Pegram Lecture 3, August 10, 2012

Columbia Consortium for Risk Columbia Consortium for Risk Management (CCRM) Management (CCRM)

www.columbiariskmanagement.net www.columbiariskmanagement.net

11

Resilience and the Resilience and the Knowledge Revolution™Knowledge Revolution™

Pegram Lecture No 3Pegram Lecture No 3Brookhaven National Laboratories, LI NYBrookhaven National Laboratories, LI NY

Graciela ChichilniskyGraciela Chichilniskywww.chichilnisky.comwww.chichilnisky.com

UNESCO Chair in Mathematics and EconomicsUNESCO Chair in Mathematics and EconomicsColumbia UniversityColumbia University



22

Human impact on the environment Human impact on the environment is uncertainis uncertain

CLIMATE CHANGECLIMATE CHANGE

andand

BIODIVERSITY DESTRUCTIONBIODIVERSITY DESTRUCTION

These are global problems. These are global problems. They are new. Science is uncertain.They are new. Science is uncertain.



33

INTERGOVERNMENTAL PANEL ON CLIMATE CHANGEINTERGOVERNMENTAL PANEL ON CLIMATE CHANGESCIENTIFIC ASSESSMENT OF CLIMATE CHANGESCIENTIFIC ASSESSMENT OF CLIMATE CHANGEPolicy-Makers SummaryPolicy-Makers SummaryJuly 1990July 1990

Under a Business-as-Usual Scenario of Greenhouse Gas Emissions:Under a Business-as-Usual Scenario of Greenhouse Gas Emissions:

●●Global Mean Temperature Global Mean Temperature will increase at a rate of 0.3°C per will increase at a rate of 0.3°C per decadedecade(with uncertainty range of 0.2°C to 0.5°C per decade)(with uncertainty range of 0.2°C to 0.5°C per decade) 1°C above present by 2025 1°C above present by 2025 3°C above present by end of next century 3°C above present by end of next century

●Rate of increase will be uneven and will vary regionally (e.g. , ●Rate of increase will be uneven and will vary regionally (e.g. , higher over land).higher over land).

●●Global Mean Sea Level Global Mean Sea Level is expected to rise 6 cm per decade (with an is expected to rise 6 cm per decade (with an uncertainty range of 3-10 cm per decadeuncertainty range of 3-10 cm per decade 20 cm above present by 2030 20 cm above present by 2030 65 cm above present by end of next century 65 cm above present by end of next century



44

● ● Most of the destruction of the Most of the destruction of the earth’s ecosystems is driven by earth’s ecosystems is driven by economic incentiveseconomic incentives

●Forests, where most known ●Forests, where most known biodiversity resides, are cleared biodiversity resides, are cleared for the extraction of natural for the extraction of natural resources (oil, wood products) or resources (oil, wood products) or to give way for cash crops and to give way for cash crops and grazinggrazing



55

The globalization of the world The globalization of the world economy since World War II has economy since World War II has intensified a pattern of resource intensified a pattern of resource use by which developing nations use by which developing nations extract most natural resources, extract most natural resources,

exporting them to industrial nations exporting them to industrial nations at prices that are often below at prices that are often below

replacement costsreplacement costs



66

To solve the environmental dilemma To solve the environmental dilemma we must cut the link between resource we must cut the link between resource

use and economic progress.use and economic progress.

The key is to achieve a new type of The key is to achieve a new type of industrialization, which is not based on industrialization, which is not based on

resource exports:resource exports:

a knowledge intensive form of a knowledge intensive form of economic progress.economic progress.



77

● ● We must incorporate the We must incorporate the dynamics of markets in the dynamics of markets in the management of ecosystemsmanagement of ecosystems

● The market has become a ● The market has become a key institution in the key institution in the destruction of the earth’s destruction of the earth’s ecosystems. No policy that ecosystems. No policy that ignores this fact can succeed.ignores this fact can succeed.



88

MARKETSMARKETS

are the dominant institution in the are the dominant institution in the global economy.global economy.

As the century turns, the market itself As the century turns, the market itself is evolving.is evolving.



99

TWO MAJOR TRENDSTWO MAJOR TRENDS

The Knowledge RevolutionThe Knowledge Revolution

Global Environmental IssuesGlobal Environmental Issues

Lead to new and fundamental Lead to new and fundamental different types of marketsdifferent types of markets



1010

Markets are widely used institutionsMarkets are widely used institutions

They are decentralized, and can be They are decentralized, and can be efficient. efficient.

But global environmental markets But global environmental markets trade unusual goods: trade unusual goods: privately privately produced public goodsproduced public goods

Biodiversity is oneBiodiversity is one

The planet’s atmosphere is anotherThe planet’s atmosphere is another



1111

EXAMPLESEXAMPLES

The trading of SOThe trading of SO22 in the Chicago in the Chicago Board of Trade since 1993, following Board of Trade since 1993, following the Clean Air Actthe Clean Air Act

The CO2 Kyoto Protocol carbon The CO2 Kyoto Protocol carbon marketmarket

Water markets in Australia – water is Water markets in Australia – water is the most scarce resource in the the most scarce resource in the world todayworld today



1212

Market for Emission Permits*Market for Emission Permits*

Annex I Countries are given Annex I Countries are given allocations of property rights on allocations of property rights on emissions summing up to the 1990 emissions summing up to the 1990 level, and they can trade these freely level, and they can trade these freely among themselves*among themselves*

* Chichilnisky and Heal “Carbon Taxes and Markets for Emissions Rights” OECD 1995* Chichilnisky and Heal “Carbon Taxes and Markets for Emissions Rights” OECD 1995



1313

● ● Environmental Markets*Environmental Markets*

● Markets for Knowledge● Markets for Knowledge

Both trade new and different types Both trade new and different types of goods: of goods:

Privately Produced Public Privately Produced Public Goods (PPP)Goods (PPP)

* * Environmental Markets: Equity and Efficiency, G.Chichilnisky and G. Heal, CUP, New York 2000



1414

The Knowledge Revolution™The Knowledge Revolution™

In many countries, is leading to a new In many countries, is leading to a new economy, with different economy, with different environmental problems and new environmental problems and new opportunities for action.opportunities for action.

Examples: California USA, Asian Examples: California USA, Asian Tigers and Little Tigers, parts of India Tigers and Little Tigers, parts of India and Barbados.and Barbados.



1515

The Knowledge RevolutionThe Knowledge Revolution

US leads the pack because of its US leads the pack because of its property-rights systems and financial property-rights systems and financial markets.markets.

Japan lost in the software race Japan lost in the software race because of property-rights systems.because of property-rights systems.



1616

● ● This is not a ”service economy” This is not a ”service economy” as was previously thought.as was previously thought.

● It is a new economy using ● It is a new economy using knowledge rather than capital as knowledge rather than capital as the most important input of the most important input of production.production.

● Fossil fuels are now replaced by ● Fossil fuels are now replaced by information technologyinformation technology



1717

Sunrise sectors are knowledge intensive: (1) IT, (2) Sunrise sectors are knowledge intensive: (1) IT, (2) biotechnology, (3) telecommunications, (4) financial biotechnology, (3) telecommunications, (4) financial markets, (5) health services, (6) entertainment and markets, (5) health services, (6) entertainment and culture.culture.

MORE AMERICANS WORK IN BIOTECHNOLOGY THAN IN THE MORE AMERICANS WORK IN BIOTECHNOLOGY THAN IN THE ENTIRE MACHINE TOOL INDUSTRYENTIRE MACHINE TOOL INDUSTRY

MORE AMERICANS MAKE SEMICONDUCTORS THAN MORE AMERICANS MAKE SEMICONDUCTORS THAN CONSTRUCTION MACHINERYCONSTRUCTION MACHINERY

THE TELECOMMUNICATIONS INDUSTRY IN NORTH AMERICA THE TELECOMMUNICATIONS INDUSTRY IN NORTH AMERICA EMPLOYS MORE PEOPLE THAN THE AUTO AND AUTO PART EMPLOYS MORE PEOPLE THAN THE AUTO AND AUTO PART INDUSTRY COMBINEDINDUSTRY COMBINED

FOSSIL FUEL IS REPLACED BY INFORMATION TECHNOLOGYFOSSIL FUEL IS REPLACED BY INFORMATION TECHNOLOGY



1818

““New Economy” ExamplesNew Economy” Examples

The US health and medical industry The US health and medical industry alone has become larger than alone has become larger than defense, and also larger than oil defense, and also larger than oil refining, aircraft, autos, auto parts, refining, aircraft, autos, auto parts, logging, steel and shipping put logging, steel and shipping put togethertogether

More Americans work in More Americans work in biotechnology than in the entire biotechnology than in the entire machine tools industrymachine tools industry



1919

Consumers now spend more on Consumers now spend more on home electronics than on new carshome electronics than on new cars

$95 billion a year on home $95 billion a year on home computers, TVs and stereos.computers, TVs and stereos.

$85 billion a year on new cars.$85 billion a year on new cars.



2020

Productivity is driven by the Productivity is driven by the knowledge sectorsknowledge sectors

According to the Federal Reserve According to the Federal Reserve Board, US industrial production in Board, US industrial production in 1997-98 increased at a strong 4.1% 1997-98 increased at a strong 4.1% annual rate, 4.4% during 1996.annual rate, 4.4% during 1996.

Take away computers and Take away computers and semiconductors and the rate drops to semiconductors and the rate drops to 2.2%2.2%



2121

Productivity is driven by the Productivity is driven by the knowledge sectorsknowledge sectors

According to the Bureau of Economic According to the Bureau of Economic Analysis, total US industrial Analysis, total US industrial production in 2002-2003 increased at production in 2002-2003 increased at a 2.17% annual rate, 4.19% during a 2.17% annual rate, 4.19% during 2000.2000.

Take away the production of Take away the production of computers and electronic products, computers and electronic products, and this drops to 1.72% (2003) or and this drops to 1.72% (2003) or 3.41% (2000).3.41% (2000).

www.bea.gov: Gross Output by Industry in Current Dollars



2222

The New Economy Starts to Hit HomeThe New Economy Starts to Hit Home

Increases in personal spending:Increases in personal spending:Key old economy itemsKey old economy itemsMotor vehicles: 0.3%Motor vehicles: 0.3%Food: 0.6%Food: 0.6%Major Appliances: 1.1%Major Appliances: 1.1%Clothing: 2/3%Clothing: 2/3%Average: 0.9%Average: 0.9%

Key new economy itemsKey new economy itemsHome telephone services: 8.8%Home telephone services: 8.8%Entertainment & recreation services: 12.4%Entertainment & recreation services: 12.4%Cable TV: 13.4%Cable TV: 13.4%Brokerage and other financial services: 15.6%Brokerage and other financial services: 15.6%Average: 12.5%Average: 12.5%

Source: Business Week, March 23, 1998Source: Business Week, March 23, 1998



2323

● ● Today more Americans Today more Americans make semiconductors than make semiconductors than construction machineryconstruction machinery

● The telecommunications ● The telecommunications industry in North America industry in North America employs more people than the employs more people than the auto and the auto parts auto and the auto parts industries combinedindustries combined



2424

Source: “Comparing economic and scientific wealth” of the article “The Scientific Impact of Nations” by David A. King, Nature, July 15, 2004, p. 311-316.



2525

Source: World Bank. www.worldbank.org.



2626

Source: World Bank. www.worldbank.org.



2727

Sources: US Bureau of Economic Analysis (BEA) 2012 data www.bea/gov. World Bank. www.worldbank.org



2828




2929




3030




3131




3232

Sources: World Bank. www.worldbank.org. World Resource Institute (WRI). www.wri.org



3333

Sources: US Bureau of Economic Analysis (BEA) 2012 data. www.bea/govEnergy Information Administration (EIA). www.eia.doe.gov/



3434

LEADING THE WAY TO ECO-FRIENDLY PROFITSLEADING THE WAY TO ECO-FRIENDLY PROFITS

Some major manufacturers have decided to do more than reduce Some major manufacturers have decided to do more than reduce waste and clean up pollution. They are developing products and waste and clean up pollution. They are developing products and processes that make it profitable to be environmentally friendly.processes that make it profitable to be environmentally friendly.

DUPONTDUPONT has co-developed 3GT, a bioengineered polyester fabric has co-developed 3GT, a bioengineered polyester fabric made from cornstarch that is lower in cost than oil-based made from cornstarch that is lower in cost than oil-based polyester and can be recycled indefinitely.polyester and can be recycled indefinitely.

SONOCOSONOCO has created an rectangular “paper can” for Lipton Iced has created an rectangular “paper can” for Lipton Iced Tea that is 70% recyclable.Tea that is 70% recyclable.

3M 3M has developed a plastic coating for the Navy to replace paint has developed a plastic coating for the Navy to replace paint on trucks, ships and trains. It’s lighter than paint, which leads to on trucks, ships and trains. It’s lighter than paint, which leads to greater fuel efficiency.greater fuel efficiency.

S.C. JOHNSON S.C. JOHNSON reformulated Raid roach killer, converting from a reformulated Raid roach killer, converting from a solvent-based to a water-based formula.solvent-based to a water-based formula.



3535

ELECTROLUX’ ELECTROLUX’ environmental products, including solar-powered environmental products, including solar-powered lawn mowers, chain saws lubricated with vegetable oil, and water lawn mowers, chain saws lubricated with vegetable oil, and water saving washing machines, generated 3.8% higher profits last year saving washing machines, generated 3.8% higher profits last year than the company’s conventional products.than the company’s conventional products.

TOYOTATOYOTA is introducing a hybrid car that gets 66 mph on a is introducing a hybrid car that gets 66 mph on a combination of gasoline and electricity.combination of gasoline and electricity.

A. FINKL & SONSA. FINKL & SONS, a Chicago steel forger, recycles more than 955 of , a Chicago steel forger, recycles more than 955 of its solid waste and has cut energy use by 36.4% over 10 years, its solid waste and has cut energy use by 36.4% over 10 years, making it one of the most efficient forgers in the world.making it one of the most efficient forgers in the world.

BRITISH PETROLEUMBRITISH PETROLEUM has invested $160 million in developing solar has invested $160 million in developing solar energy and is building a completely solar-powered Olympic village for energy and is building a completely solar-powered Olympic village for the 1998 Summer Games in Australia.the 1998 Summer Games in Australia.

Carbon Capture and Enhanced Oil Recovery (EOR) can produce 23 Carbon Capture and Enhanced Oil Recovery (EOR) can produce 23 years of additional petroleum consumption without imports in the US years of additional petroleum consumption without imports in the US (DOE)(DOE)



3636

The Developing World can leapfrog The Developing World can leapfrog and avoid resource intensive and avoid resource intensive industrializationindustrialization

The successful Asian tigers relied on The successful Asian tigers relied on technology exports, such as consumer technology exports, such as consumer electronicselectronics

In the last ten years India developed a In the last ten years India developed a Software industry worth $10 Billion USD in Software industry worth $10 Billion USD in exports to 36 countries, one of the most exports to 36 countries, one of the most dynamic in the worlddynamic in the world



3737

In recent years, nearly one-third In recent years, nearly one-third of new tech companies in the of new tech companies in the Silicon Valley have been Silicon Valley have been headed by Indian or Chinese headed by Indian or Chinese executivesexecutives

USA Today, February 24, 1999USA Today, February 24, 1999



3838

Knowledge intensive growth is Knowledge intensive growth is here today.here today.

It is the future.It is the future.

How to achieve the transition How to achieve the transition with minimum cost?with minimum cost?



3939

Knowledge and Global Knowledge and Global Environment AssetsEnvironment Assets

Are not standard public goods such Are not standard public goods such as law and orderas law and order

They are mostly produced privately, They are mostly produced privately, rather than by the governmentrather than by the government

They are costly to produceThey are costly to produce



4040

Privately Produced Public GoodsPrivately Produced Public Goods

are goods which are not “rival” in are goods which are not “rival” in consumption, but are privately produced.consumption, but are privately produced.

We all produce emissions but the We all produce emissions but the atmosphere is the same for us all.atmosphere is the same for us all.

We produce knowledge privately but can We produce knowledge privately but can share all of it with others without losing it.share all of it with others without losing it.



4141

Knowledge and Global Environment are Knowledge and Global Environment are Privately Produced Public GoodsPrivately Produced Public Goods

Why are they public goods?Why are they public goods?

● ● Knowledge is not “rival” in Knowledge is not “rival” in consumption – it can be shared consumption – it can be shared

without losing itwithout losing it



4242

SimilarlySimilarly

Global environmental assets such as Global environmental assets such as the carbon content of the the carbon content of the atmosphere are one and the same atmosphere are one and the same for everybody on the planet. These for everybody on the planet. These are physical properties, independent are physical properties, independent of the economic institutions.of the economic institutions.



4343

The Paradox of KnowledgeThe Paradox of Knowledge

It is costly to produceIt is costly to produce

It can be duplicated without losing it. It It can be duplicated without losing it. It can be shared at no costcan be shared at no cost

Because it is costly, without property rights, such Because it is costly, without property rights, such as patents, there is no incentive to produce as patents, there is no incentive to produce knowledge.knowledge.

Example: Japan has no property rights on Example: Japan has no property rights on software, and produces almost none.software, and produces almost none.



4444

Yet because it can be shared at no cost, any Yet because it can be shared at no cost, any restriction on the use of knowledge is inefficient.restriction on the use of knowledge is inefficient.

For example:For example:

Patents are inefficient because they are Patents are inefficient because they are monopolies (J. Stiglitz)monopolies (J. Stiglitz)

We need new systems of property rights for We need new systems of property rights for knowledge.knowledge.

What is the solution?What is the solution?



4545

Markets for PPP goods are Markets for PPP goods are different from the classical different from the classical

markets.markets.

They require new systems of They require new systems of property rights.property rights.



4646

Traditional MarketsTraditional MarketsFirst Theorem of Welfare EconomicsFirst Theorem of Welfare Economics

The allocation resulting from a competitive The allocation resulting from a competitive market equilibrium with private goods is market equilibrium with private goods is

Pareto efficient. Pareto efficient.

This theorem is independent of the distribution This theorem is independent of the distribution of property rights. For example, all but two of property rights. For example, all but two

traders may have zero endowments of traders may have zero endowments of property rights and the resulting equilibrium property rights and the resulting equilibrium is still Pareto efficient. This requires all goods is still Pareto efficient. This requires all goods to be private goods, with rival consumption, to be private goods, with rival consumption,

and privately owned.and privately owned.



4747

Public goods change mattersPublic goods change matters

A public good is a good which is not A public good is a good which is not “rival” in consumption: this is not an “rival” in consumption: this is not an

economic or legal definition but economic or legal definition but rather a physical constraint.rather a physical constraint.

Examples: Knowledge , the Examples: Knowledge , the concentration for concentration for COCO22 or or CFC’sCFC’s in the in the atmosphere or the planet, available atmosphere or the planet, available

biodiversity is the planet.biodiversity is the planet.This leads toThis leads to



4848

A New First Welfare Theorem in MarketsA New First Welfare Theorem in Marketswith with


in which equity and efficiency are closely in which equity and efficiency are closely linkedlinked



4949


are goods which are not “rival” in are goods which are not “rival” in consumption, but are privately consumption, but are privately

produced.produced.

We all produce emissions but the We all produce emissions but the atmosphere is the same for us all. atmosphere is the same for us all.

We produce knowledge privately but We produce knowledge privately but can share all of it with others without can share all of it with others without

losing it.losing it.



5050

A competitive market with property A competitive market with property rights on knowledgerights on knowledge

An economy has An economy has HH countries or traders who countries or traders who consume consume NN private goods and one public private goods and one public

good, Knowledge. They trade private good, Knowledge. They trade private goods goods xx RRNN and licenses giving the rights and licenses giving the rights

to use knowledge, to use knowledge, aa RR..

Trader Trader hh has finite resources which are has finite resources which are allocated to produce either private goods allocated to produce either private goods

or knowledgeor knowledge..



5151

For each trader, there is a tradeoff For each trader, there is a tradeoff between producing more private goods between producing more private goods

and producing more knowledge. and producing more knowledge. However, more knowledge leads to However, more knowledge leads to

higher productivity. Formallyhigher productivity. Formally

h xh = h (ah, a), with h

a = ah and h , xh

or a = sup ah

h H

ah

a



5252

Countries or traders have property rights Countries or traders have property rights

hh RRNN on private goods and own on private goods and own licenses that allow them to use licenses that allow them to use knowledge, knowledge, aahh RR. .

Traders derive utility from use of private Traders derive utility from use of private goods goods xx. .

Through negotiable licenses knowledge is Through negotiable licenses knowledge is

available to all.available to all.



5353

Traders may use their licenses to Traders may use their licenses to access knowledge or may sell their access knowledge or may sell their licenses in the market. If they wish licenses in the market. If they wish to use more knowledge than their to use more knowledge than their

licenses allow, they buy more licenses allow, they buy more licenses in the market. licenses in the market.

Markets for licenses are Markets for licenses are competitive.competitive.



5454

Market equilibrium with knowledge Market equilibrium with knowledge

Each trader maximizes welfareEach trader maximizes welfare

Max uMax uhh(x(xhh))

s.t.s.t. x xhh = = hh (a (ahh,a) + q (a,a) + q (ahh – a – ahh))

i.e. the i.e. the value of consumption equals the value value of consumption equals the value of production plus the value of licenses bought of production plus the value of licenses bought

or sold, and all markets clear:or sold, and all markets clear:

aahh = = aahh = a = a



5555

First Welfare Theorem for Markets with First Welfare Theorem for Markets with Privately Produced Public GoodsPrivately Produced Public Goods

TheoremTheorem

In and economy with In and economy with kk≥2 ≥2 traders, traders, jj≥1 ≥1 private goods and a privately produced private goods and a privately produced public good, there exists at most a one-public good, there exists at most a one-dimensional manifold of property rights dimensional manifold of property rights allocations on the use of the public good allocations on the use of the public good (allocation of “permits”) from which the (allocation of “permits”) from which the

competitive equilibrium is Pareto efficient.competitive equilibrium is Pareto efficient.

This is the Manifold of Efficient Allocations of This is the Manifold of Efficient Allocations of Property RightsProperty Rights



5656

Theorem 1Theorem 1((Chichilnisky, Heal and Starrett, 1993)*Chichilnisky, Heal and Starrett, 1993)*

There is only a finite number of ways There is only a finite number of ways of distributing licenses of property of distributing licenses of property rights on the use of PPP goods rights on the use of PPP goods between the traders so that the between the traders so that the market equilibrium in Pareto market equilibrium in Pareto efficient.efficient.

**Environmental Markets: Equity and Efficiency, Environmental Markets: Equity and Efficiency, CUP Chichilnisky and Heal 2000CUP Chichilnisky and Heal 2000



5757

PolicyPolicy

Those who have fewer endowments Those who have fewer endowments of private goods must be endowed of private goods must be endowed with more property rights on the use with more property rights on the use of the PPP good. Otherwise, the of the PPP good. Otherwise, the market does not operate efficiently.market does not operate efficiently.



5858

● ● Efficiency and distribution are Efficiency and distribution are connected in markets with PPP goods.connected in markets with PPP goods.

● A measure of equity is necessary for ● A measure of equity is necessary for efficiency.efficiency.

● Markets with knowledge and ● Markets with knowledge and environmental assets require equity environmental assets require equity for efficiencyfor efficiency



5959

Policy ConclusionsPolicy Conclusions

Markets with knowledge require some Markets with knowledge require some equity to function efficientlyequity to function efficiently

It is standard to favor lower income groups It is standard to favor lower income groups in knowledge-use. Examples are school in knowledge-use. Examples are school subsidies for low income groups and SUN subsidies for low income groups and SUN Microsystem’s GDP dependent price lists.Microsystem’s GDP dependent price lists.

The system of property rights proposed The system of property rights proposed here is different from patents, because here is different from patents, because there is no exclusivity. Patents are there is no exclusivity. Patents are exclusiveexclusive



6060

Policy ConclusionsPolicy Conclusions

The system proposed here consists of The system proposed here consists of negotiable licenses which are accessible to negotiable licenses which are accessible to all, together with a covenant and a system all, together with a covenant and a system of property rights allocation (such as of property rights allocation (such as auctions) that favors those with low auctions) that favors those with low income.income.

There exists microchips (Wave There exists microchips (Wave Technology, Inc.) that can measure the Technology, Inc.) that can measure the use of knowledge as required for the use of knowledge as required for the implementation of these results.implementation of these results.



6161

Traders may use their licenses to Traders may use their licenses to access knowledge or may sell their access knowledge or may sell their licenses in the market. If they wish licenses in the market. If they wish to use more knowledge than their to use more knowledge than their licenses allow, they buy more licenses allow, they buy more license in the market.license in the market.

Markets for licenses are competitiveMarkets for licenses are competitive



6262

General Market Equilibrium of two nations trading knowledge and private goods



6363



6464

A VISION OF A NEW ECONOMYA VISION OF A NEW ECONOMY

Very innovative in the use of knowledgeVery innovative in the use of knowledge

Very conservative in the use of resourcesVery conservative in the use of resources

Centered on diversity and human capital Centered on diversity and human capital

New types of markets based on property New types of markets based on property rights of enviromental use and knowledge rights of enviromental use and knowledge

Offering the prospect of substantial economic Offering the prospect of substantial economic progress without damaging the ecosystems progress without damaging the ecosystems that support life on Earththat support life on Earth



6565

US Policy in the World Economy:US Policy in the World Economy:

Help create International Markets for Help create International Markets for Trading Property Rights on the Use of Trading Property Rights on the Use of Global CommonsGlobal Commons

Possibly in conjunction with GATT or WTOPossibly in conjunction with GATT or WTO Ensure Efficient Market Functioning for Ensure Efficient Market Functioning for

whichwhich Those regions with fewer endowments of Those regions with fewer endowments of

private goods must be endowed with more private goods must be endowed with more property rights on the common property rights on the common environmental assets. Otherwise the environmental assets. Otherwise the market cannot operate efficiently.market cannot operate efficiently.



6666

● ● What are the institutions What are the institutions needed to implement needed to implement emission trading?emission trading?

● ● How to ensure efficiency How to ensure efficiency and fair trading?and fair trading?



6767

To answer these questions, a To answer these questions, a global financial mechanism global financial mechanism

must be designed that reflects must be designed that reflects full equitable and active full equitable and active

participation of developing and participation of developing and industrial nationsindustrial nations



6868

An International Bank for Environmental An International Bank for Environmental Settlements can help achieve this goalSettlements can help achieve this goal

the IBES will help to obtain economic the IBES will help to obtain economic value from environmental assets value from environmental assets without destroying themwithout destroying them

will help bridge the gap between will help bridge the gap between developing and industrial countriesdeveloping and industrial countries

Will provide a forum for adjusting to Will provide a forum for adjusting to new scientific findingsnew scientific findings



6969

The IBES could help organize and The IBES could help organize and broker:broker:

The trading of rights on the use of The trading of rights on the use of global airwavesglobal airwaves

The trading of rights on greenhouse The trading of rights on greenhouse gases emissions and biodiversity usegases emissions and biodiversity use

The trading of environmental bonds The trading of environmental bonds and earth stocksand earth stocks

The trading of options and other The trading of options and other derivatives based on the abovederivatives based on the above



7070

The IBES could alsoThe IBES could also

Securitize profit sharing agreements Securitize profit sharing agreements on genetic blueprintson genetic blueprints

Securitize profitable investments in Securitize profitable investments in aquifers, watersheds, biological soil aquifers, watersheds, biological soil enhancement and fisheriesenhancement and fisheries

Provide bridge financing and credit Provide bridge financing and credit enhancement facilities for all the enhancement facilities for all the aboveabove



7171

The case for an International Bank for The case for an International Bank for Environmental Settlements (IBES)Environmental Settlements (IBES)

Based on new economic findings on Based on new economic findings on the existing proposal for trading the existing proposal for trading carbon permits, an IBES can be carbon permits, an IBES can be created whichcreated which

●●will be self-financingwill be self-financing●●will offer a combination of markets will offer a combination of markets

solution and continuing multilateral solution and continuing multilateral negotiationsnegotiations



7272

An International Bank for An International Bank for Environmental Settlements (IBES)Environmental Settlements (IBES)

GIVES ACCESS TO INTERNATIONAL GIVES ACCESS TO INTERNATIONAL CAPITAL MARKETS FOR FUNDING CAPITAL MARKETS FOR FUNDING CONSERVATIONCONSERVATION

TO ALLEVIATE DEFAULT RISKS:TO ALLEVIATE DEFAULT RISKS:

CREDIT ENHANCEMENT BY WORLD CREDIT ENHANCEMENT BY WORLD BANK OR GEFBANK OR GEF



7373

The population explosion since The population explosion since World War II put stress on water World War II put stress on water resources globally resources globally

Clean water is the most scarce Clean water is the most scarce resource around the worldresource around the world



7474

● ● IBES provides an institutional framework IBES provides an institutional framework that combines the best aspects of free that combines the best aspects of free markets and multinational policymarkets and multinational policy

● IBES can offer a continuing way to draw ● IBES can offer a continuing way to draw capital from global financial markets to capital from global financial markets to support global environmental policysupport global environmental policy

● IBES will regulate and monitor compliance ● IBES will regulate and monitor compliance of trading of carbon permits globally of trading of carbon permits globally (borrowing, lending and derivatives)(borrowing, lending and derivatives)



7575

Policies To Avert Climate ChangePolicies To Avert Climate Change

Policies to prevent climate change Policies to prevent climate change focus mainly on curtailing emissions focus mainly on curtailing emissions of carbon dioxide (COof carbon dioxide (CO22), the most ), the most important greenhouse gas.important greenhouse gas.

● ● Regulatory ApproachesRegulatory Approaches● ● Market ApproachesMarket Approaches--- Carbon Taxes--- Carbon Taxes--- Joint Implementation--- Joint Implementation--- Tradable Permits--- Tradable Permits



7676

Policies To Prevent Climate ChangePolicies To Prevent Climate Change

Carbon TaxesCarbon Taxes

A mechanism to reduce carbon emissions is a carbon tax – A mechanism to reduce carbon emissions is a carbon tax – a tax levied on all fossil fuels in proportion to their carbon a tax levied on all fossil fuels in proportion to their carbon contents.contents.

●●By raising the cost of fuels and energy intensive products, By raising the cost of fuels and energy intensive products, this tax would discourage all fossil fuel use in proportion to this tax would discourage all fossil fuel use in proportion to their carbon contents and encourage the development of their carbon contents and encourage the development of less carbon-intensive alternatives.less carbon-intensive alternatives.

●●A recent statement by leading economists favors taxes A recent statement by leading economists favors taxes over a regulatory approach. However, taxes increase over a regulatory approach. However, taxes increase government’s intervention in the economy and are out of government’s intervention in the economy and are out of public favor in today’s market-oriented environmentpublic favor in today’s market-oriented environment



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Joint ImplementationJoint Implementation

This is a mechanism that allows a firm in one This is a mechanism that allows a firm in one country to invest in a project that reduces country to invest in a project that reduces emissions in another country, and to receive emissions in another country, and to receive credit for those reductions at home. It was credit for those reductions at home. It was proposed by President Clinton on October 22, proposed by President Clinton on October 22, 1997. An example might involve Norway and 1997. An example might involve Norway and Poland. International joint implementation of COPoland. International joint implementation of CO22 emissions reductions would allow a utility in emissions reductions would allow a utility in Norway to achieve an emissions reduction by Norway to achieve an emissions reduction by contracting to pay a factory in Poland to install contracting to pay a factory in Poland to install more fuel-efficient furnacesmore fuel-efficient furnaces



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Tradable PermitsTradable Permits

● ● This is the most market-oriented and efficient approach, This is the most market-oriented and efficient approach, which is already used for sulfur dioxide permits in the which is already used for sulfur dioxide permits in the Chicago Board of TradeChicago Board of Trade

● ● One argument for tradable permits is the perceived One argument for tradable permits is the perceived political difficulty of proposing a change in the tax structurepolitical difficulty of proposing a change in the tax structure

● ● The most difficult issue in the use of tradable permits is The most difficult issue in the use of tradable permits is how to allocate them to potential users. For small fuel users how to allocate them to potential users. For small fuel users tradable permits could cause administrative burdens tradable permits could cause administrative burdens



7979


Carbon taxes or tradable permits increase Carbon taxes or tradable permits increase the cost of energy and could reduce the cost of energy and could reduce economic growth. Different models show economic growth. Different models show different impacts.different impacts.

Despite the complexity of the models, only Despite the complexity of the models, only a handful of easily understandable a handful of easily understandable assumptions are important in determining assumptions are important in determining the simulation results.the simulation results.



8080

TTHE HE PPREDICTED REDICTED IIMPACTS ON MPACTS ON GDPGDP IN IN 2020 2020 OF OF SSTABILIZING TABILIZING

COCO22 EEMISSIONS AT MISSIONS AT 19901990 LLEVELS: EVELS: TTHE HE EEFFECT OF FFECT OF CCHANGING HANGING

UUNDERLYING NDERLYING AASSUMPTIONSSSUMPTIONS

Source: Shackleton, R. et al (1992) The Efficiency Value of Carbon Tax Revenues. Washington, D.C.: U.S. Environmental Protection Agency.



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The International Bank for The International Bank for Environmental SettlementsEnvironmental Settlements

Win-Win SolutionsWin-Win Solutions

● ● Uncertain though they are, there are costs associated with Uncertain though they are, there are costs associated with doing nothing in the face of rising greenhouse gas doing nothing in the face of rising greenhouse gas concentrations.concentrations.

●● The few models that do take expected damages from The few models that do take expected damages from climate change into account predict that a carbon tax set at climate change into account predict that a carbon tax set at an appropriate rate, with revenues recycled efficiently back an appropriate rate, with revenues recycled efficiently back into the economy, actually improves economic welfareinto the economy, actually improves economic welfare

(Nordhaus and Young, 1996; Jorgenson et al., 1995; (Nordhaus and Young, 1996; Jorgenson et al., 1995; Nordhaus, 1994, 1993).Nordhaus, 1994, 1993).



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GDPGDP LLOSS OSS (1990-2010)(1990-2010) UUNDER NDER AALTERNATIVE LTERNATIVE

RRECYCLING ECYCLING OOPTIONSPTIONS

Source: Shackelton, R. et al (1992) The Efficiency Value of Carbon Tax Revenues. Washington, D.C.: U.S. Environmental Protection Agency.



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A Win-Win ProposalA Win-Win Proposal

A market-based approachA market-based approach

Global Trading, Clearing and Global Trading, Clearing and Settlement of Tradable Carbon Settlement of Tradable Carbon PermitsPermits

International Bank for Environmental International Bank for Environmental Settlements (IBES)Settlements (IBES)



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A market-oriented institutionA market-oriented institution

Acts as an intermediary, organizes and Acts as an intermediary, organizes and regulates global trading of carbon permits regulates global trading of carbon permits and other environmental assetsand other environmental assets

Governance and operating budget decided Governance and operating budget decided by the nations of the worldby the nations of the world



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The IBES MandateThe IBES Mandate

● ● To enhance wealth generation while protecting To enhance wealth generation while protecting the environment.the environment.

It will accomplish this by:It will accomplish this by:

● ● Providing liquidity and economic return from Providing liquidity and economic return from environmental assets (such as forests) while environmental assets (such as forests) while ensuring judicious use.ensuring judicious use.



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How IBES OperatesHow IBES Operates

Preserving national sovereign rights, IBES will:Preserving national sovereign rights, IBES will:

- Act as an intermediary in multilateral - Act as an intermediary in multilateral borrowing and lending of permits borrowing and lending of permits- Trade options on carbon permits in the - Trade options on carbon permits in the future future- Clear and settle multinational transactions- Clear and settle multinational transactions- Ensure market integrity and efficient price - Ensure market integrity and efficient price mechanisms (such as SEC, CFTC) mechanisms (such as SEC, CFTC)



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How IBES OperatesHow IBES Operates

- Once the world’s ceiling of emissions is - Once the world’s ceiling of emissions is agreed upon, permits can be allocated agreed upon, permits can be allocated following a sliding rule following a sliding rule

- Starting from today’s usage, the rule - Starting from today’s usage, the rule moves moves towards an incentive system towards an incentive system allocating more allocating more to those who emit less to those who emit less

- Auctions can be used to allocate permits - Auctions can be used to allocate permits efficiently efficiently



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The IBES: A Win-Win SolutionThe IBES: A Win-Win Solution

The industrial nations have more capital. The The industrial nations have more capital. The developing nations are richer in the developing nations are richer in the environmental account. They emit less carbon environmental account. They emit less carbon and have most of the world’s forests and 80% of and have most of the world’s forests and 80% of its biodiversity. According to the economic its biodiversity. According to the economic models, there are gains to be made from trade models, there are gains to be made from trade while insuring judicious use of environmental while insuring judicious use of environmental assets.assets.



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Source: Earthrends World Resource Institute (WRI)



9090

Source: Chichilnisky, G. and Eisenberger, P. Energy Security, Economic Development and Global Warming: Addressing short and long term challenges. International Journal of Green Economics, 2009



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9292




9393

Sources: 1. FloodSmart.gov2. California Department of Insurance3. California Department of Insurance and National Association of Insurance Commissioners (the two sources differ by $.1) http://www. aic.org/Releases/2007_docs/NAIC_Releases_Homeowners_Ins_Report.htm, and http://www. naic.org/documents/research_stats_homeowners_sample.pdf



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9595




9696




9797




9898




9999




100100

Sources: Duncan Foley, “The Economic Fundamentals of Global Warming” 2007http://www.santafe.edu/research/publications/workingpapers/07-12-044.pdf



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Sources: Millennium Ecosystem Assessment. Ecosystem and Human Well-Being: Biodiversity Synthesis(2005) http://www.millenniumassessment.org/en/index.aspx

Economy & Finance

Pegram Lecture 3, August 10, 2012