The market in greenhouse gas emissions could outstrip the conventional commodities markets to become the biggest traded commodity, the head of the US Commodities Futures Trading Commission said on Wednesday.

Bart Chilton, commissioner of the CTFC, said: “The potential size and scope of a structured carbon emissions market in the US is unequivocally vast. It is certainly possible that the emissions markets could overtake all other commodity markets.”

Carbon trading was worth about $64bn last year, according to the World Bank, but the US accounted for a small fraction of this. Most of the trading – about $50bn – was carried out under the European Union’s emissions trading scheme, with nearly all of the rest carried out under the Kyoto Protocol, which the US has not ratified.

But Point Carbon, a carbon market analyst company, has estimated that the global carbon market could be worth more than $3,000bn in 2020 if the US were to participate, through setting up its own federal cap-and-trade system to limit carbon emissions and through an international agreement to succeed the Kyoto treaty.

Mr Chilton gave a slightly more cautious view yesterday, saying: “Even with conservative assumptions, this could be a $2,000bn futures market in relatively short order.” Carbon markets also have an effect on other traded commodities such as coal, oil, gas and electricity.

Carbon trading was set up under the Kyoto Protocol as a mechanism to help countries cut their emissions. Under cap-and-trade systems, a ceiling is placed on companies’ emissions and they can trade their unused quota with one another. This method is supposed to ensure that carbon is cut at the lowest possible cost.

The US is moving closer to setting up a federal cap-and-trade system. An attempt last month to pass a bill for such a system fell foul of procedural obstacles, but many believe a similar bill will be brought forward again under the next president, when it is likely to have more chance of passing. Barack Obama and John McCain, the presidential candidates, both support a cap-and-trade system.

Bloomberg.com
By Alex Morales

June 20 (Bloomberg) — Alcoa Inc., Royal Dutch Shell and 97 other companies are urging world leaders to devise a plan for fighting global warming by setting greenhouse-gas targets for all nations and creating an international carbon market.

A new climate-change treaty is needed with incentives to capture and store carbon dioxide and protect forests, the 99 companies said in a statement prepared by the World Economic Forum, a Geneva-based business coalition. The group presented the proposals today to Japanese Prime Minister Yasuo Fukuda, who hosts a meeting of the Group of Eight nations next month in Japan.

Oil, power and metal industries are among the biggest emitters of greenhouse gases blamed for global warming. To cut their output in half by 2050, an extra $45 trillion must be invested in clean-air technologies, the Paris-based International Energy Agency said this month. The business group said it wants government guidance on how new climate policies may affect investment decisions.

“The report makes clear that businesses can’t operate in a policy vacuum,” Willie Walsh, chief executive officer of London- based British Airways , Europe’s third-largest airline, said in a conference call yesterday. He is one of 16 corporate leaders who developed the proposals.

The group, representing 10 percent of the market value of the world’s listed companies, also is led by Jeroen Van der Veer, chief executive officer of Shell, Europe’s largest oil company, based in The Hague; Chairman Alain Belda of New York-based Alcoa, the world’s third-biggest aluminum producer; and Chief Executive James Rogers of Charlotte, North Carolina-based Duke Energy Corp., owner of electric utilities in the Carolinas and the U.S. Midwest. Klaus Schwab, founder and executive chairman of the World Economic Forum, presented the proposals to Fukuda in Tokyo.

Green Industry

“This is the first time you’ve had an international group of business leaders set out in a great degree of depth their vision for what the new framework should look like, and put their name to it,” Dominic Waughray, the World Economic Forum’s head of environmental initiatives, said in a telephone interview.

To limit the risks of global warming, a “paradigm shift to a low-carbon economy” is needed, the companies said in the statement prepared by the Forum and the World Business Council for Sustainable Development, also based in Geneva. The statement called for a “green industrial revolution,” with rich nations taking the lead in cutting greenhouse gases and developing a global market for carbon credits, or permits to pollute.

“We see enormous opportunity here for the global financial industry,” Caio Koch-Weser, vice chairman of Frankfurt-based Deutsche Bank AG, Germany’s biggest bank, said on the conference call. An emissions treaty enforced beyond 2012 might produce “the makings of the global carbon market, with carbon almost as a currency 10 years from now.”

New Accord

World leaders aim to reach an accord by the end of 2009 to limit emissions, replacing the Kyoto Protocol, which expires in 2012. Negotiations have stalled because of disagreement over what commitments different countries should make. The U.S. says it won’t agree to binding targets unless China and India also agree to limits. Those nations say it’s up to the industrialized world to first control emissions.

“We need strong leadership from governments to enable the business community to take advantage of opportunities,” British Airways’ Walsh said.

Under carbon trading, companies are given emission limits and enough permits to meet that cap. If they undershoot, they’re able to sell those excess credits to other businesses that are unable to meet their targets.

`Unambiguous’ Goal

“The new framework must be designed to harness the power of the market,” the chief executives wrote in the 12-page proposal. “A well-designed market-based framework in developed countries that enables the emergence of an international market for carbon can help catalyze the required flows of private capital and clean-energy technology to developing nations.”

The new treaty must include an “unambiguous” international goal to cut emissions, the companies said, suggesting a target for 2050 to halve output of the gases, produced mainly from burning fossil fuels. All major economies should be involved, including developing countries such as China and India, which have no binding targets under Kyoto, the companies said.

The proposal called for incentives to avoid cutting down forests and to develop technologies including solar energy, nuclear power, and carbon capture and storage, or CCS, an experimental technique that removes carbon dioxide from factory and power-plant exhaust and pumps it underground for storage.

Carbon Capture

“Acceleration of the demonstration and deployment of a range of CCS technologies is particularly important,” the report said. “If all new coal-fired electricity generation plants are not operating with CCS from 2015 to 2020 onward, it will be difficult to realize the target of a 50-percent reduction in global emissions by 2050.”

The executives also said licensing agreements and funds are needed to allow clean technologies to be used in poorer nations.

While no companies from mainland China have endorsed the plan, Rick Samans, managing director of the forum, said invitations are there for Chinese firms to sign up. Walsh and Koch-Weser said awareness of climate change is high among Chinese business leaders.

US meat, dairy and poultry producers on Thursday urged regulators to re-examine ethanol mandates, which are tightening limited grain supplies and forcing a run-up in feedstock prices that threatens their livelihoods.

“We are facing tighter and tighter supplies of grain that threaten to devastate meat, dairy and poultry producers and cause food price increases for the American consumer,’’ said Thomas Elam, president of FarmEcon, an agricultural and food industry consulting firm. “The government must not allow this to happen.’’

US laws require that 9bn gallons of renewable fuels be blended into transport fuels in 2008. Most of this will be met using corn-based ethanol. However, the Environmental Protection Agency can waive these requirements, in whole or in part.

Texas has asked for a 50 per cent waiver, citing high grain prices caused by the ethanol mandates and aggravated by recent flooding that is threatening corn production. Governor Rick Perry noted that corn prices rose 138 per cent globally over the past three years and that global food prices increased 83 per cent. “This misguided mandate is significantly affecting Texans’ family food bill,’’ Mr Perry said.

The EPA must rule on the Texas request by July 24. In the meantime, food producers are urging the agency to consider relaxing the rules nationwide.

“The beef industry has been able to hold off on increasing customer prices dramatically, but the cost of feed has now tripled and consumer prices cannot stay down forever,’’ said James Herring, president and chief executive of Friona Industries, the world’s fourth-largest cattle feeder. “One-third of America’s corn crop is slated to become ethanol this year, but that corn could instead be used to feed people and animals and keep grocery bills from skyrocketing.’’

Rising corn and soybean prices have cost the broiler chicken industry $5bn since October 2006, said Mark Hickman, head of Peco Foods: “It is not fair to expect us to compete with a government-subsidised market that will take one-third of the corn crop this year unless it is reformed.’’

The case for relaxing the ethanol mandate could be helped by new data from the US Department of Transportation, which said Americans drove 1.4bn fewer highway miles in April 2008 than last April. Vehicle miles travelled on all public roads for April 2008 fell 1.8 per cent, versus April 2007 travel, marking a decline of nearly 20bn miles travelled this year and nearly 30bn miles since November.

Cambridge Energy Research Associates said that gasoline demand in the US may have reached its peak and predicted that demand was likely to decline in 2008 for the first time in 17 years.

That gives meat, dairy and poultry producers hope that the EPA will reverse course, if only temporarily. Paul Hill, chairman of the National Turkey Federation, said: “The EPA has the chance to take our foot off the ethanol accelerator and help stabilise out-of-control corn markets.’’

Financial Times
Published: June 20 2008 19:02 | Last updated: June 20 2008 19:02

The queues of angry motorists outside Chinese petrol stations on Friday are a reminder of why cutting gasoline subsidies is difficult. They are also a reminder of why such cuts are a good idea. Other countries that subsidise energy – especially poor countries – should follow suit. For very similar reasons, countries that tax fuel, such as the US and the UK, should resist any temptation to cut their levies.

China has announced an 18 per cent rise in the controlled price of diesel alongside a 5 per cent rise in the price of electricity. It joins India, Taiwan, Malaysia and Indonesia, all of which have cut their subsidies in recent months, as the cost of maintaining them rose in line with the soaring price of oil.

Exporters of oil, such as Iran, can maintain their subsidies as prices rise simply by forgoing some extra tax revenue. But for the oil-hungry importers of east Asia there is no escape: high petrol prices mean somebody has to lose out, and the only question is who. Use subsidies to keep prices down and the loser is the government; allow prices to rise and it is motorists who suffer.

In developing countries, where only the rich own cars, it is especially unfair for the government to pay. Tax revenues, on a huge scale in nations such as India, have to be diverted from health and education spending to fill the fuel tanks of a small elite. Even in rich countries, fuel tax cuts are regressive.

The effect is amplified in the poorest countries because their tax-raising power is so limited anyway. Often dependent on mineral royalties or duties on goods, with only a weak income or corporate tax base, subsidies on fuel can amount to a large slice of public spending.

That applies less to China, but another objection does: when the government uses price controls, rather than paying cash subsidies, it can wreck important companies. By controlling the price at which Chinese oil companies can sell gasoline, China’s government has caused heavy losses for refiners. Left unchecked, the result would have been underinvestment in energy infrastructure, and ultimately shortages of fuel.

The simplest argument against fuel subsidies, however, is that they promote wasteful use of a resource that markets are urgently signalling is in short supply. Unless petrol pump prices follow those of crude oils, motorists will drive on oblivious. China’s move will encourage conservation of fuel; it will also make it easy for Chinese producers to invest in new supply. It is only a small step – China still controls fuel prices – but it is one of the first steps in the right direction.

To contrast Prof Sachs idea of ‘Sustaining Growth’, here is my environmentalist description of ‘Strong Sustainability’.

Financial Times
By Martin Wolf
Published: June 10 2008 19:08 | Last updated: June 10 2008 19:08

Is it possible for the vast mass of humanity to enjoy the living standards of today’s high-income countries? This is, arguably, the biggest question confronting humanity in the 21st century. It is today’s version of the doubts expressed by Thomas Malthus, two centuries ago, about the possibility of enduring rises in living standards. On the answer depends the destiny of our progeny. It will determine whether this will be a world of hope rather than despair and of peace rather than conflict.

This – not the effectiveness of its particular prescriptions – is the biggest question raised by the report of the growth commission discussed here last week. It is also the focus of a powerful new book by Jeffrey Sachs, director of Columbia University’s Earth Institute*.

The challenge is stark. World real incomes per head could rise 4.5 times by 2050 and world population by 40 per cent. This would mean a sixfold increase in global output, concentrated in the developing world (see charts below). Is such an increase feasible? The answer he gives is: yes and no – yes, because changes in incentives, technology and social and political institutions would make a benign outcome feasible; and no, because the path we are now on is unsustainable. Professor Sachs is an optimistic prophet of doom. He falls in between those environmentalists who see no solution and those free-marketeers who see no problem.

By inclination, I am far closer to the latter than the former. But it has become evident, at least to me, that the human impact on the planet on which we depend has risen to enormous proportions. We have treated the global commons as if they were free. Self-evidently, they are not.

Prof Sachs emphasises three goals:

Finally, to achieve these ends, he recommends “a new approach to global problem-solving based on co-operation among nations and the dynamism and creativity of the non-governmental sector”.

One might view the first of the above goals as that of prosperity for everybody. Population control is related to this end because the world’s poorest people are burdened by the costs of rearing its largest families. Finally, only by managing the global commons will it be possible to sustain rising living standards.

The most illuminating concept in the book is that of the “anthropocene” – the era in which human activities dominate the world. Peter Vitousek of Stanford University has documented the ways in which humanity has appropriated the bounty of the earth for its own use: human beings now exploit 50 per cent of the terrestrial photosynthetic potential; they have put up a quarter of the carbon dioxide now in the atmosphere; they use 60 per cent of the accessible river run-off; they are responsible for 60 per cent of the earth’s nitrogen fixation; they are responsible for a fifth of all plant invasions; over the past two millennia they have made extinct a quarter of all bird species; and they have exploited or over-exploited more than half of the world’s fisheries.

Like it or not, we humans are now in charge. So what should we do? In his response, Prof Sachs shares the optimism of most Americans: we must fix it, but, he insists, we can do so only together. In this great venture, he argues, the US must share the leadership, but it cannot dictate to the rest of humanity.

In regard to the dynamics of catch-up growth in developing countries, Prof Sachs’ views are close to those of the growth commission. More distinctive is his recommendation of an aid-supported, big-push investment strategy, aimed at lifting the world’s poorest people, predominantly Africans, out of the poverty traps into which, in his judgment, they have fallen. Prof Sachs has made notable contributions to our understanding of the obstacles to development created by geography, the environment and devastating diseases such as malaria. In the current book, he emphasises how shortages of water are contributing to poverty and conflict across the planet.

Yet I am more sceptical than Prof Sachs of the returns to the big-push strategy. In many cases, it will fail. But it has to be tried, because there is no morally tolerable or credible alternative. I agree, too, that huge efforts must be made to accelerate the fertility decline in the world’s poorest countries, albeit on a voluntary basis.

Now suppose that economic growth then spreads across the planet, as we would wish. Can it be sustainable? Prof Sachs is notably optimistic on direct resource inputs into growth. His view is that fossil fuel resources, renewable energy and availability of fresh water should be sufficient to support continued growth over the next half century. But this would almost certainly require a transition from oil-based energy technologies to ones based on coal and renewables. Energy would, almost certainly, be much more expensive than in the 1985-2000 period, but not prohibitively so.

The challenge, in Prof Sachs’ view, is rather to make growth compatible with sustaining the global commons: species survival and, above all, climate change. Yet what is perhaps most intriguing of all is the optimism he shows on the latter task. While he embraces the view that climate change is a huge threat, he also believes it can be dealt with at modest cost, provided suitable incentives are put in place: less than 1 per cent of global income.

In all, in fact, Prof Sachs believes we can achieve all the goals he has set – elimination of mass poverty, population control and environmental sustainability – for less than 2 per cent of global incomes. This is about half a year’s global growth and, as such, surely cheap at the price.

This, then, is an analysis that manages to be both pessimistic and optimistic at the same time. One might not be quite as optimistic about the cost of the solutions. But one must recognise the salience of the challenges. If economic growth halted, conflict among the world’s people would risk becoming unmanageable. If the environmental consequences proved overwhelming, the costs of growth would become unbearable. We are the masters of our planet now. The great question for the 21st century is whether we can also become masters of ourselves.

*Common Wealth: Economics for a Crowded Planet (Allen Lane, 2008)

***

Comments

Jeffrey D. Sachs: Martin Wolf is right, in his generous review of my book (“Sustaining Growth is the Century’s Big Challenge,” June 11), that the biggest question in economics is whether there is room enough on the planet for 7 – 10 billion human beings, the tens of millions of other species, and economic convergence, that is the continued, reliable, and fairly rapid narrowing of income gaps between rich and poor due to technological catching up by the poor. The tendencies for convergence are powerful. Rapid economic growth in China and India reflect the powerful capacity of today’s poorer countries to close technology gaps. The results are impressive: income doubling periods of 7 to 10 years. The results are also harrowing: profound threats to the Earth itself, and therefore to continued economic development and even survival of vast numbers of people and vast parts of the biosphere.

Martin calls me both optimistic and pessimistic at the same time. My point is that either the positive trajectory or negative trajectory is possible, indeed both are plausible. I believe that physical resource limits alone will not do us in, or end economic convergence. On the other hand, the market economy by itself will not solve a now world-threatening crisis of sustainable development. The market system fails to solve four fundamental classes of problems: ecosystem functions (the bio-geophysical commons); population; extreme poverty (because of the very real dynamics of poverty traps); and technological pathways needed for sustainability. These are solvable problems. They require collective action, as they are fundamentally in the character of public goods. Yet for the same reason they are not solved. Part of the barrier is the ideology of market economics itself, which often denies these problems and therefore is short on producing practical tools and solutions.

The biosphere does not come packaged according to the assumptions of neoclassical economics. What we call externalities are the norms, not the exception. In ecosystems, the nutrients, carbon, water, nitrogen, energy, and species (including ours) are in flux. There are spatial migrations and temporal flows and interactions which make a lie of the underlying assumptions of “private” property. A farmer that encloses his farm, or drains groundwater, or introduces an invasive species, or puts on chemical pesticides, or replaces high biodiversity with a commercial monoculture, has pervasive effects on a whole ecosystem. These are, by nature, not fenced in his enclosure. None of this mattered in the extreme perhaps when the Earth was still populated by 1 billion of us, or perhaps even 2 or 3 billion. When local systems failed, there were new ecological niches to conquer. Yet in the past 250 years, the population has risen nearly tenfold. There are no more places to flee. And ecosystems everywhere are under profound threat.

It is often said that we have beaten Malthus, but that is also not quite right. We have had two main solutions to Malthus. The first is voluntary fertility reduction, especially in the past half century. Malthus really couldn’t imagine this. But the global demographic transition is still incomplete, and the human population is still rising by around 75 million per year. The second is massive mining of resources. We haven’t simply figured out how to get more for less, as we usually assume; we have just as often figured out how to get more for more . . . more groundwater depletion, more habitat destruction, more fossil fuel use, more use of chemical pollutants, etc. Our “solutions” have been really only half solutions. We are clever indeed, but less clever than we pretend, by counting as income what is in fact pervasive depletion of natural capital.

The answer then to the question of whether we’ve beaten Malthus, is “Yes, no, maybe.” Yes, we have enjoyed a pervasive rise in living standards ahead of the population curve, and have set in motion the powerful global dynamics for more. No, we have not done this yet in a sustainable manner. Populations are growing too fast, we are running out of some resources, such as conventional oil and fossil groundwater, and we will lose others, such as glacier melt. And maybe we can overcome these constraints as well, but with technologies which do not (quite) yet exist, or which exist but are still very costly, or which exist but for various reasons are not deployed (e.g. because the poorest of the poor can not afford them or because of market neglect of the commons).

Standard neoclassical economics makes four kinds of mistakes regarding sustainable development. First, it literally writes natural resources out of the baseline growth analysis. This is how we are taught on the first day, with the Solow and Ramsey growth models. This assumption is correct only if the neglected natural inputs are indeed available at constant cost relative to the outputs, in which case we can assume their effects away through aggregation. This is not the case. The recent rises of oil and food prices are real signals to the contrary. And there is even more output-threatening depletion and environmental destruction not yet registered in market prices. By the way, our international agencies until very recently operated with the same blithe assumptions. The energy sector forecasts of the International Energy Agency, for example, have been “demand-side” forecasts only, as they have implicitly assumed that the supply would be forthcoming, on the margin, at constant relative costs. In the same vein, mainstream economics vastly downplays the ecological costs of human activity, by treating the massive anthropogenic pressures as mere exceptional “externalities,” rather than the pervasive rule. Again, this did not matter as much on a global scale until recently.

Second, market economics neglects the importance of population policy, especially to help promote a demographic transition in the poorest countries through a rapid, voluntary reduction of fertility rates. The rapid population growth in the poorest countries is to nobody’s benefit: the poor themselves (especially the children’s generation), the world, and the environment. It results from a combination of factors, including the pervasive lack of access of the poorest of the poor to family planning services and contraception, high child mortality rates (which discourage voluntary fertility reduction), and lack of public financing of education of girls through at least secondary level. The demographic trap, in short, is part of the poverty trap, and it is threatening to the poor, global stability, and long-term environmental sustainability.

Third, and closely related, mainstream economics assumes that production functions and financial markets are such as to ensure market-based economic growth even in conditions of extreme deprivation and lack of infrastructure. Technically, the baseline growth theory blithely assumes away poverty traps (for example, in the famous Inada condition of the first day of growth theory, which posits nearly infinite returns to incremental private-sector investments in capital-scarce economies such as Mali, Niger, Chad, and Somalia!).

Fourth, the implicit assumption of market economics is that if a technology is vitally needed, it will be found by market forces, perhaps augmented by (non-market) patent rights. Necessity will be the mother of invention, rather automatically. Yet economics teaches that knowledge — both science and the technology embodying scientific and practical know how — is not just another commodity, but a public good par excellence. It will be produced and diffused in insufficient amounts by market forces alone. Market-based technological pathways may sidestep entirely the technological needs of the poorest of the poor, and of the global commons, unless guided by public policies and action. The massive technological change, of the kind needed urgently in this century, requires a mobilization of public and private institutions and actions, new public-private partnerships (PPP), and a rich institutional environment for technological change. Massive technological innovations will require public financing at least an order of magnitude greater than today directed at technological innovations in sustainable energy, food production, water use, biodiversity conservation, and more.

My optimism is indeed that our technological prowess can be good enough to address the harrowing challenges, and that physical resource availability (energy, land, water, biodiversity) can suffice with the invention and diffusion of resource-saving technologies. I put great stock in renewable energies (especially solar power, which I believe will likely be the most important of all energy technologies by the end of this century, perhaps together with safe nuclear power), high-mileage automobiles, drought-resistant crop varieties, carbon capture and sequestration, anti-malaria bed nets and medicines, and much more.

My pessimism is that there is nothing automatic (in market terms) about the development and application of such solutions. They require a new kind of economic analysis; vastly greater public awareness and consensus; and global cooperation on a scale not yet achieved. We can end poverty with existing technologies for less than 1 percent of rich-world income, yet we think it’s much more important to argue about that proposition than to try it (despite our endless promises at the highest political levels to try it), while in the meantime around 10 million children die each year of their poverty, and vast regions of the world are inflame in their hunger, disease, and desperation.

Are the vitally needed sustainable technologies within reach? Probably at modest cost. Many are already on the horizon, a “future that is already present.” Are we making such investments? Plainly no. We have yet to master the full “value chain” of research, development, demonstration, and diffusion (RDD&D) to mobilize sustainable technologies at anything close to the necessary global scale and speed. Incidentally, a recent study by the International Energy Agency, Energy Technology Perspectives 2008, takes a similar technological perspective, and finds that around 1 percent of GNP invested per year in sustainable energy systems (mainly in close-to-market technologies) would be sufficient to cut global emissions by half by 2050 consistent with resource availabilities and continued rapid global economic growth. It’s almost exactly the same conclusion and point estimate that I give, and is consistent with similar conclusions of Sir Nicholas Stern and others as well. It just won’t happen by itself. Indeed, small tweaks to the market, such as carbon trading, are also insufficient, because those tweaks only modestly change the game along the entire RDD&D trajectory.

My point, in the end, is that our traditional debate – Should we be optimistic or pessimistic? – is not really the right framing of the question. The right issue is how to achieve the achievable sustainable development trajectory through an appropriate mix of public-sector and private-sector investment, backed up by a mix of public and private institutions at all scales. Good answers, I believe, will require a far more serious approach than our profession currently gives to these problems. We need to take very seriously indeed the role of natural resources and ecosystems in economic production (e.g. in food and energy); the pervasive and unprecedented anthropogenic forcings on natural systems; the multiple and deep failures of “private” property in crowded, stressed, and non-linear ecosystems; the existence of demographic and poverty traps which kill millions each year and which hold entire regions (e.g. the Horn of Africa and much of Central Asia) in a trap of political and social crisis; and the complexity of the processes of innovation and diffusion, which require a subtle and changing mix of public and private institutions operating locally, regionally, and globally.

Jeffrey D. Sachs is the Director of The Earth Institute, Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management at Columbia University

Posted by: Jeffrey D. Sachs | June 11th, 2008 at 10:44 am

***
Paul Collier: Nature is bountiful: we would be dead without it. I am going to propose a simple taxonomy of processes and actors that may help us to think through the economics of the natural world. Future bounty depends upon three distinct processes and four distinct groups of actors.

The three processes are the depletion of non-renewable natural assets; the dividend from renewable natural assets and the offsetting payments on natural liabilities; and the harvesting of crops.

Fears of ‘running out of oil’ are the key instance of the depletion of a non-renewable asset. The economic process here is the ‘Hotelling Rule’ that the real price of the commodity should broadly rise at the world rate of interest: this comes from viewing commodities as storable assets that should yield a return like any other asset. If firms have sufficient confidence in this principle they invest in the technological research needed to discover ways of reducing the need for the commodity. The astounding path of the oil price over the past fifty years demonstrates how woefully financial markets have failed to internalize the Hotelling rule. We simply don’t know how difficult it will be for technology to keep abreast of depleting resources, but to date it has always come to the rescue. Depletion is faster that previously, but so is technological innovation.

Fears of plundering the world’s renewable assets and accumulating liabilities are primarily about the likely mismanagement of ‘common pool resources’. Fish, forests and carbon are all in this class of problem. The efficient solutions generally involve the creation of private property rights. However, the assignment of these rights requires cooperation and gives rise to acute problems of lobbying that may frustrate the entire approach.

Fears that the world will not be able to feed itself are about a production process, agriculture, in which one input, land, is in finite supply. Like any other production process this is about technology, organization and incentives. Fortunately, so many mistakes have been made on all three that there is considerable scope for increasing supply. Further, although land is finite, we are nowhere near the land frontier. Global warming will actually expand the frontier as it opens up huge tracks of central Asia to cultivation. (editorial note: this Global Warming prediction is wildly speculative.)

Who are the four groups of actors? The responsibility for the natural world rests primarily with national governments. Nature is best-approximated by land area and governments ultimately control the management of their territory. The land area of the world divides into four quadrants of distinct governance. One quadrant is the OECD. Governments in this group of countries are generally accountable to their citizens so that solutions that require only national-level action should be easy. The qualification is that not all citizens have equal influence: democratic politics is damaged by differential lobbying and to date this has distorted policies, especially those concerning the harvesting of nature. Even solutions that require international action should be feasible because this group of countries have a long tradition of cooperation, although naturally larger countries are less familiar with cooperation than smaller ones because they have had less need for it. The second quadrant is controlled in effect by just two people, Putin and Hu Jintao. On their personalities rests the management of a quarter of the natural world. The third quadrant is the 58 governments of the ‘bottom billion’. Here, both weak governance and poverty are likely to produce high discount rates, leading to poor management of natural assets, so the first two processes are in jeopardy. The final quadrant is everyone else: around 110 countries. Here governance is usually reasonable and so solutions that require only national-level action are likely to happen, but there are so many countries that solutions requiring international cooperation are going to be really difficult.

Paul Collier is the author of The Bottom Billion. His next book, Wars, Guns and Votes: Democracy in Dangerous Places will be published in February 2009.

New York Times
By ANDREW C. REVKIN
Published: June 12, 2008

Some shark populations in the Mediterranean Sea have completely collapsed, according to a new study, with numbers of five species declining by more than 96 percent over the last two centuries.

“This loss of top predators could hold serious implications for the entire marine ecosystem, greatly affecting food webs throughout this region,” said the lead author of the study, Francesco Ferretti, a doctoral student in marine biology at Dalhousie University in Nova Scotia.

Particularly troubling, the researchers said, were patterns indicating a lack of mature females, which are essential if populations are to recover even with new conservation measures.

“Because sharks are long-lived and slow to mature, they need fully-grown females to keep their populations reproductively healthy,” said Heike Lotze, a study author who is also at Dalhousie.

The study is scheduled for publication in the journal Conservation Biology and was posted online on Wednesday at www.lenfestocean.org by the Lenfest Ocean Program, a private group in Washington that paid for the research.

The study focused on five species for which there were sufficient records to chart a long-term trend — hammerhead, blue and thresher sharks and two types of mackerel sharks. The Mediterranean is home to some 47 shark species, and similar declines are presumed to have occurred in many of them.

Sharks take years to reach sexual maturity and, unlike most other fishes, produce small numbers of young, making them particularly vulnerable to overfishing. Populations have declined worldwide, but experts say the Mediterranean — bordered by many countries with diverse rules and fished intensively for centuries — has experienced bigger losses of sharks and other large predatory fish, including tuna.

The long-term decline in the region was revealed by sifting decades of catch records and other scattered sources of data, which showed that over time the Mediterranean ecosystem has been utterly transformed. With top-tier predators removed, the populations of other fish and invertebrates shift in unpredictable ways.

In November, the World Conservation Union warned that more than 40 percent of shark and ray species in the Mediterranean were threatened with extinction because of intense fishing pressure, including the continued use of drift nets. The nets kill many sharks and rays even when they are not the target of the fishing effort.

A ban on fishing in deep waters (more than about 3,200 feet) and on cutting off shark fins, a delicacy in China, could help, but much more enforcement of laws is needed, the conservation union said.

***

Several ecologically-important shark populations in the Mediterranean Sea have completely collapsed, according to a new study, with numbers of five species now more than 96 percent below what existed two centuries ago.

“This loss of top predators could hold serious implications for the entire marine ecosystem, greatly affecting food webs throughout this region,” said the lead author of the study, Francesco Ferretti, a doctoral student in marine biology at Dalhousie University in Nova Scotia.

Particularly troubling, the researchers said, were patterns indicating a lack of mature females, which are essential if populations are to recover even with new conservation measures. “Because sharks are long-lived and slow to mature, they need fully-grown females to keep their populations reproductively healthy,” said Heike Lotze, a study author who is also at Dalhousie.

The study is scheduled for publication in the journal Conservation Biology and was posted online on Wednesday at lenfestocean.org by the Lenfest Ocean Program, a private group in Washington that paid for the research.

Sharks take years to reach sexual maturity and, unlike most other fishes, produce small numbers of young, making them particularly vulnerable to overfishing. Populations have declined worldwide, but experts say the Mediterranean, bordered by many countries with variegated rules and fished intensively for centuries, has seen bigger losses of sharks and other large predatory fish, including tuna.

The decline was revealed by sifting decades of catch records and other scattered sources of data, which showed that — over time — the Mediterranean ecosystem has been utterly transformed. With top-tier predators removed, the populations of other fish and invertebrates shift in unpredictable ways.

The study focused on five species for which there were sufficient records to chart a long-term trend — hammerhead, blue, and thresher sharks and two types of mackerel sharks. But similar declines are presumed to have occurred in many other species.

In November, the World Conservation Union warned that more than 40 percent of shark and ray species in the Mediterranean were threatened with extinction because of intense fishing pressure, including the continued use of drift nets, which kill many sharks and rays even when they are not the target of the fishing effort.

A recent ban on fishing in deep waters (more than 1,000 meters) and on cutting off shark fins, a delicacy in China, could help, but much more enforcement of laws is needed, the conservation union said.

The sharks, tunas, sturgeons, sea turtles, and so many other marine denizens of old are a pale shadow of what prevailed in the pre-humanized seas. In a world heading toward 9 billion people, it remains unclear how current populations can be sustained, let alone restored.

(W)e live in a market economy where prices guide decisions and where environmental assets are increasingly scarce and threatened.

We are not running out of economically relevant natural resources; we are running out of environment. In such a world it should be very expensive to do environmental harm and relatively inexpensive to do things that are environmentally harmless or restorative…Two initial steps are needed to move prices in (the direction that reflect environmental realities): governments must undo the damage they have done in creating environmentally perverse subsidies, and they must intervene in the economy to implement the “polluter pays” principle, broadly conceived. (pg 100)

Undoing Perverse Subsidies

Perverse Subsidies: How Tax Dollars Can Undercut the Environment and the Economy
by Norman Myers and Jenifer Kent
Link to Google Book Excerpts

This book ‘analyzed the hundreds of studies that quantify subsidies in agriculture, energy, transportation, water, fisheries, and forestry. They classified as “perverse” those subsidies that had demonstrable negative effects both economically and environmentally. Their conclusion was that, at the behest of powerful interests, the world’s governments have intervened in the marketplace to create perverse subsidies that now total about $850 billion annually. Admittedly a rough estimate, these subsidies come to about 2.5 percent of the global economy, creating a huge economic incentive for environmental destruction. (pg 100)

Congressional Research Service to Representative Diana Degette
26 May 2007

The Congressional Research Service estimates that U.S. energy subsidies alone were between $37 billion and $64 billion dollars in 2003 and were increased by two to three billion dollars annually by the provisions of the Energy Policy Act of 2005. (pg 100)

The Polluter Pays Principle

‘Any environmental consumer or despoiler—should be required to bear the full costs of all environmental damage caused to humans or nature, of all cleanup and remediation, and of all expenses required to reduce impacts to sustainable levels.’ (Speth / 101) To achieve this Speth provides three approaches to environmental regulation, ‘each has a place, and each moves the polluter pays principle forward.’:

Getting the technology right :

regulatory standards can be based on what can be achieved with available technology or management practices. Here the gold standard is what can be done by applying the very best technology available.

Getting the prices right :

Standards can be based on requiring despoilers to pay for their damages. Victim compensation schemes do this, as do requirements for environmental cleanup and restoration. Using taxes, charges, or tradable allowances to require despoilers to internalize their external costs also falls into this category. Here the gold standard is “getting the prices right” by internalizing all environmental costs.

Getting the environment right :

Standards can also be based on what is needed to achieve a prescribed quality of the ambient environment. Here the gold standard is full protection of human health, no harvesting of resources beyond long-term sustainable yields, no release of waste products beyond assimilative capacities, and full protection of ecosystem structure and function. (pg 101)

Economic Incentives and Market Mechanisms

“Economic Incentives and Market Mechanisms can be used in each of these three approaches to make them more cost-effective, and each has the result of driving up the market prices of environmentally destructive goods and services. In each case, the gold standard may mean no discharge or no impact or no product, for example where a particularly impressive technology is available or where phasing out a particularly harmful product is involved (for example, lead in gasoline, CFCs, of DDT).

Of these three approaches, the last, ‘getting the public health and ecological quantities right’ should now be the preferred approach for most cases.’ It will likely drive prices further in the right direction.” (page 101-102)

Example:

A. Cap and Trade system where appropriate : For pollutants where there is little concern about location (sulfur dioxide, CFCs, carbon dioxide), cap and trade can be a good choice. Pollution fees and other economic incentive programs are not desirable, though, where metering of releases is difficult, where changes in ambient conditions can shift quickly (for example, stream flows can decline or atmospheric inversions can occur), where particularly hazardous substances or activities are involved, or where cap and trade or emission taxes can result in “hot spots” of concentrated pollutants.

B. Direct Regulation when Cap and Trade is not appropriate

Ensure that the price on destruction of the environment of all types is discouragingly high

1. Identify those goods and services, both intermediate and final, that have the greatest environmental impacts :

Industrial ecologists in Europe have made an excellent start at this.

“Special Issue: Priorities for Environmental Product Policy,”
Journal of Industrial Ecology 10, no. 3 (2006)

One could then work back through the production chain, imposing emission and effluent taxes, user fees, and other requirements on the most damaging activities. These charges could be steadily increased in an effort to close the gap between the private and public costs of production. (Speth / page 102)

2. Radically increased resource productivity and large scale regeneration of natural capital:

Natural Capitalism : Creating the Next Industrial Revolution
by Paul Hawken, Amory Lovins, and Hunter Lovins

Changes in the federal tax code could spur action in these areas, as could virgin materials extraction charges, appropriate governmental and private research and development programs, and major government support for environmental restoration initiatives. (Speth / page 103)

3. Intergenerational equity:

“Intergenerational Resource Rights, Efficiency and Social Optimality”
Land Economics 66, no. 1 (1990)
Richard Norgaard and Richard Howarth, economists

“Environmental Valuation under Sustainable Development”
American Economic Review 82, no. 2 (1992)
Richard Norgaard and Richard Howarth

“Sustainability as Intergenerational Equity”
Environmental Impact Assessment Review, 12 (1992): 85
Richard B. Norgaard

Norgaard and Howarth show that ‘getting the prices right’ for the current generation will not ensure sustainability, which is a matter of intergenerational equity. Sustainability requires that each generation consciously decide to redistribute sufficient resources to future generations.

They urge consideration of such measures as applying resource use taxes, building futures markets, holding mineral and other resources in public trust for future use, and subsidizing resource owners to slow the rate of extraction and depletion. (Also,) require that a portion of the earnings from nonrenewable resource development (the portion above normal profits) be reinvested in developing renewable substitutes. (Speth / page103)

4. Government action to get prices right

Prices do not always work as well in practice as they do in theory. At one level, some factors mute price signals­—a phenomenon of which economists are well aware.

Productivity of Growing Global Energy Demand
McKinsey Global Institute, November 2006

For example a 2006 study of energy markets by McKinsey and Company found that the global potential for energy productivity gains was huge, but realizing them would require more than high energy prices. The reasons? Some sectors have low price elasticity, so that higher prices do not generate big responses. Consumers lack the information and capital to improve energy productivity, and their price response is further muted by the priority given to convenience, comfort, style, or safety. Businesses also forgo valuable energy productivity investments because of small or fragmented energy costs. Government measures that reduce transactions costs, provide information and capital , and reduce risks can aid in overcoming these behavioral and institutional barriers. (Speth / page 103-104)

To see an immediate example of this on a global scale, look at China’s subsidies on oil in the Spring of 2008. These national subsidies have suppressed domestic price of oil for Chinese consumers which in turn is failing to drive demand down on a global scale even though global supply remains stagnant. Prices have thus doubled in a years time because global demand keeps on moving up while stocks and supply go down. Obviously ‘government action to get the prices right’ is directly linked to the first subhead in this post “Undoing perverse subsidies”. US Agriculture subsidies are also a perverse subsidy, particularly as Congress created incentives for farmers to grow more corn for ethanol.

5. Replace GDP as a leading economic indicator

It is time to “fix another misleading or, at least, misused and overused economic signal­—Gross Domestic Product, or GDP. As currently constructed GDP is widely recognized as a poor measure of national economic welfare.” (Speth / page 104)

Speth devotes an entire chapter to this issue called “Real Growth: Promoting the Well-Being of People and Nature”.

Closing Thoughts

Make the market work for the environment
Recognize limits to and boundaries on market penetration

Confront consumption. Practice sufficiency. Work less. Reclaim your time—it’s all you have. Turn off technology. Join No Shopping Day. Buy Nothing. No logo. Practice mindfulness, and playfulness. Live in the natural world; let nature nurture. Create social environments where overconsumption is viewed as silly, wasteful, ostentatious. Create commercial-free zones. Buy local. Eat slow food. Simplify your life. Shed possessions. Downshift. Create a local currency. Build consumer-owned cooperatives. Take back America. (Speth / page 163)

The footnote for the passage above credits over 30 writers. The passage above is then followed by a poem called ‘Manifesto’, which is at the end of this post, written by Wendell Berry. Berry also is an author of the idea ‘Faustian Economics’:

Faustian Economics

by Wendell Berry
Harpers
May 2008

First half of the article in pdf format.
Second half of the article in pdf format.

If the idea of appropriate limitation seems unacceptable to us, that may be because, like Marlowe’s Faustus and Milton’s Satan, we confuse limits with confinement. But that, as I think Marlowe and Milton and others were trying to tell us, is a great and potentially fatal mistake. Satan’s fault, as Milton understood it and perhaps with some sympathy, was precisely that he could not tolerate his proper limitation; he could not subordinate himself to anything whatever.

Our human and earthly limits, properly understood, are not confinements but rather inducements to formal elaboration and elegance, to fullness of relationship and meaning. Perhaps our most serious cultural loss in recent centuries is the knowledge that some things, though limited, are inexhaustible. For example, an ecosystem, even that of a working forest or farm, so long as it remains ecologically intact, is inexhaustible. A small place, as i know from my own experience, can provide opportunities of work and learning, and a fund of beauty, solace, and pleasure—in addition to its difficulties—that cannot be exhausted in a lifetime or in generations.

To recover from our disease of limitlessness, we will have to give up the idea that we have a right to be godlike animals, that we are potentially omniscient and omnipotent, ready to discover “the secret of the universe.” We will have to start over, with a different and much older premise: the naturalness and, for creatures of limited intelligence, the necessity, of limits.

It is the artist, not the scientists, who have dealt unremittingly with the problem of limits. A painting, however large, must finally be bounded by a frame or a wall. A composer or play write must reckon, at a minimum, with the capacity of an audience to sit still and pay attention. A story, once begun, must end somewhere within the limits of the writer’s and the reader’s memory. And of course the arts characteristically impose limits that are artificial: the five acts of a play, or the fourteen lines of a sonnet. Within these limits artists achieve elaborations of pattern, of sustaining relationships of parts with one another and with the whole, that may be astonishingly complex. And probably most of us can name a painting, a piece of music, a poem or play or story that still grows in meaning and remains fresh after many years of familiarity.

We know by now that a natural ecosystem survives by the same sort of formal intricacy, ever-changing, inexhaustible, and no doubt finally unknowable. We know further that if we want to make our economic landscapes sustainably and abundantly productive, we must do so by maintaining in them a living formal complexity something like that of natural ecosystems. We can do this only by raising to the highest level of mastery on the arts of agriculture, animal husbandry, forestry, and, ultimately, the art of living.

The same is true of our arts of land use, our economic arts, which are our arts of living. With these it is once-for-all. We will have no chance to redo our experiments with bad agriculture leading to soil loss. The Appalachian mountains and forests we have destroyed for coal are gone forever. It is now and forevermore too late to use thriftily the first half of the world’s supply of petroleum. In the art of living we can only start again with what remains.

And so, in confronting the phenomenon of “peak oil,” we are really confronting the end of our customary delusion of “more.” Whichever way we turn, from now on, we are going to find a limit beyond which there will be no more. To hit these limits at top speed is not a rational choice. To start slowing down, with the idea of avoiding catastrophe, is a rational choice, and a viable one if we can recover the necessary political sanity. Of course it makes sense to consider alternative energy sources, provided they make sense. But also we will have to re-examine the economic structures of our lives, and conform them to the tolerances and limits of our earthly places. Where there is no more, our one choice is to make the most and the best of what we have.

Dean Speth closes his chapter ‘Consumption’ by quoting Wendell Berry’s “Manifesto”:

When they want you to buy something
they will call you. When they want you
to die for profit they will let you know.

So, friends, every day do something
that won’t compute. Love the Lord.
Love the world. Work for nothing.
Take all that you have and be poor.
Love someone who does not deserve it.
Denounce the government and embrace
the flag. Hope to live in that free
republic for which it stands.
Give your approval to all you cannot
understand. Praise ignorance, for what man
has not encountered he has not destroyed.

Ask the questions that have no answers.
Invest in the millenium. Plant sequoias.
Say that your main crop is the forest
that you did not plant,
that you will not live to harvest.
Say that the leaves are harvested
when they have rotted into the mold.
Call that profit. Prophesy such returns.

Put your faith in the two inches of humus
that will build under the trees
every thousand years.
Listen to carrion - put your ear
close, and hear the faint chattering
of the songs that are to come.
Expect the end of the world. Laugh.
Laughter is immeasurable. Be joyful
though you have considered all the facts.
So long as women do not go cheap
for power, please women more than men.
Ask yourself: Will this satisfy
a woman satisfied to bear a child?
Will this disturb the sleep
of a woman near to giving birth?

Go with your love to the fields.
Lie down in the shade. Rest your head
in her lap. Swear allegiance
to what is nighest your thoughts.
As soon as the generals and the politicos
can predict the motions of your mind,
lose it. Leave it as a sign
to mark the false trail, the way
you didn’t go. Be like the fox
who makes more tracks than necessary,
some in the wrong direction.
Practice resurrection.

People are searching for something more real and lasting and authentic. (Speth / page 161)

One of the main ideas of Strong Sustainability is to decrease consumption. This means less stuff, less materialism.

(T)here is (a) more fundamental area for action—a focus on reducing consumption, not just on improving it. Personal consumption expenditures are two-thirds of GDP, so the environmental case for reducing overall consumption in the rich countries is roughly the same as the case for reducing throughput. (Speth / page 156)

One of the most striking components of the United States economy in the Summer of 2008 is how much debt our government and our citizens have acquired during the boom years of the first decade of the 21st century. This huge debt inspired Michael J. Panzner to write Financial Armageddon: Protecting Your Future from Four Impending Catastrophes which includes this thought: (we have a) burgeoning tower of public and private debt wobbling precariously on a foundation of excess and fraud. Take a look at this Panzer link to see the National Debt Clock ring up the deficit at thousands of dollars per second—it’s in the right column down the page.

Speth includes this humorous sketch from the book Affluenza to make his point that we should be challenging the myth that consumption equals happiness:

Your watching TV, in the middle of a program, when the screen goes black for a moment. The scene cuts to a breaking news story. A large crowd is gathered outside an expensive home with some equally pricey cars parked out front. A well-dressed family of four stands on the stairs, looking grim. One of the children is holding a white flag. The reporter, in hushed tones, speaks into his microphone: ‘We’re here live at the home of the Joneses—Jerry and Janet Jones—the family we’ve all been trying to keep up with for years. Well, you can stop trying right now, because they have surrendered. Let’s eavesdrop for a moment.’ The shot changes, revealing a tired-looking Janet Jones, her husband’s hand resting on her shoulder. Her voice cracks as she speaks: ‘It’s just not worth it. We never see each other anymore. We’re working like dogs. We’re always worried about our kids, and we have so much debt we won’t be able to pay it off for years. We give up. So please, stop trying to keep up with us.’ From the crowd someone yells, ‘So what will you do now?’ ‘We’re just going to try to live better on less,’ Janet replies. ‘So there you have it. The Joneses surrender,’ says the reporter. ‘And now for a commercial break.’”

Here is the meaning of Affluenza taken from the web site of the PBS show:

Af-flu-en-za n. 1. The bloated, sluggish and unfulfilled feeling that results from efforts to keep up with the Joneses. 2. An epidemic of stress, overwork, waste and indebtedness caused by dogged pursuit of the American Dream. 3. An unsustainable addiction to economic growth.

Affluenza is a one-hour television special that explores the high social and environmental costs of materialism and overconsumption.

We do indeed borrow the earth from our children. If only my generation could say that we are returning it to them a better place than we found it. In truth, we have continued to purchase prosperity at an enormous cost to the natural world and to our human solidarity as well… (Speth / page 233)

In our journey down the path between two worlds, we are fast approaching a place where the path forks. We got to this fork through a long history dominated by two great and related struggles—the struggle against scarcity and the struggle to subdue nature. To win in these struggles we created a powerful technology and forged an organization of economy and society to deploy that technology extensively, rapidly, and, if need be, ruthlessly. And we succeeded at subduing nature and creating wealth far beyond our ancestors’ imaginings. So successful were these systems and accomplishments that we were swept up in them, mesmerized by them, captivated, even addicted. We thus continued pell-mell ahead—ever-grander, ever-larger, ever-richer, doing what once made sense but no longer did. There were warning signs along the way, but we did not notice them, or when we did, we paid them no heed. These signs said things like:

being, not having
giving, not getting
needs, not wants
better, not richer
community, not individual
other, not self
connected, not separate
ecology, not economy
part of nature, not apart from nature
dependent, not transcendent
tomorrow, not today

We ignored these warnings to the point that, as we now approach the fork ahead, we are perilously close to losing the most precious things of all. We are rapidly hollowing out nature, ourselves, and our society. (Speth / page 236)