Economy of Natural Resources and Environment for Sustainable Energy Systems

1. Economy of Natural Resources and Environment Prof. Manuel Coelho Prof.ª Joana Pais Sustainable Energy Systems 4 of January 2008

2. What is sustainable development? 2 Sustainable Energy Systems “…sustainable development, which implies meeting the needs of the present without compromising the ability of future generations to meet their own needs…” Report of the World Commission on Environment and Development, United Nations, 1987 “…sustainable development, which implies meeting the needs of the present without compromising the ability of future generations to meet their own needs…” Report of the World Commission on Environment and Development, United Nations, 1987

3. Agenda Weak Sustainability • Concept • Indicators Strong Sustainability Case Studies 3 Sustainable Energy Systems

4. Production function Q=Q(L,K,N) Natural resource (N) essential to production of Q Average production of natural capital does not have an upper bound Production function Q=Q(L,K,N) Natural resource (N) essential to production of Q Average production of natural capital does not have an upper bound Growth theory with limited resources Assumptions 4 Sustainable Energy Systems Success drivers to a non-decrease consumption Elasticity (ε) of substitution between produced capital (K) and natural capital is (N) is greater than 1 ε is equal to 1 and the interest rate of the produced capital is higher than the valorization of the natural resource ε is not constant but is there a technology improvement or or Solow’s model, 1974

5. From growth theory to weak sustainability Hartwick rule 5 Sustainable Energy Systems Weak sustainability Given a degree of substitutability between produced capital and natural resources returns from non renewable, scarcity rent should be reinvested in produced capital . Sustainability is equivalent to non-decreasing or increasing total capital stock In a mathematical formulation: Total capital K=K h +K m +K n K h – Human capital K m – Produced or manufactured capital K n – Natural capital Total capital K=K h +K m +K n K h – Human capital K m – Produced or manufactured capital K n – Natural capital

6. Weak sustainability 6 Sustainable Energy Systems Produced capital Natural capital Time Capital C 0 The pinch from the shrinking natural capital is countered by the services and technology from the enlarged produced capital stock The pinch from the shrinking natural capital is countered by the services and technology from the enlarged produced capital stock

7. Possible to evaluate the sustainability each year What is happening to total capital? Is it declining or increasing? Possible to evaluate the sustainability each year What is happening to total capital? Is it declining or increasing? Weak sustainability – an workable theory 7 Sustainable Energy Systems Information about the amount to be reinvested All the scarcity rent must be invested Information about the amount to be reinvested All the scarcity rent must be invested

8. Weak Sustainability Indicators 8 Sustainable Energy Systems Elasticity of Substitution Technological Progress Scarcity Rent Environmentally-adjusted Net Product

9. Elasticity of Substitution 1/2 9 Sustainable Energy Systems An high elasticity of substitution value can say, that this resources is not very essential and can be easily replaceable . Sustainability Sustainability Elasticity between Kn and Km ≥ 1 Elasticity between Kn and Km ≥ 1

10. Elasticity of Substitution 2/2 10 Sustainable Energy Systems Open questions Open questions Tendency to overestimate or underestimate real value Potential problems Potential problems What is the elasticity of substitution of air? And biodiversity? Difficulty to calculate the real value of the Elasticity of Substitution Difficulty to calculate the real value of the Elasticity of Substitution Difficulty in the cases where the resource is essential to life support Difficulty in the cases where the resource is essential to life support How evaluate δKn(t)? How evaluate δKn(t)? How to apply to some resources? How to apply to some resources?

11. Technological Progress 1/2 11 Sustainable Energy Systems Sustainability HHS Model Technological Progress Rate > Population Growth Rate Technological Progress Rate > Population Growth Rate

12. 12 Sustainable Energy Systems Technological Progress 2/2 Difficulties Difficulties  Is not easy to measure the technological progress Indicator limitations Indicator limitations  The production functions don’t have the capacity to incorporate , at same time, the technological progress and the elasticity of substitution. Indicator with a very limited scope Indicator with a very limited scope The priority is given to the elasticity of substitution The priority is given to the elasticity of substitution

13. Scarcity Rent 1/3 Sustainable Energy Systems Mercantile Natural Capital Non renewable resources, and some renewable – forests Mercantile Natural Capital Non renewable resources, and some renewable – forests Non Mercantile Natural Capital Renewable resources - air and environmental services Non Mercantile Natural Capital Renewable resources - air and environmental services

14. Scarcity Rent 2/3 Mercantile Natural Capital Definition Definition A Rarity rent (final use cost) is the difference between the shadow price of the natural resource (opportunity cost) and the marginal cost of its extraction. How to allocate a shadow price to the natural resource? The price attributed can be insufficient in the sustainability point of view Potential difficulties Potential difficulties The externalities associated to the use and extraction of the resources (negative externalities) for the future generation are not included in the calculation of the opportunity cost. The externalities associated to the use and extraction of the resources (negative externalities) for the future generation are not included in the calculation of the opportunity cost. Sustainable Energy Systems

15. Scarcity Rent 3/3 Characteristics Characteristics  How determinate the shadow price?  No market price  No access costs  Unlimited resources in quantity, that are not under any system of property law  Free access  Unlimited resources in quantity, that are not under any system of property law  Free access Difficulties Difficulties Sustainable Energy Systems Non Mercantile Natural Capital

16. 5 th Framework Programme 5 th Framework Programme Environmentally-Adjusted Net Product 16 Sustainable Energy Systems Environmentally-Adjusted Net Product eaNNP = GDP – δK p – δK n Correction of the national balance sheet taking into account the issues of the environment and sustainable development GDP - Gross Domestic Product δ K m - Depreciation of manufactured capital δK n - Depreciation of natural capital ( resource depletion + environmental degradation ) GDP - Gross Domestic Product δ K m - Depreciation of manufactured capital δK n - Depreciation of natural capital ( resource depletion + environmental degradation )

17. Problems with the WS 17 Sustainable Energy Systems The need of a new sustainability concept emerged: Strong Sustainability (SS) The need of a new sustainability concept emerged: Strong Sustainability (SS) One condition must be fulfilled One condition must be fulfilled Super-abundance Super-abundance Elasticity of substitution Elasticity of substitution Technological progress Technological progress Natural resources must be available in an abundant quantity Value of elasticity must be equal or greater than one – natural resources are substitutable Existing technology must increase the productivity of natural capital faster than its depletion       Is it? Is it? One example: Oil One example: Oil

18. Agenda Weak Sustainability • Concept • Indicators Strong Sustainability Case Studies 18 Sustainable Energy Systems

19. The creation of the SS concept 19 Sustainable Energy Systems …‘strong sustainability’, sees sustainability as nondiminishing life opportunities. This should be achieved by conserving the stock of human capital, technological capability, natural resources and environmental quality Brekke, 1997 …‘strong sustainability’, sees sustainability as nondiminishing life opportunities. This should be achieved by conserving the stock of human capital, technological capability, natural resources and environmental quality Brekke, 1997

20. There were developed 3 theories 20 Sustainable Energy Systems Similarity to the WS Similarity to the WS Conservationist Conservationist London School London School Ecological- economical Ecological- economical Theories Theories Description Description  Created by Daly in the early 90’s  Is the most radical theory which states that to achieve sustainability, the natural capital must remain constant  Developed in the 90’s over the model of Barbier and Markandya  Is an intermediate theory stating that a minimum amount of natural capital must be maintained  Created by Ruth in 1994  Is a theory where the economical agents must know and apply the limits imposed by environmental factors

21. Stationary state - base for Conservationists 21 Sustainable Energy Systems Interest rate /compound interest is null Elasticity of substitution between natural and physical capital is null Technical progress has limited impact on natural capital Management of natural capital should be done by regulatory agents Main hypothesis Economic and demographic growth rates must be null Economic and demographic growth rates must be null Economic activity must be determined by the capacity to regenerate and assimilate Economic activity must be determined by the capacity to regenerate and assimilate The shadow price of natural capital may achieve the infinite The shadow price of natural capital may achieve the infinite Is this economically and socially sustainable? Is this economically and socially sustainable?

22. London School’s natural capital categories 22 Sustainable Energy Systems Categories Division Description Mercantilism of capital Mercantilism of capital Substitutability of capital Substitutability of capital  Mercantile natural capital  Non mercantile natural capital  Substitutable natural capital  Critical natural capital  The division of these two forms of capital is based on the possibility to trade a certain asset  Non mercantile natural capital is multifunctional and so, harder to substitute  This hierarchy is established considering the natural capital’s substitutability by other forms of capital  Critical natural capital should not decrease below a minimum value so the system can be sustainable

23. Modeling the critical natural capital 23 Sustainable Energy Systems Maintenance of minimum level of critical capital  – lower threshold not to be crossed K n * - Critical natural capital The Barbier and Markandya model of 1990 However, is very difficult to create measures to assess the value of natural capital This value ends up to be measured monetarily (resembling to the WS) However, is very difficult to create measures to assess the value of natural capital This value ends up to be measured monetarily (resembling to the WS)  Utility optimization  Existence of a minimum value for environmental assets Hamiltonian

24. The 3 corners of Ecological-Economical view 24 Sustainable Energy Systems Economy Thermo- dynamics Ecology  Opportunity costs  Substitutability  Temporal preferences  Definition of the system and its boundaries  Fluxes of energy and mass  Distinction of different systems  Material cycles  Energy fluxes  Complexity of environment/systems interactions Main concepts Thermodynamic serves as a tool to understand how economy and ecology should relate to each other Thermodynamic serves as a tool to understand how economy and ecology should relate to each other

25. Ecological Footprint 25 Sustainable Energy Systems Ecological Footprint measures how much land and water area human population requires to produce the resources it consumes and to absorb its wastes under prevailing technology. http://www.footprintnetwork.org Ecological Footprint measures how much land and water area human population requires to produce the resources it consumes and to absorb its wastes under prevailing technology. http://www.footprintnetwork.org

26. 26 Sustainable Energy Systems Ecological Footprint Biocapacity varies each year with ecosystem management, agricultural practices (fertilizer use and irrigation), ecosystem degradation, and weather Biocapacity varies each year with ecosystem management, agricultural practices (fertilizer use and irrigation), ecosystem degradation, and weather Average per person resource demand (Ecological Footprint) and per person resource supply (Biocapacity) in Portugal.

27. Agenda Weak Sustainability • Concept • Indicators Strong Sustainability Case Studies 27 Sustainable Energy Systems

28. Case Studies The Physical Destruction of Nauru Forest Management in Nepal Water resources in Austria 28 Sustainable Energy Systems

29. The Physical Destruction of Nauru 1/4 29 Sustainable Energy Systems Weak Sustainability  Small island located in the central pacific;  < 20 km;  1900 one of the highest grades of phosphate rock (primary ingredient in commercial fertilizers ) ever found was discovered;  90 years of mining caused devastation of 80% of the island;  Elevated plateau - Topside

30. The Physical Destruction of Nauru 2/4 30 Sustainable Energy Systems Weak Sustainability  Scraping of the surface soil;  Removing of the phosphate between the walls of an ancient coral;  Mined out areas: - Disappearance of species; - Inaccessible to humans; - Unusable for habitation; - Unusable for crops, …  Loss of vegetation on Topside: - Hotter and drier micro climate.

31. The Physical Destruction of Nauru 3/4 31 Sustainable Energy Systems Weak Sustainability  High level of GDP in 1993;  Trust fund done with the income from the phosphate mining;  Interests from this trust fund should have insured a substantial and steady income and thus the economic stability of the island;  The Asian financial crisis, among other factors, has cleared out most of the trust fund;  Biologically impoverish island;  The money traded has vanished;  Trade with the outside world is now essential for Nauruans to get the necessities no longer available locally.

32. The Physical Destruction of Nauru 4/4 32 Sustainable Energy Systems Weak Sustainability  People all over the world are making this kind of decisions and with the same ultimate result as in the case of Nauru;  But the consequences are easier to see in a small island nation;  The development of Nauru followed the logic of weak sustainability, and shows clearly that weak sustainability may be consistent with a situation of near complete environmental devastation;

33. Forest Management in Nepal 1/5 33 Sustainable Energy Systems Strong Sustainability  The basic principal of the strong sustainability is being applied in different parts of Nepal for the forest management at the local community level;  Nepal has vast ecological resources ranging from subtropical to alpine climatic ranges; - 118 forest ecosystems; - 75 vegetation types; - 35 forest types;  90% of the population lives in the forest areas;  Forest is a major resource: timber, fuel wood, medicinal plants,…

34. Forest Management in Nepal 2/5 34 Sustainable Energy Systems Strong Sustainability  Forest depletion in Nepal: - Fuel wood collection; - Grazing; - Illegal logging; - marginal expansion of agricultural areas;  Food deficit, because p eople sell firewood at the local market to purchase food items

35. Forest Management in Nepal 3/5 35 Sustainable Energy Systems Strong Sustainability  In 1999, the total forest area was 29% of the total area of Nepal;  In 1988 it was 37%;  50 years ago it was more than 50%;  Deforestation rate – 1.7% per year;  Forest Act in 1993;  Forest regulations in 1995 lead to the creation of FUGs – Forest Users Group

36. Forest Management in Nepal 4/5 36 Sustainable Energy Systems Strong Sustainability  The FUG is responsible to manage the forest;  Constitution and operation plan approved by the District Forest Officer;  FUGs could: - initiate plantation of crops, such as medicinal herbs; - Fix prices of forestry products; - Establish forest-based industries; - And use surplus funds in any kind of community development work, but such activities should not hamper main forest stock; - 25% of the revenue used to enhanced natural capital

37. Forest Management in Nepal 5/5 37 Sustainable Energy Systems Strong Sustainability  Land ownership remains with the state, but the land use rights along with the forest resources except wildlife products, soils, sands, etc. belong to the FUGs;  In 2003 there were 12,079 FUGs (15% of total forest area);  Reverse the tragedy of the commons;  61% of the total forest area;  People are experiencing the resilience of the local ecosystem over the period of one decade.

38. Water Resources in Austria 1/3 38 Sustainable Energy Systems Strong Sustainability  Austria is a rich country regarding water resources;  Protect the quality and quantity of the water resources by one of the most stringent legal frameworks  Wasserrechtsgesetz , 1959;  Critical regions: - Where large amounts of water are extracted; - Agricultural production and industrial waste sites;  Water in a sustainability context can be regarded as a regional (national) resource;

39. Water Resources in Austria 2/3 39 Sustainable Energy Systems Strong Sustainability  Within a naturally given catchment area the yearly extraction should not exceed the yearly renewal rate of the water resource;  The organic and inorganic load into the water resource should not exceed the regeneration capacity (carrying capacity);  The seasonal differences between water supply and demand should be taken into account;  Imports or exports from one region to another are only sustainable if previous principles are fulfilled.

40. Water Resources in Austria 3/3 40 Sustainable Energy Systems Strong Sustainability  Austria has one of the most stringent water pollution acts in Europe;  Every use of water, be it the extraction of groundwater or the discharge of sewage, has to be limited according to the state of the art in control technologies to minimize eventually harmful uses;  Groundwater has to be protected in its natural state;  Polluter-pays-principle and avoidance principle are the leading objectives.