if a company causes dust and
other forms of local pollution it may
compensate affected people and/or
reduce level of pollution.
Economic incentives by tradable
permits: defining a price, => a right to
pollute according to social costs
Task: defining a target
But: administrative costs, information
deficits, scope may lead to collusion
and new externalities for third parties
(e.g. by high chimneys)


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Governmental solution (Pigou):
tax seize according to externality,
e.g. eco-tax
Price signal to which actors will
respond
Task: defining a tax rate (=price)
e.g. if the external cost of
producing electricity from coal
were to be factored into electricity
bills, between 2 and 7 cents per
kWh would have to be added to
the current price of electricity in
the majority of EU Member States
(ExternalE project)
But: Administrative costs,
information deficits, political
opportunism, rent-seeking
Economics of ecotaxes



Steering effect:
price increases
to P2, demand
decreases to Q2
Industry and/or
consumers may
complain, but
prices reflect
real costs =>
new social
optimum
Issues: size of
the tax, tax
base, special
considerations
for e.g. large
users
Economics of environmental subsidies



Positive externalities
provided by open land
(and nature
protection); marginal
social benefits exceed
marginal private
benefits.
Subsidy increases
supply up to social
optimum of Qs
Issues: size of the
subsidy, instrument
(e.g. tax reduction,
direct payment)
Internalisation strategies by firms? … see e.g.
Matsushita Group’s Environmental Accounting
In-house Economic Benefits
Category
Reduction
effects
1-year effect
3-year
accumulated
Environmental Conservation Benefits (in physical
values)
Category
Reduced
amount
(tons)
Environmental
conservation
effects in
business
activities
CO2 emissions
Environmental
Conservation
Benefits
(In monetary values:
Unit: Mln yen)
Reduction of energy conservation
costs at business units
2,085
Reduction of waste disposal costs
598
1,680
Reduction of water and sewerage
costs
139
572
NOx emissions
(Japan)
674
134
7
2,864
SOx emissions
(Japan)
Controlled chemical
substance emissions
(Japan)
29.5
2
Reduction of packaging materials
and distribution costs
Profit on
sales of
resources
for
recycling
(Unit: Mln yen)
1,000
Profit on the sales of waste from
plants
for recycling
4,130 (1-year)
GHG emissions (CO2
excluded)
Final disposal of
industrial waste
Profit on the sales of end-of-life
products for recycling
Total
6,813
291(1-year)
8,243
16,350
Monetary conversion coefficients (yen/ton):
CO2 ,9,450; NOx, 66,315; Sox, 50,159;
Water use
Environmental
conservation
effects during
product use
CO2 emissions４)
(Japan)
Packaging materials
use
Corrugated cardboard
22,398
212
-138,348
-1,307
45
11,773

1.45 mil m3
52
606,000
5,727
2,380
-237

Expanded polystyrene
Total 4,738
VOC, 50,090; ground water, 36;
electricity, 23. (yen/kWh)
Reduction in CO2 and electricity costs during product use
are calculated based on figures of four major home
appliances
(TVs, refrigerators, air conditioners, washing machines).
Customer Economic Benefits
Reduction in electricity
４
costs during product use)
Electricity
1,603.2 Mln kWh
(Unit: Mln yen)
Cost
36,874
FAQs on externalities
Why do the numbers differ?
=> Based on different methodologies:


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e.g. avoidance costs, damage costs, analysis of preferences of
the population affected, multi criteria decision analysis with
stakeholder involvement) etc.,
quantification of impacts e.g. of health effects,
valuation of services from ecosystems,
discount rate,
ethical assumptions...
Can the numbers be used, given that range of
uncertainties?
=> Yes, but more for a quantitative comparison of
magnitudes, impact assessment of response options.
Numbers have been used in EU legislation, e.g. in Large
combustion plant directive.

Conclusions on externalities



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No accurate or official data yet, framework still
improving on criteria for evaluation, treatment of
uncertainties, internalization of externalities,
discussion with stakeholders
Relationship between pressures and impacts (causeeffects) often uncertain => transparency important
Nevertheless useful for preparing decision-making
Strategic decision-making should also look at low-risk
alternative options, step-by-step approaches for
internalization, strategic partnerships, long-term
options => sustainability seen as a positive goal,
driven by private involvement!
See also EU research project under www.ExternE.info
Course work

1. Consider the following supply and demand schedule for
steel:
Price (€)
20
40
60
80
100
120
140
160
180
Qd
(mill t)
200
180
160
140
120
100
80
60
40
Qs
(mill t)
20
60
100
140
180
220
260
300
340
Pollution from steel production is estimated to create an
external cost of sixty € per ton. Show the external cost,
market equilibrium, and social optimum on a graph. What
kinds of policies might help to achieve the social optimum?
What effects would these policies have on the behavior of
consumers and producers? What effect would they have on
market equilibrium price and quantity?
Discussion
1.
2.
3.
Discuss your reaction to the following statement: “Solving the problems of
environmental economics is simple. It is just a matter of internalizing the
externalities.” Does the theory of externalities apply to most or all environmental
issues? What are some practical problems involved in internalizing externalities?
Describe examples where the principle works well, and some where it is more
problematic.
A pollution tax is one policy instrument for internalizing externalities. Discuss the
economic policy implications of a tax on automobiles, a tax on gasoline, or a tax
on tailpipe emission levels as measured at an auto inspection. How about taxing
gas guzzling vehicles and subsidizing efficient hybrid vehicles? Which policy
would be the most efficient? Which do you think would be most effective in
reducing pollution levels?
According to the principle expressed in the Coase theorem, private property
rights and voluntary market transactions can be effective tools for environmental
policy. Discuss some cases where private property and market-based solutions
can be effective, and others in which they are less appropriate. How can
policymakers best combine market-oriented and public-choice mechanisms to
craft effective environmental policy?
2) When economics comes
in

Sustainability economics
‘Weak’ and ‘strong’ sustainability
„weak“ sustainability
 Maintaining the capital stock of an economy
 Papers e.g. from Pezzey (1992), W. Beckerman
 Assumes substitutability between natural and man-made
capital
 Requires “currency” for measuring changes among different
types of capital
 Recent approaches ‘genuine savings’ (Atkinson 1997),
‘comprehensive wealth’ (measures human capital and
technology (Hamilton, World Bank): investments of an
economy should be higher than asset losses in nature
=> Relevant and reliable for resource-dependent countries (e.g.
Bolivia). If applied it may nevetheless jeopardize the natural
environment, especially if long-term losses and losses in other
regions are insufficiently accounted for.
Case study: Bolivia
‘Weak’ and ‘strong’ sustainability
„strong“ sustainability
Maintaining the natural capital stock of an economy
 Papers e.g. by Herman Daly (1991)
 Does not assume any substitutability between natural and
man-made capital
 Requires physical indicators for measuring changes within
natural capital
 Leads to quality targets and emission targets
 Accepts low or declining economic growth rates (steady-state)
 Visible e.g. in UNFCCC Art 2: no negative interference with
climate, ability to adapt for ecosystems, EU has adopted 2º C
target!
 Ecological economics = branch of economics devoted to strong
sustainability
=> Relevant for stringent environmental policy.

‘Golden Rules’ of Sustainability




Use renewable resources in such a way that the harvest
rate is not greater than the natural regeneration rate
(=maximum sustainable yield).
Keep the emissions to the natural environment below the
assimilative capacity of the environment (=carrying
capacity).
Use non-renewable resources in a way that their reduced
stock is compensated for by increases in renewable
resources (Hartwick-Rule).
Allow for that a given standard of living can be secured
from a reducing stock of resources.
David Pearce, Kerry Turner, Herman Daly
Natural Capital -> Ecosystem Services
The benefits people obtain from ecosystems
Source: MEA 2005
Consequences of Ecosystem
Change for Human Well-being
Consensus on ‘weak’ and ‘strong’
sustainability
Limited absorptive capacities of natural ecosystems
are generally accepted
 ‘Life-supporting functions’ of natural capital should be
maintained
 Investment rule (genuine savings) seen as guiding
principle for improvements especially for resourcedependent economies
 Environmental indicators and targets have been
developed
Question to course participants: Is such consensus
closer to ‘weak’ or ‘strong’ sustainability? What is the
role of economics?

The “decoupling challenge”: How to
enhance quality of life with less use of
nature?
“Happiness”
Quality
of life
Economic Sustainable
Production
growth
Pressure on
the environment
Social capital
Health, Security
Income,
Investments
Innovation
Sustainable Growth - the ‘Kuznets
curve’





Observed phenomenon: as economies grow, emissions first grow
and then decline.
Follows Kuznets observation (1955) that rising per-capita income
were associated with initial increase in inequality and a subsequent
decline.
Crucial questions: what are the relevant pressure indicators, what
are the driving forces behind any relative and absolute decoupling
between economic growth and environmental pressure?
Market drivers: factor endowments, relative prices, competition and
innovation, specific demand, etc
Policy drivers: expressed preferences of voters, effectiveness of
environmental policy / ministry, quality of regulation
Question to course participants: what would you consider to be
relevant indicators and drivers? How would you conduct an analysis
on the evidence of the Kuznets curve?
Why sustainability challenges can
be considered a business case





Environmental policy (triggered by sustainability
challenges) has an impact on industry
‘Porter Hypothesis’ (1991, 1995 etc): regulation can
stimulate innovation that may offset compliance costs and
may lead to new markets
New ‘green’ markets emerge as a result of changing
preferences and policies
Economic explanations include hidden potentials for cost
savings (‘X-Inefficiency’, Leibenstein, 1966), bounded
rationality (Simon 1979), etc.
Importance of business strategies: change management
towards precautionary, pro-active approaches
Discussion questions


Does an improved standard of living necessarily means
more consumption? Is it possible to envision a future
in which consumption of many goods and natural
resources would decline? Specify your perspecitive!
If so, what would it mean for innovation and economic
growth? How might the perception of these questions
differ between, say, a citizen of France, US, Lithuania,
India?
Task
Read the EU progress report
on the SDS 2007
Präsentation:
Ayse Yildrim, Andreas Suckow
„Environmental Kuznets Curve“:
Findet in der EU eine Entkoppelung
der Umweltbelastungen vom BIP
statt? Theorie und Empirie