1. The Economics of Sustainability
An overview of the state of knowledge
Alexander Wood
Senior Director, Policy and Markets
Sustainable Prosperity
March 24, 2011

2. Sustainable Prosperity
• Green economy think tank based at the University of
Ottawa
• Focus is on market and policy innovation in pursuit of
stronger, greener, and more competitive Canadian
economy
• Market innovation is about talking to businesses and
markets about challenges and opportunities related
to sustainability, and role of environmental markets
• Policy innovation is about talking to governments
about positive relationship between good
environmental policy and good economy policy.
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3. Presentation
• Last 5 years has seen real explosion in research
around economics of sustainability
• That research comes from both traditional research
community (academic and public organizations), and
also business research community (mostly
investment research)
• Presentation will provide overview, based on three
broad themes: (ecosystems, climate, and water)
• Basic framing on these issues is around strategic risk
management, based on enhanced understanding of
costs and opportunities
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4. Why economics of
sustainability matters
• Sir Nicholas Stern famously referred to climate
change as “greatest market failure the world
has ever seen”
• Such a failure presents huge challenges to
governments in making policy, and to
businesses in adapting to that policy
• Important to remember that “greatest market
failure” can also represent greatest market
opportunity world has ever seen
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5. UNEP Green Economy Report
• Report was released in February 2011
• Starting point is “gross misallocation of capital”,
particularly over past 2 decades
• Report estimates that financing need for global
transition to a green economy is US$ 1.05-2.59
billion p.a. (10% of annual global investments, and
2% of global GDP)
• Ensuring investment takes place is about policy
• Points to positive impact of “decoupling” resource
use from wealth generation: EFFICIENCY
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6. OECD Green Growth Strategy
• Acknowledges growth as engine of human
progress, but recognizes impending limits
• Challenge is to grow without paying
environmental penalty
• Some of this is about definitions (i.e. GDP)
• But mostly about dramatically increased
productivity of natural resource use
• Again, focus on policy as vehicle for driving
enhanced value of natural resources
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7. Sustainable Prosperity
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8. Climate Change
• Stern Review of 2006 is landmark document.
Reviewed economic theory and practice on
global climate change.
• Concluded that cost of mitigating climate
change would total 2% of global GDP, while
cost of not addressing it would be as high as
20% of global GDP
• Still considered the seminal analysis of the
economics of climate change
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9. Climate Change
• Stern report was criticized by economists,
though, over rate of discounting used, which
was not in line with standard practice
• Debate turns on whether one assumes that
even with climate change, we will continue to
see BaU growth rates. If so, then it is cheaper
for future economy to address climate
because it will be a larger economy.
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10. Climate Change
• More recent debate in economics research,
between:
– Traditionalists, who believe analysis of climate change
economics should assume no major climate disruptions
and no major impact on global economy
– Liberals, who believe that relying on GDP growth as arbiter
of climate policy is insufficient, and that risk management
imperative dictates aggressive current action
– Reformists, who believe science points to much higher
social costs of climate, much higher risks of inaction, and
much lower costs of climate mitigation
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11. Climate Change
Low carbon growth: four roads to 2020 - estimated market size in USDbn
2009e 2020e
Base Backlash Copenhagen Green growth Conviction
Low-carbon energy production 422 774 1,025 1,297 1,043
Energy efficiency and energy management 317 722 1,003 1,410 1,194
Total 740 1,496 2,028 2,707 2,238
CAGR (2009-2020e) 6.6% 9.6% 12.5% 10.6%
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12. Climate Change
Exhibit 6: For the market as a whole, 15% of total cash flow could be Exhibit 7: … with a more significant impact on the most carbon intensive
transferred from high to low emission companies by US$60/t carbon prices industries
Estimated share of total cash flow accruing to companies with higher/lower Estimated share of total cash flow accruing to companies with higher/lower
carbon efficiency than sector average, total market aggregate carbon efficiency than sector average, most carbon intensive industries
70% 70%
65% 65%
60% 60%
% of total cash flow
% of total cash flow
55% 55%
50% 50%
45% 45%
40% 40%
35% 35%
30% 30%
0 10 20 30 40 50 60 0 10 20 30 40 50 60
Cos t of direct carbon em is s ions as s um ed (US$/t) Cos t of direct carbon em is s ions as s um ed (US$/t)
Leas t carbon efficient Mos t carbon efficient Leas t carbon efficient Mos t carbon efficient
Source: Goldman Sachs Research estimates. Source: Goldman Sachs Research estimates.
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13. Ecosystems and Biodiversity
• Major UN report on “the Economics of
Ecosystems and Biodiversity” (TEEB) was
released last year
• First systematic efforts to understand the
contribution made to the global economy by
our planet’s ecosystems and biodiversity
• Loss of ecosystem services by 2050 (at current
degradation rates) is estimated at $2-$4.5
trillion p.a. (i.e 7% of global GDP)
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14. Ecosystems and Biodiversity
Table 1: Relationship between biodiversity, ecosystems and ecosystem services
Biodiversity Ecosystem goods and Economic values (examples)
services (examples)
Ecosystems • Recreation Avoiding GHG emissions by conserving forests:
(variety & • Water regulation US$ 3.7 trillion (NPV)22
extent/area) • Carbon storage
Species • Food, fibre, fuel Contribution of insect pollinators to agricultural
(diversity & • Design inspiration output: ~US$ 190 billion/year23
abundance) • Pollination
Genes • Medicinal discovery 25-50% of the US$ 640 billion pharmaceutical
(variability & • Disease resistance market is derived from genetic resources24
population) • Adaptive capacity
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15. Ecosystems and Biodiversity
Bio-carbon
Recycling, CO2
Pollution offsets &
Tradable Emissions
& waste REDD
permits
Sustainable Biodiversity
Marine Habitat &
offsets
fisheries
footprint disturbance &
conservation
(e.g. “rigs
to reefs”) conversion
banking
Water
Payments for
use
watershed
protection

16. Water
Canada Global
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17. Water
• Basic economic issue related to water, as with
climate (energy) and ecosystems/biodiversity
is how to manage growing supply scarcity
against growing demand
• McKinsey report estimates that 60% of water
demand in 2030 will have to be met by
increase in productivity of supply
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18. Water
• Economic research suggests that best driver of
productivity is full cost pricing of resource.
• Proof point is in comparing water use in
relation to water pricing in similar economies:
– Canada: average water use per day per person is
325l, cost for that use is $0.25/0.30
– UK: average water use is about 140l, cost is $1.30
– Germany: average water use is 120l, cost is about
$2.20
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19. Key Points
• Economics of sustainability have advanced greatly in
past 5 years
• Contribution to research/analysis increasingly
coming from private sector
• Focus is on understanding economic risks, but also
economic opportunities
• Point of convergence is around need for dramatic
improvements in resource efficiency as path to green
growth/green economy, and of role of policy
(particularly pricing) in getting us there
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20. Alexander Wood
Senior Director,
Markets and Policy
Sustainable Prosperity
613.878.7189
awood@sustainableprosperity.ca
www.sustainableprosperity.ca
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