Ecological EconomicsLecture 11

27th May 2010

Tiago DomingosAssistant Professor

Environment and Energy SectionDepartment of Mechanical Engineering

Collaboration: Rui Pedro Mota

rmota@ist.utl.pt

Exercise 1.9 c)• Return to capital is constant on a balanced growth path (BGP)

• Share of output going to capital is constant on a BGP

• Share of output going to labor is constant on a BGP

0r f f k

r f f

' ''

0 0r K Y

n g n gr K Y

rK

Y

wL

Y

0w L Y

g n n gw L Y

0w A kf k

gw A f kf

''

'

Exercise 1.9 d)• Growth rate of r

• Growth rate of w

• For concave functions

0r f f k

r f f

' ''

w A kf kg

w A f kf

''

'

0f kf '

0f ''

Expressions for GNNI and GS

• Green Net National Income:

• Genuine Saving (Adjusted Net Saving):

• The value of time

R(Q f ) S e ER tGNNI NNI Q

R(Q f ) SR tGS NNI C Q

( )( )t R s tst

Q t F e ds

RY RQI W

GNNI in Portugal

• Starting from conventional SNA aggregates:

– Deduct the damage from flow pollution emissions,

– Deduct (add) the value of rents from resource depletion (or not),

– Add the value of technological progress .

e E

R(Q f ) SR

tQ

-20000

0

20000

40000

60000

80000

100000

120000

140000

1990 1995 2000 2005

Mill

ion

€

GNI

CFC

Air emissions

Forest Depl.

Tech. Progress

GNNI

Pot GNNI

GNNI, T=100

• Models point to measure emissions at the – Marginal cost of abatement (MCA), or

– Marginal social cost (MSC) = Marginal benefit of abatement (MBA), a.k.a. Marginal Damage Costs (MDC)

• Measurement away from the optimum– c, over-polluting (assumed current state) => a is upper bound

– d, under-polluting => b is lower bound

Social costs vs Marginal abatement

Constant MDC

• Use the marginal damage per tonne of emission estimated in the CAFE-CBA project.

– Pollutants: sulphur dioxide (SO2), nitrogen oxides (NOx), particulate matter (PM2.5), ammonia (NH3) and volatile organic compounds (VOC).

• Assess the costs and benefits of air pollution policies, and conduct analysis of scenarios.

• Impacts considered:– Exposure to PM2.5 and ozone

– Health damages of PM2.5 (both acute and chronic effects) and ozone, O3 (only acute). Both long-term (chronic) and short-term (acute). Both mortality (i.e. deaths) and morbidity (i.e. illness)

• Most important health damages relate to mortality, restricted activity days and chronic bronchitis.

CAFE-CBA

• Regarding the effects of each pollutant on PM2.5 concentration:

CAFE-CBA

• Regarding the effects of each pollutant on O3 concentration:

CAFE-CBA

• Impacts quantified in monetary units. Beware of double counting.

CAFE-CBA

• Impacts omitted from the analysis.

CAFE-CBA

• Modelling and valuing of a uniform relative (?) reduction in emissions within each country.

• A change of 1000 t of each pollutant causes changes in concentration of PM2.5 and O3 in Europe.

• This regards a 15% emission reduction (the last 15%) of SO2, NOx, NH3, VOCs and PM2.5 at the emission level of current legislation in 2010.

CAFE-CBA – Marginal costs

Impact Pathway Aproach

• Quantification of emissions

• Description of pollutant dispersion across Europe (grid 50 x 50 km)

• Quantification of exposure of people, environment and buildings that are affected by air pollution;

– Source-receptor functions

• Quantification of the impacts of air pollution– Health damages, damages to crops and to buildings

• Valuation of the impacts

• Description of uncertainties

CAFE-CBA

• Evaluate the impacts on health of air pollution, concentrating on the two main pollutants of concern to CAFE – PM and ozone.

• Monetization of chronic mortality in terms of changing longevity (years of life lost), i.e., Value of a Life Year (VOLY).

• Premature mortality due to air pollution is valued in terms of the Value of a Statistical Life (VSL).

• VSL involves dividing some estimate of the WTP for a mortality risk reduction by that risk reduction.

• VOLY involves dividing some estimate of the willingness to pay (WTP) for an improvement in life expectancy by that life expectancy improvement.

– VOLYs have been computed mainly through computational adjustments of existing VSL

CAFE-CBA – Health Damages

• VSL can be multiplied by the statistical deaths averted by a policy to arrive at the benefits of that policy.

• Variation in the method used to value mortality

CAFE-CBA – Health Damages

• Marginal PM2.5 damage (€) per tonne emission for 2010

– 3 sets of sensitivity analysis

• Quantification of ozone effects on mortality should use the metric SOMO35 (sum of means over 35 ppb)

– relationship of daily ozone with daily mortality should be restricted to quantifying the effects at concentrations greater than 35ppb daily maximum 8-hr mean, on days when the daily maximum 8-hr mean exceeded that level.

CAFE-CBA – Health Damages

• Based on a scale of incapacity weights, ranging from 0 (healthy) to 1 (death).

• Weights are obtained from surveys.

Setting DALY’s

Severity weights

Indicator conditions

0.00-0.02 Vitiligo on face, weight-for-height less than 2 SDs

0.02-0.12 Watery diarrhoea, severe sore throat, severe anaemia

0.12-0.24Radius fracture in a stiff cast, infertility, erectile dysfunction,

rheumatoid arthritis, angina

0.24-0.36 Below-the-knee amputation, deafness

0.36-0.50 Rectovaginal fistula, mild mental retardation, Down syndrome

0.50-0.70 Unipolar major depression, blindness, paraplegia

0.70-1.00 Active psychosis, dementia, severe migraine, quadriplegia

DALY’s in Portugal

Men Women

Healthy Life Expectancy at Birth 64.3 69.4

Expectation of Lost Healthy Years at Birth 8.5 10.7

Life Expectancy at Birth 72.8 80.1

• DALYs transform any type of morbidity or mortality into an equivalent number of life years:

– Preferences over health and longevity may depend only on health consequences, and not on other characteristics of the individual (e.g wealth) or the risk (e.g.

uncontrollable, unfamiliar, dreaded).

• WTP is the rate of substitution between health and wealth– Preferences may depend on characteristics of the individuals and the risk.

– WTP to reduce mortality risk is the Value per Statistical Life (VSL or VOSL). VSL can be calculated using:

• the relationship bewteen job risks and wages paid,

• expenses made for safety gear

• people’s willingness to pay for risk reductions

– Value of a Statistical Life Year (VSLY or VOLY) can be calculated as the annuity equivalent to VSL (Pearce, 2000). Empirically, VSL is a decreasing function of age, has an income elasticity of 0.5-0.6, and depends on union status.

– However, standard applied economic analysis uses constant VSL

DALY’s in Portugal

• VSL (Value of Statistical Life)– Spain, 1999:

2.1-2.7 M€/VSL (Font et al., 2006)

– European Union:

1.7 M€/VSL (Pearce and Koundouri, 2004)

• DALY (Disability Adjusted Life Year)– Noise interference with communication; sleep interference:

45-125 kUSD(2000)/DALY (Hofstetter and Muller-Wenk, 2005)

– Health costs in the UK:

5.6 k€/DALY (Pearce and Koundouri, 2004)

– VSL in the UK:

90 k€/DALY (Pearce and Koundouri, 2004)

– Direct studies of the Willingness to Pay per DALY

10-400 kUSD/DALY (Gyrd-Hansen, 2005)

DALY’s in Portugal