Next class: Mid term test (2 hours)

20 multiple choice questions (30%) ALL readings (anything is fair game from the readings)

Spencer Well’s (from Pandora’s seed) & Robbins et al, Chapter 1,2,3 & 4

3 essays questions relating the readings and to what we’ve discussed in class (70%) Market based Environmentalism & “Institutions and the commons”.. The prisoner’s dilemma I know the bugger & his buddy did it, but I need hard evidence to • A theoretical game in which a particular action would benefit all, but make them do “hard” time individuals behaving selfishly will create a situation that is not optimal for everyone.

Interrogator has evidence that you committed one crime, but suspects strongly that you and your “partner in crime” were responsible for many more.. (you are being kept in isolation and have no way of communicating with partner). Current situation: You will spend 1 year in prison for the crime committed., unless.. If you “provide evidence” against your colleague on the other crimes, you can get a reduced sentence (probation: no prison) Your colleague will do the hard time (5 years of prison)…

What do you do? Figure 4.1: The prisoner’s dilemma

The best outcome for the two prisoners involved? Shut up and “cooperate” TOTAL TIME IN PRISON 2 years (1 year each)

If both pursue “self interest” assuming that the other doesn’t.. Worst case scenario..

Best rational outcome for either prisoner: Rat out the colleague, other one shuts up TOTAL TIME IN PRISON 5 years (5 years for one, 0 for the other)

And if both “rat out” their partner… worst case scenario for them, right? Total time in prison 10 years (5 years each) The tragedy of the commons

• The ecologist Garrett Hardin theorized the tragedy of the commons as a particular type of prisoner’s dilemma

This is a situation where individuals acting independently and rationally according to their own self-interest behave contrary to the best interests of the whole by depleting some common resource. Providing a bit of context: Main stream economics: Adam Smith 18th century economist

Free market capitalist promotes economic prosperity for all.. If everyone works hard to promote their own self interest,.. through markets and exchange, everyone benefits..

“Ethical foundation for capitalism???”

Adam smith makes reference to the “invisible hand” of free markets, as a metaphor to describe unintended social benefits resulting from individual actions. The tragedy of the commons

An example of a type of market failure clear contradiction of “Adam Smith”.. Prior to the 19th century:

Custom in many English village to let their cattle, livestock graze freely on the “commons”

The term “commons” derives from traditional English legal term of “common land”

This land might have been owned “collectively” by the village or by “the crown” without clear ownership or regulation..

For millennium, farmers/peasants would graze their livestock, hunt, collect wild plants, etc..

THE PROBLEM: Everyone has access to a commonly held pasture No rules about sustainable numbers for grazing

Each herder benefits more from adding more animals (cost to farmer is zero) Nobody has an “private” incentive to stop overgrazing,.. In fact, if you don’t use it, your neighbor will.. The land belongs to everyone, so in a sense it belongs to nobody.. Over the longer term: land can no longer sustain grazing animals, and everyone loses.. Nice place for a hike, with nice views..

1000 years ago, the UK was covered with forest

Major deforestation due to “pastoral agricultural” which continues through to the present.. Common Access Resources: Shared and unregulated resources available to all, but owned by none? No private ownership, and no system for managing the resource..

Fish in the sea? Forests?

Atmosphere?

Note: 11% of Canada’s land mass is privately owned..

Rivers, lakes? The following video clip is put together by an “economist” with an interest in Markets and the Environment Elaborates on the problem: “The Tragedy of the Commons”..

In this video, he distinguishes between:

Private costs for a producer of a good, service, or activity which includes the costs the firm pays to purchase capital equipment, hire labor, and buy materials or other inputs.

External costs, costs which are not reflected on firms’ income statements or in consumers’ decisions, but very real nevertheless! These external costs remain important to society overall, regardless of who pays for them. E.g. a Company saves money by not installing water pollution control equipment. Because of the firm’s actions, cities located down river will have to pay to clean the water before it is fit for drinking, the public may find that recreational use of the river is restricted, and the fishing industry may be harmed.

Social costs include both the private costs and any other external costs to society arising from the production or consumption of a good or service. Social costs of production” (i.e. private costs & externalities)

Don’t worry about the technicalities/diagrams here in terms of economics in this clip..

https://www.youtube.com/watch?v=NZAwGoIAFgM Fisheries (as an example of the “Tragedy of the Commons”

Let’s consider Newfoundland’s Cod Fisheries.. Basque and Portuguese Fishers, evidence going back as far as the 15th century

Employed 1000s of Newfoundlanders, from the 19th century onward!!

Until the 1950s, largely smaller scale operations.. Sustainable & labour intensive..

1960s onwards: Trawling fleets from around the world. Most vessels came from North America and Europe – primarily the Soviet Union, Spain, France, and Portugal – although smaller numbers also arrived from Asia, the Caribbean, and elsewhere.

Technologies evolved with massive engine power vessels and frozen food compartments aboard ships. Engine power vessels had larger nets, larger engines, and better navigation. The capacity to catch fish became limitless. In addition, sonar technology gave an edge to catching and detecting fish. Sonar was originally developed during World War II to locate enemy submarines, but was later applied to locating schools of fish. These new technologies, as well as bottom-trawlers that destroyed entire ecosystems, were vastly different from old techniques used, such as hand lines and long lines. Thinking of the fisheries: Private costs were low and the cod were treated like a “global commons”

Demand was increasingly driven by a world wide market

Population and “demand” increases, so too does price, and hence: more fishing..

Trawlers (1960s onwards) from the Soviet Union and its satellite countries, Great Britain, Spain, Portugal, Japan, and Canada

Note: Canada (via a UN treaty) extended a 200-mile limit in 1977, limiting the fisheries to solely Canadian fishers in parts (yet not all) the Grand Banks

But,.. Too late! Complete collapse of the fishery, because of “little regulation”,.. .. Tragedy of the commons..

Various competing interests, yet nobody taking into consideration the true social costs of fishing.. Which includes its long term sustainability.. Added complication:

Ignorance and Politics: Nobody really had a clear sense as to how “limited” the resource might be… How sustainable were current practices..

Scientists, the public, fishers and politicians debated what the limit to “catches” might Even among those that are highly concerned and be right to the end.. & all grossly overestimated the capacity of our oceans to sustain informed: heavy fishing

“UNCERTAINTY” among “scientists” and “experts”>>> -> leading to a lack of political will.

Moratorium on fishing cod within Canadian waters since about 1992 This lead to one of the largest industrial closure in Canadian history. In Newfoundland alone, over 100,000 persons (fishers, plant workers & their families were directly impacted and it had a devastating impact on over 400 coastal communities.. The tragedy of the commons: Hardin’s solutions • Hardin says that since people will act in their own interested, there are only two solutions: 1. Privatization 2. Enforcement of regulations/restrictions (coercion?)

• Hardin prefers privatization • individuals have incentive to manage property sustainably, they are the only ones hurt by their actions • Hardin’s theory is widely accepted, so many environmental issues are managed either through strict regulation or privatization • Let’s consider another example, while thinking of potential “market based” interventions to deal with the problem

The “atmosphere” as our “global commons”..

Greenhouse gases as “externalities” since most polluters (individuals and industry) do not consider them as part of their “private costs”..

Why do we consider the atmosphere as our “global commons”?

Obviously: Carbon dioxide does not stay in place Emissions come from a set of locations, but the impacts are shared (unevenly) by all Owned by all, but by no one..

How do we control carbon? How can cooperation be achieved? Controlling carbon? Though long promised, the Harper Government refused to impose greenhouse gas regulations on the oil sands – the fastest growing source of emissions – or indeed on any industrial source other than coal-fired power. Why?

Direct quote:

“In fact, Mr. Speaker, nobody in the world is regulating their oil and gas sector. I would be delighted if they did. Canada would be there with them. However, we will not impose unilateral penalties.”

Won’t act without uniform actions south of the boarder (U.S.) Similar position on China, India, among other major emitters.. Harper’s logic for doing nothing

1. Canada is a “resource based economy” (including energy!!), and we must build on our strengths.. (obviously, not everyone agrees with this assessment).

2. More fundamentally, Canada acts unilaterally on “greenhouse gases” our economy faces a “competitive disadvantage”..

Assume Government regulates: … all production must convert as quickly as possible to cleaner forms of energy and cleaner technology..

Inevitably: “Costs” to producers increases in Canada as we are also considering the social costs of production (i.e. the long term sustainability of economic activity, given the potential risks & costs of climate change”

Recall: Fossil fuels (Oil, Natural Gas, Coal) all tend to be much cheaper than “renewable energy” (wind; solar).

Canada’s economy suffers relative to any other country that fails to consider the “social costs” of energy use. Production (which has a lower cost to its energy).

Harper is obviously downplaying (or ignoring) the longer term “social costs” to Canada and the World economy.. Returning to a bit of “game theory” (Prisoner’s dilemma was an example of game theory)

Let’s consider the two world’s largest GHG polluters,.. .. And two largest economies Returning to a bit of “game theory” (Prisoner’s dilemma was an example of game theory)

U.S. has the economic advantage Both pay the same for energy China’s economy takes the hit due to (full social costs) higher energy costs.. HENCE: VERY DIFFICULT BEST CASE SCENARIO BAD SITUATION, BUT NOT AS BAD AS IF THE U.S. DID NOTHING TO ESTABLISH INTERNATIONAL LONG TERM SUSTAINABLE ECONOMIES LONG TERM COSTS GREATER THAN AGREEMENTS ON REDUCING THE BEST CASE SCENARIO EMISSIONS.. China has the economic advantage The U.S. economy takes the hit due to higher energy costs.. Both pay the same for energy (ignore the social costs) BAD SITUATION, BUT NOT AS BAD AS IF CHINA DID NOTHING WORST CASE SCENARIO LONG TERM COSTS GREATER THAN BEST CASE SCENARIO LONG TERM ECON/SOCIAL DISASTER Market environmentalism

• Environmental problems can be solved by the (free) market economy (this seems to be consistent with Hardin’s position) • Emphasizes the use of market-based instruments to internalize environmental externalities and other sources of market failure • Examples of approaches: • Green taxes • Green consumption • Trading and banking (such as cap and trade) GREEN TAXES: refers to taxes intended to promote environmentally friendly activities via economic incentives/disincentives.

EXAMPLES: Carbon taxes: extra cost in using fossil fuel (coal, gasoline, oil, natural gas) Several countries have introduced this, including Sweden, Ireland, Finland, Great Britain. Canada has introduced such taxes in BC, Alberta & Quebec, although to date they have been rather small

Specific taxes on technologies/products/services which are associated with substantial negative externalities (example: higher taxes on gas guzzling vehicles or air travel) -Some jurisdictions in Canada/USA have taxes on gas guzzling vehicles Green taxes

Waste disposal taxes and refundable fees (municipality charge more for households that throw out more waste).

Duties (or taxation) on imported goods that are produced in countries that do not have the same sort of environmental standards (interesting idea?) Advantage of “green taxes”.. Can directly address the failure of free markets to consider “environmental impacts” (i.e. the market prices not only reflect “direct production costs” but also the “social costs” of producing specific goods and services..

Perhaps easier to implement that “regulatory approaches”, i.e. no need for enforcing standards, as you attempt to modify behavior and systems through the marketplace..

Think of Julian Simon: If prices rise, forces society to “innovate”, increase efficiencies and potentially substitute…

An additional “revenue” for governments, that can then be used to finance further “environmental initiatives” e.g. tax carbon, and then subsidize the development of green energy.

Disadvantage: potentially increases costs for those that can least afford it.. e.g. non-competitive struggling industries poor persons, ..

BUT, as a rebuttal: “green taxes” can be potentially “revenue neutral” (i.e. overall tax revenue could remain unchanged, with governments implementing a “tax shift”: e.g. reduce other taxes on human labour, renewable Resources and more “sustainable” products/services, tax breaks/credits for lower income households, etc. Green consumption:

Individuals choose goods or services based on their environmental impact (often certified in some manner)..

No coercion: i.e. nobody is being told what to buy, & persons are free to continue to purchase “non-certified” products.

E.g. Provide persons with the choice to purchase produce that is grown with more sustainable agricultural products (certified organic) https://www.youtube.com/watch?v=KwNJhw9tAW4

Triclosan is toxic to aquatic bacteria at levels found in the environment. It is highly toxic to various types of algae and has the potential to affect the structure of algal communities, particularly immediately downstream of effluents from wastewater treatment facilities that treat household wastewaters

Environmental groups have called for to be banned. "And it's certainly not saving wildlife."

Major disadvantage is Greenwashing

green marketing is sometimes deceptively used to promote the perception that an organization's products, aims or policies are environmentally friendly. Market environmentalism

One last policy option that is an example of a market based solution to an environmental problem

“Cap and Trade” -> reduce GHG’s / other atmospheric pollutants.

Involves “regulation”, but more importantly, attempts to use the market place to reduce environmental impact..

“Combined regulatory /market based approach”.. • Cap and trade – • Eg. Quebec/California currently are commited. • Ontario is seriously talking about it..

• Quebec is setting out to reduce its total emissions by about 20% by the year 2020, by pricing carbon and generating what is called a “carbon market”.. How does it work? Politically popular in that it targets solely the larger polluters who are subject to regulations that set a maximum for pollution emissions i.e. Businesses that emit 25,000 metric tons or more of CO2 equivalent a year are subject to the cap-and-trade system. First step: Price carbon!!! CO2 is priced (releasing a ton of CO2 is equivalent to 1 emission unit) 1 emission unit is worth $10.75 70,000,000 tons of CO2 annually in Quebec is said to be costed at theoretically: $752,500,000!! Second step: After an 2013 inventory was taken, firms were allocated FREE “emission units” equivalent to their 2013 total emissions. An emission unit allows you to continue to pollute a ton of carbon..

E.g. Firm A is responsible for 1,000,000 metric tons of CO2, they are provided 1,000,000 free emission units worth 10.75 each (value: $10,075,000)

Firm B is responsible for 2,000,000 metric tons, so they were allocated 1,000,000 free units (worth $21,150,000)

This is the starting point, but for each of the next five years, they will be supplied 3% fewer emission units each year. If they pollute more than what their emission units allow them to pollute, they pay the difference… Next step: Quebec government says that all firms must reduce emissions by 3%, i.e. all companies are given 3% fewer emission units.

If a Firm fails to reduce CO2 by 3%, they must pay the difference: For example, in 2015 they had 1,000,000 emission units covering 1,000,000 metric tons In 2016 they are allocated 970,000 emission units (3% fewer) covering only 970,000 metric tons..

The company must either reduce total emissions by 30,000 tons Or pay 30,000 X $10.75 = about $300,000 dollars…

Note: if the company can reduce its carbon by footprint for less than $300,000 then this is a major incentive to clean up their act, as they can pocket their “emission units” & sell on the carbon markt.

If a company can’t afford it!! doing nothing over years costs millions!! but they can buy “carbon permits”.. to “pollute”..

A direct “cost” is placed on “carbon”!!! & this creates a “market for carbon”.. Why is it called “cap” and “trade”?

So far I’ve explained the “cap” which gradually reduces the amount of emissions that all companies can release into the Atmosphere

“Cap” and “trade” allows a company to save and potentially sell its “emission credits’.. A carbon market is being produced.

Example, a company reduces its emissions far beyond the target (3%), they have surplus emission targets, which can then be sold on the “carbon market”.

Why is this beneficial? Why is this beneficial? Consider two companies: 1st company is capable of reducing emissions at a cost of 5$ a ton, whereas the second company requires 15$ a ton to do

Traditional regulatory approach: all companies Cap and Trade: Same outcome: 30% reduction but Must reduce by 30% credits can be traded.

Each company initially produces 100 tons

But Note: Why would Company A bother to reduce its Emissions beyond 30 tons? 100 tons initial Reduces by 0 tons, but 100 tons initial 100 tons initial purchases 30 tons worth of There is an 100 tons initial Reduces by 30 tons Reduces by 30 tons emission units from Incentive! Reduces by 60 tons 30 tons X 5$ = $150 30 tons X 15$ = 450$ company A to cover its costs 60 tons X 5$ = $300 ($150)

Outcome the same: total reduction is 60 tons but.. Outcome: total reduction for both companies is 60 tons Cost to both companies combined ($150)+($450) = $600 Cost to both companies combined is less (300-$150)+(0+$150) = $300 By creating a market on carbon permits, you can create incentives for companies to reduce CO2 by more than what they might have using the regulatory approach.. Again consider the same two companies: 1st company is capable of reducing emissions at a cost of 5$ a ton, whereas the second company requires 15$ a ton to do Company A could have sold its excess permits at 8$ a ton (more than its cost to Traditional regulatory approach: all companies reduce emissions 5$ a ton), and still both companies would be better off with Must reduce by 30% the same reduction in carbon

100 tons 100 tons Reduces by 0 tons Reduces by 60 tons But purchases 30 tons worth of 100 tons 100 tons 60 tons X 5$ = $300 emission units from company A at 8$ Reduces by 30 tons Reduces by 30 tons a permit to cover its costs ($240) 30 tons X 5$ = $150 30 tons X 15$ = 450$ Outcome: total reduction for both companies is 60 tons Cost to both companies combined ($300-240)+($0+240) = $300 Outcome: total reduction for both companies is 60 tons ($60) + (240) = 300 Cost to both companies combined ($150)+($450) = $600 Company A gets a competitive advantage by reducing more than required (total cost to Company A is $60 after selling $240 worth of permits) Advantage:

Politically easier to push through & looks promising in terms of reducing emissions.. Doesn’t target individual consumers..

Disadvantage relative to the “carbon tax”..

Involves much more regulation and administration