Natural Resource Management. Social Entrepreneurs. Sources of Unsustainability. Natural Resource Management I

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1 Natural Resource Management The Role of Business: The Changing Landscape The Natural Capitalism Vision by Paul Hawken, Amory Lovins, L. Hunter Lovins Book (pictured) and Harvard Business Review article Natural Resource Management I Concept: They advocate a shift from the current production economy that disregards the environmental costs of goods, toward a service economy in which durability, ease of repair, and the elimination of waste transforms commerce so that we have sustainable profit, not short-term destructive profit. What is necessary? Information (so consumers and investors know who the sustainable firms are), values (so consumers and investors favor sustainable firms and products) and a level playing field created by policy. The Interface Story A business plan with three novel elements: Transition to carpet tiles Leasing carpet, not selling it New product (Solenium) can be completely remanufactured into itself (not converted to a lower valued use) Result: Embodied materials and energy reduced by a phenomenal 97% while costs reduced and profit margin increased. Ray Anderson, Interface CEO Social Entrepreneurs Challenge: How to bring appropriate products to developing counties to facilitate sustainable development. Problem: More profitable to focus on the wealthy, leaving the problems of the poor unaddressed. Social entrepreneurs are Revolutionaries with a business plan according to Paul Hudnut. For more see: resources.html Social Entrepreneurs: An Example Dr. Victoria Hale, CEO OneWorld Health directs a worldwide effort to uncover, research, and develop new medicines for neglected infectious diseases. Their approach is simple. Identify the most promising drug and vaccine candidates. Develop them into safe, effective and affordable medicines. Then partner with companies, non-profit hospitals and organizations in the developing world to conduct medical research on new cures, manufacture and distribute newly approved therapies that will impact the health of millions of people. They challenge the assumption that pharmaceutical research and development is too expensive to create the new medicines that the developing world desperately needs. Sources of Unsustainability The Role of Incentives Or Why Good People Degrade the Environment! 1

2 The Natural Resource Commons Fisheries: an Example In commons extraction rights are jointly shared, but extracted resources are individually consumed. Can you come up with some examples of resources that fit this description? Depletable Renewable What are the specific consequences? Excess capacity (too many boats, excessively large boats, too many fishermen) Collective Action (Self-regulation) Privatizing access Scarce, free-access resources will tend to be overexploited and their value dissipated. The difficulty of finding a solution Stock is depleted. Tremendous dependency on an unsustainable level of fishing (mortgage payments on boats and equipment, need to put food on the table) Need to diminish harvesting pressure on resource to allow it to regenerate. Obvious solution (stop fishing for a few years while stock rebuilds) has very high economic cost and is politically difficult to implement. The Central Authority Solution Centralized Authority The Chocolate Chip Cookie Theorem Changing Incentives: Difficulties Potential Solutions to the Chocolate Chip Cookie Problem The incentive to conserve the resource is lost. Depletion of the stock (despite everyone s interest in maintaining it). Note that this is an example where private actors are prevented from acting individually in a socially responsible way, despite good intentions. Neither values, nor information are sufficient to solve the problem. Hardin s Tragedy of the Commons The pivotal role for free-access What is the perverse incentive? Fisheries When does the problem arise? The Historical Approach Gear Restrictions Trip Limits Set Total Allowable Catch Close season once aggregate catch level reached. In the majority of the cases this does not, by itself, solve the tragedy of the commons and indeed make make it worse (derby fishing) 2

3 Privatizing Access: The New Zealand Approach The Self-Regulation Solution The Lobster Gangs of Maine Defining harvest rules among fishers-no longer free access. Excluding outsiders Illegal, but effective enforcement Size restrictions V-Notching Conditions for Success Stable community Not too much pressure on resource Complementary Regulatory support Total allowable catch established (by science) and reduced over time Set up individual transferable harvesting quotas (ITQ s) that sum to equal the total allowable catch. Result: (1) substantial reduction in fishing effort, but income increased ( lower costs, more fish, price effects); (2) regeneration of the stock; (3) withdrawal from fishery was voluntary, (4) indigenous rights (Maori) protected. Incentive to conserve protected. Do you see how and why? Not universally successful-the orange roughy case Externalities: A Second Incentive Source of Unsustainability The Definition: Externalities exist when a decision imposes costs and/or confers benefits on parties other than the decision maker. The Implication: Decision-makers have a tendency to give full weight to the costs and benefits they bear, but to ignore or give less weight to those born by others. External social benefits and costs will be inadequately considered. Land Use: The Maine Example Externalities: Consequences Biased decision-making. Resource exploitation strategies may look privately attractive even when they overexploit resources Creates uneven playing field Out-of-pocket costs for environmentally destructive choices may be lower even if the total costs (considering the environmental costs) are not. For example generating electricity from coal may SEEM cheaper than wind, but wind may actually be cheaper if the environmental costs of coal (climate change, human health, aesthetic) are considered. Forest Externalities Since 1998, approximately 7,217,107 acres has changed hands in Maine s North Woods. The character of ownership has changed from paper companies to private individuals and development companies. What does this mean for the character of Maine Forests? Do forest owners accrue all the benefits that society accrues from forests or are externalities at work? Wildlife habitat Soil erosion protection Aquifer protection Carbon absorption Mostly the benefits landowners accrue come from harvesting the timber or developing the land, not from the preserved forest.those benefits are reaped by others. 3

4 The Consequences Some Corrective Solutions Bias against preservation and for liquidation harvests (capture the timber value before clearing the land for development). Result: society loses all the benefits mentioned above even when those benefits may be quantitatively larger than the benefits from liquidation harvests. To the private owner, liquidation harvests produce more benefits and that drives the decision. Tax policies, which tax land at its highest market value, make the pressure of land conversion worse. Land for Maine s Future Outright Purchase by State Conservation Easements How they Work The Incentives The Role of Land Trusts Forest Certification How does it work? What are the preconditions? An Externalities Case Study: Mangrove Protection in Asia Externalities and Ecosystem Services Many ecosystems provide valuable functions, but their value goes unrecognized because they are externalities to the land owners. Mangroves being decimated, mainly to make way for shrimp farms. Converting mangroves to shrimp farms are more profitable because the some key benefits of mangroves (affording flood protection and providing nutrient rich nursery areas for fisheries) are externalities. Governments such as Bangladesh are now recognizing these benefits and halting mangrove destruction and organizing local replanting programs. While these benefits are externalities to the individuals, they are not externalities to the countries. Hence countries have incentives to take corrective action when properly informed about the benefits. (Notice that better information provided the incentive for Bangladesh to take action.) Perverse Pricing and the Environment Examples of Consequences Prices charged for resource use may be too low. Subsidies Taxpayers pick up the tab Government Price controls Hold prices down to protect consumers, but they end up encouraging over use. Solid Waste Fee independent of volume (so marginal cost =0) Agriculture Price controls to hold down cost of food Effects on domestic supply Subsidies and Tariffs in Europe and America Effects on fertilizers and pesticides and water supply Effects on developing countries with a comparative advantage in agriculture Brazilian Rainforest Tax subsides to livestock ranchers Conversion of rainforest to agricultural use Solid Waste Excessive waste generation and disposal 4

5 Solutions Volume pricing or deposit refund systems for solid waste Downside: Volume pricing can create incentives for illegal disposal, but deposit refund reduces the problem. Removing subsidies and price controls can be effective, but it is easier said than done May cause short-term hardships due to dependency May particularly affect poor, although pricing systems to simultaneously protect the poor and encourage conservation are beginning to be designed and implemented. Conclusions In many cases with environmental degradation it is possible to examine incentive structures to both identify the behavioral sources of the problem and to design a suitable remedy. A host of economic incentive devices are available to be enlisted in the quest to change unsustainable behavior to sustainable behavior. Many, but not all, cases of even severe environmental degradation may lend themselves to win-win situations where short-term and long-term objectives can be harmonized by realigning values, information and incentives. Thursday night we will meet in the group research rooms to discuss refining your projects. For Friday I would encourage you to look for perverse incentives that affect your use of resources at Colby and elsewhere. 5