The Ecological Environment Presentation 1

I te rn a ti n a lB u si e ss n o n

Group 5

Omaer Ahmed ZR-09 Gaus Samdani ZR-12 Kawsar Ahmed ZR-50 Rafaat Wasik Ahmed ZR-53 Nasim Ul Haque ZR-54 Rashed Al Ahmad Tarique ZR61

Todays Topics
1.Introduction
Ecological

4.

Environment and Business International Summits on Ecological Issues and their outcomes

Internalization of Externalities
Pigovian Tax Coase Theorem Calculating the

2.Demand-Supply Model of Market Mechanism

Demand Supply

Amount of Negative Externalities Carbon Emissions Trading

5. 6.

Mechanism Types of Competition Market Failure

Sustainability 5-Stage Transformation towards Sustainability

3.Externalities
Definition and Types

Oil spill dumped 4.9 million barrels into Gulf of Mexico

Cause of oil spill22

To put it simply, there was a bad cement job and a failure of the shoe track barrier at the bottom of the well, which let hydrocarbons from the reservoir into the production casing. The negative pressure test was accepted when it should not have been, there were failures in well-controlled procedures and in the blow-out preventer; and the rigs fire and gas system did not prevent ignition

Ecological effect
The number of animals killed during the spill or injured and captured alive was 4,417 birds, 730 turtles, 69 dolphins and one sperm whale

Tourism
The U.S. Travel Association estimated that the economic impact of the oil spill on tourism across the Gulf Coast over a three-year period could exceed approximately $23 billion

Economic Consequences
Market value reached 52 week low. 54% loss in market value in 2010 Second quarter loss is 17 billion BP gas station, majority of which it does not

own reported sales reduction of 10 40% According to UBS total loses could be 12 billion

In the 1980s, energy efficiency was number ten or eleven in consumer priorities. In the last four or five years, it has come up to number three behind cost and performance, and we believe these concerns will continue to grow.

Casey Tubman, Brand Manager of Fabric Care Products, Whirlpool

Changing business environment

Regulatory exposure Competitive exposure New technological and business

opportunities

Regulatory Exposure (1 of 3)
The implementation scheme on the trading

of greenhouse gas emissions quotas Labeling regulations pursuant to the CO2 directive Tax policies China enacted a 20% tax on large cars in an effort to decrease the demand for those polluting vehicles.

Regulatory Exposure (2 of 3)
Cap of CO2emissions for all aircraft

departing from EU airports

the introduction of taxes on aviation fuel

(kerosene)

=by 2020 the price of a return flight would be 1.8 to 9 more

Regulatory Exposure (3 of 3)
In Europe power stations are required to

have a permit for each tone of CO2 emitted.

In China, while the current regulations focus

more on the reduction of SO2 emissions, it is likely that regulations on CO2 emissions will follow

Competitive Exposure
Steel, aluminum, and glass may increase

in (relative) price Price of electricity generated from coal may increase Standards are likely to divert consumer demand towards smaller and more fuel efficient cars

New business opportunities (1 of 2)

Hybrid technologies Alternative fuels are gaining increasing

attention Cylinder deactivation technology; Advanced diesel technology

New business opportunities (2 of 2)

Nuclear power generation, Extended use of renewable energy (solar,

wind, and hydroelectricity Electricity production using photovoltaic cells Bio-degradable plastic

SUPPLY AND DEMAND: THE MARKET MECHANISM

Demand The desire to own anything and the ability and willingness to pay for it Quantity demanded moves in the opposite direction to price (all other things held constant)

SUPPLY AND DEMAND: THE MARKET MECHANISM

Supply The amount of some product producers are willing and able to sell at a given price The higher the price, the larger the quantity supplied, (all other things held constant).

SUPPLY AND DEMAND: THE MARKET MECHANISM

Perfect Competition Number Of Competitors Entry Or Exit Barrier Many Easy Monopolistic Competition Few to many Somewhat Difficult Seemingly different but may be quite similar Some Oligopoly Very few difficult Similar or different Monopoly No direct competition Regulated by government No direct competing product

Similarity Of same Goods And Services Offered By Competing Firms Individual Firms None (set by Control Over market) Price Examples Farmer

some

Considerable(in true monopoly), Little (in regulated Monopoly) Power Company

Fast Food Restaurant

Automotive manufacturer

Externalities (Transaction Spillover)

Harmful or beneficial side effects borne by

those not directly involved in the production or consumption of a commodity.

A benefit in this case is called a positive

externality or external benefit, while a cost is called a negative externality or external cost.

Classification of Externalities
Externalities are divided into five different

categories: External Diseconomies of Production: Uncompensated costs imposed on others by the expansion of output by some firms.
Example: Increased discharge of waste

materials by some firms along a waterway may result in antipollution legislation that increases the cost of disposing of waste materials for all firms of that area.

Classification of Externalities
External Diseconomies of Consumption
Uncompensated costs imposed on others by

the consumption expenditure of some individuals. Example: The riding of a snowmobile by an individual imposes a cost (in the form of noise and smoke) on other individuals who are skiing, hiking or ice fishing in that area.

Classification of Externalities
External Economies of Production:
Uncompensated benefit conferred on others

by expansion of outputs by some firms.

Firms training more workers to increase

output and some workers go on to work for other firms.

Classification of Externalities
External Economies of Consumption
Uncompensated benefits conferred on

others by increased consumption by some individuals.

Example: Increased expenditures to

maintain his or her lawn by a homeowner increases the value of neighbor's house.

Classification of Externalities
Technical Externalities
Declining long-run average cost as output

expands lead to monopoly, so price exceeds marginal cost. Not even regulation to achieve competitive marginal cost pricing is then viable.

Pareto Optimum
The situation in which no re-organization of

production or consumption can lead to an increase in welfare of some without, at the same time, reducing the welfare of others. Efficiency and Pareto Optimality are not achieved whenever private and social costs or benefits differ.

Market Failure
S S S

Market Failure and Corrective Actions

1. External Diseconomies of Consumption 2. External Economies of Production and Consumption Tax on consumers rather than the product.

Requires a subsidy on the producers.

3. Technical Externalities

Marginal cost pricing is neither possible nor viable; and Pareto optimum cannot be achieved.

TRAGEDY OF THE COMMONS

Garrett Hardin first wrote on the topic in Science 1968 Used the example of medieval common grazing fields

Negative Externality 1 Public Utilities Business

Private Costs taken into consideration: Fuel and operating Expenses

Social Cost NOT taken into consideration: Security, Environment and Health

Result = Market failure that leads to overproduction of fossil-fuel fired power plants

Negative Externality 2

Logging

Private Costs and benefits taken into consideration: Cost of capital and labor Social Cost and benefits NOT taken into consideration: habitat preservation, forest cover, biodiversity conservation, carbon sink

Result = Market failure resulting in deforestation

Negative Externality 3
Industrial farm animal production Private Costs and benefits taken into consideration: fewer and often less-highly-skilled employees, and a greater output of uniform animal products Social Cost NOT taken into consideration: pool of antibiotic-resistant bacteria because of theoveruse of antibiotics; air quality problems; the contamination of rivers, streams, and coastal waters with concentrated animal waste; animal welfare problems Result = Market failure resulting in overproduction and consumption due to low equilibrium prices

Solutions
To solve 1. Privatize public property 2. Provide permits 3. Pigovian Taxation 4. Coasian solutions

Internalizing Externalities
Equating Social Costs and Social benefits to achieve an equitable price

Two approaches: 1. Centralized Approach 2. 2. Decentralized Approach (Free Market Operation)

Underlying framework
1. Two alternatives 1. Pigovian Taxation 2. Coasian solutions

Pigovian Taxation

Considered the traditional approach

Marginal Private Cost The tax shifts the marginal cost curve by the Marginal +Tax Social Cost amount Pric negative externality caused of Marginal New Private Cost Equilibrium e

Price = Marginal Revenue Pigovian Tax Revenue

New Quantity

Old Quantity

Quantity

Problems with the Pigovian Tax

No strict method for calculation of the exact

quantity of externalities exists, pointed out by Pigou himself Government lobbying by industries can set the taxes too high or too low

All Ecotaxes are based on these Pigovian principles

Private responses
Coase theorem Mergers Social conventions

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Coase Theorem
Insight: root of the inefficiencies from

externalities is the absence of property rights. The Coase Theorem states that once property rights are established and transaction costs are small, then one of the parties will bribe the other to attain the socially efficient quantity. The socially efficient quantity is attained regardless of whom the property rights were initially assigned.
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Property rights: entitlements which holders cannot be forced to give up. Example: water pollution a chemical plant may have the property right to pollute a river. swimmers and bathers may have the property right to clean water Transaction costs a re th e co sts th a t p a rti s e incur in the process of agreeing to and following through on a bargain.

41

When is the Coase Theorem relevant or not?

Low transaction

high transaction Few parties involved costs or ill-defined externality Source of externality Example: Air well defined pollution Example: Several firms with pollution

costs

Not relevant with

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Coase Theorem

Building the graph

Producer creates output

Creates benefits marginal benefits

(diminishing)

pollution

Building the graph

Producer creates output

Total Benefit to Company

Creates benefits marginal benefits

(diminishing)

pollution

Building the graph,

With

contd

pollutio n
Community experience s

Total Costs to Community

Costs
up clean health care

Optimal solution (max social benefit) without actual transactions ??

Net Social Gain

optimal @ output producing 60 units of pollution MB = MCcommunity company

Optimal amount of pollution

Equitable to Both parties

Coase Theorem says same optimal outcome obtained via market transactions

Case 1
B o th p a rtie s benefit , thus , both agree optimal 60 reached via Market mechanism

Community owns right to determine how much pollution is permissible Begin with zero pollution Company would like to produce output & gain benefit. But, creates Pollution

Community has 1.pollution costing $6000 (C)

What has been achieved?

Same Optimal result obtained via Market
A = $9000

2.$12000 new income (B+C) 3.Net Gain $6000

Company has

1.Made pmts of $12000 (B+C) 2.Gained benefits of $21000 (A+B+C) 3.Net profit of

B = $6000 C = $6000

Case 2

Company owns right to determine how much pollution they make

Begin with output that creates maximum benefits of $25,000

(A+B+C+D) and creating 100 units pollution

A = $9000 F=$3000 B = $6000 C = $6000 E = D=$4000

$4000

Community incurring costs of $17,000

Case 2 Company owns right,

Contd

Community wants to reduce pollution

Offers to make pmt of $200 unit to cutback output

Both parties benefit , thus , both agree

Community has 1.Eliminated $11,000 in pollution costs (D+E+F) 2.Made pmts of $8,000 (D+E) 3.Left with pollution costs of $6,000 4.Total Outlay

What has been achieved? For community

F=$3000 E = C = $6000 D=$4000

(to get rid of all pollution)

$4000

$14,000

(C+D+E)

Company has

1.Reduced output & pollution, giving up benefit of $4,000 (D) 2.Received pmts of $8,000 (D+E) 3.Retains existing benefit of $21,000 (A+B+C) 4.Existing benefit plus pmts = Total Benefit $29,000 (A+B+C+D+E)

What has been achieved? For the company

A = $9000 F=$3000 B = $6000 C = $6000 E =

$4000

D=$4000

Mergers
Mergers between firms internalize the

externality. A firm that consisted of both the steel firm & fishery would only care about maximizing the joint profits of the two firms, not eithers profits individually. Thus, it would take into account the effects of increased steel production on the fishery.
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Social Conventions
Certain social conventions can be viewed

as attempts to force people to account for the externalities they generate. Examples include conventions about not littering, not talking in a movie theatre, etc.

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Carbon footprint

What is it? Why do it? calculated? How is it

What is a Carbon Footprint?

What is a Carbon Footprint? The total set of greenhouse gas emissions caused directly and indirectly by an individual, organisation, event or product Carbon Trust
2007
Different types of carbon footprint:

1. Individual footprints 2.Organisational footprints 3. Event footprints 4.Product footprints 5.

57 Carbon Footprinting

What is a Carbon Footprint?

fro m i d u stry n fro m tra n sp o rt fro m b u i d i g s l n

fro m a g ri l re cu tu
58 Carbon Footprinting

What is a Carbon Footprint?

Metrics for expressing carbon footprints:

1.Tonnes of CO2 equivalent (CO2e)

2.Tonnes of carbon (approximately of mass of CO2 is carbon).

59

Carbon Footprinting

What is a Carbon Footprint?

What does CO2 equivalent (CO2e) mean?

There are six gases which are controlled under the Kyoto protocol:

Greenhouse Gas Carbon dioxide (CO2) Methane (CH4) Nitrous oxide (N2O) Sulphur Hexafluoride (SF6) Perfluorocarbons (PFCs) Hydrofluorocarbons (HFCs)
60 Carbon Footprinting

Global Warming Potential 1 23 296 22,200 4,800 9,200 12 12,000

What is a Carbon Footprint?

CO2e expresses the amount of greenhouse gas in terms of the amount of carbon dioxide (CO2) that would have the same global warming potential E.g. 1 kg of CH4 = 23 kg of CO2e CO2e is useful has it expresses the amount of greenhouse gas emitted in a single figure.

61 Carbon Footprinting

Why carry out a carbon footprint

Three main reasons for calculating a carbon

footprint:

62

1.To manage the footprint and reduce emissions over time. 2. 3.To off-set emissions (to go carbon neutral) 4. 5.To accurately report emissions to a third-party (e.g. the public.) 6. Carbon Footprinting

How to Calculate a Carbon Footprint.

How to calculate a carbon footprint:
The steps needed to work out a carbon footprint

are different depending on whether the subject is an organisation, product, or event etc.

More details on:

Organisational assessments

63

Product assessments
Carbon Footprinting

How to Calculate a Carbon Footprint.

How to calculate a carbon footprint

organisational carbon footprints (3 steps):

1.Define the boundaries (what you want to assess) 2.Collect the data 3.Calculate emissions and convert GHGs to CO2e 4.
64

Carbon Footprinting

How to Calculate a Carbon Footprint.

Step 1 define the boundaries:

Operational boundary:
o Scope One emissions (direct emissions from the organisations building, vehicles, plant etc) o Scope Two emissions (indirect emissions from electricity consumption or other energy generated by third parties) o Scope Three emissions (all other indirect emissions, e.g. business travel, deliveries, commuting, Carbon Footprinting waste).

65

Scope 1: Direct Emissions

Relatively easy:
Combustion Sources Site owned vehicles On site electrical

generation CFC and HFC losses from refrigeration equipment Sulfur hexafluoride losses from electrical equipment

Scope 2: Indirect Emissions Purchased Energy

Relatively easy:
Emissions from

consumption of purchased utilities:

Typically electricity Could be steam or

high temperature hot water Could be negative (ex: electricity from landfill gas)
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Scope 3: Other Indirect Emissions

Can be very difficult: Transportation of purchased material or goods Employee business travel Employee commuting impacts Outsourced work Emissions from finished products Transportation of waste Vegetation & Trees Scope 3 has various challenges Boundary issues Can be a magnitude higher than Scope 1 and 2 Costly value chain analysis
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Carbon Footprint 3 Scopes

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R e m e m b e r: th e re a re th re e l ve l ( sco p e s) e s to a g re e n h o u se g a s/ ca rb o n fo o tp ri t n ca l l ti n . cu a o

How to Calculate a Carbon Footprint. Step 2 Collect

the data:

Gas and electricity bills Company owned vehicles Other business travel Deliveries Weight of waste Refrigerant gas losses

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Carbon Footprinting

How to Calculate a Carbon Footprint.

Step 3 Calculate Emissions and

convert GHGs to CO2e:

Emissions factors convert units of energy or material flows into quantities of greenhouse gas.

E.g. One kWh of UK grid electricity produces 0.523 kg of CO2.

10,000 kWh per year = 5 tonnes CO2

Carbon Footprinting

71

How to Calculate a Carbon Footprint.

X
Grid/energy specific C O 2 em ission factor

=
X
C H4 global w arming potential

Kg C O 2

Electricity or other im ported energy consumption (kWh M J) ,

Grid/energy specific C H 4 em ission factor

= =

Kg C Oe 2

Grid/energy specific NO 2 em ission factor

N2O global w arm ing potential

Kg C Oe 2

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Carbon Footprinting

How to Calculate a Carbon Footprint.

Standards and protocols:

World Business Council for Sustainable Development/World Resources Institute (2004) - the Greenhouse Gas Protocol. ISO 14064 (2006) Specification with guidance at the organisation level for quantification and reporting of greenhouse gas emissions and removals. Defra 2007. Guidelines to Defras greenhouse gas conversion factors for company reporting. WBCSD website. www.ghgprotocol.org IPCC 2006. Guidelines for National Greenhouse Gas Inventories. Carbon Footprinting http://www.ipcc-nggip.iges.or.jp/public/2006gl/index.htm 73

Sources for emissions factors:

How to Calculate a Carbon Footprint.

Also available are online calculators:

Climate Care: http://www.climatecare.org/business/business-co2-ca

The CarbonNeutral Company: http://www.carbonneutral.com/sbc/index2.asp

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Carbon Footprinting

How to Calculate a Carbon Footprint.

How to calculate a

carbon footprint products:

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Carbon Footprinting

How to Calculate a Carbon Footprint.

Product assessments - 5 steps:

1.Analyse the materials and supply chain processes 2.Build a supply chain map for the product 3.Define the assessment boundaries 4.Collect data 5.Calculate emissions using appropriate factors 6.
76 Carbon Footprinting

How to Calculate a Carbon Footprint.

Materials Manufacture Distribution Consumption End of life Raw material 1 Transportation Fugitive emissions

Raw material 1

Transportation

Production facility

Transportation

Consumption

Waste

Raw material 1

Transportation

Raw material 1

Transportation

Waste and by products

Holding warehouses

Materials

Energy Consumption

Transportation

Waste

Fugitive emissions

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Carbon Footprinting

How to Calculate a Carbon Footprint.

Cradle to
78 Carbon Footprinting

How to Calculate a Carbon Footprint.

Standards and

guidance for product assessments:

Draft BSI Standard

Publicly Available Specification (2050)

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Carbon Footprinting www.carbon-label.co.uk

Carbon emissions trading

Often called Cap and Trade

A market uses economic incentives to reduce emissions of pollutants

Developed from the Coase Theorem

A central body creates a limited number of pollution permits that are distributed to firms

Any firm who have leftover permits can trade them on a market, hence promoting the most cost effective reduction of emissions

Sustainability and Sustainable Development

Sustainable Development

development which meets the needs of the present without compromising the ability of future generations to meet their own needs Brundtland Report, United Nations, 1987

" interdependent and m u tu a l y re i fo rci g p i l rs" l n n la o f su sta i a b l d e ve l p m e n t n e o a s e co n o m i d e ve l p m e n t, c o so ci l d e ve l p m e n t, a n d a o e n vi n m e n ta l p ro te cti n ro o U n i d N a ti n s W o rl te o d Sum m i 2005 t

Transformation to a Sustainable business model 5 - stage sustainability continuum

Bob Willard , The Sustainability Advantage

5-stage sustainability continuum (1 of 3)

In Stages 1 & 2 major difference is legal requirement

Stage 3 organization recognizes benefits to proactive eco-efficiency but not only less unsustainable total institutionalization of governance systems incomplete

5-stage sustainability continuum (2 of 3)

Stage 4 Massive shift of organizational mindset Requires: 1.Eco-efficient processes and products 2.Improved supply chain conditions 3.New eco-effective processes and products 4.Sustainable governance Stage 5 Same as Stage 4 but with added motivation In Stage 4 companies do the right thing to be successful businesses, in Stage 5 companies continue to do the right thing because they are successful businesses

5-stage sustainability continuum (3 of 3)

In Stage 4 companies do the right thing to be successful businesses, in Stage 5 companies continue to do the right thing because they are successful businesses

Only Stages 4 & 5 can be considered sustainable

Captain Planet Video

Topics covered in todays presentation

1.Introduction

Ecological

4.

Environment and Business International Summits on Ecological Issues and their outcomes

Internalization of Externalities
Pigovian Tax Coase Theorem Calculating the

2.Demand-Supply Model of Market Mechanism

Demand Supply

Amount of Negative Externalities Carbon Emissions Trading

Mechanism Types of Competition Market Failure

5. 6.

3.Externalities

Sustainability 5-Stage Transformation towards Sustainability

Definition and Types Tragedy of the

Commons

In the next presentation

1.Overview of Environment Laws

4.

2.Nature of Organizations Responses to Ecological Regulations 3.Developing a Sustainable Business Model

Mechanism (CDM)

USA, European Commission, Bangladesh

Interest Groups and their Influence on the Organization

Consumers Stakeholders Environmental

5.

Review of Case Studies

Pressure Groups

1.

Clean Development