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Posts Tagged ‘environment’

The Great Barrier Reef: a tragedy in the making

Australia held a general election on 2 July 2016. The Liberal/National coalition narrowly won in the House of Representatives, gaining a substantially reduced majority of 77 of the 150 seats, to Labor’s 68 and other parties’ 5 seats. One campaign issue for all parties was the destruction of the Great Barrier Reef, which is seen as an environmental disaster. Each party had proposals for tackling the problem and we examine some of them here.

The Great Barrier Reef is the largest coral reef in the world. As the BBC’s iWonder guide states:

One of the world’s seven natural wonders, the Great Barrier Reef contains some 900 islands and 3000 smaller reefs. It is larger than the UK, the Netherlands and Switzerland combined, home to around 10% of the world’s marine fish, over 200 bird species and countless other animals, including turtles and dolphins.

But this iconic Reef system is facing unprecedented threats. Together with governments, scientists are playing a key role in the battle to preserve this vulnerable ecosystem before it’s too late.

The Reef is 2300km long. In the northern third, around half of the coral is dead. Few tourists see this, as they tend to dive in the southern third, which, being cooler, is less affected.

The bleaching and destruction of coral reefs has a number of causes. These include: rising water temperatures, generally from global warming and more extreme El Niño events (rising warm waters that periodically spread across the Pacific); pollution, including that from coal mining, industrial effluent and run-off of pesticides, herbicides, fertilisers and sediment from farming, leading to acidification of waters; more frequent and more violent cyclones; rapidly expanding numbers of coral-eating Crown of Thorns starfish; and over fishing of some species of fish, leading to knock-on effects on ecosystems.

The Barrier Reef and the oceans and atmosphere around it can be regarded as a common resource. The warming of the atmosphere and the oceans, and the destruction of the reef and the wildlife on it, are examples of the ‘tragedy of the commons’. With no-one owning these resources, they are likely to be overused and abused. Put another way, these activities cause negative externalities, which do not appear as costs to the polluters and despoilers, but are still costs to all who treasure the reef. And, from a non-human perspective, it is a cost to the planet and its biodiversity. What is in the private interests of the abusers is not in the social or environmental interest.

The Australian government had sought to downplay the extent of the problem, afraid of deterring tourists – a valuable source of revenue – and under pressure from the coal and farming industries. Nevertheless, in the run-up to the election, the destruction of the Reef and what to do about it became a major debating point between the parties.

The Coalition government has pledged A$1bn for a new Reef fund, which will be dedicated to tackling climate change and water quality.

The fund will also help coastal sewage treatment plants to reduce ocean outfalls with efficient pumps, biogas electricity generation and next-generation waste water treatment. Improving water quality will enhance the Reef’s resilience to climate change, coral bleaching and outbreaks of the destructive crown of thorns starfish.

But how much difference the fund can make with the money it will have is not clear.

The Labor Party pledged to follow every recommendation in the Great Barrier Reef Water Science Taskforce’s Final Report, released in May, and to pass laws to prevent farm pollution flowing into the waters around the Reef and to have a more rapid shift towards renewable energy.

The Green Party goes the furthest. In addition to the Labor Party’s proposals, it wants to impose taxes on coal firms equal to the cost of the damage they are causing. The tax revenues would be paid into a multi-billion dollar fund. This would then be spent on measures to rescue the Reef, invest in clean energy projects, stop damaging industrial development, improve farm management and stop polluted run-off into the Reef catchment area by investing in water systems.

Promises at the time of an election are all well and good. Just how much will be done by the re-elected Coalition government remains to be seen.

Interactive Videos and presentations
David Attenborough’s Great Barrier Reef: an Interactive Journey, Atlantic Productions, David Attenborough (2015)
Global Warming – the greatest market failure Prezi, Yvonne Cheng (5/12/12)

Articles
The Great Barrier Reef: a catastrophe laid bare The Guardian, Michael Slezak (7/6/16)
The Guardian view on the Great Barrier Reef: the crisis they prefer to downplay The Guardian (7/6/16)
Fight to save Great Barrier Reef could cost billions, secret government modelling estimates ABC News, Mark Willacy (2/6/16)
Great Barrier Reef: government must choose which parts to save, says expert The Guardian, Joshua Robertson (8/7/16)
This election, what hope is there for the Great Barrier Reef? The Guardian, Michael Slezak (1/7/16)
Coalition will protect Great Barrier Reef with $1bn fund, says PM The Guardian, Gareth Hutchens (12/6/16)
Great Barrier Reef election explainer: how do the parties compare? The Guardian, Michael Slezak (2/6/16)
Five things we can do right now to save the Great Barrier Reef The Guardian, John Pandolfi (13/6/16)
We’ve scored the parties on the Reef My Sunshine Coast, Australian Marine Conservation Society (29/6/16)
Our Most Iconic Places Are Under Dire Threat From Climate Change Huffington Post, Nick Visser (26/5/16)
There are bright spots among the world’s coral reefs – the challenge is to learn from them The Conversation, Australia, Joshua Cinner (21/7/16)

Questions

  1. Explain what is meant by the Tragedy of the Commons. Is all pollution damage an example of this?
  2. What can the Australian government do to internalise the external costs to the Great Barrier Reef from (a) farming; (b) mining; (c) global warming?
  3. Why is it difficult to reach international agreement on tackling climte change? What insights can game theory provide for understanding the difficulties?
  4. What are the recommendations in the Final Report of the Great Barrier Reef Water Science Taskforce? What mix of tools does it suggest?
  5. What are the relative advantages and disadvantages of taxation, laws and regulations, public investment, education and international negotiation as policy instruments to protect the Reef?
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City life

Two surveys have been released looking at the quality of life in cities and the levels of happiness of their residents. The first is a three-yearly Eurobarometer survey by the European Commission focusing on 83 European cities/conurbations. This survey finds that, despite growing concerns about immigration, terrorism and stagnant real incomes, levels of satisfaction have remained stable since the 2012 survey. In all except six cities, at least 80% of respondents say that they are satisfied to live in their city. The highest scores (above 98%) are in the north of Europe.

The second is the 2016 Quality of Life Survey (an annual survey) by the consultancy firm, Mercer. This looks at cities worldwide, particularly from the perspective of employees of multinational companies being placed abroad. The survey found that the top ten cities by quality of life include seven in Europe, and that the five safest cities in the world are all in Europe.

So what is it that makes the quality of life so high in many European cities, especially those in Germany, Austria, Switzerland, the Netherlands and Scandinavia? Is it that income per head is higher in these cities? In other words, is the quality of life related to GDP?

The answer is only loosely related to GDP. What seems more important is people’s income relative to other people and whether their income relative to other people is rising.

But people regard the quality of life in cities as depending on other factors than simple relative income. One factor common across all cities is household composition. People are least happy if they live on their own.

Other factors include: a feeling of safety; how well integrated different ethic and social groups are felt to be; the quality of public transport; the cleanliness of the city; health care provision and social services; the quality of schools and other educational establishments; sports facilities; cultural facilities; parks and other public spaces; the quality of shops, restaurants and other retail outlets; the quality and price of housing; the ease of getting a job; trust in fellow citizens; environmental factors, such as air quality, noise, traffic congestion and cleanliness; good governance of the city. The top three issues are health services, unemployment and education and training.

Although cities with higher incomes per head can usually afford to provide better services, there is only a loose correlation between income per head and quality of life in cities. Many of the factors affecting quality of life are not provided by the market but are provided publicly or are part of social interaction outside the market.

Articles
Happiness in Europe The Economist (25/2/16)
Happiness in Europe: What makes Europeans happy? It depends on where they live The Economist (27/2/16)
Rating Europe’s Most and Least Happy Cities CityLab, Feargus O’Sullivan (9/2/16)
Europe’s Nicest Cities Aren’t Its Happiest Ones Bloomberg, Therese Raphael (2/2/16)
Vienna named world’s top city for quality of life The Guardian, Patrick Collinson (23/2/16)
Vienna named world’s best city to live for quality of life, but London, New York and Paris fail to make top rankings Independent, Loulla-Mae Eleftheriou-Smith (23.2.16)
The world’s most liveable cities: London and Edinburgh rank in top 50 The Telegraph, Soo Kim (23/2/16)

Reports
Quality of Life in European Cities 2015 Flash Eurobarometer 41 (January 2016)
Quality of Life in European Cities 2015: Individual Country Reports Flash Eurobarometer 41 (January 2016) (This may take a short while to download.)
Quality of life in European Cities 2015: Data for Research Flash Eurobarometer 41 (January 2016)
2016 Quality of Living Rankings Mercer (23/2/16)
Western European Cities Top Quality of Living Ranking Mercer, Press Release (23/2/16)

Questions

  1. Why, do you think, is the quality of life is generally higher in (a) most northern European cities than most southern and eastern European ones; (b) most European cities rather than most north American ones?
  2. To what extent is (a) absolute real income per head; (b) relative real income per head an indicator of quality of living in cities?
  3. Why, do you think, are Italians less satisfied with the quality of life in their cities than residents of other western European countries?
  4. What factors affect your own quality of living? To what extent do they depend on the city/town/village/area where you live?
  5. Look at the list of factors above that affect quality of life in a given city. Put them in order of priority for you and identify any other factors not listed. To what extent do they depend on your age, your background, your income and your personal interests and tastes?
  6. Identify a particular city with which you are relatively familiar and assume that you were responsible for allocating the city’s budget. What would you spend more money on, what less and what the same? Provide a justification for your allocation.
  7. Discuss the following passage from the Bloomberg article: “What is striking is that there appears to be a correlation between those who report high levels of satisfaction and those who view foreigners in their city as an advantage. Conversely, respondents who complained loudest about transportation, public services, safety and other issues tended to view the presence of foreigners far less favorably.”
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End of the old fossils?

In December, most of the countries of the world will meet in Paris at the 21st annual United Nations Conference of the Parties (COP) on climate change. COP21 ‘will, for the first time in over 20 years of UN negotiations, aim to achieve a legally binding and universal agreement on climate, with the aim of keeping global warming below 2°C.’

When the Copenhagen conference (COP15) ended in disagreement in 2009, few people thought that the increase in renewable energy would be anything like sufficient to prevent global temperatures rising more than 2°C. But things have dramatically changed in the intervening six years.

Solar power and other renewables have increased dramatically and the technology for the cleaner burning of fossil fuels, including carbon capture and storage, has developed rapidly.

But perhaps the most important change has been the attitudes of governments. No longer is it a case of Europe and other developed countries moving in the direction of renewables, while developing countries, and, in particular, China and India, argue that their economic development requires a rapid expansion of coal-fired power stations. Now China, India and many other emerging countries are rapidly developing their renewable sectors. This is partly driven by the fall in the costs of renewables and partly by worries that climate change will directly effect them. Now the ‘pro-coal’ countries are in a minority.

And industry is realising that significant profit is to be made from the development and installation of power plants using renewable energy. This is driving both R&D and investment. As the Telegraph article, linked below, points out, in 2009 ‘the International Energy Agency (IEA) was still predicting that solar power would struggle to reach 20 gigawatts by now. Few could have foretold that it would in fact explode to 180 gigawatts – over three times Britain’s total power output – as costs plummeted, and that almost half of all new electricity installed in the US in 2013 and 2014 would come from solar’.

So is this a good news story? Will real progress be made at COP21 in Paris? The articles explore the issues.

Articles
Paris climate deal to ignite a $90 trillion energy revolution The Telegraph, Ambrose Evans-Pritchard (28/10/15)
OP21 deal critical for low-carbon economy Japan Times, Carlos Ghosn (29/10/15)
Is Solar Without Subsidies Now Viable? Oilprice.com, Michael McDonald (22/10/15)

Policy Paper
The road to Paris and beyond Centre for Climate Change Economics and Policy, Grantham Research Institute on Climate Change and the Environment (LSE), Rodney Boyd, Fergus Green and Nicholas Stern (August 2015)

Report
Energy and Climate Change International Energy Agency (October 2015)

Questions

  1. What are the drivers for a move from fossil fuels to renewables? Are they similar dirvers in both developed and developing countries?
  2. What externalities are involved in energy production (a) from fossil fuels; (b) from renewables?
  3. What policies can be adopted to internalise the externalities?
  4. What are the merits and problems of a carbon trading scheme? What determines its effectiveness in reducing CO2 emissions?
  5. Why are more and more investors moving into the renewable energy sector? Could this become a speculative bubble? Explain.
  6. How might game theory help to explain the process and outcomes of international negotiations over climate change and energy use?
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China in facts and figures

The second largest economy in the world, with a record expansion to its current economic status: China. With a phenomenal population, massive migration to the cities and incredible infrastructure development, China has fast become a key economic player, with environmental and pollution problems to match.

The price of China’s economic development may be too high for some people. Increases in incomes, growth and employment may be good news, but is the cost too high? Do economic growth and progress mean poor health and if so, is this a price worth paying

Another big topic within China is the impact on inequality. With growth accelerating in urban areas, population movement from the rural to the urban has been a common feature across China, but this has also created greater inequality. This population movement has separated families and played a role in creating barriers of access to health and education.

The following article from the BBC considers a range of indicators within China and you may also want to review some earlier blog postings on the Sloman News Site which analyse the Chinese economy.

Cement and pig consumption reveal China’s huge changes BBC News (21/9/15)

Questions

  1. What are the key drivers of China’s development?
  2. What are the costs and benefits of rural-urban migration?
  3. To what extent do you think there may be a trade-off between quality and quantity when it comes to infrastructure projects? Or is Chinese labour simply more efficient relative to countries such as the UK?
  4. How should we measure economic development? If access to education and health care is limited in the more rural areas, but widely available in the larger cities, does this suggest a country that is developing?
  5. What are the main externalities that China must tackle? Are they domestic issues or global ones? What about the solutions?
  6. If a key driver of Chinese growth and development is government investment in infrastructure projects, is this true and sustainable growth or do you think it might slowly disappear if the government doesn’t continue to invest?
  7. Do you think the relative success of China can be replicated in other emerging nations and in particular in nations within Africa?
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Integral ecology: mentally internalising externalities – and more

At the G7 conference in Bavaria on 7 and 8 June 2015, it was agreed to phase out the use of fossil fuels by the end of the century. But despite this significant objective, there were no short-term measures put in place to start on the process of achieving this goal. Nevertheless, the agreement contained commitments to further developments in carbon markets, elimination of fossil fuel subsidies, incentives for the development of green energy and support for developing countries in reducing hydrofluorocarbons.

The agreement also sent a strong message to the 21st United Nations International Climate Change conference scheduled to meet in Paris from 30 November to 11 December 2015. The G7 communiqué states that binding rules would be required if the target was to be met.

The agreement should enhance transparency and accountability including through binding rules at its core to track progress towards achieving targets, which should promote increased ambition over time. This should enable all countries to follow a low-carbon and resilient development pathway in line with the global goal to hold the increase in global average temperature below 2°C.

But many environmentalists argue that a more fundamental approach is needed. This requires a change in the way the environment is perceived – by both individuals and politicians. The simple selfish model of consumption to maximise consumer surplus and production to maximise profit should be rejected. Instead, the environment should be internalised into decision making.

What is more, there should be an integral ecology which brings together a wide range of disciplines, including economics, in analysing the functioning of societies and economies. Rather than being seen merely as a resource to be exploited, respect and care for the environment should be incorporated into our whole decision-making process, along with protecting societies and cultures, and rejecting economic systems that result in a growing divide between rich and poor.

In his latest encyclical, On care for our common home, Pope Francis considers integral ecology, not just in terms of a multidiciplinary approach to the environment but as an approach that integrates the objectives of social justice and care for the environment into an overarching approach to the functioning of societies and economies. And central to his message is the need to change the way human action is perceived at a personal level. Decision making should be focused on care for others and the environment not on the selfish pursuit of individual gain.

With a change in heart towards other people and the environment, what would be seen as externalities in simple economic models based on rational self-interested behaviour become internal costs or benefits. Care and compassion become the drivers for action, rather than crude self interest.

A key question, of course, is how we get here to there; how society can achieve a mass change of heart. For religious leaders, such as the Pope, the approach centres on spiritual guidance. For the secular, the approach would probably centre on education and the encouragement for people to consider others in their decision making. But, of course, there is still a major role for economic instruments, such as taxes and subsidies, rules and regulations, and public investment.

Articles
G7 leaders agree to phase out fossil fuels by end of centuryEU Observer, Peter Teffer (8/6/15)
Integral Ecology Approach Links ‘Welfare of God’s People and God’s Creation’ Catholic Register (11/6/15)
President’s Corner Teilhard Perspective, John Grim (May 2015)
In his encyclical on climate change Pope Francis reveals himself to be a master of scientific detail Washington Post, Anthony Faiola, Michelle Boorstein and Chris Mooney (18/6/15)
Pope Francis Calls for Climate Action in Draft of Encyclical New York Times, Jim Yardley (15/6/15)
Pope Francis letter on climate change leaked: Draft Vatican encyclical released three days early Independent, Kashmira Gander and Michael Day (15/6/15)
The Pope is finally addressing the gaping hole in the Judaeo-Christian moral tradition Independent, Michael McCarthy (15/6/15)
Pope Francis warns of destruction of Earth’s ecosystem in leaked encyclical The Guardian, Stephanie Kirchgaessner and John Hooper (16/6/15)
Explosive intervention by Pope Francis set to transform climate change debate The Observer, John Vidal (13/6/15)
Pope Francis’ Leaked Encyclical Draft Attributes Climate Change To Human Activity Huffington Post, Antonia Blumberg (15/6/15)
Pope Francis’ Integral Ecology Huffington Post, Dave Pruett (28/5/15)

Videos
Pope Francis: Climate change mostly man-made BBC News, Caroline Wyatt (18/6/15)
Pope urges action on global warming in leaked document BBC News, Chris Cook (16/6/15)

Questions

  1. What do you understand by ‘integral ecology’?
  2. Is an integrated approach to the environment and society consistent with ‘rational’ behaviour (a) in the narrow sense of ‘rational’ as used in consumer and producer theory; (b) in a broader sense of making actions consistent with goals?
  3. Can cost–benefit analysis be used in the context of an integrated and cross-disciplinary approach to the environment and society?
  4. What types of incentives would be useful in achieving the approach proposed by Pope Francis?
  5. Why do many companies publicly state that they pursue a policy of corporate responsibiliy?
  6. To what extent does it make sense to set targets for the end of this century?
  7. In what crucial ways might GDP need to be adjusted if it is to be used as a measure of the success of the approach to society, the economy and the environment as advocated by Pope Francis?
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An environmentally friendly Church

Climate change is a global issue and reports indicate that more and more people are concerned about buying environmentally friendly products. We have seen tighter emissions targets and companies across the word investing in new technologies to reduce their emissions. But what can the Church of England do?

The Church of England has numerous investments, which help generate its revenue. Some of these investments are in fossil fuel companies, which are extracting resources and polluting the environment. The Church’s new environmental policy will see it selling any of its investments in companies where more than 10% of its revenue is generated from extracting thermal coal or the production of oil from tar sands. Estimates suggest that this is a total of £12 million. The Deputy Chair of the Church’s Ethical Investment Advisory Group (EIAG) said:

“The Church has a moral responsibility to speak and act on both environmental stewardship and justice for the world’s poor who are most vulnerable to climate change … This responsibility encompasses not only the Church’s own work to reduce our own carbon footprint, but also how the Church’s money is invested and how we engage with companies on this vital issue.”

However, some have seen this as ‘trivial act’, suggesting it will have limited effect on the environment and have criticised some for suggesting that the biggest moral issue facing the world is climate change. But, with more companies recognising their ‘moral responsibility’, perhaps this decision by the Church of England is unsurprising. The following articles consider this topic.

Church of England divests from coal, tar sands as adopts new climate change policy Reuters (30/4/15)
Church of England wields its influence in fight against climate change The Guardian, Damian Carrington (1/5/15)
Church of England Bishop provokes anger by saying the biggest moral issue affecting the world is … CLIMATE CHANGE Mail Online, Steve Doughty (2/5/15)
Church of England to sell fossil fuel investments BBC News (1/5/15)
Church of England blacklists coal and tar sands investments Financial Times, Pilita Clark (30/4/15)
Church of England ends investments in heavily polluting fossil fuels The Guardian, Adam Vaughan (30/4/15)
Church of England pulls out of fossil fuels, but where does it invest its cash? Independent, Hazel Shefield (1/5/15)

Questions

  1. Why is climate change a global issue?
  2. How might the Church of England’s decision affect environmental policy in fossil fuel companies?
  3. What other action has the Church of England taken to tackle climate change?
  4. The Church and the articles suggest that the poor are the most vulnerable to climate change. Why is this?
  5. Do you think the Church of England will lose money by divesting itself of some of these investments?
  6. If the Church of England now has more money to invest, which factors might influence its decision as to where it should invest?
  7. Where does the Church of England get its money from? What does it spend it on?
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Naomi Klein on climate change and growth

On my commute to work on the 6th October, I happened to listen to a programme on BBC radio 4, which provided some fascinating discussion on climate change, growth, capitalism and the need for co-operation. With more countries emerging as leading economic powers, pollution and emissions continue to grow. Is it time for a green revolution?

The programme considers some ‘typical’ policies and also discusses some radical solutions. There is discussion on developing and developed nations and how these countries should be looked at in terms of compensation, entitlement and aid. Carrots and sticks are analysed as means of saving the planet and how environmental damage can be reduced, without adversely affecting the growth rate of the world economy. I won’t say any more, but it’s certainly worth listening to, for an interesting discussion on one of the biggest problems that governments across the world are facing and it is not going to go away any time soon.

Naomi Klein on climate change and growth BBC Radio 4, Start the Week (6/10/14)

Questions

  1. What are the market failures with the environment?
  2. Why is global co-operation so important for tackling the problem of climate change?
  3. Which policies are discussed as potential solutions to the problem of climate change?
  4. What has been the problem with the European carbon trading scheme?
  5. Why may there be a trade-off between capitalism, growth and the problem of carbon emissions?
  6. To what extent do you think that countries such as Bangladesh should be ‘compensated’?
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Valuing natural capital

In market capitalism, the stock of manufactured capital provides a flow of output. The profitability of the use of that capital depends on the cost of investing in that capital and the cost of using it, and on the flow of revenues from that capital. Discounted cash flow techniques can be used to assess the profitability of a given investment in capital; the flows of costs and revenues are discounted at a market discount rate to give a net present value (NPV). If the NPV is positive (discounted revenues exceed discounted costs), the investment is profitable; if it is negative, the investment is unprofitable. (See Economics, 8th edition, section 9.3.)

There may be market imperfections in the allocation of investment, in terms of distorted prices and interest rates. These may be the result of market power, asymmetry of information, etc., but in many cases the market allows capital investment to be allocated relatively efficiently.

Natural capital
This is not the case with ‘natural capital’. Natural capital (see also) is the stock of natural resources and ecosystems that, like manufactured capital, yields a flow of goods and services into the future. Natural capital, whilst it can be improved or degraded by human action, is available without investment. Thus the natural capital of the oceans yields fish, the natural capital of the skies yields rain and the natural capital of forests reduces atmospheric CO2.

Even though some natural capital is owned (e.g. private land), much is a common resource. As such, it is free to use and tends to get overused. This is the Tragedy of the Commons – see, for example, the following news items: A modern tragedy of the commons and Is there something fishy going on?.

Natural capital accounting
But would it be possible to give a value to both the stock of natural capital and the goods and services provided by it? Would this environmental accounting enable governments to tax or subsidise firms and individuals for their use or enhancement of natural capital?

On 21 and 22 November 2013, the first World Forum on Natural Capital took place in Edinburgh. This brought together business leaders, politicians, economists, environmentalists and other scientists to discuss practical ways of taking natural capital into account in decision making. Central to the forum was a discussion of ways of valuing natural capital, or ‘natural capital accounting’. As the forum site states:

Natural capital accounting is a rapidly evolving new way of thinking about how we value the economic benefits we derive from our natural environment. The World Forum on Natural Capital will bring together world-class speakers, cutting edge case studies and senior decision makers from different sectors, in order to turn the debate into practical action.

But if natural capital is not owned, how is it to be priced? How will the costs and benefits of its use be valued? How will inter-generational effects be taken into account? Will firms price natural capital voluntarily if doing so reduces their profits? Will firms willingly extend corporate social responsibility to include corporate environmental responsibility? Will governments be prepared to introduce taxes and subsidies to internalise the costs of using natural capital, even if the effects extend beyond a country’s borders? Will natural capital accounting measure purely the effects on humans or will broader questions of maintaining and protecting environmental diversity for its own sake be taken into account? These are big questions and ones that various organisations are beginning to address.

Despite problems of measurement and incentives, sometimes there are clear economic benefits from careful evaluation and management of natural capital. Julia Marton-Lefèvre is Director General of the International Union for Conservation of Nature (IUCN). According to the first Guardian article below:

Her favourite example of natural capital working in practice comes from Vietnam, where “planting and protecting nearly 12,000 hectares of mangroves cost just more than $1m but saved annual expenditures on dyke maintenance of well over $7m. And that only accounts for coast maintenance: mangroves are also nurseries for fish, meaning livelihoods for fishing and source of nutrients … “

One organisation attempting to value natural capital is The Economics of Ecosystems and Biodiversity project (TEEB). It also looks at what organisational changes are likely to be necessary for the management of natural capital.

Based on data collected from 26 early adopter companies (60% of them with $10 Billion+ revenues each) across several industry sectors this provides real life evidence on the drivers and barriers for natural capital management.

Pricing the environment is a highly controversial issue. Critics claim that the process can easily be manipulated to serve the short-term interests of business and governments. What is more, where tradable permits markets have been set up, such as the EU’s Emissions Trading Scheme (ETS), prices have often been a poor reflection of social costs and have been open to manipulation. As Nick Dearden, director of the World Development Movement (WDM), says:

It is deeply ironic that the same financial markets that caused the economic crisis are now seen as the solution to our environmental crisis. It’s about time we learnt that financial markets need to be reined in, not expanded. Pricing these common resources on which people depend for their survival leaves all of us more exposed to the forces of the global economy, and decisions about whether or not to protect them become a matter of accounting.

The measurement of natural capital and setting up systems to internalise the costs and benefits of using natural capital is both complex and a political minefield – as the following articles show.

Articles
Putting a value on nature: Edinburgh conference says business is ‘part of the solution’ Blue & Green Tomorrow, Nicky Stubbs (20/11/13)
Edinburgh forum says putting value on nature could save it BBC News, Claire Marshall (20/11/13)
Natural capital must be the way forward, says IUCN director general The Guardian, Tim Smedley (11/11/13)
Is ‘natural capital’ the next generation of corporate social responsibility? The Guardian, Tim Smedley (7/11/13)
Natural capital accounting: what’s all the fuss about? The Guardian, Alan McGill (27/9/13)
Put nature at the heart of economic and social policymaking The Guardian, Aniol Esteban (1/3/13)
Campaigners warn of dangers of ‘privatised nature’ The Scotsman, Ilona Amos (21/11/13)
Edinburgh conference attempts to ‘privatise nature’ World Development Movement, Miriam Ross (18/11/13)
Valuing Nature BBC Shared Planet, Monty Don (8/7/13)

Sites concerned with natural capital
World Forum on Natural Capital
TEEB for Business Coalition
International Union for Conservation of Nature

Questions

  1. How would you define natural capital?
  2. What are ecosystem services?
  3. Is social efficiency the best criterion for evaluating the use of the environment? What other criteria could you use?
  4. How would you set about deciding what rate of discount to use when evaluating the depletion of or enhancement of natural capital?
  5. How can game theory provide insights into the strategies of both businesses and governments towards the environment?
  6. What are the arguments for and against attempting to value natural capital and to incorporate these values in decision making?
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Miliband’s freeze

For all households, energy is considered an essential item. As electricity and gas prices rise and fall, many of us don’t think twice about turning on the lights, cooking a meal or turning on the heating. We may complain about the cost and want prices brought down, but we still pay the bills. But, is there anything that can be done about high energy prices? And if there is, should anything be done?

The worlds of politics and economics are closely linked and Ed Miliband’s announcement of his party’s plans to impose a 20-month freeze on energy prices if elected in 2015 showed this relationship to be as strong as ever. The price freeze would certainly help average households reduce their cost of living by around £120 and estimates suggest businesses would save £1800 over this 20 month period. The energy companies have come in for a lot of criticism, in particular relating to their control of the industry. The sector is dominated by six big companies – your typical oligopoly, and this makes it very difficult for new firms to enter. Thus competition is restricted. But is a price freeze a good policy?

Part of the prices we pay go towards investment in cleaner and more environmentally friendly sources of energy. Critics suggest that any price freeze would deprive the energy sector of much needed investment, meaning our energy bills will be higher in the future. Furthermore, some argue this price freeze suggests that Labour is abandoning its environmental policy. Energy shortages have been a concern, especially with the cold weather the UK experienced a few years ago. This issue may reappear with price freezes. As Angela Knight, from Energy UK, suggests:

Freezing the bill may be superficially attractive, but it will also freeze the money to build and renew power stations, freeze the jobs and livelihoods of the 600,000-plus people dependent on the energy industry and make the prospect of energy shortages a reality, pushing up the prices for everyone.

There is a further concern and that is that large energy companies will be driven from the UK. This thought was echoed by many companies, in particular the British Gas owner Centrica, commenting that:

If prices were to be controlled against a background of rising costs it would simply not be economically viable for Centrica to continue to operate and far less to meet the sizeable investment challenge that the industry is facing…The impact of such a policy would be damaging for the country’s long-term prosperity and for our customers.

Share prices naturally fluctuate with global events and a political announcement such as this was inevitably going to cause an effect. But, perhaps the effect was not expected to be as big as the one we saw. Share prices for Centrica and SSE fell following the announcement – perhaps no great shock – but then they continued to fall. The market value tumbled by 5% and share prices kept falling. This has led to Ed Miliband being accused of ‘economic vandalism’ by a major shareholder of Centrica, which is hardly surprising, given the estimated cost of such a price freeze would be £4.5 billion.

The economic implications of such a move are significant. The announcement itself has caused massive changes in the FTSE and if such a move were to go ahead if Labour were elected in 2015, there would be serious consequences. While families would benefit, at least in the short term, there would inevitably be serious implications for businesses, the environmental policy of the government, especially relating to investment and the overall state of the economy. The following articles consider the aftermath of Ed Miliband’s announcement.

Miliband stands firm in battle over fuel bills plan The Guardian, Patrick Wintour and Terry Macalister (25/9/13)
Michael Fallon calls Miliband’s energy prices pledge ‘dangerous’ Financial Times, Elizabeth Rigby and Jim Pickard (26/9/13)
Britain’s labour treads narrow path between populism and prudence Reuters (26/9/12)
Ed Miliband’s radical reforms will make the energy market work for the many Independent (26/9/13)
Has Labour fallen out of love with Business? BBC News (26/9/13)
Top Centrica shareholder Neil Woodford accuses Labour leader Ed Miliband of economic vandalism The Telegraph, Kamal Ahmed (25/9/13)
Centrica and SSE slide after Labour price freeze pledge The Guardian (26/9/13)
Ed Miliband’s energy price freeze pledge is a timely but risky move The Guardian, Rowena Mason (24/9/13)

Questions

  1. Why are energy prices such a controversial topic?
  2. How are energy prices currently determined? Use a diagram to illustrate your answer. By adapting this diagram, illustrate the effect of a price control being imposed. How could it create an energy shortage? What impact would this have after the 20-month price freeze
  3. Why would there be adverse effects on energy companies if prices were frozen and costs increased? Use a diagram to illustrate the problem and use your answer to explain why energy companies might leave the UK.
  4. How would frozen energy prices help households and businesses?
  5. Why were share prices in Centrica and SSE adversely affected?
  6. Is there an argument for regulating other markets with price controls?
  7. Why is there such little competition in the energy sector?
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Going nuclear

The UK government has just given the go-ahead for the building of two new nuclear reactors at Hinkley Point in Somerset. The contract to build and run the power station will go to EDF, the French energy company.

The power station is estimated to cost some £14 billion to build. It would produce around 7% of the UK’s electricity. Currently the 16 nuclear reactors in the UK produce around 19%. But all except for Sizewell B in Suffolk are due to close by 2023, although the lives of some could be extended. There is thus a considerable energy gap to fill in the coming years.

Several new nuclear power stations were being considered to help fill this gap, but with rising capital costs, especially following the Fukushima disaster in Japan, potential investors pulled out of other negotiations. Hinkley Point is the only proposal left. It’s not surprising that the government wants it to go ahead.

All that remains to agree is the price that EDF can charge for the electricity generated from the power station. This price, known as the ‘strike price’, is a government-guaranteed price over the long term. EDF is seeking a 40-year deal. Some low carbon power stations, such as nuclear and offshore wind and wave power stations, have high capital costs. The idea of the strike price is to reduce the risks of the investment and make it easier for energy companies to estimate the likely return on capital.

But the strike price, which will probably be agreed at around £95 per megawatt hour (MWh), is roughly double the current wholesale price of electricity. EDF want a price of around £100 per MWh, which is estimated to give a return on capital of around 10%. The government was hoping to agree on a price nearer to £80 per MWh. Either way, this will require a huge future subsidy on the electricity generated from the plant.

There are several questions being asked about the deal. Is the strike price worth paying? Are all the costs and benefits properly accounted for, including environmental costs and benefits and safety issues? Being an extremely long-term project, are uncertainties over costs, performance of the plant, future market prices for electricity and the costs of alternative forms of power generation sufficiently accounted for? Will the strike price contravene EU competition law? Is the timescale for construction realistic and what would be the consequences of delays? The articles consider these questions and raise a number of issues in planning very long-term capital projects.

Articles
Hinkley Point: Britain’s second nuclear age given green light as planning permission is approved for first of new generation atomic power stations Independent, Michael McCarthy (19/3/13)
Will they or won’t they? New nuclear hangs in the balance ITV News, Laura Kuenssberg (19/3/13)
Hinkley Point C: deal or no deal for UK nuclear? The Telegraph, Alistair Osborne (19/3/13)
New nuclear power plant at Hinkley Point C is approved BBC News (20/3/13)
Britain’s Plans for New Nuclear Plant Approach a Decisive Point, 4 Years Late New York Times, Stanley Reed and Stephen Castle (15/3/13)
Nuclear power plans threatened by European commission investigation The Guardian (14/3/13)
New Hinkley Point nuclear power plant approved by UK government Wired, Ian Steadman (19/3/13)
Renewable energy providers to help bear cost of new UK nuclear reactors The Guardian, Damian Carrington (27/3/13)
Europe backs Hinkley nuclear plant BBC News (8/10/14)

Information/Reports/Journal Articles
Environmental permitting of Hinkley Point C Environment Agency
NNB Generation Company Limited, Radioactive Substances Regulations, Environmental Permit Application for Hinkley Point C: Chapter 7, Demonstration of Environmental Optimisation EDF
Greenhouse Gas Emission of European Pressurized Reactor (EPR) Nuclear Power Plant Technology: A Life Cycle Approach Journal of Sustainable Energy & Environment 2, J. Kunakemakorn, P. Wongsuchoto, P. Pavasant, N. Laosiripojana (2011)

Questions

  1. Compare the relative benefits of a construction subsidy and a subsidised high strike price from the perspectives of (a) the government (b) EDF.
  2. What positive and negative externalities are involved in nuclear power generation?
  3. What difficulties are there in valuing these externalities?
  4. What is meant by catastrophic risk? Why is this difficult to take account of in any cost–benefit analysis?
  5. What is meant by a project’s return on capital? Explain how discounted cash flow techniques are used to estimate this return.
  6. What should be taken into account in deciding the rate of discount to use?
  7. How should the extra jobs during construction of the plant and then in the running of the plant be valued when making the decisions about whether to go ahead?
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