PROMOTING ENVIRONMENTALLYSOUND ECONOMIC PROGRESS:

WHAT THE NORTH CAN DO

Robert Repetto

\ V O R L [ ) R L S O U R C } S I N S

PROMOTING ENVIRONMENTALLYSOUND ECONOMIC PROGRESS:What the North Can Do

Robert Repetto

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W O R L D R E S O U R C E S I N S T I T U T E

April 1990

Kathleen CourrierPublications Director

Brooks ClappMarketing Manager

Hyacinth BillingsProduction Manager

Each World Resources Institute Report represents a timely, scientific treatment of a subject of public concern. WRI takesresponsibility for choosing the study topics and guaranteeing its authors and researchers freedom of inquiry. It also solicits andresponds to the guidance of advisory panels and expert reviewers. Unless otherwise stated, however, all the interpretation andfindings set forth in WRI publications are those of the authors.

Copyright © 1990 World Resources Institute. All rights reserved.ISBN O-915825-57-OLibrary of Congress Catalog Card No. 90-070576

CONTENTS

PAGE

ACKNOWLEDGMENTS iii

FOREWORD v

I. ECOLOGY AND THE GLOBAL ECONOMY 1

II. MAKING ECONOMIC ACCOUNTS REFLECT ENVIRONMENTAL REALITIES 3

III. INTEGRATING ENVIRONMENTAL AND ECONOMIC OBJECTIVES 5

IV. STEPS TOWARD INTEGRATING ECONOMICS AND ECOLOGY 7

CONCLUSIONS 21

ACKNOWLEDGMENTS

We wish to thank Robert Stavins and EdwardSchuh, who provided background papers for theJanuary 1990 "Economics of Sustainable Develop-ment" workshop in Washington, D.C., sponsored bythe UN Economic Commission for Europe and or-ganized by the U.S. Environmental Protection Agen-cy. We also appreciate the invaluable insights pro-vided by delegates to that workshop and to theFebruary 1990 InterAction Council's meeting inNoordwijk, the Netherlands.

We also wish to acknowledge the useful contri-butions of Per Schreiner, Donald "Skip" Luken, Fran

Spivey-Weber, and Dr. Zbigniew Bochniarz in draw-ing together final recommendations from theworkshop.

Among WRI colleagues, John Pezzey deservesspecial mention for his help in drafting the UNECE/USEPA overview paper and Chuck Lee for his edi-torial assistance. Thanks are also due to Dan Tun-stall, Mark Trexler, Bill Moomaw, Irving Mintzer,Kathleen Courrier, and Gus Speth.

R.R.

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FOREWORD

As we enter the last decade of the twentieth cen-tury, the pursuit of prosperity is influenced as neverbefore by environmental realities. What is new is thegrowing realization that political and economicdecisions—once made with an eye to particularregional or business impacts—must now be madewith the earth in mind. The false dichotomy be-tween commerce and nature is giving way as peoplecome to see that development cannot be economi-cally sound over the long term unless it is environ-mentally sound.

Global environmental deterioration—a peri-pheral issue during most of the 1980s—is moving tothe forefront of the political agenda of the industrialNorth. At the first "green summit" in Paris in July1989, leaders of the G-7 industrial nations identifiedglobal environmental challenges and promised ac-tion. They had little choice in taking on these issues.

Consider this century's explosive growth: worldpopulation has tripled, the global economy hasgrown twentyfold, and fossil fuel use tenfold. It tookall of human history for the world economy to reach$600 billion in 1900, but it now grows by more thanthis sum every two years. Today's $ 15 trillion econ-omy could multiply fivefold by the middle of thenext century. The population curve is equally daunt-ing. World population doubled from 2.5 to 5 billionbetween 1950 and 1987 and was until recently ex-pected to stabilize at just over 10 billion near the endof the next century. But new projections from theUnited Nations indicate that population may notstabilize until it hits 14 billion early in the twenty-second century.

The basic reality is that the scale of human ac-tivity has grown so large that it is disrupting theplanetary systems that support life. The Antarcticozone hole keeps growing, and one may be appear-ing over the North Pole as well. Rising atmosphericconcentrations of greenhouse gases threaten to dis-rupt weather patterns and raise sea levels the worldaround. Prospects for the developing world dim inthe face of accelerating decline in its natural re-source base. Deforestation claims over an acre a sec-ond in the tropics. Every hour another four speciesdie out.The industrial North bears much responsibili-ty for solving these problems, not only because it islargely to blame (for the current state of the atmo-sphere in particular), but also because it has the

financial and technological wherewithal to lead theway toward a sustainable future.

Many global environmental initiatives are al-ready afoot under the aegis of the United Nationsand others: the Intergovernmental Panel on ClimateChange, the Vienna Convention on the Protection ofthe Ozone Layer, the Economic Commission for Eu-rope/United Nations conference—Action for a Com-mon Future—in Norway in May 1990, and the up-coming UN Conference on Environment andDevelopment in Brazil in June 1992.

Robert Repetto, director of WRI's economic re-search program, advances this important agenda inPromoting Environmentally Sound Economic Prog-ress: What the North Can Do. Drawn from papersdelivered at preparatory workshops for the 1990conference in Bergen, Norway, his report argues thatindustrial countries can promote sustainable eco-nomic progress without sacrificing living standards,and indeed, that such progress can raise productivityand strengthen the global economy.

Dr. Repetto suggests actions that the North musttake if the world economy is to develop and yetavoid the environmental degradation that wouldundermine living standards. Among his prescriptionsare reconfiguring national income accounting to re-flect natural resource losses; dismantling farm poli-cies that disrupt trade and penalize developing coun-try farmers; revamping economic policies todiscourage pollution and waste; enacting fossil fueltaxes to encourage energy efficiency and technologydevelopment; and providing developing countrieswith debt relief and a more supportive policy frame-work for international trade, investment and tech-nology transfer, and finance. As he concludes, "Thechallenge is not so much to discover what must bedone to ensure sustainability. The challenge is to dis-cover how to do it."

The policy recommendations spelled out in thisreport complement those of Dr. Repetto's recentWRI studies Wasting Assets: Natural Resources inthe National Income Accounts and Natural Endow-ments: Financing Resource Conservation for Devel-opment. This report also extends the findings inWRI's recent studies on reforming economic incen-tives: The Forest for the Trees? Government Policiesand the Misuse of Forest Resources; Paying thePrice: Pesticide Subsidies in Developing Countries;

Skimming the Water: Rent-Seeking and the Perfor-mance of Public Irrigation Systems; and Money toBurn? The High Costs of Energy Subsidies. In theseand related studies, WRI has sought to discover andpromote policy paths that will lead to more sustain-able development worldwide.

This study was sponsored by the InterActionCouncil, the Economic Commission for Europe(ECE), and Action for a Common Future. The Inter-national Environmental Bureau, Inc., providedfinancial support for the background paper pre-sented at the ECE January 1990 workshop organizedby the Office of International Activities of the U.S.

Environmental Protection Agency. WRI's overalleconomic research program is currently receivingsupport from the Ford Foundation, the Joyce Foun-dation, the John D. and Catherine T. MacArthurFoundation, the Rockefeller Foundation, the WallaceGenetic Foundation, Inc., the Netherlands Ministryfor Development Cooperation, and the U.S. Agencyfor International Development. To all these institu-tions, we express our deep appreciation.

James Gustave SpethPresidentWorld Resources Institute

VI

I. ECOLOGY AND THE GLOBAL ECONOMY

Can the world economy continue to expandwithout environmental repercussions that increas-ingly undermine living standards? The question isunavoidable because all economic activity dependson natural resources and inherently limited biologi-cal and chemical processes. Biological productivityand living organisms' resistance to climatic varia-tions and other stresses are limited. The capacities ofair, water, and soils to assimilate wastes are alsolimited. Overstepping these limits alters naturalsystems.

Since World War II, population has more thandoubled and world economic activity has expandedroughly fivefold. Extensive environmental changeshave resulted. In industrial countries, emissions haveconcentrated in the atmosphere, in surface andunderground waters, and in land-based disposalsites. In developing countries, along with urban pol-lution, agricultural expansion and tree felling far be-yond regeneration rates have greatly reduced naturalforest cover and increased soil erosion.

Environmental impacts have become global.Greenhouse gases, such as carbon dioxide, methane,and chlorofluorocarbons, are building up in the at-mosphere. Fossil fuel combustion and deforestationhave increased CO2 emissions to levels substantiallyabove natural rates of withdrawal. Higher CO2 con-centrations in the air affect the heat balance of theearth and, consequently, surface temperatures,ocean and air currents, precipitation, and evapora-tion. Emissions of greenhouse gases can affect cli-mate continents away and generations into the fu-ture. These effects are complex and not wellunderstood, but they are highly non-linear and irre-versible and may be compounded or mitigated bysecond and third-order repercussions. Other en-vironmental changes of global scope include the ac-celerating loss of genetic diversity due to tropicaldeforestation and loss of other species-rich habitats,the pollution of oceans, and the depletion ofstratospheric ozone.

Such changes in natural systems have profoundeconomic significance. Direct economic losses aresuffered when supplies of minerals, forest products,and other natural resources commodities are de-pleted. Renewable resources, such as forests, alsoyield valuable economic services—water and soilretention, for example. Losing them raises economic

costs associated with flooding, sedimentation, andthe like. The "services" that greenhouse gases pro-vide in mitigating temperature extremes are so sub-stantial that should concentrations rise or fall be-yond a limited range, human life on earth would beimpossible.

itNatural systems providedemonstrably large eco-nomic benefits by enhanc-ing the quality of life,though such values are notcaptured in standard eco-nomic accounts.

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Less obviously, natural systems provide demon-strably large economic benefits in themselves by en-hancing the quality of life, though such values arenot captured in standard economic accounts. One isnot used to thinking of a favorable climate as an eco-nomic good, though people will incur substantialmigration costs and accept lower monetary earningsto live in well-endowed regions. Adverse climatechanges would impose direct economic losses byreducing the quality of life, as well as extra outlayson heating or cooling to mitigate the loss, and a vari-ety of other effects on productivity.

Because of these economic losses, it is a seriousconcern that, as economic activity depletes naturalresources and disturbs natural systems, net economicwelfare might fall. Those who use up the resourcesmight benefit, but at the expense of others who suf-fer the environmental impacts and of future genera-tions for whom the resources and their serviceswould be unavailable. Current economic welfarewould then be obtained at the expense of futurereductions in living standards.

The challenge of sustainable economic progressis leaving natural resources and systems sufficientlyintact to permit continuing gains in economic wel-fare into the foreseeable future. In this spirit, theBrundtland Commission's definition of sustainabilityis development that "meets the needs of the present

without compromising the ability of the future tomeet its own needs."

The challenge of sustain-able economic progress isleaving natural resourcesand systems sufficientlyintact to permit continuinggains in economic welfareinto the foreseeablefuture.

99Whether sustainable progress is possible globally

is by no means obvious. Four decades of post-WWIIeconomic development have left at least a billionpeople in dire poverty and most of the developingand the socialist countries in economic difficulty. Ithas created enormous economic disparities between

rich and poor (such that the average American usesas much energy as 20 Indians) without abating in theslightest the pressures for further economic growthin the most affluent countries. These currently re-ceive net resource outflows from the less developedof $50 billion per year—the amount of Egypt's totalgross national product. Arrested economic develop-ment has delayed the demographic transition somuch that demographers now project world popula-tion ultimately stabilizing at 12 to 14 billion. Mini-mal forecasts of economic expansion likely to occurover the next 50 years imply a further fivefold ex-pansion of the world's economy.

In view of the disruptions already occurring innatural systems, such an attempted expansion, ab-sent a markedly different mode of economic activi-ty, will result in the substantial further accumulationof greenhouse gases, the deterioration of air andwater quality over large regions, the accumulation ofindustrial and household wastes, the depletion ofnatural resource stocks, and the accelerated loss ofbiological diversity.

II. MAKING ECONOMIC ACCOUNTS REFLECTENVIRONMENTAL REALITIES

The economic significance of natural resourcesis not adequately reflected in economic accountingsystems. The non-marketed, unpriced services thatnatural resources provide are typically not valued,while the expenditures forced on society by the lossof those services are. As a result, resource degrada-tion often appears to raise, rather than lower, eco-nomic welfare. For example, should toxic substancesleak from a landfill to pollute waters and soils, mea-sured income does not fall, despite possibly severedegradation of natural resources. If the governmentspends millions to clean up the mess, income risesbecause such expenditures are regarded as purchasesof final goods and services. But, if industry under-takes the clean-up, even if under court orders, theexpenditures are treated as intermediate costs andleave income unchanged. Finally, if the site is notcleaned up and nearby households suffer medical ex-penses or must purchase costly bottled water, mea-sured income again rises because household outlaysare considered final consumption in the national ac-counts. Inevitably, decisions based on such one-sided accounts are biased against resourceconservation.

To make matters worse, natural resources arenot consistently treated in economic accounting sys-tems as economic assets. Like other forms of capital,natural resources provide a flow of economicbenefits over time. Nonetheless, activities that de-plete or degrade them are represented as generatingincome, rather than as reducing wealth. A countrycould sell off its timber and minerals, erode its soils,pollute its aquifers, deplete its fisheries, and the na-tional accounts would treat all the proceeds as cur-rent income. Mistaking a decline in wealth for a risein income is a confusion likely to end in bankruptcy.

A widely accepted definition of income, fullyconsistent with the Brundtland Commission's con-cept of sustainable development, is the maximumamount that can be consumed in the current periodwithout reducing potential future consumption. Inboth business and national accounting, a capital con-sumption allowance representing the depreciation ofthe capital stock during the year is subtracted fromnet revenues in calculating annual income. Thisdepreciation allowance reflects the amount neededto keep the capital stock intact. But depreciation isnarrowly applied only to buildings and equipment.

Failing to allow for depreciation of natural resourcestocks when they are depleted or degraded disguisesthe sacrifice of future consumption, overstates in-come and capital formation, and justifies policiesthat waste natural resources in the name of econom-ic growth.

kk

Mistaking a decline inwealth for a rise in incomeis a confusion likely to endin bankruptcy.

An important operational step toward integrat-ing ecology and economics is to measure economicprogress properly. Current economic accountingsystems, which were developed when natural re-source limitations seemed less pressing, should be re-vised. Two changes are of high priority:

First, natural resources for which economicvalues can be established should be treated as tangi-ble capital in economic accounting frameworks. Ad-ditions to stocks should be treated as capital forma-tion, while depletion and degradation should betreated as capital consumption.

Second, pollution control and other identifiable"defensive expenditures" undertaken to prevent theloss of environmental services should be treated notas final expenditures but as intermediate costs (i.e.,the cost of generating a given level of goods and ser-vices) whether undertaken by government, house-holds, or enterprises.

There is extensive academic research literatureon these revisions, and several OECD governmentsare making statistical estimates. A few developing-country governments also have initiated resource ac-counts. Such international organizations as theOECD, UNEP, and the World Bank, have sponsoredconferences and research.

The UN Statistical Commission has a key role toplay since most market economies follow the UNSystem of National Accounts (SNA). In the currentround of revisions to the SNA, which take place onlyevery twenty years and will be completed in 1991,the Commission considered such changes but has

tentatively decided against changes in the "core" ac-counts. As an alternative, the UN Statistical Office isdrafting methodological guidelines for nationalstatistical offices that wish to construct satellite re-source and environmental accounts to supplementthe "core" or basic accounts.

Faster reform is warranted. Few national statisti-cal offices actually have the manpower or money towork on satellite accounts. In those few that do,politicians and the public pay little attention to theresults, focussing instead on the more familiar mea-sures of GNP and national income. Because the eco-nomic accounts are the foundation of planning, anal-ysis, evaluation, and decision making:

1) The UN Statistical Commission should establish

a work program aimed at incorporating these re-source and environmental accounting revisionsinto the core system of national accounts withinthree to five years.

2) More member governments, especially withinthe OECD, should adopt such changes in theirnational accounts.

3) The World Bank and other development agen-cies should increase their assistance to develop-ing countries in initiating resource accounting.

No other change could so powerfully demonstratethat steps to protect the environment are in coun-tries' own economic interests.

III. INTEGRATING ENVIRONMENTAL ANDECONOMIC OBJECTIVES

PROMOTING "ENVIRONMENTALPRODUCTIVITY"

Most postwar economic growth has resulted notfrom capital and labor accumulation, but from im-provements in the quality of inputs and the efficien-cy with which they have been used. Productivitygains have been driven by vigorous innovation andrapid diffusion. However, productivity measuresshould include not just output per worker and perunit of capital. Output per unit of natural resourcesused and per unit of wastes discharged are impor-tant, neglected dimensions of productivity. The rateof improvement in this environmental dimension ofproductivity largely determines whether economicgrowth can be sustained without ecological damage.Governments should devote the same attention to"environmental" productivity as to conventional in-dicators of economic efficiency.

Technical innovations—energy-saving process-es, for example—might raise both environmentaland capital productivity. However, there could alsobe trade-offs. Should firms save capital by not install-ing pollution control equipment, the apparent gainin capital efficiency, at the expense of heavier en-vironmental damage, could mask overall productivi-ty losses.

Such trade-offs are probably important. Profit-oriented private decisions largely determine the di-rection of technological change. Although govern-ment R&D policies play a role, market incentivesdominate the search for and adoption of new tech-nologies. Since waste discharges are usually free,except for regulatory limits, there are few market in-centives to seek and adopt waste-reducing technolo-gies unless environmental efficiency gains are inci-dental to other cost savings, such as reduced rawmaterial costs. On the contrary, there are consider-able incentives to reduce costs at the expense ofgreater environmental damages not borne by thepolluter.

Compounding this effect, government marketinterventions often artificially reduce the costs ofnatural resource commodities to users or raise theprofits of suppliers. These interventions reduce in-centives to adopt resource-saving technologies andincrease environmental impacts from primary com-modity production. Examples are obvious: many

governments heavily subsidize irrigation water, de-stroying farmers' incentives to adopt even simpleand highly economic technologies to conservewater. Overall water use efficiency is drasticallyreduced, and rivers, wetlands, groundwater, andsoils also suffer significant loss of productivity,though few such losses impinge directly on the in-dividual farmer. Resource subsidies create perverseincentives.

ftOutput per unit of naturalresources used and perunit of wastes dischargedare important, neglecteddimensions of productivity.

Reducing "policy failures" in government poli-cies toward natural resource commodity markets isimportant in both industrial and developing coun-tries, whether capitalist or socialist. Tax, credit, pric-ing, and other government policies towards naturalresource industries often discourage resource con-servation, while reducing economic productivity, in-creasing fiscal burdens on government, and reinforc-ing inequities. Energy, water, forest, industrial, andagricultural sectors are all greatly affected by theseinterventions. Producer incentives are often biasedtoward depletion or degradation of the resourcebase, and potentially more efficient production sys-tems are discouraged.

Economic instruments can also correct incen-tives by making waste generators pay the economiccosts of disrupting natural systems. Emissionscharges, marketable emissions permits, non-compliance charges linked to emissions standards,deposit and return systems, and assignment of legalliability for pollution damages are among the poli-cies that can discourage pollution. They decentralizetechnological choices about environmental protec-tion with the enterprise manager, who generallyknows best which technologies fit and perform wellin his situation, and confront managers with the fullincremental costs both of abating and of not abatingtheir emissions. For these reasons, economic instru-

ments are generally more effective in promoting ap-propriate technological innovation than "command-and-control" regulations, and the former lead tomore efficient environmental control.

These economic instruments have performed asexpected when tried. Yet, few governments haveused economic instruments to deal with "marketfailures" to the extent the potential warrants. Thecosts of disturbing natural systems must be incorpo-rated much more systematically into the profit-losscalculus of enterprises and households if environ-mental productivity is to rise sufficiently to permitsustainable development.

Few governments haveused economic instru-ments to deal with "mar-ket failures" to the extentthe potential warrants.

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PROMOTING CONCERN FOR THEFUTURE

At long-term interest rates of about 10 percent,an ecological loss of a million dollars expected tohappen in a hundred years has a present cost of $75.For consumers borrowing at 18 percent per year ontheir credit cards, it would have a present cost of$0.06. The implication, obviously irrational, is thatglobal climate change or loss of biological diversity,which risk potentially enormous losses over the nextcentury, can be virtually ignored in current govern-ment and private decisions that will significantly af-fect those future developments.

Future costs and benefits, if discounted at all inpublic investment decisions, should reflect society'svaluation of future welfare. Nonetheless, many na-tional governmental and inter-governmental agen-cies continue to use private market interest rates forinvestment analysis. The World Bank and IDA, forexample, screen projects with a 10-percent rate ofreturn. The Inter-American Development Bank usesa 12-percent discount rate. Instead, project benefitsand costs should be evaluated using a much lowerrisk and inflation-free discount rate—say, 2 per-cent—and investments should then be screened byrequiring a high ratio of discounted benefits to (dis-counted) costs. Many scientists would argue thateven a 2-percent discount rate, which implies thatcosts incurred 35 years in the future are only half asimportant as those incurred now, is too myopic, buta 2-percent rate puts 1900 times more weight onconsequences a hundred years hence than does a10-percent rate. Public and international agencies,including particularly the multilateral developmentbanks, should be directed by their governing bodiesto adopt this alternative approach to investmentevaluation.

Public policy can manifest concern for futurewelfare most powerfully by encouraging greater pri-vate savings and investment. High private market in-terest rates reflect heavy competition among publicand private borrowers for limited savings. U.S. fiscalpolicy, perhaps more than that of most industrialcountries, penalizes savings and rewards borrowing.Taxation of personal dividend income as well as cor-porate profits, capital gains, and legacies effectivelysubjects savings to multiple taxation. Simultaneous-ly, business and personal borrowing costs are low-ered by the deductibility of most interest paymentsfrom taxable income. This fiscal orientation, to-gether with heavy public borrowing, pushes marketinterest rates up and shortens economic timehorizons.

IV. STEPS TOWARD INTEGRATING ECONOMICSAND ECOLOGY

FORESTS

Forests are under heavy but varied pressuresthroughout the world. In industrial regions, forestsare threatened by local and long-range air pollution.In the United States and some other affluent coun-tries, public forests face severe problems in manag-ing conflicting demands for the services and com-modities they provide. In most developingcountries, forests are being rapidly depleted andconverted to other land uses, with grave economicand ecological losses.

PUBLIC FORESTS

Industrial Countries

Forestry traditions in most of Europe ensurethat public forests are husbanded for the multiplebenefits they provide, but forestry practice in moresparsely settled areas of the United States, Canada,and Australia gives effective pre-eminence to timberproduction. These priorities often conflict with theincreasingly important recreational and ecologicalbenefits that forests provide.

Such biases can be corrected by managing publicforests more economically. Budgetary subsidies fortimber production should be eliminated, except forappropriations to protect biological diversity andother non-marketable services. Forest road construc-tion and management should be financed out of netrevenues. User fees based on market values or con-sumer willingness-to-pay should be collected fornon-timber commodity production (including min-ing rights), livestock grazing rights, recreational uses,and other services from public forests—thus estab-lishing the value of other forest benefits. Such mea-sures to ensure that governments obtain fair marketvalue for commodities and services produced in pub-lic forests and to reduce government subsidies for re-source exploitation on public lands will encouragemore sustainable forest management in several tem-perate zone countries.

Tropical Countries

Tropical forests are being rapidly and wastefullydepleted. Inappropriate and unsustainable exploita-

tion is dissipating much of most tropical countries'forest wealth. Governments are realizing little of thepotential benefits. Rationalizing forest management,collecting fair market value for timber, and reducingsubsidies for competing agricultural uses can greatlyreduce that wastage. Tropical deforestation, whichthreatens biological diversity and the earth's climate,is a global concern and should be addressed throughinternational cooperation.

European countries, the United States and Japanare the main markets for tropical timber exports, andtheir multinational companies are deeply involved intropical timber exploitation. Governments of all im-porting countries should ensure that these com-panies, their subsidiaries, and their affiliates strictlyadhere to all host-country laws and regulationsregarding timber operations, export restrictions, andtax and royalty payments. In addition, importingcountries should support and strengthen the Interna-tional Tropical Timber Organization's role in moni-toring compliance, publicizing violations, andnegotiating remedies.

The Tropical Forestry Action Plan (TFAP) is aninternational effort to identify and fund high-priorityactions to strengthen forestry management, re-search, conservation, and policy affecting tropicalforests. With a secretariat located at the UN Foodand Agriculture Organization, participation from allinterested constituencies, and national plans underway in more than fifty countries, it is a vehicle forinternational cooperation. Industrial countriesshould provide financial and technical support forboth planning and implementation. Sponsors shouldensure that the TFAP generates higher long-termreturns to tropical countries by designing forest rev-enue systems that promote sustained yield manage-ment and collect fair market value for tropicaltimber and non-timber products.

The multilateral development banks are nowformulating forest sector loans that address the needto improve forest revenue policies, to strengthen in-stitutions, and to meet other concerns. Membercountries should support these activities in theBanks' governing bodies and through co-financing.

As part of the TFAP and other development as-sistance programs in forestry, investments in refor-estation should be markedly increased. In mostcountries, the private sector has a better record in

plantation and community forestry than does thegovernment, but because forestry is a long-term in-vestment, private participation depends on securityof tenure and predictable policies. Developmentagencies and host governments in developing coun-tries should cooperate in expanding reforestation,community forestry, and plantation programs.

kkBecause forestry is a long-term investment, privateparticipation depends onsecurity of tenure and pre-dictable policies.

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MANAGING LONG-RANGE AIRPOLLUTION DAMAGE

Throughout most of Europe and North America,airborne emissions of sulphur and nitrogen oxides,reacting with volatile organic compounds and drift-ing over long distances, are acidifying forests andaquatic ecosystems, among other damages. Consid-erable research into emissions sources, atmospherictransport and chemistry, and ecological responseshas justified public concern. Governments havetightened emissions standards on both mobile andstationary pollution sources, but actions have beenlimited by the high costs of emissions reductionsfrom coal-fired power plants, vehicles, and indus-trial furnaces. Decisions have also been complicatedbecause much of the pollution drifts across jurisdic-tional boundaries. Jurisdictions exporting pollutiongain only part of the benefits from clean-up, whilethose importing pollution have no authority over thedamaging sources.

Governments in Europe and America haverecognized that precursor emissions should bereduced by international agreement, and they arenegotiating the difficult issue of responsibilities forabatement in different jurisdictions. Economicstudies show that the costs of achieving any prede-termined overall abatement level can be greatlyreduced if policies allow flexibility as to where andhow abatement should take place and avoid pre-scribing either specific technologies, such as flue gasdesulfurization, or rigid allocations of emissionsreduction among sources.

Innovative regulatory instruments such as the"bubble" and "marketable emissions reductioncredits" can provide this flexibility. A bubble is an

overall emissions reduction target for a group ofsources that allows them discretion on how best toachieve it. The bubble concept has recently been ap-plied in U.S. legislative proposals on acid rain: over-all sulphur-abatement targets were set for each statebut how those targets should be met was not speci-fied. This policy allows each state to concentrate onlow-cost sources and means of abatement.

Marketable emissions-reduction credits that aretransferable across jurisdictional boundaries are aninnovative economic instrument that could furtherstrengthen long-range pollution control. In opera-tion, each source would be allowed to transfer all orpart of its permitted emissions to another agency formonetary compensation. Sources that would incurhigh abatement costs could compensate low-costsources in other jurisdictions for cutting back furtherthan otherwise required. Differences among jurisdic-tions in marginal pollution-control costs would thustend to narrow. Moreover, should some jurisdictionsexperience exceptionally high damages from pollu-tion originating elsewhere, they could compensatesources in the offending region for cutting backmore than the minimal prescribed amount.

Intergovernmental institutional cooperation isessential to realize these benefits. A mechanism torecord and enforce these transfers across jurisdic-tional boundaries would have to be created. In Eu-rope, the ECE might consider this innovation. InNorth America, the EPA should be authorized tooperate such a mechanism in tandem with itsemissions trading program and to open discussionswith its Canadian counterpart on internationaltransferability.

WATER

In most regions, inland and coastal water qualityis increasingly threatened by pollution. Regulationsrequiring large industrial and municipal sources totreat their wastes before discharging it need to bestrengthened in many countries. In dense urban andindustrial areas, even the sheer volume of treateddischarges can degrade water quality. Moreover, fewcountries effectively control "non-point source"effluents from agriculture, construction, and trans-port. These effluents—a large, rapidly growingsource of water pollution—include discharges to airand soils that finally find their way into water bod-ies. Regulations requiring wastewater treatment bylarge sources cannot combat these broaderproblems.

Semi-arid areas, such as the American West, alsoface increasing competition for water. Agriculturehas long used most of the available water, disturbing

rivers and wetlands. Good dam sites have been oc-cupied, underground aquifers depleted, and munici-pal and recreational uses have increased, so the costsof supplying agricultural demands have risen sharp-ly. Fertilizers, pesticide residues, and salts washedfrom irrigated fields have created increasingly intrac-table environmental problems. Yet, highly subsi-dized public water supplies, the weakness of institu-tional mechanisms for transferring water amongpotential users, and the lack of regulatory controlover agricultural effluents and return flows have in-sulated farmers from these rising problems. To safe-guard this vital resource, governments must resolveto treat water as a valuable economic resource andimpose its full costs on those who use or degrade it.

Water Pricing

In most countries, urban and rural water chargesare far below incremental supply costs. Flat rate feesunrelated to use, average cost pricing, and decliningblock tariffs are widely employed. They are inferiorto marginal cost pricing structures combining incre-mental capital costs and volumetric charges coveringoperating costs. Volumetric charges should incor-porate drainage costs for irrigation waters and sew-age costs for household users. Industrial users, mostof whom can control the volume and content ofwater-borne discharges by making technical modifi-cations, should face sewage and wastewater treat-ment charges based on the incremental costs of treat-ing discharges with specific characteristics andvolumes.

Marginal cost pricing encourages water conser-vation and thereby reduces the need for new storageand diversions while providing financial resourcesfor maintenance and improvements. At the sametime, pollution from contaminated return flowsdiminishes. Wastewater treatment and drainagecharges also encourage enterprises to control andprevent discharges on site through relatively effi-cient process modifications.

Adopting marginal cost water pricing ap-proaches may require worthwhile investments inmetering, and the move certainly faces political re-sistance, especially from highly subsidized users.Nonetheless, pricing that incorporates full supplyand environmental costs is the strongest instrumentavailable to encourage efficient water use, promotethe adoption of less polluting technologies, and con-serve increasingly scarce water resources.

By financing highly subsidized water projectsand failing to insist on pricing approaches that en-courage efficiency in water use, bilateral and mul-tilateral development assistance agencies contribute

to these wasteful approaches in developing countriesas well.

The result is gross inefficiency in water use inmost developing countries, overinvestment in newconstruction at the expense of maintenance of exist-ing systems, and serious ecological damage to soilsand river basins. Although food security and povertyalleviation are advanced to justify the situation, theprincipal beneficiaries are better-off landowners andurban middle classes. Imposing economically realis-tic user charges is virtually the only way to put astop to the pervasive pork-barrel politics of waterproject investments. Member governments shouldensure that bilateral and multilateral developmentassistance agencies adopt and enforce in waterprojects the same principles of financial autonomy,cost recovery, and marginal cost pricing that are ap-plied to other public utilities.

Several European governments have also usedpricing mechanisms in the control of water pollutionby levying fees or charges on emissions. Othergovernments should emulate the European response.For the most part, however, charges have been reve-nue devices ancillary to administrative emissionscontrol, and the rates have been too low relative totreatment costs to limit the discharge of wastes tothe assimilative capacity of water bodies. Higherrates and less reliance on technology-based emis-sions standards would encourage further abatementand efficient process changes.

Water Transfers

Governments should also provide greater scopefor voluntary transfers of rights to use water, eitheras a production input or as a receptacle for wastes.In the United States, limited sales and lease marketsfor water transfers among irrigation users, and be-tween rural and urban users, have emerged despitehigh transaction costs and considerable uncertaintyover property rights to in-stream and return flows.Instituting explicit legal mechanisms for establishingand transferring such rights and protecting the in-terests of third parties would encourage these trans-actions, which reallocate water to more valuableuses. Issuing shares in public irrigation projects thatwould entitle shareholders to a proportionate frac-tion of available water each year, and allowing leasesand sales of such shares, is such an institutionalmechanism.

Governments that have not yet done so shouldadjudicate the rights of corporate and individualclaimants to groundwater. Clarifying these rightswould strengthen private incentives to conservegroundwater and enable interested parties to seek

compensation for damages from contamination. Incountries where rights over groundwater will re-main vested in government, charges for withdrawaland penalties for contamination can still bolster ad-ministrative regulations.

CONTROLLING NON-POINT SOURCEEMISSIONS

This growing problem can be addressed not bytraditional source-by-source regulation, but onlythrough more far-reaching policies, including the useof economic incentives. In agriculture, for example,overuse or inefficient application of fertilizers, pesti-cides, and irrigation water, and intensive cultivationof erodible soils adjoining water bodies have resultedin serious pollution of surface and undergroundwater in many areas. In the Netherlands, nearly 25percent of groundwater supplies contain nitrates inconcentrations hazardous to health, and 20 percentof acid deposition has been traced to ammoniareleased by farm operations. Higher prices for chem-ical and water inputs, whether through fees orreduced subsidies, can induce more efficient use andencourage the diffusion of agricultural technologiesthat are less input-intensive. Several ECE countrieshave already imposed charges on farm chemicals todiscourage excessive use and finance environmentalprograms, in accordance with the "polluter pays"principle.

Higher prices for chemicaland water inputs, whetherthrough fees or reducedsubsidies, can induce moreefficient use and encour-age the diffusion of agri-cultural technologies thatare less input-intensive.

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More fundamental changes in farm-support poli-cies in European countries, the United States, andJapan would reduce non-point source pollution fromagriculture even more powerfully. At present, mea-sures that raise farmers' income by supporting agri-cultural commodity prices induce farmers to applychemical and other inputs more heavily to their cul-tivated acreage. Despite acreage limitations built intosome agricultural support programs to control pro-duction surpluses, the net effect of price supports is

to raise total input use. Regulations such as "cross-compliance" provisions in U.S. agricultural policyare designed to mitigate these environmental effectsby discouraging cultivation of highly erodible soils.In addition, specific regulations on pesticide use andthe protection of drinking water supplies seek to bal-ance agricultural benefits against health risks. How-ever, such regulations cannot reverse the strongoverall incentives farm-support programs create tointensify chemical use. Providing targeted farm in-come supplements and subsidies more directly, in-stead of by manipulating farm prices, would lead toless intensive cultivation and less agriculturalpollution.

PROMOTING SUSTAINABLEAGRICULTURE

The agricultural sector has recorded remarkablegains in output and yields. Yet, it suffers from seri-ous economic and ecological distortions that mayprove unsustainable. In advanced regions, outputgains have been achieved at the cost of heavy andrising energy inputs, both mechanical and chemical,which make the agricultural sector quite vulnerableto rising energy costs. Farmers in many irrigatedareas are squeezed between rising real supply costsfor water and rising environmental costs due to soilsalinization and drainage problems. Intensive culti-vation has raised erosion rates in some regions tolevels that imply serious soil fertility losses and evenlarger off-site sedimentation costs. Despite doubledand redoubled pesticide applications, the fraction ofmany crops lost to pests has not declined, and thenumber of pests resistant to one or more chemicalshas risen sharply. Financially, the farm sector has be-come increasingly dependent on government sup-port. These trends are potentially unsustainable.

Agriculture is also a major contributor to off-farm environmental problems. In the United States,for example, 70 percent of nutrients and 33 percentof sediments reaching waterways come from agricul-tural land. Twenty percent of the nation's wells arecontaminated by nitrates from fertilizers, and in theIowa cornbelt, where three out of four people drinkwell water, 40 percent of tested wells show pesticidecontamination and 40 percent exceed EPA's maxi-mum health limits for nitrates. In the agriculturalareas of Western Europe, the same problems ofwater pollution, soil erosion, and exceedingly heavyinput use have been documented.

Agricultural policy in the United States, the Eu-ropean Community, and Japan exacerbates these en-vironmental problems. Supporting farm incomesthrough import restrictions and export subsidies,

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through direct price supports and supplemental pay-ments linked to historical production levels, andthrough input subsidies induces farmers to expandthe acreage of crops under support programs and touse more inputs on those crops.

Import restrictions on sugar, dairy products,and other agricultural products raise domestic pricesand thus increase both acreage and inputs used inprotected regions. These restrictions involve eco-nomic losses to consumers and more efficient pro-ducers (located mainly in less developed countries)and increase pollution problems. Direct price sup-ports also expand acreage and input use, with similareconomic and environmental costs, but also large fis-cal costs, if supported by government stockpiles orexport subsidies. Price support programs have typi-cally needed acreage limitations to reduce surpluses,but farmers respond by retiring their least produc-tive land (not necessarily the land most prone to en-vironmental damage) and using even more inputs onthe rest. The environmental benefits of acreage limi-tations can be increased by targeting cutbacks onsensitive areas, including stream borders andgroundwater-recharge zones.

In the United States, supplemental "deficiency"payments increase the net receipts of producers ofcotton, wheat, corn, sorghum, and rice. Paymentsrepresent the difference between target and market(or floor) prices multiplied by historical productionlevels. These levels are calculated as past averageacreages and yields. Such supplemental paymentskeep more acreage in relatively erosive, chemical-intensive program crops. They also discourage croprotations involving non-program crops, such as legu-minous cover crops because they reduce "base acre-age" and potential future support payments. Sincecrop rotations are fundamental to low-input regener-ative farming systems, this policy promotes intensivemonocultures.

Governments have tried to reduce these envir-onmental damages by additional interventions, suchas "cross-compliance" provisions regulating farmingof vulnerable soils or inappropriate input use. In ad-dition, land-retirement schemes, such as the Conser-vation Reserve Program, have been targeted towardsoil conservation. These are stop-gap mitigating mea-sures, however, and don't obviate the pressing need,on both economic and environmental grounds, formore fundamental change. Farm policy in the UnitedStates, Japan, and Western Europe has been econom-ically inefficient, raising producers' income at amuch larger cost to consumers and taxpayers, ex-ceedingly burdensome fiscally, disruptive of tradingrelations among these regions, harmful to agricultur-al producers in other regions, particularly in devel-

oping countries, and highly regressive (since benefitsare proportional to the amounts produced). In addi-tion, these policies encourage environmentally dam-aging and ecologically unsustainable farmingsystems.

Farm policy in the UnitedStates, Japan, and WesternEurope has been economi-cally inefficient, exceed-ingly burdensome fiscally,disruptive of trading rela-tions among these regions,harmful to agriculturalproducers in other regions,and highly regressive.

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These countries should move swiftly to alterna-tive agricultural policies based on direct income sup-port for targeted producers and practices, and dis-mantle interventions that support farm prices anddistort production decisions. "Decoupling" supportprograms from market interventions in this waywould greatly reduce the fiscal costs of agriculturalpolicy and allow governments to target subsidiesmuch more accurately on worthwhile policy objec-tives. Decoupling would also greatly reduce the eco-nomic costs of agricultural policies by allowing un-distorted market incentives to reallocate cropproduction to regions and nations with comparativeadvantage while inducing farmers to make efficientprofit-maximizing choices among alternative tech-nologies. It would greatly reduce environmentaldamage from agricultural production by eliminatingpolicy-induced incentives for excessively intensiveacreage cultivation and input use and by encourag-ing sustainable and regenerative cropping systems.

Undoing fifty years of market intervention willnecessitate considerable structural adjustment inagriculture—a painful process that many politicians,farmers, and agribusinesses are unwilling to under-take. But gains will greatly outweigh losses. Ironical-ly, the structural adjustments that the industrialcountries are calling on developing and socialistcountries to make are much more extensive, andthose countries have far fewer resources with whichto cushion the process. The present value of futurefiscal and economic savings from eliminating agricul-tural distortions would provide ample resources

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with which to finance an agricultural structural ad-justment program. This four-part program wouldeliminate all market interventions, replace themwith direct income supports subject to reasonableceilings and phasing down over several years,refinance facilities to deal with changes in land andother agricultural asset values, and provide tem-porary financial assistance to cushion agribusinessdislocations.

Undoing fifty years of mar-ket intervention willnecessitate considerablestructural adjustment inagriculture. But gains willgreatly outweigh losses.

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ECONOMIC POLICIES TO PROMOTEPOLLUTION PREVENTION

Pollution Prevention or Pollution Control

Environmental policies in all countries have em-phasized "pollution control" (treating emissions toreduce their environmental impact) rather than"pollution prevention" (reducing the amount ofwaste produced). But the latter has manyadvantages:

• Controlling pollution in one medium oftenmerely transfers wastes to another medium, atconsiderable cost and sometimes little environ-mental gain;

• Designing waste-reducing processes into indus-trial plants is often much cheaper than control-ling pollution through end-of-pipe techniques orcleaning up degraded environments; and

• Producing less waste also saves costly rawmaterials, a double bonus.

Many governments have established programs,such as sponsored research and information ex-changes, to encourage the adoption of low-wastetechnologies. Such programs are useful, but only ifenterprises receive strong incentives to seek ways toreduce emissions and wastage of materials and ener-gy. Economic instruments can help create thoseincentives.

Ideally, pollution could be efficiently preventedby comprehensive emission charges or transferableemission permits, which would put the correct en-vironmental price on all wastes going to air, water,or land. For the enterprise, a large waste streamwould inevitably result in heavy costs. Firms wouldrespond according to their circumstances: somewould install cleaner technologies now, others laterwhen equipment is replaced. Some would recyclemore wastes into other processes, others wouldmodify their products. These flexible, incentive-driven responses would achieve environmental qual-ity standards at the lowest possible cost and promotetechnical innovations.

Unfortunately, in the real world, ideal economicinstruments are impossible, partly because it is costlyfor regulators to get information about abatementcosts and emissions damages in various media. En-vironmental and health damages might not come tolight for years, for example. Information for enforce-ment is also hard to obtain: illegal disposal or dis-charge is often difficult to detect. Charges imposedon emissions at rates related to the marginal damagesthey cause might encourage "midnight dumping,"or concentrate emissions in less strictly regulatedmedia.

Ideal policies also ignore the political realitythat heavy charges may put disruptive financial bur-dens on industry and increase the risk of rising localunemployment. Realistic pollution prevention poli-cies must, like ideal instruments, create incentivesfor flexible, efficient responses and innovations toprevent pollution in many different circumstances,but take account of information costs and politicalrealities.

Governments should move toward controllingemissions in all media with economic instruments.Emissions charges can be made more palatable byrefunding some of the revenues to the industry assubsidies for technological innovation, or by ex-empting small amounts of emissions from thecharge. Transferable emissions permits can also begranted free to existing emission sources instead ofbeing auctioned off or sold. These modifications re-duce the financial burden on industrial sources whileretaining the same incentive effects at the margin.

Other economic instruments that take accountof information and enforcement costs may be morefeasible in some circumstances. For example, makingemitters clearly liable for any damages they cause,with the burden of proof on the industry to establishharmlessness unless the emission level falls withinestablished safety standards, has proven effective inobtaining industry's cooperation in standard-setting.By contrast, when the burden of proof is on the vic-

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tim to establish that emissions above a standard havecaused harm, industries have frequently resistedstandard setting.

Economic instruments applied to process inputsrather than to waste outputs are especially relevant ifwastes are hard to monitor and there is a fixed rela-tion between inputs and wastes. Thus, a tax on thecarbon content of fuels purchased will work betterthan a tax on CO2 emissions. Even if the input is in-corporated into the product, like cadmium in batter-ies, an input tax may be appropriate if eventualproduct disposal will cause problems.

Deposit-refund systems may be appropriate ifmonitoring discharges is difficult, as it is with manyhazardous wastes. Deposit-refund systems not onlydiscourage the discharge of waste, but also en-courage sources to dispose of it properly. Such sys-tems work by taxing some industrial input or con-sumer product (such as a beverage container or a car)and granting a refund when an approved method ofdisposal or recycling is followed. Deposit-refundsystems have been successful (in the form of "bottlebills," for example), and governments of Northernnations should apply them more widely.

Raw material prices play an important part inpreventing pollution. If prices are "too low," thereis little incentive to use less raw material per unit ofoutput; and, because raw materials are not destroyedin the production process but only transformed, theexcess inputs will end up as increased wastes. Also,low raw material prices undercut the demand forrecycled inputs. Raw material prices must at the veryleast reflect the full private costs of extraction, so asto avoid an unjustified bias in favor of virgin insteadof recycled (and, hence, waste-reducing) materials.Governments should examine their tax and tariffcodes with a mind to eliminating allowances that re-duce prices of virgin materials, and remove other im-plicit subsidies to virgin materials users. Further-more, taxes on virgin materials coupled to rebates topurchasers for use of recycled materials are analo-gous to deposit-return systems and can help providebroader markets for recycled materials.

When regulatory rather than economic instru-ments are the prime method of pollution prevention,enforcement is handicapped because in many North-ern countries fines for violations are so low that itpays polluters handsomely to break the law. Toavoid time-consuming litigation, it is better to usenon-compliance fees rather than criminal prosecu-tion, provided that these fees are set so that firmshave a strong incentive to abide by the regulations.Non-compliance penalties should be related to theextent and duration of the violation, and exceed thesource's estimated costs of compliance.

ENERGY

Energy is essential for every industrial and com-mercial process and cannot be recycled. Because thesupply of fossil fuels is finite and non-renewable, fu-ture generations may not have the same access tocheap energy sources that we do. Moreover, extract-ing, transporting, and converting all forms of energyimposes environmental costs, though some energyforms are less damaging than others. For these rea-sons, ecologically sound development must includepolicies that achieve a sustainable energy system andtake the environmental costs of energy use fully intoaccount.

ftWhen regulatory ratherthan economic instrumentsare the prime method ofpollution prevention, en-forcement is handicappedbecause in many Northerncountries fines for viola-tions are so low that itpays polluters handsomelyto break the law.

ff

Promoting Energy Efficiency and Sustainability

Promoting energy efficiency is the least-cost andmost effective immediate option for reducing the lo-cal, regional, and global environmental problems as-sociated with energy use. In all countries, and partic-ularly in developing countries, the scope foreconomically and technically feasible investments inenergy efficiency is large. Grasping these opportuni-ties offers attractive returns over expanding energysupplies and can save many tens of billions of invest-ment dollars over the next decade. Promoting ener-gy efficiency requires governments to reduce energysubsidies. Governments in most countries are deeplyinvolved in energy markets, through public owner-ship, regulation, and fiscal interventions. As a result,while some energy sources and uses are heavilytaxed, others are available to users at far less than theincremental costs of supply, which includes environ-mental side effects. Government ownership or regu-lation of some energy supplies, though theoreticallyjustified by economies of scale in conversion or dis-tribution, has usually been a vehicle for direct and

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indirect energy subsidies. The belief that cheap ener-gy is essential for economic growth is behind energysubsidies, but low energy prices typically mean lowand stagnant energy efficiency, not rapid economicgrowth. On the contrary, many countries haveachieved rapid economic growth since 1973 withrelatively high energy prices and little increase inenergy consumption.

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The belief that cheap ener-gy is essential for econom-ic growth is behind energysubsidies, but low energyprices typically mean lowand stagnant energy effi-ciency, not rapid economicgrowth.

Given this constellation of factors, all govern-ments should seek to eliminate unwarranted subsi-dies in energy industries, whether direct or indirect.At a minimum, energy prices should reflect full in-cremental supply costs, including the costs of ade-quate environmental controls. Coal industries, inparticular, are subsidized in many countries, despitecoal's high environmental costs. Using public fundsto cushion the redeployment of coal miners wouldbe economically and ecologically preferable. Nuclearpower has also been heavily subsidized in manycountries. If nuclear power stations were transferredfrom the public to the private sector and hidden sub-sidies removed, electricity rates would better reflectreal supply costs, encouraging energy conservation.Such changes are particularly likely to raise energyefficiency in Eastern European economies, whereprices are well below world levels, and energy useper unit of GDP is roughly twice as high as in West-ern Europe.

The regulated monopolies and public ownershiptypical in the electricity generation industry consti-tute barriers to efficient investment and energy use.Electric utilities should be reoriented to becomeprofit-seeking vendors of energy services, not meresuppliers of kilowatt hours. To accomplish this, thelink between electricity output and utility earningsmust be broken. Generating companies must be ableto profit by reducing sales, so long as costs fall fasterthan revenues. To these ends-.

• Governments should ensure that cogenerators

and independent electricity generators have afair chance to compete with large centrallyowned power stations, by inducing power com-panies to accept all competitive supply offersand to ensure independent suppliers access totransmission and distribution grids.

• Regulations should also create appropriate in-centives for power companies to accept "de-mand side" bids from suppliers of electricityconservation and to supply energy efficiencyservices themselves. Electricity rate regulationsshould allow suppliers to retain profits from ef-ficiency gains and investments in energyefficiency.

• Tariff policies should replace average cost pric-ing and declining block rates with economicallyrational marginal cost pricing systems.

If these incentives are put in place, very exten-sive investments in energy efficiency will be possibleat high rates of return.

Enormous savings are also possible in develop-ing and previously centrally planned economies. Itwould be a costly mistake for these countries toequate "development" with a quantitative expan-sion of energy supplies, ignoring highly profitableopportunities to adopt energy efficient technologiesand systems in making new investments. Interna-tional investment banks, particularly the multilateraldevelopment banks, should be instructed by theirdirectors to significantly increase the focus on ener-gy efficiency in their new lending to developingcountries and to Eastern Europe. Since many energyefficiency programs require interventions that aredispersed and relatively small-scale, institution-building and expanding private sector participationare essential to success.

Consumers make most choices about energy useindirectly, when buying cars, houses, and appli-ances. Unless consumers are fully informed aboutthe energy efficiency of such durable purchases, theyare likely to buy cheaper but less efficient ones. In-formation may not suffice if incentives are lacking,as is the case when the owner of commercial real es-tate has no incentive to invest in energy conserva-tion because he or she does not pay the energy bills.Incentives are also weak if industries have "softbudget constraints" and can simply pass alonghigher energy costs to customers or to governmentfinancing agencies. Policies to promote energy effi-ciency must permit market forces to function effec-tively by ensuring that people have enough informa-tion to make wise choices on energy use and bycreating appropriate incentives. To these ends:

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• Much more rigorous "energy labelling" ofrefrigerators, washing machines, domestic fur-naces, the insulation and structure of houses,and vehicles is clearly needed.

• Industrial standards and building codes shouldbe revised to promote greater energy efficiency.

• Legislation should ensure that energy servicecompanies have the information and legal struc-ture they need to realize the tremendous poten-tial for profitable investments in energy efficien-cy in commercial and residential buildings.Mandatory energy labelling and metering of allnew buildings and legal rights for tenants to hireenergy service companies will help to achievethe potential for energy saving.

Transportation imposes environmental costs onthe economy from air pollution, noise, congestion,and accidents. Predictions of dramatic traffic growthin many Northern countries over the next decade ortwo largely ignore these costs, and such growth maytherefore be neither sustainable nor desirable. Poli-cies are needed to ensure that environmental costsare reflected in the prices that transport users pay.Substantial increases in gasoline and diesel taxes arewarranted, especially in countries such as the UnitedStates and Canada, where they are now relativelylow. This one change will simultaneously create per-vasive but flexible incentives for more efficient en-gines, smaller cars, shorter journeys, better publictransport, and (in the long term) less dispersed citylayouts without impinging on personal freedom oftravel.

Administrative controls on specific environmen-tal impacts are also necessary. Vehicle emission stan-dards should be enforced in all Northern countries.More traffic-free areas should be introduced in urbanareas, and speed limits, which also affect safety,need to be enforced. But opportunities for economicincentives should be used wherever possible:

• By relating vehicle taxes more closely to fuelconsumption and environmental impacts;

• by introducing tolls and road-pricing schemeswhere practicable in congested city areas;

• by relating aircraft landing fees to noise and airpollution generated, and to the time of day; and

• by decoupling revenues from transportation andfuel taxes from public expenditures on particu-lar transport modes (e.g., by abolishing the U.S.Interstate Highway Fund).

Environmental Impacts of Energy Use

The environmental impacts of energy use arepervasive. Burning any fossil fuel releases CO2 intothe global atmosphere. Coal use also causes waterpollution and subsidence or landscape scarring whenit is mined, and particulate and sulfur dioxide pollu-tion when it is burned. The lignite burned in manyEast European countries is particularly polluting.Petroleum extraction results in oil spills at sea. At-tempts to "disperse and dilute" SO2 and other pollu-tants by building tall chimneys results in acidprecipitation many hundreds of miles away. Gaso-line (petrol) use in automobile engines releases a va-riety of air pollutants—such as nitrogen oxides, car-bon monoxide, and volatile organic compounds(VOCs)—that cause photochemical smog in urbanareas. Natural gas (methane) is relatively free of im-purities, and produces the lowest CO2 per unit ofheat of all fossil fuels, but is itself a powerful green-house gas. Leaks from natural gas wells and pipelinesand the methane flared at large oilfields contributeto global warming.

Nuclear power, while not a greenhouse gasemitter, creates environmental problems from urani-um mining wastes, accidents in operating nuclearplants, long-lived nuclear wastes, and the prolifera-tion of nuclear weapons. For these reasons, it hassuffered a dramatic loss of public confidence in mostNorthern countries. Renewable energy sources areinherently low density, so large areas of collectors(whether windmills, wave generators, tidal barrages,solar mirrors, solar cells, or biomass fuel plantations)are needed to collect energy in significant quantities.These inevitably affect the environment, both visual-ly and ecologically.

Policies to control the environmental impacts ofenergy use in Northern countries have concentratedlargely on administrative or "command and con-trol" methods, which usually impose very unevencontrol costs on users and so increase the total costof achieving any abatement since total costs could bereduced by shifting more of the clean-up ontosources with low abatement costs. They also providelittle incentive to industries to develop new andmore efficient technologies for emissions control.ECE governments should therefore strive for greaterefficiency in energy pollution control by steadily in-troducing economic instruments that reflect the en-vironmental costs of energy use. Two well-knowneconomic instruments are emissions charges andtransferable emissions permits, but others, such asdifferential taxes on energy-using equipment (say,automobiles) may be appropriate.

The most important pollutants in the energy

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sector are SO2, VOCs, NOX and CO2. Transferableemissions permits would lower the costs of achiev-ing negotiated targets for reducing SO2, VOCs, andNOX emissions (see discussion of acid rain damage toforests), but they are potentially applicable to localas well as to transboundary pollution control pro-grams. "Bubble" policies can greatly reduce abate-ment costs for multi-source enterprises, while "off-sets" and other systems of transferable permitsprovide flexible, effective incentives for controllingconventional atmospheric emissions.

By contrast, CO2 is a pollutant with many emis-sions sources, both large and small. Basing nationalor international control programs on a system ofquantitative permits would be administratively ex-pensive and economically risky, for reasons dis-cussed below. Individual national actions and inter-national agreement to reduce CO2 emissions arebetter supported by carbon taxes. An internationalagreement to stabilize the world climate should in-clude coordinated national taxes on fossil fuels atrates proportionate to their CO2 emissions per Btuand at levels designed to reduce overall global CO2

emissions substantially.Effective carbon taxes would produce consider-

able revenues. To avoid macroeconomic disruption,they would have to be phased in gradually and bepartially offset by reductions in other taxes. But itwould be possible to design a revenue package thatwould avoid the regressive impacts of energy taxes,offset some of the impacts of higher energy taxes onbusiness costs, and maintain overall fiscal balance.

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International trade is stillan engine of development.Despite pleas by trade pes-simists and political Utopi-ans for self-sufficiency,countries must trade togain access to technology,finance, and goods theycan't produce efficiently.

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PROMOTING SUSTAINABLEDEVELOPMENT INTERNATIONALLY

Meeting the pressing needs of their increasingpopulations for better living standards without fur-ther depleting and degrading their natural environ-

ments is an urgent task for developing countries.Economic recovery is no less desperately needed inEastern Europe. Moreover, it must be achieved pre-dominantly by these countries' own efforts, throughfar-reaching changes in priorities and policies. Whatthe developed market economies can and shouldprovide is a more supportive policy framework forinternational trade, investment, and finance—onethat will at least remove the severe impediments tosustainable development that less affluent countriesnow face.

Trade Policies

International trade is still an engine of develop-ment. Despite pleas by trade pessimists and politicalUtopians for self-sufficiency, countries must trade togain access to technology, finance, and goods theycan't produce efficiently. However, countries with-out ample capital resources or advanced technologycan profitably export only labor-intensive or naturalresource-intensive products. Despite concern in theNorth about natural resources depletion in develop-ing countries, the North's trade barriers strongly dis-courage developing countries from exporting morelabor-intensive commodities. Facing such barriers,many developing countries rely on mineral and agri-cultural export industries, which draw heavily onnatural resources.

Restrictions on market access, such as the Multi-Fibre Agreement and other quantitative restrictions,which apply most widely to labor-intensive manu-factures from developing countries, constitute themost serious barrier since no comparative advantagecan surmount them. These barriers are also expen-sive for the United States, Japan, and European coun-tries that maintain them since every protected rela-tively low-productivity job costs several times itsworth in higher costs to consumers. But, worse, bar-riers discourage developing countries from less en-vironmentally burdensome labor-intensive manufac-turing exports and contribute to unsustainablenatural resource depletion. For these reasons, gov-ernments should quickly phase out quantitative im-port restrictions on labor-intensive manufactures,using domestic policy measures to facilitate thenecessary redeployment of labor and capital. If usedat all, quantitative restrictions should be imposed todeny international markets to products based on en-dangered species, tropical timber harvested in con-travention of host country forestry regulations, andother ecologically hazardous exports.

Along the same lines, industrial country tradepolicies protect their own processing industries andmake it difficult for developing countries to increasethe value added to raw materials prior to export. Al-

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most invariably, industrial country tariffs are sub-stantially higher, the more highly processed the ma-terial. Thus, for example, if logs can be importedduty-free, sawn timber would pay a tariff of 5 per-cent and furniture a tariff of 15 percent. Such tariff"escalation" provides much higher effective protec-tion for the processing industry in the importingcountry and forces the developing country to earnmore foreign exchange by increasing the tonnage ofprimary production rather than by adding more val-ue to each ton. In the current round of GATT negoti-ations, industrial countries should offer to do awaywith tariff escalation of this kind on processedagricultural, wood, and mineral products.

The dumping of surplus products by industrialcountries on world markets can also impede sus-tainable development abroad. The most egregiousexample, disposing of hazardous wastes, banned pes-ticides, and other abominations by exporting themto developing countries, should stop soon as the re-sult of negotiations now under way. Less blatant butalso important is the subsidized export of agricultur-al surpluses, which benefits consumers but penalizesfarmers in importing countries by lowering worldprices. Lower agricultural commodity prices maydiscourage farmers on marginal soils in poor coun-tries from making the investments in soil conserva-tion, water management, and agroforestry that areessential to maintaining productivity. Lower outputprices act like a tax on the returns to those invest-ments, another reason for decoupling farm incomesupports in industrial countries from market-distorting interventions.

Not only can trade policies have environmentaleffects; differences in environmental policies amongcountries can also affect trading relations. Althoughinternational "competitiveness" is of great concernto both industries and governments, it should beremembered that whenever tighter environmentalstandards in one country reflect higher environmen-tal damages there, those tighter standards imply thatthe country has a real cost disadvantage in that par-ticular line of production. Alternatively, whenevertighter standards reflect lower abatement costs, thenthey entail no loss of international competitiveness.Therefore, though the EEC has chosen to "har-monize' ' environmental standards to a considerableextent in creating a unified internal market, the fun-damental GATT principle that domestic environ-mental protection measures do not distort interna-tional trade is economically sound.

Investment and Technology Transfer

Restoring private capital flows from Europe andNorth America is vital to sustainable development in

Eastern Europe and developing countries. The steepdecline in private lending and investment in the1980s deprived many capital-importing countries ofaccess to critical imports and technology and forceda severe retrenchment. The resulting economic crisishas aggravated environmental degradation in manyways: by accelerating resource depletion to increaseexport earnings, by driving more landless and joblesspeople to frontier areas as migrant farmers, and byreducing available funds for environmental protec-tion programs.

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Whenever tighter environ-mental standards reflectlower abatement costs, thenthey entail no loss of inter-national competitiveness.

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Since private international capital movements,including capital flight, are both larger and morevariable than public flows in response to internation-al market conditions, restoring them requires jointefforts by borrowers and lenders. The United States,which has been the largest international borrowerduring the 1980s, must restore internal fiscal balanceand thereby reduce its demands on internationalcapital markets, lowering real borrowing costs forother capital-importing countries.

Other capital-importing countries must also cre-ate more favorable conditions for private capitalflows. For heavily indebted countries, this meansrestoring creditworthiness, in large part by under-taking vigorous structural adjustment programs withthe assistance of the World Bank, the IMF, and otherinternational financial institutions. Within structuraladjustment programs, modifying policies that resultin wasteful and unsustainable exploitation of naturalresources—by raising resource prices and eliminat-ing public subsidies and expenditures that exacerbateenvironmental damages, for example—can help re-store fiscal balance and raise economic productivity.Member governments should see that the multilateraldevelopment banks and the IMF take full account ofthese opportunities in their structural and sectoraladjustment lending.

Governments in creditor countries shouldrecognize, as financial markets already have, thatcurrent levels of debt in many countries are inconsis-tent with resumed growth and creditworthiness.Debt reduction negotiations in the spirit of the

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Brady Plan should be accelerated. Governmentsshould explore mechanisms to reduce the transac-tion costs of these negotiations and reduce the temp-tation of commercial banks to "free ride" on theprocess, sharing in the benefits of restoring credit-worthiness but not in the costs.

Creditworthiness is a necessary but not suffi-cient condition for increased private capital andtechnology transfers. Also important are politicaland economic stability, reasonable, predictable, andnon-discriminatory laws and enforcement policiestoward private enterprise, and appropriate marketincentives.

Market incentives for technology transfer in-clude both prices and regulations. Low-pollutingtechnologies may be available internationally, butthey will certainly not be widely adopted in thetechnology-importing country unless its governmentmakes effective pollution control mandatory. Norwill resource-efficient technologies be widelyadopted unless resource prices in the host countryreflect full incremental supply costs.

Under appropriate conditions, many invest-ments that promote sustainable resource use andsound environmental management provide attrac-tive opportunities for the private sector. Financialintermediation by specialized investment banking fa-cilities, venture capital funds, and the like can helpidentify and realize these opportunities. Industrialcountry governments should encourage the Interna-tional Finance Corporation, the European and Nor-dic Investment Banks, the Overseas Private Invest-ment Corporation, export credit agencies, andsimilar institutions to pay special attention to com-mercially feasible investments that promote sustain-able development in Eastern Europe and developingcountries.

kk

Many investments that pro-mote sustainable resourceuse and sound environ-mental management pro-vide attractive opportuni-ties for the private sector.

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Similarly, the World Bank and regional develop-ment banks are considering ways to channel addi-tional resources to high-priority natural resourcemanagement projects, especially to protect biologi-cal diversity, tropical forests, regional seas, and the

global atmosphere. Given the limits on members'borrowing capacities and the fact that benefits frominvestments in these fields are not fully captured bythe borrowing country, there is a clear case for con-cessional terms for such loans. Member countriesshould support these initiatives by the multilateraldevelopment banks, and promote greater coopera-tion among them, since such initiatives are muchmore valuable to borrowing countries if donor coor-dination is improved.

Many of the poorest countries in sub-SaharanAfrica and elsewhere, where outstanding publiclyowned or guaranteed debt has been rescheduled andreduced under Paris Club agreements, will clearlyneed additional debt relief, as well as continuedflows of new money. Paris Club members shouldseriously consider converting a substantial additionalfraction of outstanding debt to local currency bonds,interest from which could be used to finance highpriority programs to protect human and naturalresources. These resources could provide the localcurrency counterpart funds needed to increase capi-tal flows for natural resource and environmentalprotection projects.

MANAGING THE GLOBAL COMMONS

The most worrisome environmental problemstoday are large-scale disturbances to the world's at-mosphere, oceans, forests, and genetic resources.Climate change, depletion of stratospheric ozone,accelerating deforestation, and extinctions of speciesin the tropics demand attention because of theirpotentially massive worldwide risks to economicwelfare, health, and even life. Europe is affected bydecisions taken in China, and the Soviet Union byevents in Brazil, just as Africa depends on policiesadopted in the United States.

Global environmental interdependence posesnew challenges. Each country's actions affect itselfand the rest of the world as well, but there are fewinstitutional mechanisms through which the inter-ests of other countries can effectively be representedin national decisions. Each country bears the fullcosts of its own protective measures, but capturesonly part of the rewards. Naturally, each countrywould prefer that others bear the burden of globalenvironmental protection, and share the benefitswhile avoiding the costs, and managing the globalcommons is difficult because of the "free rider"problem. Should most countries restrict fossil fueluse to reduce CO2 emissions, those that did notwould gain a competitive advantage from lowerenergy prices while still benefitting from a morestable climate. For these reasons, responding effec-

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tively to global environmental disturbances requiresinternational cooperation.

The 1985 Vienna Convention on the Protectionof the Ozone Layer and the 1987 Montreal Protocolon Substances that Deplete the Ozone Layer provideuseful models for an international framework con-vention and implementing protocols. They are alsocritically important steps toward climate control be-cause CFCs, besides scavenging stratospheric ozone,can be 20,000 times more efficient in absorbinginfra-red radiation than CO2 is, molecule for mole-cule. Replacing CFCs with less potent substitutesmight be the most cost effective step to mitigate cli-mate change. In any event, industrialized countriesshould agree to phase out ozone-depleting gases bythe end of the century, as recommended by the Hel-sinki meeting of May 1989.

Industrial countries should also help develop-ing-country signatories, financially and technically,phase down more rapidly. The economic rationalefor such assistance is not that developing countrieswould suffer economic losses by phasing downCFCs. With large agricultural sectors at risk fromultraviolet radiation and climate change and relative-ly small industrial demands for CFCs, developingcountries have much to gain on balance from rapidimplementation. For this reason, non-signatory de-veloping countries should quickly adhere to theagreements. The case for international transfers restson the self-interest of industrial countries in helpingthe rest of the world phase out CFCs and adoptingsubstitutes as rapidly as possible.

Economic instruments can help in the transi-tion. In the short run, deposit-return or tax-rebatesystems could provide useful economic incentives torecover and recycle the large stock of CFCs out-standing in cooling systems and industrial processes.Moreover, taxes or fees on CFCs, whether imposedin conjunction with marketable permit systems oralone, can stimulate the development and adoptionof substitutes.

The scale of the global climate problem and theuncertainty surrounding it will make internationalagreements more difficult. Although the emergenceof the Antarctic ozone hole came as an eerie sur-prise, it is clear that there would be no winners fromozone depletion and that the costs of prevention arerelatively modest. Similarly, the potential costs andbenefits countries face from climate change arepoorly understood, but the greenhouse effect is wellestablished and documented, and scientists agreethat continued accumulation in the atmosphere oftrace gases that absorb long-wave radiation willeventually raise surface temperatures, with profoundeffects on atmospheric circulation and precipitation.

There is also no doubt that concentrations ofgreenhouse gases, CO2, methane, CFCs, and NOX

have increased at historically rapid rates. Extrapola-tions of past trends would lead to a doubling ofCO2-equivalent gas concentrations in the atmospherewithin the next fifty years.

To date, there are many unknowns in the deter-minants of climate. Among these are the roles ofclouds and oceans. Clouds trap seven times as muchenergy as would be trapped by greenhouse gaseseven with a doubled concentration, but at the sametime reflect eleven times as much back away fromearth. Relatively small changes in the area, altitude,and water content of clouds in response to thegreenhouse effect could powerfully amplify or offsetit.

The oceans play an equally important role. Eachyear 200 billion tons of carbon are exchanged be-tween oceans and atmosphere, thirty times morethan annual greenhouse gas emissions. Small changesin this exchange balance could overwhelm the directgreenhouse effect. Shifts in ocean currents could alsotrigger regional climatic change. Because of theseand other important unknowns, and the complex,non-linear dynamics of the underlying geophysicalsystems, the effects of many other influences, andthe intrinsic variability of weather patterns, detailedpredictions over time and space of future climate areexceedingly difficult, if not impossible. Therefore,scientific uncertainty, differences among simulationmodels, and the lack of close correlations betweenrecent weather patterns and changes in greenhousegas concentrations are currently unavoidable.

Governments have no choice but to make deci-sions in the face of this uncertainty by assessing theconsequences of possible future climatic states of theworld and formulating policies as a response tothose risks. At issue is whether those policies shouldbe risk-neutral (acting on expected outcomes),moderately risk-averse (partially insuring against ad-verse risks), or extremely risk-averse (minimizing themaximum possible losses).

An international framework convention and im-plementing protocols should at this stage promotecoordinated research and monitoring activities and amoderately risk-averse mitigation strategy. Undersuch a strategy, relatively low-cost measures to abategreenhouse gas emissions and slow the pace of cli-mate disturbance would be adopted immediately,along with reasonable measures to adapt to climatechanges to which past and present actions haveprobably committed us. A slower rate of climatechange would of itself lower the economic costs ofadaptation, and, by allowing more time for betterunderstanding of the problem through research and

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experience, would reduce the risks of costly policymistakes.

There is consensus that low-cost actions to abategreenhouse gases are available, though their extent isdebated. The relevant measure of "cost" is one thatis net of other benefits unrelated to climate change.For example, phasing out CFCs prevents health andecological damages from ultraviolet radiation, reduc-ing deforestation in the tropics also preserves genet-ic diversity, and raising energy efficiency helps withother environmental and economic problems. These"side benefits" reduce their costs as instruments forstabilizing climate.

Engineering and econometric estimates of theavailability of economically feasible improvementsin energy efficiency vary widely. The latter are basedon past market behavior, and implicitly incorporateall sorts of inertia, market frictions, adjustment lags,and information gaps that engineering estimates ig-nore. They are also based on past, rather than cur-rent or future, technological and market opportuni-ties. Engineering estimates, on the other hand,reflect hypothetical long-run supply conditionsrather than current market possibilities. The two es-timates probably represent upper and lower boundson actual possibilities.

Despite the need for an in-ternational agreement, im-mediate actions by a smallgroup of countries, a'Climate Protection Club,'are economically rational.

Despite the need for an international agreement,immediate actions by a small group of countries, a"Climate Protection Club," are economically ration-al. By virtue of population and economic size, thelarge countries, even individually and a fortiori col-lectively, would capture a substantial fraction of thebenefits of their abatement actions, although benefitsalso "spill over" to smaller nations. These largecountries, the United States, USSR, China, Japan,Brazil, India, and (collectively) the EEC are also thelargest sources of greenhouse gases. For this reason,as well as to insure themselves, these large countriesshould immediately adopt available low-cost policiesto reduce greenhouse gas emissions by:

1) accelerating the phase-out of CFCs, among themost potent greenhouse gases;

2) promoting energy efficiency vigorously;3) encouraging shifts to natural gas, a relatively

clean-burning fuel;4) accelerating research on non-fossil energy sys-

tems, including efficient gas turbine systems,passively safe nuclear and advanced solar tech-nologies; and

5) promoting reforestation domestically and reduc-ing deforestation internationally by supportingthe Tropical Forestry Action Plan and othermeasures discussed above.Several large countries, notably the United

States but also the Soviet Union and China, haverelatively low energy taxes and prices and, conse-quently, low average energy efficiencies by interna-tional standards. These countries should take ap-propriate steps to raise domestic energy prices. Inthe United States, the most appropriate measurewould be a broadly based carbon tax high enough tostabilize greenhouse gas emissions by encouragingenergy conservation and shifts in the fuel mix to-ward natural gas. Phased in over several years, andpartially supplanting other tax sources, a carbon taxcould have positive macroeconomic effects as well.

In addition to these national actions, all coun-tries should help formulate and conclude a frame-work convention on stabilizing global climate, asrecommended by the UNEP governing council, theG-7 economic summit in 1989, and other bodies.This should follow closely the review of the interimfindings of the Intergovernmental Panel on ClimateChange in November 1990.

Proposals have been made to set global and na-tional limits on greenhouse gas emissions and to cre-ate mechanisms for international trading of "off-sets" and emissions permits. These proposals raiseserious issues of monitoring and enforcement. Trad-able permit systems are not yet well enough estab-lished within countries, even for limited numbers ofmajor emissions sources, to be readily extended toglobal trading among many diverse sources of green-house gases.

Considering that both the climate response togreenhouse gases and the extent of potential gains inenergy improvement and low-cost abatement op-tions are uncertain, it also makes economic sense toset a maximum limit on the acceptable cost of abate-ment measures rather than a minimum limit on theacceptable amount of abatement to be accomplished.Greenhouse gas taxes or charges have this desirablefeature: they encourage adoption of all (and onlythose) methods of reducing emissions that involveless incremental cost than the amount of the tax thatcan be avoided. Carbon taxes, user fees on CFCs,and other pricing instruments should be phased in.

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Simultaneously, OECD countries should use ex-isting mechanisms to help developing and EasternEuropean countries take low-cost steps to reducegreenhouse gas emissions. In particular, internation-al financing institutions should be encouraged tochannel sharply increased financial and technicalresources into energy efficiency, renewable energysystems, CFC substitutes, and forestry. The WorldBank and regional development banks should be en-couraged to develop special lending facilities to ex-pand investments in these fields, and member gov-ernments should be prepared to channel resourcesthrough them. Revenues from higher energy taxesand charges on CFCs represent one possible way ofproviding additional financial resources for thesefacilities.

CONCLUSIONS

The initiatives that industrialized countries cantake to promote sustainable economic progress athome and abroad are varied, but share important

characteristics. First, they will not require a sacrificeof economic welfare. Instead, by removing distor-tions in economic policies and inefficiencies in theuse of natural resources, they will raise productivityand strengthen the economy. Second, they are notnovel ideas. The polluter pays principle, the goal ofenergy efficiency, the need to rationalize agriculturalpolicies and reduce barriers to trade in labor-intensive manufactures have been on the policyagenda for decades. They appeared on the agendabecause they made sense economically, often evenbefore they were seen as important environmentally.Third, these initiatives still await widespread im-plementation. Each faces political resistance fromsome group that would face either short-term adjust-ment costs, or the long-term loss of policy entitle-ments. Despite overwhelming public support forpolicies to protect the environment, the political orinstitutional means have not been found to over-come or neutralize this opposition. The challenge,then, is not so much to discover what must be doneto ensure sustainability. The challenge is to discoverhow to do it.

Robert Repetto is Director of the Program in Economics and Institutions at the World Resources Institute.Formerly, he was an associate professor of economics in the School of Public Health at Harvard University anda member of the economics faculty at Harvard's Center for Population Studies.

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World Resources Institute

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WRI's Board of Directors:Matthew NimetzChairmanJohn E. CantlonVice ChairmanJohn H. AdamsRobert O. AndersonRobert O. BlakeJohn E. BrysonWard B. ChamberlinRichard M. ClarkeEdwin C. CohenLouisa C. DuemlingAlice F. EmersonJohn FirorJose GoldembergMichio HashimotoCynthia R. HelmsCurtis A. HesslerMartin HoldgateJames A. JosephThomas E. LovejoyAlan R. McFarlandRobert S. McNamaraScott McVayPaulo Nogueira-NetoThomas R. OdhiamboRuth PatrickAlfred M. Rankin, Jr.Roger SantJames Gustave SpethMaurice F. StrongM.S. SwaminathanMostafa K. TolbaRussell E. TrainAlvaro UmanaGeorge M. Woodwell

James Gustave SpethPresidentMohamed T. El-AshryVice President for Research and Policy AffairsJ. Alan BrewsterVice President for Administration and FinanceJessica T. MathewsVice PresidentWallace D. BowmanSecretary- Treasurer

The World Resources Institute (WRI) is a policyresearch center created in late 1982 to helpgovernments, international organizations, and privatebusiness address a fundamental question: How cansocieties meet basic human needs and nurtureeconomic growth without undermining the naturalresources and environmental integrity on which life,economic vitality, and international security depend?

Two dominant concerns influence WRI's choice ofprojects and other activities:

The destructive effects of poor resource managementon economic development and the alleviation ofpoverty in developing countries; and

The new generation of globally importantenvironmental and resource problems that threatenthe economic and environmental interests of theUnited States and other industrial countries andthat have not been addressed with authority intheir laws.

The Institute's current areas of policy researchinclude tropical forests, biological diversity,sustainable agriculture, energy, climate change,atmospheric pollution, economic incentives forsustainable development, and resource andenvironmental information.

WRI's research is aimed at providing accurateinformation about global resources and population,identifying emerging issues, and developing politicallyand economically workable proposals.

In developing countries, WRI provides fieldservices and technical program support forgovernments and non-governmental organizationstrying to manage natural resources sustainably.

WRI's work is carried out by an interdisciplinarystaff of scientists and experts augmented by anetwork of formal advisors, collaborators, andcooperating institutions in 50 countries.

WRI is funded by private foundations, UnitedNations and governmental agencies, corporations, andconcerned individuals.