Chapter 23

Economics, Environment, and Sustainability

How are economic systems related to the biosphere?

Ecological economists and most sustainability experts regard human economic systems as subsystems of the biosphere. An economic system is a social institution through which

goods and services are produces, disturbed, and consumed to satisfy peoples needs and wants. Natural capital includes

resources and services produced by the earths natural processes, which support all economies and all life. Human

capital includes peoples physical and mental talents that provide labor, organizational and management skills, and innovation. Manufactured capital refers to items, such as machinery, equipment, and factories made from natural

resources with the help of human resources.

Market economic systems depend on interactions between buyers and sellers. In a truly free market economic system,

all economic decisions are governed solely by the competitive interactions of supply, demand, and pride with little or no government control or interference. Economic

growth is an increase in a nations capacity to provide goods and services to people. economic development is the

improvement of human living standards through economic growth. During this century, many analysts call for us to put

much greater emphasis on environmentally sustainable economic development. Its goal is to use political and

economic systes to encourage environmentally beneficial and more sustainable forms of economic development,

and to discourage environmentally harmful and unsustainable forms of economic growth.

Governments intervene to help correct market failures. Markets usually work well in guiding the

efficient production and distribution of private goods. Economists disagree over the importance of natural capital and whether economic growth is sustainable.

Most of todays advanced industrialized countries have high-throughput economies, which attempt to boost

economic growth by increasing the flow of matter and energy resources extracted from the environment through their economic systems to produce goods

and services.

In general, the models of ecological economists are built on three major assumptions:

Resources are limited and we should not waste them, and there are no substitutes for most types of natural capital. In 2008, Achim

Steiner, head of the UN Environment Programme (UNEP), said, “I believe the 21st century will be dominated by the concept of

natural capital, just as the 20th century was dominated by financial capital.”

2. We should encourage environmentally beneficial and sustainable forms of economic development, and discourage

environmentally harmful and unsustainable forms of economic growth.

3. The harmful environmental and health effects of producing economic goods and services should be included in their market

prices (full-cost pricing), so that consumers will have more accurate information about the harmful environmental and health

effects of the goods and services they buy.

How can we put values on natural capital and control pollution and resource use?Environmental and ecological economists have developed various

tools for estimating the values of the earths natural capital. In 2009, a team of ecological researchers and environmental ministers began

making what is called the TEEB study of The Economics of Ecosystems and Biodiversity. The three goals of this study are to (1) integrate

economic and ecological knowledge in order to estimate the economic and ecological values of ecosystem services; (2) to evaluate

the costs and benefits of actions that could be taken to prevent the decline of these services; and (3) to develop toolkits to help local,

regional, and international policy makers promote more sustainable development that conserves ecosystems and biodiversity. To

determine the value of a resource, economists, businesses, and investors use a tool known as the discount rate, which is an estimate of a resources future economic value compared to its present value.

An important concept in environmental economics is that of optimum levels for pollution control and restore use. You

might think that the best solution for pollution is total cleanup. In fact, there are optimum levels for various kinds of pollution for two reasons. First, the cost of pollution control goes up for each additional unit of a pollutant removed from

the environment. The main reason for this is that it takes increasing amounts of energy to remove increasingly lower

concentrations of a pollutant from the air, water, or soil. Second, natural processes such as dilution and chemical

cycling can reduce the levels of some pollutants. This helps to make cleanup of a certain amount of pollution affordable, but

at some point the cost of additional pollution control is greater than the harmful costs of the pollution to society.

That point is the equilibrium point, or the optimum level for pollution cleanup.

Cost-benefit analysis is a useful but crude tool. Another widely used tool for making economic decisions about how to control pollution and manage resources is cost-

benefit analysis. To minimize possible abuses and errors, environmental economists advocate using the

following guidelines for a cost-benefit analysis:• Clearly state all assumptions used.

• Include estimates of the ecological services provided by the resources involved.

• Estimate short- and long-term benefits and costs for all affected population groups.

• Compare the costs and benefits of alternative courses of action.

How can we use economic tools to deal with environmental problems?

Most things cost a lot more than we might think. The market price, or direct price, that we pay for something does not include most of the

indirect, or external costs of harm to the environment and human health. Economic growth is usually measured by the percentage change in a

county’s gross domestic product (GPD): the annual market value of all goods and services produces by all firms and organizations, foreign and domestic, operating within a country. Changes in a country’s economic

growth per person are measured by per capita GDP: the GDP divided by a country’s total population at midyear. Environmental and ecological

economists and environmental scientists call for the development and widespread use of new indicators called environmental indicators.

Genuine progress indicator = GDP + benefits not included in –

market transactions

harmful environmental and social costs

Most environmental and ecological economists argue for a more environmentally honest market system. Full-cost pricing seems to

make a lot of sense, but why is it not used more widely? First, many producers of harmful and wasteful products would have to charge more

for them, and some would go out of business. Naturally, they oppose such pricing. Second, it is difficult to estimate many environmental and health costs. But ecological and environmental economists argue that

making the best possible estimates is far better than continuing with the current misleading and eventually unsustainable system, which

excludes such costs. Third, many environmentally harmful businesses have used their political and economic power to obtain environ-

mentally harmful government subsidies and tax breaks that help them make profits. Product eco-labeling and certification can encourage

companies to develop green products and services and can help consumers select more environmentally beneficial products and

services. Green washing: a deceptive practice that some businesses use to spin environmentally harmful products and services as green, clean,

or environmentally beneficial.

One way to encourage a shift to full-cost pricing and promote sustainability is to phase out environmentally harmful subsidies and tax breaks for

environmentally destructive activities such as burning fossil fuels, clear-cutting forests, overfishing, and over pumping aquifers. Environmental

taxes and fees, advantages: help bring about full-cost pricing, encourage business to develop environmentally beneficial technologies and goods to save money, easily administered by existing tax agencies, disadvantages: low-income groups are penalized unless safely nets are provided, hard to

determine optimal level for taxes and fees, governments may use money as general revenue instead of improving environmental quality and reducing taxes on income, payroll, and profits. Environmental regulation is a form of

government intervention in the marketplace that is widely used to help control or prevent pollution and to reduce resource waste and

environmental degradation. Tradable environmental permits advantages: flexible, easy to administer, encourage pollution prevention and waste

reduction, permit prices determined by market transactions, disadvantages: big pollutants and resource wasters can but their way out, may not reduce pollution at dirtiest plants, caps can be too high and not regularly reduce to promote progress, self-monitoring of emissions can

allow cheating.

How can reducing poverty help us to deal with environmental problems?The gap between the rich and the poor is getting

wider. According to the World Bank and the United Nations, 1.4 billion people-a number greater than the entire population of China and 4.5 times the size of

the U.S. population-struggle to survive on an income equivalent to less than $1.25 a day. Poverty has

numerous harmful health and environmental effects. Reducing poverty benefits individuals, economies,

and the environment, while empowering women and helping to slow population growth.

To assist in this process, governments, businesses, international lending agencies, and wealthy individuals in more-developed countries could also undertake these measures:

• Mount a massive global effort to combat malnutrition and the infectious diseases that kill millions of people prematurely.

• Provide universal primary school education for the world’s nearly 800 million illiterate adults (a number that is 2.5 times the size of the U.S. population). According

to Nobel Prize–winning economist Amartya Sen, “Illiteracy and innumeracy are a greater threat to humanity than terrorism.” Illiteracy can also foster terrorism and strife within countries by creating large numbers of unemployed individuals who have little

hope of improving their lives or those of their children.

• Provide assistance to stabilize population growth in less-developed countries as soon as possible, mostly by investing in family planning, reducing poverty, and elevating the

social and economic status of women.

• Focus on sharply reducing the total and per capita ecological footprints of their own countries as well as those of rapidly growing less-developed countries such

as China and India.

• Make large investments in small-scale infrastructure such as solar-cell power facilities in villages, as well as sustainable agriculture projects that would enable less-developed nations to work towards more energy-efficient and sustainable economies.

• Encourage lending agencies to make small loans to poor people who want to increase their income.

In fact, the average amount donated in most years has been 0.25% of national income. The United States—the world’s richest country—

gives only 0.16% of its national income to help poor countries and Japan, another wealthy

country, gives only 0.18%, compared with the 0.9% given by Sweden. For any country,

deciding whether or not to commit 0.7% of annual national income toward the Millennium

Development Goals is an ethical issue that requires individuals and nations to evaluate their

priorities.

How can we make the transition to more environmentally sustainable economies?

The law of conservation of matter and the two laws of thermodynamics tell us that eventually, this resource

consumption and waste will exceed the capacity of the environment to sufficiently renew those resources, to dilute and degrade waste matter, and to absorb waste heat. We are living unsustainably and depleting the

earth’s natural capital. No one knows how long we can continue on this path, but environmental alarm bells

are going off.

In 2001, environmental scientist Donella Meadows contrasted these two views as follows:

• The first commandment of economics is: Grow. Grow forever. The first commandment of the Earth is: Enough. Just so much and no more.

• Economics says: Compete. The Earth says: Compete, yes, but keep your competition in bounds. Don’t annihilate. Take only what you need. Leave your

competitor enough to live. Wherever possible, don’t compete, cooperate.

• Economics says: Use it up fast. Don’t bother with repair; the sooner something wears out, the sooner you’ll buy another. This makes the gross national

product go round. Throw things out when you get tired of them. Get the oil out of the ground and burn it now. The earth says: What’s the hurry? When something wears out,

don’t discard it, turn it into food for something else.

• Economics discounts the future. Take your profits from a resource such as a forest now. The earth says: Nonsense. Give to the future. Never take more in your

generation than you give back to the next.

• The economic rule is: Do whatever makes sense in monetary terms. The Earth says: Money measures nothing more than the relative power of some humans over other humans, and that power is puny compared with the power of the climate, the

oceans, the uncounted multitudes of one-celled organisms that created the atmosphere, that recycle the waste, and that have lasted for 3 billion years.

Economics: Reward (subsidize) environmentally sustainable economic development

Penalize (tax and do not subsidize) environmentally harmful economic growth

Shift taxes from wages and profits to pollution and waste

Use full-cost pricing Sell more services instead of more things Do not deplete or degrade natural capital Live off income from natural capital

Reduce poverty Use environmental indicators to measure progress Certify sustainable practices and products Use eco-labels on products

Resource Use and Pollution: Cut resource use and waste by reducing, reusing, and recycling

Improve energy efficiency

Rely more on renewable solar, wind and geothermal energy

Shift from a nonrenewable carbon-based (fossil fuel) economy to a non-carbon renewable energy economy

Ecology and Population: Mimic nature Preserve biodiversity Repair ecological damage Stabilize human population

The chapters three big ideas

■ Making a transition to more sustainable economies will require finding ways to estimate and include the harmful environmental and health costs of producing goods and

services in their market prices.

■ Making this economic transition will also mean phasing out environmentally harmful subsidies and tax breaks, and

replacing them with environmentally beneficial subsidies and tax breaks.

■ Other tools to use in this transition are to tax pollution and wastes instead of wages and profits, and to use most of the

revenues from these taxes to promote environmental sustainability and to reduce poverty.