EEP23 L1 Capital approach to SD for .pdf

Capital approach to SD

1. INTRO + THE SUSTAINABILITY
OF ECONOMICDEVELOPMENT
Environmental Economics and Policy (96100)
Module II –Lecture 1
Lecturer: Emanuele Campiglio
University of Bologna
Department of Economics

2. Welcome to the EEP course!
•Aim of the module:
•Present and discuss the state of research and practice of environmental
economics
•Strong focus on climate change and the low-carbon transition
•Focus on macro/finance but interdisciplinary approach
•Functional objectives:
•Expand knowledge on facts, empirical evidence, theories
•Familiarise with current scientific/policy research (focus on climate/transition
economic modelling)
•Develop and present original critical analysis
•Online presence
•Virtuale(course material and submissions)
•Panopto(recordings)
•UniBo course page(description and timetable)
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3. Course overview
1.The sustainability of economic development
2.Are growth and sustainability compatible?
3.How to measure sustainability
4.Climate change and mitigation strategies
5.Macro-financial transition requirements
6.Sustainable finance
7.Macro-financial transition risks
8.Climate-related policies and commitments
9.Sustainable finance policy-making
10.Climate macroeconomic modelling
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4. Lecture structure
•Lecture/tutorialclassestiming
•Starts 5 minspastthehour(sharp)
•50-min blockswith10-min breaks
•Fromlecture5: studentpresentations
•2 presentationsper lecture
•Shouldlast 15 mins+ 10 minsQ&A and discussion
•All groupmembershavetospeak
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5. Student’s role
•Come to lecture/class
•Lecture content key to pass the course
•Recordings posted on Panopto with 2-week delay
•Participate
•Diversity of backgrounds, knowledge and interests
•→ Lots to learn from and teach to each other
•Raise your hand for questions, comments, news..
•Be on time
•We start 5 mins, we end 5 mins to
•Stay focused
•Laptops limited to note-taking
•Mobile phones: please, no
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6. Assessment overview
•Course (module I) assessment methods
•Groupwork (35%)
•Exam (65%)
•Final grade scaling from 0 to 30
•Lower than 18 → fail
•Particularly excellent work → ‘laude’ (30L≈33).
•Intermediate grading
•Each assessment method assigns percentage points
•Final 100-score translated into a 33-score (eg.91*33/100≈30)
•Overall grade for integrated course:
•Unweighted average of the two modules
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7. Exam (65%)
•Exam structure (1 hour time)
•Broad essay-style questions
•Choose one out of two available questions
•Essay-style answers expected
•Showcase knowledge of concepts and literature..
•.. but also develop substantiated critical analysis
•Exam preparation slides on Virtuale
•Exam date
•13 June 2023, 10.00am
•Full exam alternative
•Partial Module I exam is compulsory
•If unsatisfied with grade → full exam (17 July 2023)
•Module I group-work grades will remain valid
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8. Group-work (35%)
•Groups
•Self-allocation via Virtuale(first come first serve)
•2 members per group for now
•Papers
•Each group will choose a reference paper
•State-of-the-art (mostly empirical) research
•Paper allocationon Virtuale starting19/4 at 8.00 (closes23/4 at 23.59)
•Tasks
•Give presentation (24 October 2022)
•Submitanessayby4June2023viamail(noword constraints) offering a
critical discussion of paper within academic and policy context
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9. A bit more about me
•Current affiliations
•Associate Professor, UniBoDepartment of Economics (DSE)
•Scientist, RFF-CMCC European Institute on Economics and
the Environment (EIEE)
•Visiting Fellow, London School of Economics and Political
Science, Grantham Research Institute
•Previous work
•Assistant prof. at WU Vienna: 2016-2020
•Postdoc at LSE: 2012-2016
•PhD in Economics in Pavia: 2008-2012
•Researcher at New Economics Foundation: 2010-2012
•MSc Intl. development & cooperation (Pavia: 2005-2007)
•BSc Economics for intl. institutions (Bocconi: 2000-2005)
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10. A bit more about my work
•Main research focus at the moment:
•Dynamic links between low-carbon transitions and macro-financial
dynamics
•Policies and institutions for a rapid and smooth decarbonisation
•Main thread: SMOOTH project
•ERC Starting Grant (2020-25)
•University of Bologna and European Institute on Economics and the
Environment
•‘Sustainable finance for a smooth low-carbon transition’
•Link to project website
•Personal research profiles:
•Personal website
•Google Scholar
•ResearchGate
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11. A bit more about UniBo
•Department of Economics
•Environmental and resources econ cluster. See research profiles
•Several econ/finance people incorporating climate in their work (e.g.
sustainable finance econometricians)
•Host of the EAERE2022 conference!
•Teaching: RESD Master programme; other Bologna-based courses (e.g.
Environmental Economics and Policy)
•Lots of other climate research at/around UniBo
•STAT: GrEnFin master programme
•AlmaClimate interdepartmental centre
•UniBo research project by SDG
•Bologna Business School: Initiative for Sustainable Society and Business
•Euro-Mediterranean Centre on Climate Change (CMCC)
•Strong advice
•Go explore, meet faculty, attend events
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12. WHAT ARE WE STUDYING?

13. Where we are
• No human control over Earth dynamics
• Planet entirely dependent on incoming solar energy
Small rock orbiting around a star. Source: Google Earth
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14. The great acceleration
Source: Steffen et al. (2015)
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15. What the problem is
•Environmentalconstraintsto
humanprosperity.
•Doughnut Economics
•The tragedy of the commons
•Externalities
•Humanprosperity:
•Whataretheobjectivesof
humansocieties?
•Income,the satisfactionofneeds,
humandevelopment
Source:Wikimedia;OriginallyinHalletal(1986)
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16. When was the problem posed? (I)
•Roots in classical political
•T.R. Malthus (1798) ‘An Essay on the principle of population’
•J.S. Mill (1848) on a stationary state
•Jevons (1865) on ‘The coal question’ and the Jevons paradox
•A.C. Pigou (1920) on externalities and the Pigouvian tax
•H. Hotelling (1931) ‘The Economics of Ehaustible Resources’ and
the Hotelling rule
•To go deeper:
•Sandmo2015 on REEP: ‘The early history of environmental
economics’
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17. When was the problem posed? (II)
•Fromthe50s:increased
environmentalawareness
•GreatSmogofLondonin
1952→UKCleanAir Act
1956
•R.Carson(1962)‘TheSilent
Spring’onchemicalpollution
•Firstpictures ofEarthfrom
space→Moonlandingin
1969
•Oilcrisesin1973and 1979
Great smogof London,1952;Source:Britannica
1966imageofEarthfromATS-1satellite;Source:NESDIS6
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18. Environmental Economics
•Economistsanalysingenvironment-relatedproblems:
•P.Dasgupta,G.Heal,W.Nordhaus,J.Stiglitz,J.Hartwick,
•M.Weitzman..
•Focusonmarkets,prices,technology,growth,substitutability,
smoothness,efficiency
•Someproblems:
•Optimalresourcedepletionplans
•Economicvalueofenvironmentalgoodsand services
•Cost-benefitanalysis;discounting
•Externalitiesandoptimalpolicies
•Togodeeper
•Pearce2002onAREE:‘An IntellectualHistoryof
EnvironmentalEconomics’
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19. Ecological economics
•Economists,butalsosocialandenvironmentalscientists
•Multi-andinter-disciplinaryapproach
•Focusonfiniteness,limits,scale,stationarity,irreversibility
•Relevantcontributions:
•K.Boulding(1966)and‘ThecomingspaceshipEarth’
•N.Georgescu-Roegen(1971)‘The entropylawandthe
economicprocess’
•Meadowsetal.(1972)‘TheLimitstoGrowth’
•H.Daly(1977)‘Steady-stateeconomics’
•Togodeeper
•I.Ropke2004-2005onEcolEcon:‘Theearlyhistoryofmodern
ecologicaleconomics’;‘Trendsinthedevelopmentofecological
economicsfromthelate1980stotheearly2000s’
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20. 80s:Shiftoffocusfrominputs..
•Resource scarcity less biting
•Technological innovations
•Exploration: large expansion of reserves
•Energy-saving technologies, mass mobility
•Oil price fluctuations still relevant
•Geopolitical implications still relevant
•Main material constraints now:
•Rare metals for electronics
•Water
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21. .. to sinks
•The Ozone layer scare
•Montreal Protocol (1987)
•Environmental concerns
•Oil spill and disasters
•Loss of biodiversity
•Climate change
•1990: first IPCC report
ExxonValdezspill(1989)Source:NOAA
Source:IPCC1990
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22. WHAT MAKES DEVELOPMENT
SUSTAINABLE?
The capital approach to SD

23. Outline oftoday‘slecture
•Sustainable development
•The Bruntlanddefinition
•Intra-vsinter-generational equity
•Capital approach to sustainability
•Sustainable development as preservation of capital stocks
•Weak vs Strong sustainability
•Degree of substituabilityof capital stocks
•Physical vs monetary measurement
•Environmental vs Ecological economics
•Two visions of economy-environment relation
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24. Sustainable development
•World Commission on Environment and
Development (1987), Our Common Future
•‘Sustainable development is development that
meets the needs of the present without
compromising the ability of future generations to
meet their own needs.’
•SD in this formulation is about both intra-
as well as inter-generational equity.
•Intra-generational approach: ‘Overriding priority’
should be given to the ‘essential needs of the
world’s poor’
•Inter-generational approach: the satisfaction of
needs has to be maintained in the long run
GroBrundtland(1939-)
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25. Intra vsInter-generational equity studies
•Intra-generational equity became its own sub-field of
study in economics:
•Economics of inequality and distribution
•Basic needs and poverty eradication
•Only vaguely related to sustainability (‘high levels of inequality are
not sustainable’)
•Sustainability mainly refers to inter-generational equity
•What makes economic development last in the long-run?
•What conditions must be satisfied?
•Capital approach to sustainable development:
•Economic development is sustainable if it does not decrease the
capacity to provide at least the same level of welfare in the future.
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26. The capital approach to sustainability
•Human ‘welfare’ is the ultimate objective
•Welfare is a function of welfare-generating flows of
consumption
•Goods and services we consume and make our life worthwhile
•All welfare-generating flows are produced combining a number
of input factors
•Labour, mechanic work, energy, materials
•These input factors are in turn ‘extracted’ from stocks
•Stock of human labour, stock of machinery, stock of fossil fuels, stocks
of metals and minerals
àFocus on stocks (‘wealth’) as a basis for welfare generation
•Capital is a stock that is capable of providing current and future flows
of utility.
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27. Man-made capital
•The physical ‘hardware’
you need to produce goods
and services:
•Factories, machinery,
infrastructure
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28. Human capital
•Knowledge, skills, creativity
embodied in human brains:
•If man-made capital is the
economy hardware, human
capital is the software
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29. Natural capital
•Everything in nature that provides
human beings with utility:
•Non-renewable resources (fossil fuels,
minerals, metals)
•Renewable resources (fish, forestry,
food)
•Ecosystem services
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30. Social capital
•The quality of institutions, norms
and interactions governing society:
1.Strength and resilience of the
network of cooperative relationships
embodied in a society (trust,
networks, social relations)
2.Institutional quality and good
governance (lack of corruption, rule
of law and government
effectiveness)
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31. Wealth
and
welfare
Source: Inclusive Wealth Report 2014
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32. WEAK AND STRONG
SUSTAINABILITY
Capital substitutability and beyond

33. What has to be maintained exactly?
1.Physical stocks or value?
•Attaching a monetary value to non-monetary stocks
2.Together or separate?
•Is it the overall stock of capital(s)..
•Or each form has to be preserved on its own?
•Weak vs strong sustainability
•Main disagreement: substitutability of different forms of capital
•But it goes further than that:
•Optimists / cornucopians/ environmental economics
•Neo-malthusians/ pessimists / ecological economics
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34. Weak Sustainability (WS)
•WS approach: these forms of capital are substitutable
•Sustainability ‘Hartwickrule’: the overall capital stock has
to remain intact for development to be sustainable
•One type of capital can decrease (depreciation/degradation higher
than investment/regeneration)..
•..if some other type of capital increases.
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35. An example: Botswana and Namibia
Source: Lange (2004) Link
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36. Contrasting Development Fortunes
•Botswana: diamond mining
accounts for 1/3 of GDP
•Active re-investment of mineral
revenues
•Per capita (real) GDP has
grown annually at 5%
•Namibia: mining/ fishing
account for >1/5 of GDP
•Little reinvestment or control
over marine fisheries
•Per capita (real) GDP stagnated
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37. 0.00
0.50
1. 00
1. 50
2.00
2.50
3.00
3.50
1980 1981 1982 1983 1984 19 8 5 19 8 6 1987 1988 19 8 9 19 9 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Botswana, per capita GDP
Botswana, per capita wealth
Namibia, per capita GDP
Namibia, per capita wealth
Contrasting development fortunes (II)
Source: Lange (2004) Link
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38. Weak sustainability authors
•Weak sustainability
•Substitability between natural and manufactured capital
•Hartwick, 1977 AER
•“Invest all profits or rents from exhaustible resources in
reproducible capital such as machines”
•Solow 1974 RES
•“(..) earlier generations are entitled to draw down the
pool (optimally, of course!) so long as they add
(optimally, of course!) to the stock of reproducible
capital.”
•Other authors
•Joseph Stiglitz, ParthaDasgupta, Geoffrey Heal, William
Nordhaus..
•RES Symposium on the Economics of Exhaustible
Resources (link)
Robert Solow (1924-)
John Hartwick (1944-)
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39. WS: scarcity can be overcome by markets
•When a resource becomes scarce, its price will rise
•Demand is larger than supply àprice increase
•The price increase will trigger a number of dynamics
•Consumers will move to substitute goods and services
•Firms will invest in expanding supply (e.g. offshore platforms)
•Firms will invest in new technologies that can replace the scarce
resource or make its use more efficient
•As a result, growth can go on
•This seems to be confirmed by recent decades
•Oil price spikes led to energy-saving technologies and expansion of
supply
•Reserve/production ratio of most ehaustible resources increased
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40. Strong sustainability
•The different forms of capital
are NOT substitutable
•Most importantly, natural capital is
not substitutable with man-made
capital
•Critical forms of natural
capital: non-substitutable life-
supporting functions
•Atmospheric and climate
regulation
•Sink and absorption functions
•Water cycle
•Focus on physicalterms
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41. SS: rooted in biophysical reality
•‘We might say that Solow’s recipe calls for
making a cake with only the cook and his
kitchen. We do not need flour, eggs, sugar, etc.,
nor electricity or natural gas, nor even firewood.
If we want a bigger cake, the cook simply stirs
faster in a bigger bowl and cooks the empty
bowl in a bigger oven that somehow heats
itself.’ (Daly, 1997)
Herman Daly (1938-)
•àInfinite growth in a finite
planet is impossible
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42. Ecological and Environmental economics
1.Environmental Economics
•Environment and natural resources analyzed
through neoclassical methodology and/or
empirical analysis
•Well-established and accepted methodology
•Smoothness and substitutability
•Non-systemic research questions
2.Ecological economics
•Multi-and interdisciplinarity
•Critical to mainstream economics
•Interested in social movements (environmental
conflicts, degrowth)
•Systemic questions (societal transitions) but no
organic methodology
•Compare conference programmes
•Environmental economics (2022): link
•Ecological economics (2022): link
Environment
Economics
Economics
Social and environmental
sciences
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