3. Teaching sustainability in a standard module

Box 2: Renewable resources

Theories of the exploitation of renewable resources are covered in most standard environmental economics texts covering natural resource economics. Students are interested (at least to some extent) in the escalating price of fish and chips and this represents a good context for discussing the management of fish stocks and behaviour of fishing enterprise under different regimes.

Information has an important role in the sustainable harvesting of renewable resources (see for example, Clark, 1990). If those exploiting the resource act in their mutual long term self-interest and have full information about the impact of various levels of harvesting on stock levels, then the risk of over-exploitation is removed and the maintenance of carrying capacity is more likely. It is fascinating that traditional hunter-gatherer societies often had such information systems embedded in their cultures, reinforced by a system of beliefs and rituals.

The figure below shows the outcome of restricted access to a renewable resource, for example, where the number of operators is restricted through a licensing system.

The figure above shows the outcome of joint profit maximisation where hunters or fishing enterprises act to limit their activity (effort) so that the maximum harvest relative to effort is achieved. As effort (E) increases, the harvest rate (H) initially increases but peaks at the maximum sustainable yield (MSY) where stock density and food supply allows the maximum rate of reproduction. Additional effort causes stocks and hence population density to fall and increasing difficulty in mating. Joint profit maximisation (at Em) requires barriers to entry and restriction on individual enterprise effort. Good information on fish stocks, catches, etc. will enhance stability. With open access, additional effort is made, stocks fall and the reproduction rate falls so that profit is zero.

In the diagram, W = wage rate, P = price per unit of catch, TPB = total private benefit, TPC = total private cost.

Box 3: Extending the circular flow of income

The circular flow of income is a foundational tool in economics, and is typically found in introductions to macroeconomics. The typical circular flow model presents flows of income, expenditure, goods and services between groups of economic actors. The version below is highly simplified, collapsing government and import sectors into ‘businesses’.

Box 4: Valuation

Cost benefit analysis (CBA) is an ideal point at which to introduce the valuation of environmental assets. CBA has been criticised for failing to evaluate environmental impacts, merely describing them in physical units. Over the past 30 years, methodologies for evaluation in money terms have been evolving, although these are not widely used as they have proved expensive and unreliable. Nevertheless, it is often argued that it is better to have some monetary evaluation rather than a physical measure that is not included in the net present value and thus easy to ignore. The application of valuation techniques has been given a boost recently by attempts to evaluate ecosystem services and 'green infrastructure' by central and local government (see for example www.greeninfrastructure.org.uk).

Total economic value of natural capital

Discussing total economic value (TEV) with students as an introduction to evaluation encourages reflection on the meaning of value in economics. TEV is made up of use value and non-use values. Use value can be direct where, for example, a lake is used for fishing, or indirect, where it provides the setting for a pleasant walk. Non-use value is usually divided into a number of categories representing different ways in which a natural asset may bestow value:

• Option value arises from the retention of the asset for possible use in future, for example moorland which might be used for grazing or forestry in future.
• Quasi-option value is based on a possible use which may arise in future due to new knowledge about the asset. An example would be the Amazon Rain Forest where many plant species remain to be catalogued and some might yield a valuable drug for medical use.
• Existence value derives from an emotional attachment people feel for natural assets that acquire some cultural significance, even though there may never be an opportunity to experience the assets at first hand. Threatened species such as whales, rhinos and tigers evoke strong feelings as do iconic landscape features – Everest, the Danube, the Grand Canyon. Subsets of existence value include heritage value (the desire to preserve the asset for future generations) and vicarious use value (associated with contemplating the enjoyment of the asset by others).

Evaluating environmental impact

Most development incurs environmental costs as a result of the destruction or degradation of environmental assets or by causing pollution. For example, building a new road will interfere with natural drainage, cause pollution of watercourses, and act as a barrier severing wildlife habitats. It will result in noise and congestion to local communities in the construction phase. It will continue to have an impact on amenity by causing noise and pollution subsequently. In many cases, the impact will reduce the use value of the asset. Direct use may be associated with a marketed output and the reduction in this is the basis for evaluating impact. Indirect use may also be marketed where entrance fees are charged. Where there is no money transaction, there are three main methods of evaluation:

• Contingent valuation method (CVM) elicits values from a representative sample of an appropriate population by describing a context where an environmental asset is (usually) destroyed. Respondents are then asked how much they would be willing to pay (WTP) to preserve the asset or how much they would be prepared to accept in compensation (WTA) for the loss. Unique among valuation methods, CVM can capture all the components of TEV.
• Travel cost assumes that the expense of travelling to visit an environmental asset is a good proxy for a price for the benefits of the visit. By surveying a sample of visitors to the asset and collecting travel cost and other socioeconomic data, it is possible to generalise to the total population of visitors and construct a demand curve for the benefits flowing from the asset. The method only captures use value.
• Hedonic pricing uses the variation in the prices of dwellings or remuneration levels associated with different environmental conditions as a source of evidence of the WTA for tolerating those conditions. The most frequent application has been the variation in house prices with proximity to some nuisance (such as aircraft noise from an airport) or some environmental asset (such as a riverside location). Applying the technique requires the collection of house price data in the area, together with house and neighbourhood characteristics that might also have an influence on price. Econometric estimation of a house price function will allow the component of the price associated with the environmental attribute of interest. This is the basis for deriving a WTP or WTA associated with the attribute. Again, this method only captures use values.

Benefit transfer

As more studies of the values of environmental assets and conditions are completed, a database of valuations can be built up. Increasingly, it becomes possible to use the results of previous studies as the basis for valuation in new projects without having to carry out an asset valuation from scratch. The UK repository of valuations is available at http://www.hm-treasury.gov.uk/d/green_book_complete.pdf .

A critique of valuation methods

Detailed descriptions of the methods briefly outlined above can be found in most standard texts on environmental economics. These usually include a listing of the shortcomings of the methodologies with more detail on operationalisation. Suffice it to say that, as the number of studies have built up, the range of values for similar assets has been disturbingly wide suggesting serious reliability issues.

Introducing valuation to students

This is a very rich area for exploring issues in applied economic methodologies and for discussing underlying theoretical issues. As an introductory exercise, groups of students can be asked to choose an environmental asset to value and then be given 15 minutes or so to sketch a valuation methodology they might apply. Each group then describes their methodology and this leads to some interesting discussion of problems and challenges.

Box 5: Cost benefit analysis (CBA)

Investment appraisal (IA) is a good starting point for introducing CBA. This establishes the basic cash flow foundation, the distinction between one-off capital and recurring current expenditures and discounting. IA can be presented as capturing the private costs and benefits of a project. The introduction of external costs and benefits transforms IA into CBA.

Presenting a case study helps to emphasise the relevance of the subject. An example taken from a study of tourism development in Minorca is shown below:

The study compared the provision of 1000 bed spaces in an extensive villa style development with concentrated high-rise resort development. The students tend to think that villa style development is more sustainable and the IA shows that it provides a much greater private NPV. However, the external costs that are included in CBA show that the high-rise concentrated development generates a greater social NPV. This is largely due to the very great infrastructure cost of providing utility services and access to developments spread all over the island, together with the greater land take, energy consumption and water demand associated with villas each with their own swimming pools and air conditioning systems.

Of particular relevance to sustainability is discounting. There is an argument that intergenerational equity implicit in the resource based view of sustainability demands a discount rate of zero. A valuable discussion of the theoretical basis of discounting can be based on issues of inflation, risk and time preference.

Students can construct their own CBA using CBA builder (see Section 7).

CBA leads naturally into the evaluation of environmental impacts (see Box 4) The potential contribution of CBA to deciding macro policy priorities has been illustrated recently in the Stern Review (Stern, 2006), in which it was the key methodology for assessing the benefits of intervening to reduce carbon emissions and thus to reduce the likelihood of further global warming.