Welcome to the video on the institutional economics of nature. I will discuss environmental agreements, self-regulation by firms, and institutions that help behavioral change by individuals and households. This theory, therefore, is complimentary to the social economic theory as presented in a previous video. Institutional economics can help to achieve the policy goals of ecological economics. So you may even learn how to change your own economic behavior in favor of less material use and less damage to nature. When formal institutions mediate nature and the economy this involves agreements. We distinguish between international and national agreements. The first international agreement was the Kyoto Protocol, which ran between 2005 and 2012, and aimed to reduce carbon emissions by 5% between 2012 and the starting level 1990. It failed due to the non-participation of the world's largest polluters, the United States and China. In 2015, a new international climate agreement was reached in Paris, and this time with the participation of all key countries, including China and the US. All countries feel the urgency to cooperate in fighting climate change. Now the target is set at keeping average global temperature increase below 2 degrees Celsius. And preferably below one and a half degrees. National level agreements are many-fold. Partly deriving from the ratification of international agreements. And partly reached through a national level consensus, which is related to national level environmental issues. For example, in an the industry and the environmental movement, have reached an agreement on energy saving, and a shift to wind energy, with huge wind turbines on land, and at the North Sea. When I take a walk along the beach, it's in where I live, I can see the tops of the blades of wind turbines, that are placed just behind the horizon. At night, I can see the red top lights flickering at the horizon. And I feel satisfied that the electricity that I use at home is produced by these windmills. But my country produces only 5% of all energy through wind or solar energy, which is much less than neighboring Germany, where it's about a quarter. In Germany, the shift to renewable energy has been much bigger and is referred to as the. Why is it bigger and faster shift to renewable energy so urgent for a country like the Netherlands? Because the Dutch have a serious environmental problem. Being a country that is 50% below sea level and because of recent earthquakes in the north. That is why recently another agreement was made. Namely to reduce the gas extraction in the northern province of Groningen. This was necessary after protests by the inhabitants after a series of earthquakes that shook their houses, and even destroyed some homes. The picture show how that needs support to prevent collapse with the next earthquake. The second type of institution is informal and and refers to self regulation by industry. Interestingly, firms only have a short term financial benefit from pollution, but it's externalizing waste cost. But in the long term, its in firms interest to reduce material input, and to become less dependent on volatile world market prices of fossil fuels such as oil and gas. Firms also fail competitive pressure from consumers to keep their brand image clean. And they experience pressure from investors. who like to see not only short term gains. but also sustainability of their investments. An example of competitive pressure by investors is the Dow Jones Sustainability Index. Which features only the very best performing firms per sector in terms of energy use and other environmental indicators. When in 2015 a fraud case, a diesel motor emission testing of Volkswagen was disclosed, this company was dropped from the Dow Jones Sustainability Index in favor of another car producer, BMW. The third type of institutional mediation between nature and the economy is through behavioral change. A recent and quite successful form of behavioral change is through nudging. Which is the framing of choice situations towards a desirable option. So not through taxes or regulation, but voluntarily. Let me explain this with three examples. First changing the default option, for example changing the default of a free plastic shopping bag to a standard payment of ten euro cents per bag. This induces consumers to bring their own reusable shopping bag with them, and it thereby reduces plastic waste. A second type of nudge is the stimulus of a social norm. For example, by providing information about average energy use per neighborhood, which many people will take as the standard they would also like to achieve. Third type of nudging is personalized feedback, an example is smart energy meters with real time feedback on energy use. Many households in the Netherlands have already save hundreds of Euros per year with this device. Largely, because they like to beat the previous record of low energy use or to beat their neighbors in energy saving. It feels like a game. Many people love to play games, in particular, when it also helps to save money and the environment. Next to institutional mediation between nature and economy, there are also cases of institutional failure. A special case of institutional failure, in relation to natural resources is called Dutch Disease. It refers to the negative economic consequences of the export of natural resources. It is called Dutch Disease by economists because the Netherlands was the first country that clearly showed these negative economic consequences. The first consequence of natural resource exports was currency appreciation due to the huge sales of gas to foreign buyers. This made the Dutch guilder expensive, and hence reduced the exports for all other Dutch products such as dairy products, and cars, and TV sets. Second, fiscal instability because the gas price is linked to the world market oil price. So, the government budget increases in times of high oil prices and it decreases in times of low oil prices, even if the level of gas exports remains exactly the same. So in some years the government budget certainly went down or certainly went up simply because the world market price for oil changed. Now more recently, several resource-rich developing countries also show signs of the Dutch disease, but with additional negative effect. That is, why now a wider term is in use. The natural resource curse. This adds to the other effects the risk of rent-seeking, corruption and social conflict over the resource revenues. Multinational firms sometimes bribe government officials to get a mining license. And marginal social groups often bear the costs of pollution, or even relocation of their villages. The natural resource curse is particularly strong when the natural resources is located in areas in already disadvantaged area for minority groups, such as the case for countries like Pakistan, Congo, Nigeria, Indonesia and Bolivia to mention just a few examples. Luckily, the Norwegians have found a solution to the Dutch disease. As soon as they discovered oil, like the Dutch discovered gas, they did set up a sovereign wealth fund. This is a public investment fund where the natural resource revenues are kept and used for investment to earn a return on investment. The government budget is not allowed to use this money. It cannot even access it because the fund is managed by an independent agency. The government only receives an annual amount from the fund's profits, but not from the fund, itself. And the annual oil revenue additions to the fund. This leaves a large fund available for future needs for example to counter the cost of an aging society, increasing house care cost, and a shift to renewable energy sources to counter climate change. The Norwegians therefore found a cure to the Dutch disease. But it requires that resources are meant to public good, under state control. And with strict rules for the use of its revenues by the government through an independent agency. It's like you have a huge savings account and only spend what you earn from the annual interest leaving the amount of savings itself untouched. This concludes the video on the institutional economics of nature. The next video will present a post Keynesian perspective, zoom in on the key Keynesian concept, namely, uncertainty. This time, not only uncertainty generated by markets, but also uncertainty of nature, and it effects on the economy. Curious, watch the next video.
