The price of going green
Almost everybody seems to believe in sustainable development. That suggests many people do not understand what the phrase implies
IN THE green frenzy that is preceding next month’s Earth Summit, the phrase "sustainable development" keeps popping up in unexpected places.
Usually it is simply shorthand for anything environmental. But some see it as a better basis for taking environmental decisions than balancing costs and benefits.
Assessing environmental costs and benefits is not easy. There is no market in which the prices of environmental goods, such as clean water or beautiful views, can be readily discovered.
Instead, such prices have to be estimated in ways that are both difficult and controversial. The task is further complicated by the fact that the environment may deliver nasty and irreversible surprises.
Worse, the costs often arise far into the future.
William Cline, an American economist, has estimated for the OECD that the costs of global warming, one of the main subjects on the agenda at the Earth Summit, will be about one per cent of American GDP in 2050, but six per cent in 250 years’ time.
Benefits, too, may accrue over centuries: planting an oak tree today will give pleasure to people whose grandparents are not yet born.
Economics is badly equipped to deal with such time scales, partly because it relies on the concept of discounting. If interest rates are six per cent, 94 cents today (94.34, to be precise) is worth the same as a dollar next year: a deposit in a savings account would yield the difference.
An investment must therefore earn a return high enough to compensate the investor for the interest lost. That is bad news for many environmental investments.
Not only are the returns on growing oak trees hard to quantify; they take an inordinately long time to appear.
These limits to the application of conventional concepts of costs and benefits have led some people to argue that "sustainability" should be an overriding criterion for environmental decisions.
Richard Norgaard, an associate professor of energy and resources at the University of California at Berkeley, argues that conventional economics assumes that the present generation holds all the rights to environmental resources.
In fact, he says, the world’s future generations have rights, too.
He believes this generation should make moral decisions about the rights of future generations, then let the economy follow these.
The very concept of discounting, when applied to the environment, is based on the idea that all resources belong to those alive today.
Economists fail to distinguish between decisions about the efficient use of this generation’s stock of environmental resources and decisions about the stock of resources that should be passed on to future generations.
If the same criteria — and the same discount rates — are applied to both sets of decisions, then the prevailing rate of interest will appear to be "too high" to protect the environmental welfare of future generations.
The arithmetic that tells you whether to invest in building a factory cannot also tell you whether to conserve the ozone layer.
Environmental economists usually try to resolve this dilemma by suggesting that a different discount rate should be applied to environmental decisions.
An attempt to set an overriding criterion of "sustainability" is made by Michael Jacobs, a British environmental consultant, in a book published last year.
He argues that governments should set "sustainability targets" which define the extent to which key aspects of the environment are to be protected.
Jacobs argues that sustainability implies maintaining environmental resources at levels which at least prevent future catastrophe and at best offer future generations the option of as much "environmental consumption" as the present one.
Economic activity should then be kept within the limits of sustainability.
Both Norgaard and Jacobs see environmental issues as fundamentally different from most other decisions, on a par with, say, decisions about saving human lives rather than buying a pound of cheese.
But decisions about saving human lives are frequently taken on a balance of costs and benefits.
Besides, a problem with environmental decisions is that they are often inextricably bound up with pound-of-cheese sorts of questions.
When a government decides whether to build a road through a nice bit of habitat, it is inevitably removing a few environmental rights from future generations.
But it will be no more straightforward for a government to take the decision if it has to worry about how much unspoilt habitat future generations will want than if it has to try to put prices on the land as part of a cost-benefit exercise.
Many environmental decisions do, in effect, balance this generation’s right to health and wealth against the unknown preferences of the unborn.
Suppose a developing country must choose between allowing its people to buy refrigerators containing ozone-depleting chlorofluorocarbons (CFCs), and banning the sale of new fridges because no inexpensive CFC-free model is available.
One result may be that more people succumb to food poisoning. What price then the ozone layer?
It is unclear why the environment should impose a uniquely privileged constraint on economic activity.
Comparing costs and benefits may not be an entirely satisfactory approach to making environmental decisions, but it seems indispensable as the starting-point for any intelligent analysis. — The Economist
Source : Sunday Star, May 24, 1992
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