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Sustainable Economics: Economics and Challenges Facing the Industrial Nations

Economics, Environment, and Sustainability The Economics of Pollution Control The Economics of Resource Management What’s Wrong with Economics: An Ecological Perspective Creating a Sustainable Economic System: Challenges in the Industrial World Environmental Protection Versus Jobs: Problem or Opportunity? Spotlight on Sustainable Development 25-1: A Small Business Park Unpaves the Way to a Sustainable Future Spotlight on Sustainable Development 25-2: Cultural Survival: Serving People and Nature Sustainably Spotlight on Sustainable Development 25-3: Principles of Natural Capitalism

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CHAPTER OUTLINE

CHAPTER 25

Thirty years of exploration into biology, physics, and human nature have brought me to the realization that humanity itself has, in fact, sharpened the sword that is potentially responsible for piercing it through the heart.

—Michael Reynolds

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CRITICAL THINKING

Exercise “In order to improve our economy we need to grow—that is, produce and sell—more goods,” say many business economists. “If we can’t do it here, we need to tap into global markets. Without economic growth, jobs won’t be available for those who need them. We have to keep growing economically, even if it means lowering environmental standards.”

This view is widely held in the United States and other countries. Critics point out, however, that it is flawed for a couple of rea- sons. Based on what you’ve learned so far from this book and your course, can you think of any reasons why? Can you think of any al- ternatives to economic growth to create a strong and sustainable economy? What criti- cal thinking rules come into play?

Economics, Environment, and Sustainability

As you may recall from your study of the cultural history of humankind (Chapter 7), manufacturing and trade began in earnest with the rise of towns and villages. Towns and villages, in turn, owe their origin to agricultural surpluses made pos- sible by technological advancements. New implements and techniques permitted farmers to produce an abundance of food with less labor. Displaced farm workers and their fam- ilies moved to cities and towns, where many took up trades to earn a living.

Although the economic system began a long time ago, the science of economics began only two centuries ago with the publication of the Scotsman Adam Smith’s book The Wealth of Nations.

Economics is a science that seeks to understand and explain the production, distribution, and consumption of goods and services. Economics is generally divided into two broad disciplines, microeconomics and macroeconomics.

Microeconomics is concerned with economic behav- ior of individuals, households, and businesses—both large and small. It concerns itself with decisions that are made in markets where goods or services are being bought and sold. Microeconomics examines how our decisions and behavior affect the supply and demand for goods and services, which, in turn, determines prices. It also examines how prices af- fect the supply and demand of goods and services. Two of the main concerns of microeconomics are inputs and outputs. Inputs include the commodities that companies need to produce goods and services, including raw materials, labor, and energy. Outputs include goods and services. These in- clude materials, goods, and services that companies pro- duce for use by consumers or other companies.

Macroeconomics is a branch of economics that deals with the bigger picture, that is, the performance, structure, and behavior of national or regional economies. It deals with growth, inflation, and unemployment, and with national economic policies and governmental actions such as taxa- tion, that influence these issues.

Economics, like ecology and environmental science, is concerned with relationships. It employs scientific tools to discover the laws that regulate economies. Economists rec- ognize two broad disciplines within micro- and macroeco- nomics. The description of economic facts and relationships falls within the purview of the first discipline, known as de- scriptive economics. Descriptive economics is a relatively pure science. Its questions can be answered by research and facts.

Economics melds with political science and sociology when it attempts to answer value-laden questions. For ex- ample, should companies pay for pollution controls? Should the economy continue to grow? Such questions cannot be an- swered by empirical facts and figures. There are no right or wrong answers to them, for they require value judgments and are left to the political process and the economic players

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In southern India, people once made traps formonkeys by drilling small holes in coconuts,filling the shells with rice, and chaining them to trees. The success of this trap was attributed to the fact that the hole was large enough for a monkey to put its empty hand in but too small for it to pull a handful of rice out. As monkeys clung tenaciously to their rice, villagers threw nets over them. The monkeys were trapped by their own refusal to let go.

Many observers believe that humankind is caught in a similar dilemma. Clinging tenaciously to an unsustainable way of living and doing busi- ness, many among us ignore the critical environ- mental problems such as global warming that undermine our long-term future including the health of our economy. As a result, we often resist changes needed to build a sustainable human econ- omy. This chapter begins with an overview of some key principles of economics, describes the eco- nomics of pollution control and resource man- agement, and then discusses weaknesses in economic systems from the viewpoint of sustain- ability. It concludes with a discussion of ways to build sustainable economic systems in industrial nations. Chapter 26 tackles the less developed nations.

 

 

562 PART VI. Ethics, Economics, and Environment

themselves. This realm of economics is called normative economics.

More and more, people are calling for a new kind of economics, an ecological economics or sustainable economics, one that concerns itself with supplying the needs of people while protecting the environment. In this chapter, we examine sustainable economics. As you ponder this new and exciting discipline, remember that it seeks ways to en- sure that economic development serves people—and serves them equitably, while protecting, even enhancing the natu- ral world. Sustainable economics, as envisioned by its many proponents, is a system that would supply goods and services in ways that honor limits and protect the carrying capacity of the planet. It is a system that would enhance human wel- fare not only in the present but also in the future, thus sup- porting the goals of intergenerational and intragenerational equity. Before we examine what a sustainable economic sys- tem might look like and study ways to make this vision a re- ality, we must first examine the current economic system. To do so, we examine some of the basic precepts of economics.

KEY CONCEPTS

Economic Systems Economics is a discipline that helps businesses and soci- eties solve three fundamental problems:

1. What commodities should it produce and in what quantity?

2. How should it produce its goods? 3. For whom should it produce them?

Of course, there are many ways for a society to solve these three basic problems. The type of economy influences the answers. Economists recognize two basic types of eco- nomic systems: command and market. A command economy, also known as a planned economy, is one in which the state or government manages the economy. Examples are the economies of North Korea, Cuba, and, until recently, main- land China. In command economies, the state or govern- ment controls all major sectors of the economy—from food production to the manufacture of household goods. In other words, government officials dictate production and distri- bution goals. They make all decisions about the distribu- tion of income—who gets what—and what the economy produces and how much is produced.

Government decisions, in an ideal world, are supposed to be made to benefit all, but even in these systems based on egalitarian goals, corruption abounds and the ruling elite often live high on the hog while the majority of the popula- tion lives in poverty.

In a market economy, the production, distribution, and price of goods and services are made by private individuals— business owners—based upon their own and their customers’

The human economy has been functioning for thousands of years, but only recently have people begun to think seriously about developing a sustainable economy—one that serves peo- ple equitably and protects and enhances the environment on which we all depend.

interests, rather than on an overarching macroeconomic plan as in command economies. That is to say, in market economies what companies produce and the quantity they produce each year are determined by consumer demand and businesses and the potential for profit. Although there may be a high demand for a particular product or service, if a company can- not make a profit, it will generally not produce it.

In market economies, like those of most nations of the world, governments (theoretically) take a back seat to the marketplace. In other words, the market operates on its own without government intervention. Companies produce the goods and services for which there is the highest demand or products that yield the highest profit, thus answering the first question: What goods and services and in what quan- tity? Profit ultimately dictates how goods are produced. In market economies, the least costly method of production yields the greatest profit.

In a market economy, the question “For whom?” is also determined by money. In general, whoever can afford a good or service can get it.

One of the key principles of economics is the law of scarcity, which states that most things that people want are limited (FIGURE 25-1). As a result, their sale is rationed. In a market economy, price is the principal rationing mecha- nism. For instance, few of us drive a Tesla, a sporty electric vehicle that costs around $110,000, even though many of us might like to. Why? Because the price greatly exceeds the abil- ity of the vast majority of us to pay for this car. In a sense, then, price rations Tesla sales and purchases. In contrast, in command economies, governments ration most of the out- put, although prices do play a role.

In truth, most nations’ economies are mixed—that is, they contain elements of market and command economies. China’s economy is becoming more and more a market econ- omy as thousands of government-owned businesses have been converted to private ownership. In the market economies of Great Britain, Canada, and the United States, for example, free enterprise is often touted as the guiding rule.

FIGURE 25-1 A treat for the wealthy. High-end vehicles, such as this sporty Tesla electric car, is targeted to the world’s wealthy.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 563

Let the market determine who gets what. Nonetheless, in these and other countries, governments also influence eco- nomic behavior.

The market economy of the United States is highly in- fluenced by public policy. The U.S. government, for exam- ple, often subsidizes certain activities, giving some businesses and some products an economic advantage over others. The subsidies to oil, coal, and nuclear energy, for instance, arti- ficially lower their price. Mining companies, for instance, are given special tax breaks as they deplete their mineral re- serves. The economic incentives are intended to provide money for further mineral exploration and development.

Regardless of whether you agree or disagree with the policy, it represents governmental interference with the free- market economy that alters the cost of producing goods. Consider one specific example: Each year the U.S. military spends an estimated $50 billion protecting oil tankers in the Persian Gulf, according to the Rocky Mountain Institute. This oil, which will be refined in the United States, is worth an estimated $10 billion. If oil companies paid the cost of pro- tecting their oil themselves, the cost of fuel oil, diesel, jet fuel, gasoline, and hundreds of other products derived from crude oil would be much higher. Instead, taxpayers pay the bill. To be fair, government policies provide subsidies help to foster a sustainable future. Companies that install wind turbines to produce electricity in the United States are given a federal pro- duction tax credit—a government incentive for each kilowatt- hour of electricity they generate. There are numerous incentives for homeowners and businesses who want to in- stall solar elective systems, too.

Governments also influence businesses through vari- ous laws and regulations—for example, those that require companies to control pollution. Laws that stipulate how much pollution a company can emit affect the price of goods and services. Outright government bans on dangerous prod- ucts limit product availability and, therefore, dictate pro- duction and consumption, interfering in a free economy to protect health or the environment. (For a look at a creative way to regulate natural resources, see Spotlight on Sus- tainable Development 25-1.)

Another way of influencing the market is through fed- erally mandated freight rates. As noted in Chapter 23, freight rates are set by the federal government. In the case of raw ore versus recycled materials, raw ore travels more cheaply than scrap for recycling—providing a great benefit to the min- ing industry and a deterrent to recycling.

State and federal governments also subsidize various activities by special tax breaks or by sponsoring or funding research. These and other subsidies create an uneven play- ing field, which benefits some and harms others. Last, but far from least, governments also impose tariffs (taxes on im- ports) to regulate the flow of goods into a country, thus sti- fling free international competition. For example, there’s a tariff on ethanol imported from Brazil and a limit to how much can be imported—measures that favor domestic pro- duction of ethanol for fuel. Governments can also exempt products from tariffs. Mexico, for instance, charges no tar- iff on renewable energy technologies like solar electric sys- tems in an effort to promote their adoption.

Regulations, bans, subsidies, and other policy instru- ments are levers through which governments influence mar- ket economies to protect natural resources, people, and special economic interests, such as the mining industry.

Although they’re nearly extinct, command economies also generally consist of a mixture of market and command practices. China, for example, allows a great deal of free- market enterprise within an economic system once tightly controlled by the central government.

Finally, both types of economic systems have enormous impact on the environment. The command economies of the former Soviet Union, for example, produced enormous amounts of air and water pollution and have left behind a trail of toxic hot spots, not unlike those of the Western world, where free enterprise has been the rule.

KEY CONCEPTS

The Law of Supply and Demand In market economies, the three essential questions posed in the previous section are generally solved by price. The price of a good or service is, in turn, determined by two ad- ditional factors: supply and demand. Supply refers to the amount of a resource, product, or service that’s available. Demand refers to the amount people want. The predictable interplay of price, supply, and demand constitutes the law of supply and demand.

To understand the relationship between these three fac- tors, take a moment or two to study the graph in FIGURE 25-2a, which shows a demand curve for rice. On the vertical axis of the graph is the price (P) of rice per bushel. On the hori- zontal axis is the quantity (Q) that people will buy at each price. This graph shows that as the price falls, the demand increases and vice versa. The relationship between P and Q is inverse—that is, as one increases, the other decreases.

Most of us are familiar with the interplay of price and de- mand. We all know, for example, that popular rock bands sell their tickets for a higher price than struggling bands.

The supply curve is of interest chiefly to producers (FIG- URE 25-2b). It plots the relationship between price and the quantity that suppliers will produce. The supply curve il- lustrates an intuitively simple concept: The higher the price, the more producers are willing and able to produce. At lower prices, producers often have to reduce production. Numer- ous examples exist. The fall in oil prices in the early 1980s, for example, put many American oil drillers out of business and caused economic hardship throughout the world. What happened? As oil prices fell because of conservation (which reduced demand) and cheaper foreign oil, many American companies went out of business or shut down wells because they couldn’t produce oil profitably at the lower prices.

Two types of economic systems exist: command and market economies. Command economies are run in large part by gov- ernments. In market economies, decisions about production are largely determined by prices and by people’s ability to pay. Nonetheless, governments affect market economies in many ways. Both types of economies have had enormous environ- mental impact.

 

 

564 PART VI. Ethics, Economics, and Environment

SPOTLIGHT ON SUSTAINABLE DEVELOPMENT

25-1 A Small Business Park Unpaves the Way to a Sustainable Future

Umeå is a small city in northern Sweden, a country renowned for environmental stewardship. Among its many environ- mental features, Umeå is home to a remarkable small busi- ness park—a model that other cities could emulate. The business park is home to franchises of three multinational corporations: a Ford Motor Company sales and service deal- ership; a Statoil gas station, car wash, and convenience store; and a McDonald’s fast-food restaurant.

Okay, you say, there’s no way these three companies pos- sibly contribute to environmental protection and a sus- tainable future.

Well, let’s take a look . . . To begin, all three businesses have green roofs—not

roofs painted green, but rather specially constructed roofs that are planted in grass and other forms of vegetation. These roofs help give back to nature a little more green space, taken up by the development itself. They absorb moisture, which nourishes the plants, rather than letting it run off parking lots, picking up oil and other pollutants that then wash into surface waters. Green roofs also help keep the buildings cooler in the summer.

The parking lot at the Ford dealership is unlike other parking lots you’ll find in industrial nations. This one is made from porous pavers, special blocks that allow mois- ture to seep into the ground where it replenishes ground- water. By letting water seep into the ground, these pavers reduce surface runoff, water pollution, and flooding.

The buildings are made of natural or recycled building materials, too. Moreover, the buildings are built to be effi- cient—so efficient that they use 60% less energy than sim- ilar structures. As an example, motion sensors in the buildings turn off lights when the rooms are unoccupied.

Energy demands are met from renewable energy sources, such as the sun and wind. Electricity comes from a wind gen- erator on the coast about 9 kilometers (15 miles) away. The Ford dealership also has solar panels on one side that preheat incoming air, reducing energy demand of the heat- ing systems. It also has skylights that reduce daytime elec- trical consumption by 60 to 70%. At the McDonald’s, waste heat from various processes such as cooking grills and deep fryers and from refrigeration systems is captured and piped to parts of the complex that require heat.

The business park also uses water efficiently and cap- tures and reuses all of the storm water onsite. It flows into an onsite water garden. Ninety-nine percent of the water from the car wash is filtered and reused. Sewage from the facility is used for fertilizer in local farming operations.

In addition, the business park reuses or recycles all of the waste that it produces. Wood used to build the facility comes from local wood lots and was sustainably grown and harvested.

When building the small business park, the developer removed a house located on the site. Rather than demol-

ishing the structure and hauling the waste to the landfill, he lifted it and trucked the building to a new location. Rather than cutting down a large oak tree on the site, it, too, was transplanted elsewhere. The developer left a pine tree that was home to an endangered beetle on the site, too, rather than cutting it down.

The list of environmental attributes of this remarkable fa- cility does not stop here. The gas station, for instance, sells three types of fuels that replace environmentally unfriendly diesel and gasoline. The convenience store sells organic pro- duce and other organic foods. They encourage customers to recycle food containers by including well-labeled receptacles.

The Ford dealership recycles all waste oils and other waste fluids from cars such as brake fluid and radiator fluid. They use vegetable oil, rather than a petroleum-based fluid, in their hydraulic lifts. They even work hard to make this the healthiest and safest possible workspace for their employ- ees. All three businesses provide ongoing education for their employees to ensure the continuation of sustainable business practices.

Now, you say, sure this is all well and good, but the busi- nesses must be suffering.

Wrong. The fact is that during the first year of operation rev-

enue from sales at the car dealership and service shot through the roof. The other businesses are thriving as well, indicating that this is clearly not a case of environmental philanthropy, but a sound, economically profitable busi- ness practice that provides a model for the rest of the world. Over a half a million people visit the park every year, and city officials are encouraging other similar development.

Imagine how the world would change if all businesses pursued a similar strategy?

Adapted with permission from Dan Chiras, EcoKids: Raising Children Who Care for the Earth, Gabriola Island, British Co- lumbia: New Society Publishers, 2004.

FIGURE 1 Umeå business park in Sweden.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 565

The economy is a balancing act with two principal play- ers, supply and demand. Supply and demand interact to de- termine the price of goods and services. Graphically, this is represented by the intersection of the supply and demand curves and is known as the market price equilibrium point (FIGURE 25-2c). The market price equilibrium point represents the price at which both consumers are willing to buy a prod- uct and producers can afford to produce it.

To recap: the law of supply and demand is a relatively sim- ple idea that explains a great deal of economic activity of businesses and individuals—specifically the market rela- tionship between buyers and sellers. As just noted, the law of supply and demand says that the price of a good or ser- vice determines both the quantity supplied by manufactur- ers and the quantity demanded by consumers. That is, the price determines how much a manufacturer provides and how much is consumed.

On the supply side, the quantity of a good or service is often depicted as directly proportional to price: the higher the price of the product, the more the producer will supply. On the demand side, demand is normally depicted as an in- verse relationship: the higher the price of the product, the less the consumer will demand.

Although you may not have studied the law of supply and demand, you are probably familiar with it. You may have seen instances when the demand for a resource ex- ceeded the supply, leading to an increase in price. This is one of the reasons for rising oil prices in this decade. If supply exceeds demand, the price falls. Demand is, therefore, said to be elastic.

Imagine an economy in which literally millions of prices are set by this kind of interaction without interference by gov- ernments. That system would be a free-market system. How- ever, as noted previously, in most countries, governments meddle in economic affairs, sometimes benefiting businesses through subsidies and sometimes thwarting free enterprise through regulations.

The free-market system may also be tampered with by business itself. Some businesses, for instance, push for pro- tectionist trade policies that limit or eliminate imports from foreign producers, in an effort to keep markets to themselves. Others buy up competitors, creating monopolies. Monopo- lies eliminate competition and can result in prices that are set at any level the monopoly wants (provided the public will pay). Antitrust laws in the United States are aimed at protecting in- dividuals from monopolies. Companies may also try to drive others out of business. For example, Walmart purportedly marks down prices below those of nearby competitors like small hardware stores. Outpriced by this corporate giant, the small businesses are eventually forced to close their doors.

KEY CONCEPTS

Environmental Implications of Supply and Demand The law of supply and demand has some very real implica- tions for sustainability. First, consider the impact of declin- ing supplies by looking at the ivory trade. For years, elephants were slaughtered by the thousands in Africa to support the profitable ivory trade. When populations began to decline, African countries made it illegal to shoot elephants, and many countries prohibited the importation of ivory. Nonethe- less, poaching continued. Why? Bans on ivory export and the dramatic decline in wild elephant populations caused by overhunting increased the price of ivory. That, in turn, gave poachers a considerable economic incentive to continue the illegal slaughter, even at the risk of being killed by game wardens. The supply graph predicts such activity, showing that the higher the price, the more willing someone is to produce a given product. People become rich, and the

The law of supply and demand shows that prices affect both the supply of goods and services and the demand for them. In ad- dition, the prices of goods and services in a market economy are largely determined by the interaction of supply and demand.

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FIGURE 25-2 Supply and demand curves for rice. (a) The demand curve shows the relationship between the price (P) on the vertical axis and demand (Q) on the horizontal axis. This graph shows that a rise in prices reduces the demand. Falling prices increase demand. (b) The supply curve shows the relationship between the price and supply, or amount produced. The higher the price, the more farmers will produce. (c) The market equilibrium point is the intersection of the supply and demand curves. It’s the price people will pay for rice and the amount farmers will produce at that price.

 

 

566 PART VI. Ethics, Economics, and Environment

elephant is pushed toward extinction. It’s a simple line of cause and effect with devastating consequences.

Government regulations that put a stop to the sale of ivory products in many countries have helped to solve the problem. These bans caused the market for raw ivory to evaporate, making poaching unprofitable and brightening the future of the elephant. Now that the elephant populations are recovering, efforts are under way to allow limited ivory pro- duction—say, from animals killed to keep populations on game preserves from skyrocketing and ruining the environment.

Supply and demand economics also have considerable impact on conservation efforts. For instance, as the price of oil climbs many industrial nations are finding ways to improve the efficiency of factories, automobiles, and homes. Supply and demand can also spawn wasteful behavior, though. The fall in oil prices in the early 1980s, created by conservation and by increases in production by the United Kingdom and other countries, eroded many people’s resolve to save en- ergy. The U.S. government, in fact, lost virtually all interest in energy efficiency at that time.

As a general rule, abundant supplies (at least in the near term) lead to low prices, which often foster wasteful prac- tices. “We’ve got plenty, so why conserve?” seems to be the attitude of many. Section 25.4 discusses some of the weak- nesses of supply and demand.

KEY CONCEPTS

Measuring Economic Success: The GNP Economists need ways to measure economic activity. The most widely used measure of a nation’s economy is its gross national product. The gross national product (GNP) is the market value of the nation’s output—in other words, the dollar value of all goods and services that a nation produces and sells (including government purchases) in a given year. GNP includes domestic and overseas operations of all busi- nesses. (Gross domestic product [GDP] is a subset of the GNP and includes all economic activity within the borders of a nation.)

Real GNP is the GNP adjusted for inflation. Per capita GNP is defined as follows:

Per capita GNP 5 = GNP ÷ Total population

Widely used to track economies, the GNP gives a gen- eral picture of the wealth of nations and the living standards of their people. As you will soon see, the GNP, like the law of supply and demand, is insensitive to environmental con- cerns and sustainability.

KEY CONCEPTS The gross national product is a measure of the economic output of a nation, including all goods and services, and is used as a means of tracking the success of economies.

Economic considerations have profound impacts on activities that affect the quality of our environment and the sustainability of our society.

The Economics of Pollution Control

The free-market economic system in the United States and other countries, as well as the command economies of socialist and communist nations, treated pollution with almost uni- form disregard until the late 1960s and early 1970s (FIG- URE 25-3). (Some disregard continues today.) Pollution was something that issued from smokestacks and that symbol- ized progress and prosperity. The costs incurred from pol- lution were largely ignored and are considered an economic externality, a cost to society and the environment not paid directly by manufacturers or consumers. Economic exter- nalities include damage to human health, fish and wildlife populations, vegetation, climate, and others. Numerous ex- amples have been pointed out in this text.

In many instances, businesses were simply unaware of the external costs of their activities. Gradually, though, cit- izens throughout the world began suing polluters (if their sys- tem of government allowed it). Governments established pollution standards to protect people and the environment, and businesses began to curb pollution, usually by installing

25.2

FIGURE 25-3 Disregard for pollution. In the past, factories such as this one belched out huge amounts of smoke, which was con- sidered a sign of progress. Little thought was given to the damage it created and the subsequent costs.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 567

pollution control devices. Reducing pollution reduces ex- ternal costs, but pollution controls cost money. Pollution control became part of the cost of doing business—in other words, they were internalized. Such costs are passed on to the consumer.

Chapters 18 through 23 described U.S. pollution laws, which have forced significant controls on pollution and sub- sequent cost internalization. Among them are the Clean Air Act, the Clean Water Act, the Resource Conservation and Re- covery Act, and the Surface Mine Control and Reclamation Act. Although these laws are important, they have not resulted in a full internalization of costs. In fact, despite billions of dol- lars spent on controlling pollution, environmental damage (externalities) still occurs at unsustainable levels.

The reason environmental destruction continues is largely one of policy. As explained in Chapter 2, most gov- ernment policy designed to control pollution has relied on end-of-pipe controls. In most cases, such controls reduce only the output of pollution and lessen problems or slow their rate of development. To a large extent, economics de- termines the level of control—that is, just how much money we are willing to spend on controlling pollution.

KEY CONCEPTS Pollution creates outside costs called externalities, which are borne by society at large, not by producers. Pollution control tech- nologies reduce the emission of harmful substances and, thus, reduce external costs, but they add to the cost of producing goods and services.

Cost–Benefit Analysis and Pollution Control As you may recall from discussions of risk assessment in Chapter 18, the chief goal of pollution control is to reduce pollution in ways that yield the maximum benefit at the low- est cost. This goal is made possible by cost–benefit analysis. To understand how this process operates, take a look at FIG- URE 25-4. FIGURE 25-4a illustrates an intuitive concept: the higher the level of pollution, the higher the cost of damage. Thus, the more acid deposition, the more damage one can expect.

FIGURE 25-4b shows the relationship between control costs and the amount of pollution that can be removed from a smokestack. This graph indicates that a little bit of effort can remove large quantities of pollutants cheaply. As more and more pollutants are removed, however, the cost to remove each additional increment rises. In the initial phase, for ex- ample, removing 100 units of pollution may cost only 1 cent per unit. Later on, the cost of removing pollution increases rapidly—for example, to $1 per unit of pollution. The phe- nomenon is called the law of diminishing returns. It states that for each additional dollar invested, we get a smaller return.

If both graphs are placed together, the point where the two lines intersect is the break-even point—theoretically, the level at which costs and benefits are equal (FIGURE 25-4c). If a society wants even lower pollution levels, it will have to pay more (FIGURE 25-4d).

FIGURE 25-4 Cost of damage vs. cost of control. Optimizing pollution control efforts requires balancing the cost of cleanup against the economic benefits of control. (a) This graph shows that as pollution levels rise, the amount of damage increases, as reflected in rising costs. (b) Removing pollution requires an economic expenditure when pollution control devices are used. Removing 100% of the pollution is quite expensive. Removing 75% costs less per unit removed. This graph shows the relationship between cost of control and percentage of pollution remaining. (c) This graph shows the point at which pollution control costs equal economic damage. This is the break-even point. Unfortu- nately, determining the full costs of pollution is not easy, and estimates may be in serious error. (d) Society may wish to lower pollution levels past the break-even point. The desired level of pollution may technically cost society more than it benefits in reducing damage.

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Removing all or nearly all of the pollution is quite expensive

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568 PART VI. Ethics, Economics, and Environment

Although this sounds very easy, it isn’t. As Chapter 18 noted, determining the actual cost of pollution is very diffi- cult. One of the first problems in this exercise is determin- ing the amount of damage. For example, how many people will die from air pollution-induced cancer? How many fish will be poisoned? The second problem comes in assigning a value to lost lives, lost wilderness, polluted air, extinct species, or obstructed views. How much is a person’s life worth? How much are the many free services (oxygen pro- duction and carbon dioxide trapping, for example) provided by nature really worth?

One way around the dilemma of the unpriceable good is to calculate mitigation costs, the cost of offsetting damage. How much would it cost to restore an eroded statue? How much would it cost to move an endangered species to a new habitat? These costs can be surprisingly high. Engineers estimated that the cost of replacing nearly 3,400 hectares (8,500 acres) of wetlands in the Charles River Basin (near Boston, Massachusetts) was over $17 million a year. The Army Corps of Engineers instead opted to protect the wet- lands, which provide natural flood protection, rather than build expensive flood control facilities along the river. The Minnesota Department of Natural Resources estimates that it costs the public $300 in flood control measures to replace 0.4 hectare (1 acre) of wetland that holds 30 cm (12 inches) of water. The cost of replacing 2,000 hectares (5,000 acres) would be $1.5 million, which exceeds the state’s annual spending for flood control. Another means is to calculate maintenance costs—that is, how much it costs to maintain and protect natural services.

Reducing all life-forms to dollars and cents bothers many people. It strikes many as morally wrong to consider sacrificing people’s lives so that society can have its endless supply of disposable pens, diapers, and razors. Others con- sider it a cruel form of business logic. How can people or species such as the spotted owl be sacrificed for profit? Clearly, it is not an easy issue.

Because of the difficul- ties in assessing damage and the elusive nature of deter- mining value, modern soci- ety is bound to find itself torn between two factions. On the one side are those who would allow some acceptable damage as a trade-off for the benefits of modern technology. On the other side are those who ar- gue for eliminating harmful pollutants altogether. Torn be- tween polar opposites, we muddle along, using the best scientific information available on environmental and health damage while battling one another in courts and legislatures over the proper levels of control. Interestingly, all this con- flict could be greatly reduced by applying sustainable mea- sures: implementing conservation, practicing pollution prevention, recycling, and turning to renewable energy tech- nologies. These alternative solutions eliminate many ad- verse impacts because they eliminate the source of the problem—and they often do it at a fraction of the cost of the traditional end-of-pipe controls.

KEY CONCEPTS

Who Should Pay for Pollution Control? In today’s world, pollution control devices remain the dom- inant means of dealing with pollution. One of the most fre- quent economic questions is, “Who should pay for pollution control?” Should corporations be required to pay for scrub- bers and other devices to clean up the environment? In such cases the costs will ultimately be passed on to the consum- ers of industry’s products. This strategy is known as the consumer-pays option. Another option, the taxpayer-pays option, places the financial responsibility on taxpayers. Gov- ernment payments to coal miners who suffer from black lung disease are an example of this option. Government pro- grams to lime lakes to neutralize acids are another.

Individuals who favor the consumer-pays option argue that the people who use the products that create pollution should bear the cost. The more one buys (and pollutes and depletes), the more one should pay. Frugal individuals should not have to subsidize the cost of cleanup through taxes. Passing the cost directly to the consumer, they add, could cre- ate more frugal buying habits—so essential to our long-term sustainability.

Those who support the taxpayer-pays option argue that through their elected officials, voters (and, hence, taxpay- ers) have allowed industry to pollute with impunity for years. Today, new standards are imposed on industry that place costly burdens on companies that have been operat- ing lawfully for long periods. As pointed out in Chapter 23, some think that when society changes its rules, society (cit- izen taxpayers) ought to be required to pay for controls. Advocates of the taxpayer-pays option also argue that soci- ety has elected and continues to elect officials who make deals with polluters to entice them and their polluting busi- nesses into the community. In other cases, elected officials have overlooked flagrant violations of environmental laws. If society is responsible for elected officials who permitted pollution and other forms of environmental destruction, then the voting public (taxpayers) must bear at least some of the cost.

As in most controversies, there is validity to both ar- guments. In the case of old industries suddenly confronted with new laws, taxpayers might bear the economic burden of new controls. However, in new industries, pollution con- trol costs should probably be borne by the corporation and consumers.

KEY CONCEPTS Pollution controls and other environmental protection strategies are paid for by consumers if the costs are borne by businesses, or by taxpayers if the costs are shouldered by government.

Cost–benefit analysis is a balancing act that allows one to de- termine how much should be spent to reduce pollution to a level at which the costs of control equal the benefits (reduced ex- ternalities). Sustainable approaches have the advantage over end- of-pipe solutions in that they can reduce pollution emissions at a far lower cost.

GO GREEN

Pick up trash on your walks and recycle those items that are recyclable such as cans and bottles.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 569

Does Pollution Control Always Cost Money? The previous discussion may leave the impression that re- ducing pollution always costs inordinate sums of money. Far from it. In some cases, pollution control devices can be installed to capture marketable products that might other- wise be dispersed into the air. These materials can be sold or reused, thus generating considerable profits. Pollution prevention strategies, discussed in Chapter 23, can be even more profitable. Redesigning chemical and industrial processes, for example, can sharply reduce energy and ma- terial demand and eliminate hazardous waste disposal. These reductions often save companies considerable sums of money. In other words, companies profit from such changes.

Nowhere is this case for pollution prevention more ob- vious than in the 1989 Exxon Valdez oil spill in Alaska or the Gulf oil spill in 2010, where a little prevention could have saved billions of dollars (FIGURE 25-5). Accidents such as this have three costs: direct costs, indirect costs, and repercussion costs. Direct costs from an oil spill are those that oil compa- nies incur in the weeks and months following an accident. These include the costs of lost oil, cleanup, waste disposal, and ship repairs. The oil lost from the Valdez was worth an estimated $4.8 million. Cleanup costs were $2.5 billion the first year. The company also agreed to pay an additional $1.25 billion in fines and penalties.

Indirect costs are those costs that are incurred by state and federal agencies. Oil companies are usually required to reimburse the government for some or all of these costs. An- other indirect cost results from damage to the local economy: reduction in tourism, fishing revenues, and so on. Yet another indirect cost is damage to wildlife. The Clean Water Act holds companies liable for the cost of damage to natural re- sources from oil spills. The law permits federal agencies to collect money for lost sea otters, waterfowl, and eagles. All

told, indirect costs in the Exxon Valdez case could come to several hundred million dollars.

Repercussion costs, the image problems arising from the spill, cause people to boycott the company or reduce their patronage. Adverse publicity may also result in more costly restrictions on oil tankers. Companies invariably balance the costs of control and prevention against the possible costs of an accident. If they don’t incorporate the full costs, how- ever, cost–benefit analyses are likely to be flawed and pollution may end up costing them hundreds of millions of dollars.

KEY CONCEPTS

The Economics of Resource Management

The previous section looked at the economics of pollution control as it is typically practiced. This section examines the economics of resource management—for example, the man- agement of forests and soils—offering additional insights into the problems of modern society as well as some new so- lutions. Many decisions about natural resources are influenced by basic economic considerations, among them a factor called time preference.

KEY CONCEPTS

Time Preference Time preference is a measure of one’s willingness to postpone some current income for greater returns in the future. For ex- ample, suppose your parents offer you $100 today or prom- ise to invest it so it is worth $200 by the end of the year. If you are short on cash and need to pay for school books, you may take the money now. Your decision to accept the money now is based on your current needs, which in this case out- weigh the benefits of waiting the year, even though you would be $100 ahead. Economists would say that your need for current income outweighs greater returns in the future.

Time preference is also influenced by uncertainty. In the previous example, how certain are you that your par- ents will be able to invest the money successfully so you get the $200? Another factor affecting time preference is the rate of return. The higher the rate of return, the more likely it is that you will wait for the income. For instance, if your parents said they had a sure thing they could invest in and that your money would grow to $1,000 a year from now, you’d probably wait. You could borrow $100 from a friend, if you needed the money, at 10% interest and pay her back at the end of the year with the $1,000 you earned—and you would have lots of money left over.

The management of natural resources is affected by numerous economic factors.

25.3

Reducing or eliminating pollution can be a profitable venture that adds to the bottom line of companies. Pollution prevention and other techniques often save companies considerable sums of money, especially if all costs are calculated.

FIGURE 25-5 Alaskan oil spill. This tragedy substantially boosted the GNP of Alaska, but such expenditures are not a true measure of economic welfare.

 

 

570 PART VI. Ethics, Economics, and Environment

Inflation also affects time preference. In times of infla- tion, people are apt to buy now to avoid higher costs later. But inflation can also drive interest rates up, making sav- ings more appealing.

Time preference applies equally well to the ways in which we manage many of our natural resources such as water, farm- land, and forests. Take agriculture as an example. Farmers have two basic choices when it comes to managing their land. They can choose a depletion strategy, which permits them to acquire an immediate high rate of return for a short period. This might involve the use of artificial fertilizers, herbicides, and pesticides to maximize production (Chapter 10). Soil erosion control and other techniques might be ignored. Alternatively, farmers may choose a conservation strategy, which includes techniques to conserve topsoil and maintain soil fertility. These actions require immediate monetary investments. They may cost the farmers a little more in the short run and cut into im- mediate profits. When one takes into account the possible loss of future income from soil erosion, however, the conser- vation strategy may make the most sense.

The choice of strategy in this example depends on the time preference. Will farmers choose the cheapest method of production, which gives the highest profit in the short term, or will they choose a slightly more expensive route, forgoing immediate high profits in favor of sustainable profits in the fu- ture? The economic needs of farmers determine, to a large ex- tent, their time preference. For example, a young farmer looking forward to a productive career may opt for the conservation strategy. His immediate needs may be small. He may have no family and few debts. He can sacrifice income now for larger returns in the long run. However, an established farmer may have a family to support and excessive debt. He may, therefore, maximize his short-term profits through a depletion strategy.

Farmers’ willingness to give up the potentially higher later income resulting from conservation may also result from uncertainty about future prices, the long-range prospects for farming, and interest rates. If the price of corn is high this year but might drop significantly in coming years, farmers may choose to make their money now. If the bottom falls out of the market in the next few years, they will have made the most of this short-term opportunity. If interest rates are likely to rise, short-term profit making may be the preferable choice. High interest rates on land and machinery that farm- ers purchase tend to encourage the depletion strategy.

KEY CONCEPTS

Opportunity Cost Another factor that greatly influences economic decisions re- garding resource management is the opportunity cost—the cost of lost opportunities. For instance, the conservation strategy requires a monetary investment. The money put into conservation could have been invested in the stock mar- ket or a new business venture, possibly yielding more profit

Resource management is influenced by time preference, one’s temporal preference for earnings. Time preference is affected by current needs, uncertainty, and inflation.

with less work than the conservation strategy. As a result, when opportunity costs are high, farmers are likely to choose options other than conservation.

Opportunity costs are also incurred when resources are wantonly destroyed. Chapter 11 (on wildlife extinction), for example, describes the economic benefits of medicines derived from plants from the tropical rain forest. Losing them through disregard creates a significant opportunity cost—a loss of profit and potentially life-saving drugs. As an- other example, many of the world’s ocean fisheries have been badly depleted. Salmon runs have also been ruined by dams and water diversion projects, pollution, and outright habitat destruction. The economic loss to commercial fish- ing interests and the lost recreational opportunities are enor- mous. These losses suggest that a broader view of opportunities should be considered during resource man- agement decisions and when making new laws and regulations.

KEY CONCEPTS

Discounting Economists rely on a decision-making tool, known as dis- counting that allows investors and economists to determine the net present value of different profit-making ventures.

The net present value is the dollar value of the stream of income generated by a strategy, while taking into account inflation and other economic factors. This technique can be used to compare very different economic strategies—for ex- ample, installing a solar electric system vs. paying the utility company for electricity they generate. Big business uses this method all the time. A timber company, for instance, will use it to determine whether it makes more sense to clear cut a tropical rain forest or harvest its wood and other products sustainably over a long period.

Through a complicated set of calculations, economists can determine which strategy makes the most sense. The strategy with the highest net present value is generally cho- sen. To understand how it works, consider an example. Sup- pose you were contemplating installing a wind turbine on your property to generate all of the electricity you and your family consumed. Being a smart buyer, you want to determine how this strategy compares to business as usual—buying electricity from the power company.

To do this, you would first project the cost of all of the electricity you’d buy from the local utility over a period of 30 years, the life of a wind turbine, and compare that to the cost of the wind system. To arrive at an accurate estimate of electrical costs from the utility, however, you’d have to take into account rising electrical costs and the declining value of the dollar due to inflation. (A dollar today is worth more than it will be 10 years from now due to inflation.)

To determine the value of the electricity from the wind turbine, you’d have to include the cost of the system, in-

Money can be put to many uses. Many people choose options that provide the highest returns. That may not include investment in wise resource management

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 571

cluding installation, maintenance, and repair over the 30-year life of the system. You’d also need to calculate the cost of borrowing money to purchase it (interest on loans or inter- est lost if you took the money out of a savings account). You’d have to calculate inflation, too. When all of this is done, you can determine the net present value of both strategies.

As noted earlier, this technique is also used by large organizations, such as the World Bank, which funds development in less developed countries. Unfortunately, it is often more rational from an economic standpoint (based strictly on net present value) to liquidate a resource than to harvest at a sustainable rate which would result in a lower net present value and a lower rate of return on the investment. The strategy, then, is to make your money and run, investing it in another high-rate-of- return venture. When this happens, economics and ecol- ogy clash.

Creating a sustainable system of resource management requires rethinking the way we calculate the value of dif- ferent opportunities. Education can provide economists and resource managers with a new view of time preference, as well as alternative (sustainable) strategies to achieve re- spectable economic returns without depleting ecological re- sources. Bearing in mind that sustainable strategies provide a way of ensuring the long-term prosperity of our species, many critics argue that we must learn to factor in the long- term and hard-to-quantify benefits (like cleaner air) of sus- tainable strategies that might have lower net present value or yield lower returns. One means of fully valuing such strategies is to calculate the replacement or mitigation cost of various actions. Replace- ment cost is an estimate of the true value of a resource to human society. How much would it cost to re- plant a tropical rain forest and reestablish the complex ecosystem and the benefits it provides such as lowering atmospheric carbon dioxide levels and maintaining rain- fall patterns that are essen- tial to agriculture?

By factoring these costs into the economic calculus used to determine net present value and opportunity costs, re- source managers get a more accurate picture of the eco- nomics of various strategies. In this light, many profitable ventures will seem foolish. Sustainable strategies will ap- pear much more attractive under a more ecologically sound means of accounting.

KEY CONCEPTS Discount rates are used to calculate the present value of different options in resource management. Decisions based on the discount rate tend to emphasize immediate returns, which results in the liquidation of natural resources rather than their sustainable harvest.

Ethics To many people, money is a key driving force in society. You can’t convince them that other people will act out of a sense of duty to future generations or other species. Others see this view as hopelessly pessimistic. They point out that many noneconomic factors influence economic decisions. One of the key factors is ethics. In some cases, ethics can be as pow- erful as—or even more powerful than—profit and other eco- nomic factors.

In building a sustainable society, writers, educators, busi- ness leaders, and government leaders can play an important role in creating a long-term view that seeks to ensure the sur- vival and well-being of all life. This view, if widely held, could help foster wiser management of the Earth’s resources. Most important, it could help shift time preference and encour- age us to reconsider opportunity costs and discount rates.

KEY CONCEPTS

What’s Wrong with Economics: An Ecological Perspective

Herman Daly, who has led the effort to create an Earth- friendly system of economics, studied three leading eco- nomics textbooks and found that not one of them mentioned pollution, the environment, or natural resources. Some for- ward-thinking economists see this almost complete disregard for the environment as a fundamental flaw in their disci- pline. Worldwatch Institute’s Sandra Postel writes, “While the environment and the economy are tightly interwoven in reality, they are almost completely divorced from one an- other in economic structures and institutions.”

In my book Lessons from Nature, I outline four major flaws in economic thinking when viewed through the lens of sustainability: It is shortsighted. It is obsessed with growth. It promotes dependency, and it tends to exploit people and the environment. This criticism is not meant to be a de- nunciation of capitalism or a condemnation of those who are part of the economic system—which is all of us. It is in- tended to show how we can bring the human economy back into line with the economy of nature.

KEY CONCEPTS

Economic Shortsightedness Earlier in this chapter you learned that the law of supply and demand governs modern economic transactions and profoundly influences our thinking. Proponents of sustainable

The economic system has several key flaws when viewed from an ecological perspective. Correcting these flaws can help us cre- ate a sustainable human economy.

25.4

Not all decisions about resource management are based on eco- nomics. Ethics can play a big role in determining actions, over- riding other immediate concerns such as opportunity costs.

GO GREEN

When staying in a hotel or mo- tel room, throw all of the trash in one waste can. Plastic bags that line the receptacles are usually thrown out each time a trash can is emptied, so dumping all of your waste in one trash can will help reduce this waste of resources.

 

 

572 PART VI. Ethics, Economics, and Environment

economics, however, point out that this crucial law of eco- nomics is shortsighted, for it fails to take into account the fi- nite supplies of many natural resources: oil, natural gas, and minerals. As a rule, supply and demand economics focuses on immediate supplies and is blind to long-term stocks and long-term demand. Current prices reflect short-term supplies. “Why worry about running out?” ask supply and demand proponents. As a resource is depleted, rising prices will stim- ulate exploration and more discovery, thus opening up new supplies. Falling supplies may also force us to find substitutes, permitting society to continue on the endless treadmill of pro- duction and consumption.

At some point, nonrenewable resources become eco- nomically depleted—that is, they fall into such short supply that they are no longer affordable. They’re too expensive to extract. No one would pay the price. If substitutes are not available—and there appear to be a number of important minerals for which there are no substitutes—hard times are likely. Long before that point, though, the rising prices of de- clining resources could stimulate crippling global inflation.

Soil, the ozone layer, and the current climate are vital Earth assets. Exploited and abused, these resources have no substitutes. Their exploitation is clearly part of a short-term economic thinking. Only now are we finding that these sup- plies are limited and that previous indicators of their abun- dance were misleading.

Supply and demand economics as it is practiced today is a serious impediment to sustainability. To overcome it, supply and demand economics must be adjusted to reflect ecological realities. Key economic players, among them pro- fessors of business and economics, can assist by pointing out the limitations of supply and demand theory. Such ac- tivities could temper our lust for growth and stimulate efforts to recycle and use resources more efficiently.

Changes are also needed in public policy to help adjust economic activity to honor limits. The basic goal of these pol- icy measures would be to adjust current prices to reflect long-term supplies. Several market tools are available, in- cluding a range of incentives and disincentives. One of the most important adjustment tools is user fees, or green taxes. User fees are taxes on raw materials, paid by producers and ultimately passed on to consumers. One example is the sev- erance tax charged to coal companies on each ton of coal they mine. Chapter 18 described carbon taxes currently used in several European countries; they are another user fee.

User fees artificially increase the cost of raw materials and finished products. This, in turn, helps promote conserva- tion and raises revenues that can be used to develop alter- native supplies. For instance, money raised by a tax on coal could be used to promote energy conservation or renewable energy such as solar. Thus, a tax can help ensure future gen- erations that they too will have access to resources needed for a healthy, productive life. User fees help us honor the rights of future generations. Although new taxes are not popular, the impact of user fees or green taxes can be offset by lowering income taxes.

Another means of instilling vision in the economic sys- tem is to revamp cost–benefit analysis, described earlier in

the chapter. Efforts are needed to identify all environmental, social, and human health impacts—present and future— and to quantify them. As best they can, companies should en- sure that all costs are incorporated into the price of their product or service. This is known as full-cost pricing. By in- corporating the external costs into the cost of a good or ser- vice, we can narrow the gap between the market price and the real cost. Spotlight on Sustainable Development 20-1 explains how computer chip manufacturer Intel is help- ing reduce its carbon footprint by purchasing renewable energy.

Full-cost pricing is an ideal to work toward. It could stimulate economic change. For instance, it might com- pel companies to find ways to prevent problems in the first place, through sustainable practices such as pollution pre- vention, energy efficiency, recycling, and renewable en- ergy use. To make it happen, government agencies such as the Environmental Protection Agency (EPA) and the De- partment of Energy could widen their research efforts to de- termine the full costs of various economic activities, thus helping businesses adjust their cost–benefit analyses. Busi- ness and economics professors could train future business leaders in the practice of full-cost pricing.

Governments can also play a role by requiring least- cost policies. As Chapter 15 notes, numerous states now re- quire utilities to choose the least costly ways of producing new energy. To reflect the cost of various strategies more ac- curately, some states require utilities to add 15% to the cost of conventional strategies such as coal, oil, and nuclear power. This helps account for economic externalities and usually makes environmentally sustainable strategies more competitive.

KEY CONCEPTS

Economics and Growth In the 1967 edition of his popular economics textbook, No- bel prize-winning MIT economist Paul Samuelson defined economics as “the science of growth.” Subsequent editions have dropped the wording, but the bias remains. In his 1984 edition, for example, Samuelson wrote, “Today, the ultimate measure of economic success is a country’s ability to gener- ate a high level of and rapid growth in the output of eco- nomic goods and services. Greater output of food and clothing, cars and education, radios and concerts—what else is an economy for if not to produce an appropriate mix of these in high quantity and fidelity?” Although some econ- omists do not subscribe to this view, many do—especially those in business and government.

Our focus on growth is rooted in the frontier notion that “there is always more.” For many decades, human civ-

Economic systems and the participants in them often fail to take into account long-term supplies, a dangerous trend that re- sults in an underpricing of many natural resources and that leads to environmentally unsustainable activities. Several mech- anisms are available to incorporate such concerns into eco- nomic decision making, including user fees.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 573

ilization has been caught up in it and has been willing to pay almost any price for it.

Economic growth is based on an increasing consump- tion of goods and services. Such an increase generally arises from (1) an increase in population size and (2) an increase in the amount each of us buys—per capita consumption. Because it means greater production and, presumably, greater economic wealth, population growth has traditionally been viewed as an asset to society, with each new baby viewed as a potential new consumer.

The dangerous aspect of our nearly singular focus on growth is that it tends to equate economic growth with progress. The faster an economy is growing, many assume, the better off people are. Thus, a rising GNP is taken to mean that a country’s health and people’s lives are improving. Over the years, so many people have bought into this logic that economic growth has become a way of life. In fact, it is no exaggeration to say that economic growth has become the abiding principle of economics and business and the central focus of political campaigns and government policy. With the growth-is-essential philosophy so deeply embedded in our society, many people are blind to the outcome of continual growth. Few people today recognize that continuous eco- nomic growth is ultimately incompatible with the economy of nature, where very real limits exist.

KEY CONCEPTS

Growth and the GNP: Some Fundamental Flaws Economic growth is measured by tracking the GNP of na- tions, but the GNP is believed by many observers to be a flawed index of a nation’s welfare. Why? The GNP includes many goods and services that make no contribution to the welfare of the people. More to the point, the GNP fails to dif- ferentiate between revenue from different activities. For ex- ample, the GNP includes all expenditures on homes, books, concerts, and food that improve the standard of living. How- ever, it also includes expenditures on oil spill cleanup, can- cer treatment, and air pollution cleanup. It includes hospital bills from drive-by shootings and the ever-increasing cost of insurance to protect our homes from theft. Therefore, a country with filthy air and polluted water faced with rising cancer rates and violent crime will register a high GNP. In other words, as the GNP is structured, a dollar spent on a piano lesson for a future Mozart is just as important as a dol- lar spent on a pack of cigarettes.

By carefully defining terms, as is required by critical thinking, we can see the fallacy of overdependence on GNP as a measure of success. A telling example is the state of Alaska, whose economic output increased by $1 billion in 1989 because of the Valdez oil spill. Are there examples of the

Continual economic growth is the abiding principle of many economies and the measure of success, but it is ultimately in- compatible with the finite world in which we live. Economic growth is fueled by population growth and ever-increasing per capita consumption.

failure of economics to distinguish between various eco- nomic activities?

Actually, yes. Indonesia’s economic growth in the 1990s was predicated in part on rapid deforestation—clear-cutting of tropical rain forests. This boosted the economy, at the detri- ment of the nation’s future. It has, for instance, resulted in massive soil erosion that robs land of valuable topsoil that also pollutes streams. Much of the cleanup and housing of residents displaced by Hurricane Katrina, estimated to ex- ceed $150 billion, adds to the U.S. GNP. How much more pro- ductive would the $150 billion have been were it spent on developing a renewable energy supply to reduce greenhouse gas emissions that are causing global climate change that may have been the main reason why this hurricane was so expensive?

Another problem with the GNP is that it fails to account for the destruction of natural assets, a nation’s natural cap- ital. Natural capital is a nation’s ecological wealth. It in- cludes topsoil, forests, grasslands, open spaces, farmlands, fisheries, and wild species—resources of great aesthetic and economic importance. In many ways, natural capital is like money in the bank. Nations draw on this capital to fuel their industries and to satisfy human needs for food, building ma- terials, and other goods and services. But most nations are dipping into the bank account, taking not only the interest but the principal itself. Thus, a nation can be rapidly de- pleting its natural capital while posting a high GNP, and there is no way of knowing it. Herman Daly once wrote, “most nations are treating the Earth as if it were a corpora- tion in liquidation.” That is, most nations are selling off their natural assets such as their forests to make a quick buck. Although their GNPs may be impressive, sooner or later, they will have no productive capacity left. How does ex- ploitive behavior such as this affect GNP?

Suppose that lumber companies in a country cut down the nation’s forests to increase exports but failed to replant them. A study of the GNP of the country during the cutting phase would show that the economy is strong. If the de- struction of the forests were taken into account, however, it would be clear that conclusions about economic strength would be meaningless. The GNP fails to show the dramatic decline in assets. Unfortunately, many countries the world over are depleting their natural resources. Bolivia, Colom- bia, Ethiopia, Ghana, Indonesia, and Kenya, for example, depend on primary resources (such as minerals, timber, and crops) for 75% or more of their exports, but they are rapidly depleting them. Their GNPs hide evidence of the decline. Soon there will be no assets and no source of income.

Yet another largely unrecognized problem with the GNP is that it is blind to accumulated wealth. Modern economies today compare one to another on the basis of their annual growth in GNP. This criterion, however, fails to take into account the accumulated wealth of a country—how much people already have. A newly developed nation may have a 5% annual growth in its GNP compared with a 2% growth rate in a developed country such as the United States. Does this mean the newly developed nation is doing better? Not necessarily. It only means that its economy is expanding

 

 

574 PART VI. Ethics, Economics, and Environment

more rapidly. Most likely, it has more room to expand, but its people are far less wealthy than those of the United States keeping in mind their accumulated wealth may help na- tions temper their seemingly insatiable obsession with growth.

Finally, GNP also pays no attention to the distribution of wealth in a society. Many projects that improve the GNP of a nation fail to improve the lives of the people they are designed to help. A select few benefit, and in some cases, the masses may actually be harmed. (Some people like to call this the trickle-up theory.) In developed countries, the GNP hides frightening inequities. In the United States, for example—a country deemed rich by GNP standards—one-fifth of all chil- dren live in poverty, and about 35 to 40 million Americans have no health insurance. Looking at the GNP, one would be com- pelled to think that all was well within U.S. borders.

Author Wendell Berry calls the GNP the “fever chart of our consumption.” It is much more than that. It is an indis- criminate measure of our consumption, our waste, and our disregard for environmental conditions. It has become a measure of our unsustainability. Even its inventors argue that the GNP is prone to overvaluing production and con- sumption of goods and not reflecting improvement in human well-being. Because the GNP fails to make this distinction, critics argue that it is a false measure of success. Clearly, something else is needed to measure progress.

KEY CONCEPTS

Alternative Indicators of Progress One of the most excit- ing developments of recent years is the push to develop al- ternative measures of progress. The Yale economists William Nordhaus and James Tobin, for example, devised a measure that adjusts the GNP to make it a more accurate represen- tation of the good that people receive from their nation’s economic growth. This measure, called the net economic welfare (NEW), subtracts the disamenities of an economy— the cost of pollution, the cost of medical care for victims of lung disease caused by urban air pollution, and other costs made necessary by economic growth—from the GNP. The NEW also adds the cost of certain activities, such as house- hold services (cleaning and cooking) provided by men and women, that are not part of the traditional GNP calculations but that improve well-being.

FIGURE 25-6 shows the relationship between NEW and GNP. As you might expect, NEW is lower than the GNP. That is to be expected. Moreover, NEW is growing more slowly than GNP. In other words, as the nation’s output grows, the economic benefits of growth fall behind, largely because of rising pollution and environmental destruction. We are spending more money but getting less for it.

Continual economic growth is the abiding principle of many economies and the GNP is our measure of success. However, the GNP is an inaccurate measure of the welfare of a nation’s peo- ple because it fails to distinguish economic activity that enhances our welfare from that which results in a decreased quality of life. It also fails to take into account resource depletion, accu- mulated wealth, and the distribution of wealth.

Economist Herman Daly proposed an alternative mea- sure, the Index of Sustainable Economic Welfare (ISEW), which is now called the Genuine Progress Indicator (GPI). Although the procedure for calculating the GPI is complex, the GPI is the outcome of an attempt to measure whether a country’s economic growth, resulting from an increase in the production and consumption of goods and services have improved the health and well-being of the people in the country or caused a deterioration in them. To some ob- servers, the difference between GDP and the GPI is analo- gous to the difference between the gross profit of a company and the net profit. The net profit is the gross profit (how much money a company brought in) minus the costs in- curred. Accordingly, the GPI will be zero if the financial costs of crime and pollution equal the financial gains in produc- tion of goods and services, all other factors being constant.

GPI takes into account the enhancement of nature’s abil- ity to provide its many services and provide clean air and wa- ter, among other things. These factors are, therefore, part of a more inclusive ideal of progress. The GPI, therefore, is considered by proponents as better approximation of the nation’s true economic welfare. Growth in GPI, in turn, can be compared to the GNP to determine whether economic progress, measured by growth in GNP is actually improving our lives or not.

When Daly compared the GPI to the GNP of the United States, he made a startling discovery. In the 1970s, the GNP grew annually by 2% per capita. In the 1980s, the per capita GNP grew by 1.8% per year. The GPI during the 1970s, how- ever, climbed only 0.7% per capita (FIGURE 25-7), indicating that only about one-third of the annual growth in GNP im- proved the lives of Americans. Largely because of environ- mental degradation, the GPI declined by 0.8% per year in the 1980s. During the 1990s and the 2000s, the growth in the GNP continued but GPI leveled off. What does this mean?

Although our economic output is increasing, and econ- omists and politicians would have us believe that we are bet-

P er

ce nt

o f 1

92 9

300

Year

250

200

150

100

198019701960195019401930

Great Depression

World War II

Net Economic Welfare (per capita)

Gross National Product (per capita)

FIGURE 25-6 Net economic welfare vs. gross national product. The GNP is the market value of all goods and services produced by a country. U.S. per capita GNP has risen continuously for many years. The NEW, or net economic welfare, is a measure of beneficial goods and services. It is derived by subtracting the negative as- pects of the GNP, which do nothing to improve the quality of life, such as damage from air pollution. As shown here, the per capita NEW is lower than the GNP and rises at a slower rate, suggesting diminishing returns from economic growth.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 575

ter off, our lot in life is actually declining. In other words, de- spite a growing economy, which most people think is good news, we are actually worse off.

The United States is not the only country to show a dis- crepancy between the GNP and GPI, but it is one of the few countries for which the GPI continues to plummet. In Ger- many, the GPI is actually increasing faster than the GNP.

The GPI, like GNP, is an aggregate measure. This means that it is a single number that takes into account all positive and negative economic factors discussed in the previous sec- tion. These measures are needed to help create a more ac- curate picture of economic performance.

Fortunately, many ef- forts are under way to recal- culate GNPs to take into account the depletion and deterioration of natural re- sources. Essential as these ef- forts are, it is important to note that aggregate measures such as the GPI hide important trends needed to assess a nation’s progress. To get an even more accurate picture, over 75 U.S. cities, towns, and states are developing or have developed alternative measures of success—often called benchmarks or indicators of sus- tainability. These include data on a variety of social, eco- nomic, and environmental trends that allow communities to track crime, energy consumption, pollution, and a host of other factors. Indicators of sustainability tell communities where they are and where they’re going. They provide valu- able information needed to develop policies that address the most critical problems in an era of limited revenues. Trends data also show how effective policies are at solving problems.

In summary, while single measures of the economic, so- cial, and environmental health of a nation may be helpful, they could hide important distinctions within countries. What’s needed are new national report cards based on fac- tors such as health, literacy, environmental conditions, re- source supplies, and income distribution. Pertinent measures of sustainability could also be included, among them effi- ciency of resource use, reliance on renewable energy, level of recycling, and expenditures on restoration. Population con-

trol measures and public policy supporting sustainable goals could also be included.

KEY CONCEPTS

Making the Economic System Work Better Some economists believe that the continued divergence of the GNP and mea- sures of economic welfare and sustainability such as the GPI may be inevitable as the world becomes more congested and more dependent on fossil fuels, large-scale technologies, synthetic chemicals, and disposable goods.

Advocates of a sustainable future argue that nations should strive to reduce the difference between the GNP and GPI, that is, we should make our economic systems work for us, not to our detriment. For every gain in economic output, we should receive a similar social benefit, not a shot of pol- lution that needs to be cleaned up. How can this be done?

One way of maximizing the social benefit of economic activity is to reduce the pollution, waste, and environmen- tal destruction per dollar of GNP. This can be accomplished by applying the operating principles of sustainability, dis- cussed in previous chapters. By becoming more efficient in our use of resources; by recycling and reusing all materials; and by converting to clean, renewable energy supplies, we can reshape our economic system so that economic activity translates into measurable improvements in our lives and the ecosystems upon which we depend.

Corporations, small businesses, and even individuals can promote these activities by adopting new approaches. As many previous examples in this book have shown, such changes can result in substantial economic savings. Gov- ernments can also assist by providing a range of incentives and disincentives, many of which have been discussed in previous chapters.

KEY CONCEPTS

Rethinking Growth: Focusing on Development Many ad- vocates of sustainable development assert that our economy as presently configured is much like a cancer, eating away at its host, the Earth. They remind us that sooner or later all un- treated cancers kill their hosts. Put another way, continual economic growth in a finite world results in environmental degradation and resource depletion. Although some advo- cates of sustainability think we can grow continually and sustainably, others disagree.

Critics of economic growth argue that the future of in- dustrial nations depends more on development than on con- tinual economic growth. Continued economic growth

Applying the principles of sustainability can help us ensure that economic activity translates into improvements in the quality of our lives in all ways—social, economic, and environmental.

Alternative measures of economic performance that take into ac- count economic negatives (such as the depletion of natural re- sources) provide a more accurate picture of the welfare of nations. Even more precise information about the welfare of people comes from efforts to track key social, economic, and environmental trends.

D ol

la rs

35,000

Year

40,000

25,000

30,000

15,000

10,000

20,000

5,000

0 200019901980197019601950

GDP (per capita)

GPI (per capita)

FIGURE 25-7 Alternative indicators of progress. This graph is part of a set of indicators that measure the well-being of the United States. Note that while GNP continues to rise, GPI falls. (Data from The Genuine Progress Indicator, Redefining Progress: The Nature of Economics, Washington, DC [2006].)

GO GREEN

When staying in a hotel room, take the used soap with you and use it at home—otherwise it will be thrown out.

 

 

576 PART VI. Ethics, Economics, and Environment

requires a continual extraction of resources and ever- increasing production and consumption, which many observers believe cannot be sustained.

As Michael Kinsley of the Rocky Mountain Institute notes, “Development is very different from growth. After reaching physical maturity, we humans can continue to de- velop in many beneficial and interesting new ways—learn- ing new skills, gaining deeper wisdom, and much more.” Likewise, a nation can develop without increasing (growing) its material consumption. It can still create jobs and expand cultural and educational opportunities without expanding its demand for resources.

In the more developed nations, then, sustainable eco- nomic development must strive to create a higher quality of life without depleting resources or causing environmen- tal impacts that undercut future generations and other species. Many of the strategies outlined in this chapter will help us reach this goal. Especially important are efforts to use re- sources more efficiently and to reduce our demand for un- necessary goods and services. Using renewable resources and recycling also meet our needs, at a fraction of the envi- ronmental costs of traditional strategies.

In the less developed nations, development and limited growth within ecological limits are probably required. Lim- ited economic growth is essential to raise the standard of living of the poor. Such efforts are needed to improve the lives of the world’s people and will help put an end to the cycle of poverty and environmental decay, say proponents of this viewpoint. Strategies for sustainable development in the least developed countries are detailed in Chapter 26.

KEY CONCEPTS

Fostering Local and Regional Self-Reliance The economic system of much of the world also tends to foster dependency among individuals, regions, and nations through trade. Economic interdependence, while desirable in many respects, creates very real problems from an envi- ronmental perspective. First and foremost, it tends to sepa- rate producers of goods and services from consumers. As a result, consumers are often blind to the source of human wealth, the Earth, and oblivious to the environmental costs of satisfying their needs and desires.

Trade and interdependence allow human populations to flourish beyond the local and regional carrying capacity. Wa- ter imported from the Colorado River to the cities and towns of southern Arizona, for example, has resulted in explosive population growth. Food imports allow populations in re- gions with poor agricultural potential to flourish. Without infusions of fuel, food, and water, many regions could not sup- port large human settlements (FIGURE 25-8). If resource sup- plies dwindle, many of these regions could suffer extreme

Creating a sustainable future may require us to develop—to maintain and improve human well-being—without increasing economic throughput. Many sustainable strategies such as ef- ficiency permit the attainment of this goal.

economic and social hardship. In the U.S. West, for instance, studies of global warming suggest that water flow in the Col- orado River, which currently serves an estimated 20 million people, could fall by 30%, with devastating effects on this pop- ulation. This could cripple agriculture in arid southern California.

Despite these problems, business economists usually refer to the global marketplace (and interdependence in gen- eral) as a highly desirable goal. From an ecological view- point, however, the global marketplace and the rising interdependence that accompanies its development could be a dangerous bargain.

Some leading thinkers on the subject argue that from a sustainable vantage point, the future of human society lies not in globalization, but rather in local or regional self- reliance—that is, human communities living within the means of a bioregion. Food, water, energy, and other re- sources would come from local sources, not be imported from sources hundreds, even thousands of miles away. Greater regional and local self-reliance does not eliminate all im- ports and exports; it seeks greater self-sufficiency and re- liance on resources that are immediately available—for example, sunlight and wind energy instead of imported oil.

The transition to a sustainable society may ultimately re- quire increasing regional self-reliance. For the United States, regional self-reliance means tapping into local energy sup- plies, preferably clean and renewable ones. For states, it may mean developing diverse economies that produce many of the goods and services needed by people on a day-to-day basis. In fact, many products could be manufactured locally from recycled materials gleaned from our wastes. The di- versification of regional economies could provide an added benefit: It could help make communities and states more recession proof.

FIGURE 25-8 The price of interdependence. The city of Las Ve- gas, Nevada, is surrounded by desert. If its energy or water were cut off, the city could not exist.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 577

Greater local self- reliance, although in oppo- sition to the dominant view of economic success, is be- ginning to emerge through- out the world. In Brazil, for instance, a program to pro- duce ethanol for cars and trucks was created to reduce the nation’s dependence on foreign oil. California’s public util- ities have developed an energy strategy that relies princi- pally on energy efficiency and local supplies of renewable energy, such as wind and geothermal. Many states have pro- grams to promote the purchase of goods produced within the state. Efforts to promote U.S. or state-produced goods are an- other sign of emerging self-reliance.

KEY CONCEPTS

Creating an Ecologically Compatible Society Many economic practices widen the gap between the rich and the poor, the powerful and the weak. Income statistics support this assertion. In 1980, for instance, the average salaries of the chief executive officers (CEOs) of the 300 largest companies in the United States were 20 times greater than the average salaries of manufacturing employees; by 1990, the CEOs were earning 93 times more than the average manufacturing employee. In 2005, the difference in earning had reached 262. As further proof of the widening gap, from 1980 to 1990, the income of the top 1% of the U.S. population (those earning over $250,000 a year) doubled, whereas middle income increased only slightly. These trends continued through the 1990s and 2000s. From 2002 to 2007, two-thirds of the increase in income occurred in the top 1% of the population. Social scientists view this as a socially disruptive phenomenon.

Economic exploitation is part of the reason why less developed nations remain so poor. As in colonial times, many wealthy nations continue to reap the benefits of nat- ural resources in the less developed countries, but they of- ten pay a fraction of their real value. Gold mined in several African countries, for example, provides little economic ben- efit to miners and their local economies, whereas the mid- dlepersons who purchase and sell it to others reap huge profits. As pointed out in Chapter 16, poverty caused in part by this form of exploitation is a key element in the complex equation of rapid population growth and environmental de- cay in many less developed countries.

Economic activities also exploit the environment. In the 1800s, for example, the U.S. timber industry cut down most of the white pine trees from New England to Min- nesota. When the last of the forests were depleted, they moved to the Southeast and the Northwest to continue this

For most of us, trade is viewed as a highly desirable activity, but the interdependence it creates has many adverse effects on our long-term sustainability. Greater local and regional self-reliance, although controversial, may be essential to achieving a sus- tainable future.

unsustainable harvest. Widespread overharvesting of many whale species is another example of economic exploitation. So is commercial fishing, which (as pointed out in Chapter 10) has depleted at least two dozen ocean fisheries in the North Atlantic in the past 40 years and is threatening the majority of the remaining ones.

Making economies less exploitive of nature and of peo- ple is an enormous challenge. Virtually all of the practices out- lined in this book to promote sustainability and to help correct the flaws in our economy could greatly reduce our exploitation of nature by making society more efficient, less resource intensive, and more ecologically compatible. Some measures will reduce our exploitation of people as well. For instance, alternative measures of progress that indicate in- come distribution or education and illness among different socioeconomic strata could help adjust economic activities so that they serve all people, not just a select few. Conservation can also help. Protecting forests, for instance, by reducing de- mand for materials that are extracted from them (timber) or under them (minerals), protects the large segment of hu- manity that makes the forest its home. When a rain forest is converted into a coffee plantation, most often it is the own- ers who reap a sizable profit, while poor rural families and indigenous peoples that depend on the forest for food and fuel suffer. (For a discussion of sustainable rain forest man- agement, see Spotlight on Sustainable Development 25-2.)

Other changes are also needed to make the economic system fairer. In mineral-exporting countries, for instance, eliminating the middlepersons can bring more income to the people who extract the ore. (For an example see Spotlight on Sustainable Development 20-1.) Furthermore, developing factories in which people can convert raw materials (ore) into intermediate (metal) or finished products (hubcaps) can shift the wealth to those who have the raw materials to begin with. Further ideas on reducing the exploitation of people in less developed countries are presented in the next chapter.

Creating a Sustainable Economic System: Challenges in the Industrial World

Kenneth Boulding was one of the first to write about changes needed in the U.S. economy. In 1966, he coined the phrase cowboy economy to describe the present economic system, characterized by maximum production, consumption, re- source use, and profit. Boulding suggested that the cowboy, or frontier, economy be replaced by a spaceship economy— an economic system that recognizes that the Earth, much like a spaceship, is a closed system wholly dependent on a frag- ile life-support system.

An economic system that seeks to meet human needs while protecting and enhancing the life-support systems of the planet is called a sustainable economy (Table 25-1). The notion of a sustainable economy was not widely accepted when Boulding first proposed it. Today, as more and more nations face limits, experience environmental deterioration

25.5

GO GREEN When leaving a hotel room, turn the heat down in the win- ter and turn the temperature up in the summer to save energy.

 

 

578 PART VI. Ethics, Economics, and Environment

SPOTLIGHT ON SUSTAINABLE DEVELOPMENT

25-2 Cultural Survival: Serving People and Nature Sustainably

Throughout the tropics, efforts are under way to improve the lives of people who live in the rain forests without de- stroying the rich diversity of their biome. One way to pro- tect a resource is to set it off-limits to people. Such reserves, however, stand little chance of remaining intact if local people are robbed of the resources they need to survive. Rec- ognizing that in some instances land must be used in or- der to be preserved, some countries have established extractive reserves (Chapter 12).

Extractive reserves are protected regions where local res- idents harvest the natural products of the forest, among them fruits and nuts, rubber, oils, fibers, and medicines. Be- cause they are harvested in ways that do not harm the for-

est, extractive reserves can be productive sources of food and resources ad infinitum. In fact, indigenous peoples of the world have depended on a sustainable harvest of for- est resources throughout history (FIGURE 1).

Although numerous countries have set aside huge tracts of land, the success of extractive reserves also depends on efforts to market forest products in ways that benefit those who do the work. Jason Clay, an anthropologist with a U.S.- based group known as Cultural Survival, is one of many vol- unteers helping to make this happen. Clay manages a rain forest marketing project. He helps rain forest inhabitants process and sell the nuts they harvest. Instead of receiving 4 cents per pound, the typical price for unprocessed nuts, processing and marketing raise the price to $1.00 per pound. Cultural Survival charges its commercial clients an addi- tional 5%, which it uses to support the group’s activities throughout the world.

One of Cultural Survival’s biggest customers is a com- pany called Rainforest Products, which currently markets two cereals in the United States, Rainforest Crisp and Rainfor- est Granola. Both cereals contain Brazil nuts and cashews harvested by indigenous Amazonians. Ben and Jerry’s Ice Cream of Vermont once marketed a popular ice cream fla- vor called Rainforest Crunch, made with handpicked Brazil nuts and cashews from the Amazon.

“For the forests, it is a question of use it or lose it,” says Cultural Survival’s Jason Clay. “The value of the rain forest will have to be tested in the marketplace. But the point is to change the market, not the forest.”

By that, Clay means that the rain forest needs to be viewed differently—as a source of sustainably harvested fruits, nuts, and other products, rather than as a source of wood and pasture land. Do such nonwood forest products have adequate economic value, though?

The World Bank argues that “the extractive reserves are the most promising alternative to land clearing and col-

FIGURE 1 Nonprofit organizations are finding ways to help those closest to the land reap great financial reward from the sustainable harvest of forest products.

firsthand, and ponder threats such as global warming, the need to reshape economic systems is becoming clear. The Earth Summit in Rio de Janeiro is a symbol of these global re- alizations. How do we create a sustainable economy?

The previous sections have outlined numerous ways to make the economy more sustainable—among them user taxes, full-cost pricing, and better cost–benefit analysis. They outlined some efforts to create new measures of progress and described the need for more self-reliance. New laws and private initiatives that promote conservation (efficiency), restoration, and recycling were also discussed, as were efforts that encourage the use of renewable resources and promote

population stabilization. These steps could help revamp ma- jor sectors of our society, such as agriculture, transporta- tion, housing, and energy. No one of the changes listed in this paragraph or this book will work alone; all are needed, and each one is vital to the effort.

Because many private and government initiatives that promote these activities have been outlined in previous chap- ters, in this section we examine four major ideas: harness- ing market forces, corporate reform, green products and green seals of approval, and appropriate technology. Each of these is an important element in the complex equation of sustainability.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 579

KEY CONCEPTS

Harnessing Market Forces to Protect the Environment Companies often argue that, left to their own devices, they could find ways to reduce pollution at a much lower cost than governmentally mandated controls. In response to this com-

Numerous changes can help us forge a sustainable economy, one that meets human needs without foreclosing on future gen- erations by destroying the natural resource base that makes all economic activity possible.

plaint and the growing cost of regulation, former Democra- tic senator Tim Wirth of Colorado and a Republican col- league, the late John Heinz of Pennsylvania, assembled a multidisciplinary, bipartisan team from businesses, colleges and universities, the environmental community, and gov- ernment. Their goal was to propose ways that government could tap into economic forces to reduce pollution and man- age resources sustainably. Such measures could supplement— even supplant—traditional laws aimed at regulating pollution and resource use.

Their report, issued in 1988, outlined a number of “mar- ketplace solutions,” including (1) economic disincentives,

SPOTLIGHT ON SUSTAINABLE DEVELOPMENT

onization schemes” (italics added). In 1989, Charles M. Pe- ters of the New York Botanical Gardens’ Institute of Economic Botany and his associates proved this to be true. These re- searchers evaluated a 1-hectare (2.5-acre) plot of Ama- zonian forest in Peru to determine the economic value of a variety of options. An inventory of plant life turned up 842 trees with diameters greater than or equal to 10 centime- ters (4 inches). The trees included specimens from 275 species. Seventy two of the species yield products that are currently marketed by natives. Sixty species produce com- mercial timber, one species produces rubber, and 11 species produce edible fruits. Peters and his associates found that the 1-hectare survey area produced fruit whose annual net worth was about $400 and rubber worth more than $22.

The 1-hectare plot also contained 93.8 cubic meters of merchantable timber, which if clear-cut would be worth about $1,000. However, clear-cutting would destroy the fruit and rubber trees and would put an end to future tim- ber production. The $1,000 net income would be a one-time profit.

The researchers also examined selective cutting of mar- ketable trees (Chapter 12), which could be compatible with fruit and rubber harvesting. They found that this option by itself yielded about $310 per year.

As pointed out in the chapter, economists often rely on the discount rate to determine the present economic value of different profit-making strategies. Net present value (NPV) is equal to the net revenue produced each year, di- vided by a discount rate. The equation is NPV = V/r, where V is the annual revenue and r is the discount rate. Peters and his colleagues used a 5% inflation-free discount rate to determine the net present value of the fruit and latex re- sources of all future harvests. They found that the NPV of sustainable fruit and latex harvests was $6,330 per hectare, assuming that 25% of the fruit crop was left in the forest for regeneration.

The researchers used another equation to determine the NPV of a perpetual series of sustainable timber har- vests. Using that equation, they found that the NPV of sus- tainable harvest by selective cutting was $490. The fruit, rubber, and sustainable timber harvests of the 1-hectare plot have a combined net worth of $6,820. The value would in- crease even further if the revenues from medicinal plants, small palms, and other plants were included.

Clear-cutting has a much lower net present value be- cause, as noted previously, the practice is not sustainable. Interestingly, even conversion of the forest to tree farms was found to have a lower net present value than sustainable harvest. Timber and pulpwood produced on a 1-hectare plantation of a commercially valuable tree called Gmelina arborea in Brazil was estimated at $3,184, less than half that of the natural forest. Calculations also showed that a fully stocked cattle ranch in Brazil has a present value of only $2,960 per hectare, even if the costs of weeding, fencing, and animal care are excluded.

This economic assessment clearly shows that the value of a standing forest is much higher than the most common alternatives. Except for a few cases, though, decisions about the forests seem to favor economically less productive and environmentally unsustainable options.

The goal of sustainable economics is to serve people and to protect, even enhance the environment, making extrac- tive reserves an essential element of the new economy. Some advocates believe, however, that for such ventures to be truly successful, the people who do the work have to have more control in the market. By eliminating the middle per- sons, locals can generate more income for local collectors. If extractive reserves are successful, not only will lifestyles improve, but large tracts of rain forest and the species that live in them could be saved.

 

 

580 PART VI. Ethics, Economics, and Environment

(2) economic incentives, (3) tradable and marketable per- mits, (4) laws that eliminate market barriers to efficient re- source use, and (5) laws that remove subsidies for environmentally destructive activities.

KEY CONCEPTS

Economic Disincentives Governments have many legal means to force companies to control pollution, reclaim dam- aged lands, or reduce resource consumption. In the United States and many other industrial countries, the mainstay of environmental control is a complex and costly set of rules and regulations. U.S. environmental regulations generally es- tablish standards of conduct for a wide range of activities, from the release of pollutants from smokestacks to the restoration of surface-mined land. Some regulations stipulate how com- panies will meet standards—that is, what technologies they will use.

Regulations are generally backed by legal recourse, among them fines and prison sentences. Fines are a type of economic disincentive to discourage environmentally de- structive activities.

The 1988 report proposed a different set of economic dis- incentives, among them user fees and pollution taxes, de- scribed earlier. User fees and pollution taxes impose a fee on products that waste resources, pollute the environment, or damage ecosystems. A good example is the gas guzzler tax, a tax on cars that get poor gas mileage, which President Clin- ton rescinded through executive order. Carbon taxes, de- scribed in Chapter 20, are a good example of pollution taxes.

Economic disincentives can work. The 1990 Clean Air Act, for instance, imposed a steep tax on the use of ozone-

Many market mechanisms can be brought to bear on environ- mental problems, allowing businesses to innovate, save money, and reduce the burden of regulations.

depleting chlorofluorocarbons (CFCs) that provided con- siderable incentive for companies to find alternatives. Pol- lution taxes have long been used in Europe to reduce the emissions of a number of harmful environmental pollutants, but have been fiercely opposed by business in the United States. Efforts are currently underway to impose a carbon tax on fossil fuels to be used to reduce emissions and to de- velop clean, carbon-free energy sources, although it is doubt- ful it will ever pass given the strong opposition of oil and coal companies and a strong public campaign they have mounted to convince citizens that this will cause severe damage to the economy. A more likely candidate would be tradeable per- mits, discussed shortly.

Hazel Henderson, a leader in rethinking economics, calls user fees and pollution charges green taxes and argues that they should be applied to a wide variety of products and activities, among them disposable goods, airplane travel, international tourism, and oil consumption. Interestingly, some European nations that embrace the idea that present generations have an obligation to future generations have in- stituted a number of green taxes. In such cases, green taxes have been found to generate a substantial source of revenue. Henderson notes that many business executives find green taxes more acceptable than bureaucracy and regulation. Sur- prisingly, most economists approve of the idea. But efforts to institute a carbon tax on coal during the Clinton Adminis- tration met with stiff opposition from Western senators and was quickly killed in Congress.

KEY CONCEPTS

Economic Incentives In recent years, government offi- cials have also explored a variety of economic incentives that induce companies to comply with pollution laws. Tax credits can also be effective incentives. A tax credit works this way: A government gives a company a tax credit—say 10%—for investing in recycling equipment or for buying re- cycled material. This lowers the cost of business and en- courages responsible practices. The 10% credit for a $100,000 purchase would amount to a $10,000 savings on taxes. Tax credits can be given to individuals who invest in environ- mentally responsible products, for example, solar energy, wind energy, and conservation. Wisconsin and Colorado offer a 5% tax credit for companies that invest in recycling equipment.

Faced with budget shortfalls, governments are often wary of tax credits because they can lower tax revenues. Therefore, careful analysis is a must when considering offering tax credits—to avoid losing revenues, avoid investing in businesses that could prosper without support, and avoid in- vesting in activities that could not survive even with tax credits. Creative leaders, however, can find ways to help en- vironmentally responsible businesses get started and save the government money.

Green taxes—levies on undesirable products or activities— create a disincentive to companies that spurs interest in find- ing environmentally sustainable alternatives.

Table 25-1 Characteristics of a Sustainable Economy

Participants take a long-term systems view that

• Recognizes the importance of natural systems to human well-being.

• Ensures that economic activities improve the quality of life of all, not just a select few.

• Seeks ways to ensure that economic activities maintain or improve natural systems.

• Uses all resources extremely efficiently. • Promotes maximum recycling and reuse. • Relies heavily on clean, renewable technologies. • Restores damaged ecosystems. • Promotes regional self-reliance. • Relies on appropriate technology. • Designs and builds using principles of ecological

sustainability.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 581

KEY CONCEPTS

The Permit System Another incentive is the tradeable or marketable permit. As Chapter 19 notes, a marketable per- mit works this way: The EPA grants a permit to Company A, allowing it to emit 10,000 metric tons of sulfur dioxide each year, but the company finds an inexpensive yet effective way to cut emissions to 5,000 metric tons. It can then sell its per- mit for the 5,000 metric tons to Company B. For Company B, purchasing the permit may be cheaper than installing pol- lution control devices. Under this system, the total emis- sion of pollution in the region remains the same. However, permit systems are generally designed to reduce pollution lev- els. In this example, the EPA would simply lower permitted levels of emissions for all companies in an area. Those that can reduce pollution below their permitted value—say, through pollution prevention—can sell unused permitted emissions.

In Colorado, a marketable permit system was used to control water pollution entering Dillon Reservoir, located in the Rocky Mountains 112 miles west of Denver. Nitrogen and phosphorus entering the reservoir from farms, sewage treat- ment plants, and other sources had begun to make the reser- voir eutrophic. A study of various options to reduce phosphorus pollution showed that additional controls in treatment plants would cost the towns about $1,800 per kilogram ($820/pound) of phosphorus removed. Controlling nonpoint pollution would cost only about $150 per kilogram ($68/pound)—over 10 times less. The legislature and the EPA approved a marketable per- mit plan allowing the publicly owned sewage treatment plant to pay for nonpoint pollution controls on farmland, saving an estimated $1 million per year. Several countries now have marketable permit system pollutants that create acid rain, notably sulfur oxides, and the greenhouse gas carbon dioxide.

Marketable permits have been used in the United States to reduce carbon dioxide emissions in certain states, and efforts are underway to expand this program nationwide, although there are strong forces that oppose efforts to regulate carbon dioxide emissions—largely from oil and coal compa- nies and utilities.

KEY CONCEPTS

Removing Market Barriers Numerous laws and regula- tions create subsidies for environmentally destructive activ- ities, as discussed in chapters on mining, forestry, and solid waste. They make it more difficult for environmentally de- sirable companies and products to compete. Subsidies, there- fore, create market barriers. Chapter 23 also described another barrier, preferential freight rates—mandated by federal reg-

Permits that regulate the amount of pollution factories and other facilities are allowed to release can, in some cases, be bought and sold. This provides companies with an economic incentive to re- duce pollution. If they can find a cost-effective way to reduce emissions, they can sell their unused permitted emissions.

Outright grants and tax incentives can be used by governments to encourage sustainable business practices and products.

ulations—that make it cheaper to haul virgin materials than scrap bound for recycling. Chapter 14 mentioned subsidies to oil, gas, coal, and nuclear industries that give them a con- siderable advantage over renewable fuels.

By removing the subsidies and shipping regulations, economically inefficient and environmentally unsustainable practices can be eliminated. Removing these barriers can help protect the environment, ensure sustainable practices, and reduce government spending.

KEY CONCEPTS

Corporate Reform: Greening the Corporation A sustainable economy depends in large part on the emer- gence of companies that operate sustainably. Their products will be made from recycled materials and will themselves be recyclable. They will be produced in ways that optimize energy efficiency and minimize or eliminate hazardous waste. They could be powered by renewable energy sources, and so on. Marketplace solutions such as those described earlier and the traditional command-and-control legislation can promote such operations. Corporate change may also come internally, though—from a sense of corporate environmen- tal responsibility.

In 1989, a number of environmental groups and sev- eral managers of major pension funds in the United States, including those of California and New York, joined forces to form the Coalition for Environmentally Responsible Economies (CERES). The CERES proposed a set of guide- lines for responsible corporate conduct. Called the Valdez Principles, they call on companies to do the following:

1. Protect the biosphere by reducing and eliminating pollution.

2. Promote the sustainable use of natural resources by en- suring sustainable management of land, water, and forests.

3. Reduce the production and disposal of wastes by recy- cling, waste minimization, and other measures; use safe disposal methods for wastes that cannot be handled otherwise.

4. Employ safe and sustainable energy sources and use en- ergy efficiently.

5. Reduce risk to the environment and to workers.

6. Market safe products and services—those that have minimal environmental impacts—and inform consumers of the impacts of the products and services a company offers.

7. Restore previous environmental damage and provide compensation to persons who have been adversely affected by company actions.

Unsustainable practices are often subsidized by governments or are given economic advantage over more sustainable practices. Removing these market barriers can create a level economic playing field, permitting sustainable activities and products to flourish.

 

 

582 PART VI. Ethics, Economics, and Environment

8. Disclose accidents and hazards and protect employees who report them.

9. Employ environmental directors, with at least one mem- ber of the board of directors qualified to represent en- vironmental interests; employ environmental managers, with a senior executive responsible for environmental affairs.

10. Assess and audit progress in implementing the Valdez Principles.

Take a moment to look back over them, and you will see that almost all of the principles of sustainability (and many other ideas discussed in this chapter) are embodied in them. Number 9 is particularly important. It instructs companies to appoint high-ranking executives to the task of environ- mental management. IBM, for example, appointed a vice president of environmental health and safety, with a staff of about 30 people, to ensure that corporate environmental policy is carried out. IBM has also upgraded the status of its environmental staff, creating a more powerful and au- tonomous group that ensures production goals are met while minimizing pollution and reducing environmental damage. Environmental management staff are responsible for envi- ronmental auditing, periodic checks to ensure compliance with federal laws and enactment of sustainable practices. Most agree that environmental auditors must have the same autonomy that is afforded corporate financial auditors. Ciba- Geigy (a manufacturer of drugs, pesticides, and other prod-

ucts) recently placed all environmental auditors into an in- dependent group that reports directly to the CEO.

The success of corporate programs depends in large part on leadership from CEOs or presidents of corporations who look favorably upon corporate environmental policy. Thus, when DuPont’s chairman Edgar S. Woolard, Jr., proclaimed a new policy of “corporate environmentalism,” the vice pres- ident of safety, health, and environmental affairs (who had faced stiff resistance from plant managers) noticed a sud- den change in interest from employees.

Although few businesses and governments adopted the Valdez Principles, many have begun to implement the prin- ciples and practices of a natural capitalism, described in Spotlight on Sustainable Development 25-3. Natural cap- italism incorporates some of the key principles of sustain- able economics described in this book and has been popularized by Amory and Hunter Lovins and Paul Hawkens in a book called Natural Capitalism. Individuals can help influence the direction of business by investing in socially and environmentally responsible companies and mutual funds. The New Alternatives Fund, for example, is a mu- tual fund that invests in companies involved in many envi- ronmentally sustainable activities, among them renewable energy, cogeneration, insulation, efficient light bulbs, and other forms of energy conservation. Offering a respectable rate of return, it and other environmentally responsible in- vestments illustrate that good business and environmental protection can go hand in hand.

SPOTLIGHT ON SUSTAINABLE DEVELOPMENT

25-3 Principles of Natural Capitalism

The principles of natural capitalism provide the basis for a complete rethinking of business. They show how, in contrast to conventional wisdom, far greater profits are achieved through protecting and enhancing nature, culture, and com- munity than by harming them.

Radically increase resource efficiency Most companies can dramatically increase the productivity of almost any resource they use. Fourfold increases in re- source productivity are now the basis of economic devel- opment policy for the European Union, and 10-fold increases or greater are possible with existing technologies. In- creasing efficiency also encompasses the development of in- novative business models that focus on meeting consumer needs in ways that require fewer manufactured products and reward companies for reducing their environmental footprint.

“Biomimicry” Biomimicry calls for a shift away from conventional “heat, beat, and treat” manufacturing methods, which require enormous energy inputs and usually create toxic byproducts,

to production based on models derived from nature. The benign productive processes of living things can guide in- dustrial innovation and teach us how to eliminate waste and toxics. This principle, outlined in the book Biomimicry, by Janine Benyus, can be the source of dynamic industrial in- novation.

Invest in restorative practices All good capitalists reinvest in productive capital. Restor- ing the world’s depleted natural and human capital is a critical foundation of sustainable wealth creation. This prin- ciple encourages businesses to behave in ways that restore the capacity of both the earth and society to sustain life by investing in human and natural capital.

The goal No net loss of natural or social capital. No current balance sheet accurately captures the real economic value of natu- ral or social capital. But no human system that systemati- cally degrades either one can long endure. To achieve genuine prosperity and an economy worth sustaining, it is essential to ensure that neither form of capital is diminished.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 583

KEY CONCEPTS

Green Products and Green Seals of Approval Individuals can also influence corporate policy—and make an enormous impact on the environment—by avoiding envi- ronmentally unfriendly products (among them disposable di- apers and pens) and purchasing green products, defined as environmentally friendly goods and services. Green products may be goods made from recycled materials—for example, books, toilet paper, and paper towels made from recycled pa- per. They also include nontoxic cleaners and high-efficiency showerheads or lightbulbs. They include a wide range of re- cyclable and reusable products, such as shopping bags. Hun- dreds of green building products are now available, and thus, a house can be built from the foundation to the roof using en- vironmentally friendly materials (FIGURE 25-9). Many non- toxic, environmentally friendly paints, stains, and finishes are also available. Many of them are cost competitive with con- ventional products, too. Using the operating principles of sus- tainability—conservation, recycling, renewable resource use, and restoration—as guidelines for product purchase will help you select the most sustainable products.

Individuals can find out about a company’s environmen- tal and social record by consulting the book Shopping for a Better World, which is published by the Council on Economic

Companies can be forced to become sustainable through regu- lations and market mechanisms, but individual responsibility and action on the part of business owners, members of boards of directors, CEOs, and employees can have a profound effect on the nature of business.

Priorities, a nonprofit consumer/environmental group. It rates hundreds of products that people routinely buy. Companies are scored in 10 categories, including environmental policy, char- itable giving, minority advancement, and women’s advance- ment. Green building products have become so popular there are several well-respected books on the subject and at least one website where individuals can learn more about them.

Another means of learning about products is government labeling programs. In the early 1980s, the government of the former West Germany instituted a product-labeling pro- gram known as the Blue Angel program. The Blue Angel la- bel on a product assures the customer that the product is environmentally acceptable and was produced in an envi- ronmentally acceptable manner. Since its beginning, the program has scrutinized over 3,850 products and services.

The Blue Angel program offers even more complete analy- sis of the environmental acceptability of products have had a profound influence on German industries. In some cases, companies whose products have been given poor ratings have altered their manufacturing processes or made drastic changes in the products themselves to receive a seal of approval.

Ecolabeling programs have also emerged in Europe, Canada, Japan, and the United States. The Green Seal pro- gram in the United States, headed by Earth Day cofounder Denis Hayes, for instance, passes judgment on products us- ing criteria similar to those used in Canada (FIGURE 25-10). This program currently certifies over 1,000 products and services—everything from coffee filters to windows and doors to lodging.

Another popular label that can help individuals buy green is the Energy Star, discussed in Chapter 1. They are found on 50 products from air conditioners to stereo re- ceivers to computer screens to houses. They indicate that the product is one of the most energy efficient in its category. The Energy Star program is sponsored by the U.S. EPA and De- partment of Energy.

The EPA also recently initiated a WaterSense label for washing machines, showerheads, toilets, and more. Like the Energy Star labels, they help buyers identify the most water- efficient appliances and fixtures on the market.

FIGURE 25-9 Green building products. Virtually every part of a home can now be made from an environmentally friendly or green building material like bamboo flooring (shown here). Bamboo is a fast-growing species that can be harvested repeatedly from the same rootstalk. (Teragren Signature Bamboo Flooring: photo cour- tesy of Teragren, LLC.)

FIGURE 25-10 The Green Seal of approval. This seal affixed to a product indicates that it is a green product—one whose purchase causes less harm to the environment than competing products made by other manufacturers.

 

 

584 PART VI. Ethics, Economics, and Environment

A truly sustainable economy would require that virtu- ally all products be produced in efficient, environmentally sustainable ways. In the meantime, individuals can send a strong signal to the marketplace by purchasing products that are environmentally acceptable.

Although green products and green seals of approval are an important step along the road to sustainability, some critics point out that green consuming is still consuming. To build a sustainable world, we still need to reduce our consumption—that is, learn to do less with less.

KEY CONCEPTS

Appropriate Technology and Sustainable Economic Development In his classic book Small Is Beautiful, the late E. F. Schumacher popularized the term appropriate technology. Summarized in Table 25-2, appropriate technology puts people to work in meaningful ways. Compared with many modern forms of technology, it is efficient on a small scale. It uses locally avail- able resources, takes less energy to run, and produces mini- mal amounts of waste. Some examples of appropriate technologies geared to a less exploitive lifestyle include pas- sive solar heating for homes and businesses, wind genera- tors and photovoltaic panels for making electricity, bicycles for commuting to work when the weather permits, and com- post piles or compost worm bins to decompose yard wastes.

The use of appropriate technologies can help the less de- veloped nations reduce their resource demand and impact on

Products vary in the degree to which they contribute to sus- tainability. Some promote the principles of sustainability, such as recycling, renewable resource use, and restoration. By pur- chasing such green products, individuals help promote a sus- tainable economy. Product labeling programs can help individuals select the most environmentally sustainable products.

the environment. It could also free up resources for other peo- ple, making a better life possible for a larger number of people.

In more developed countries, the shift to appropriate technology will eliminate some jobs that have been a part of the economy for decades. Auto and steel workers and min- ers, for example, may be phased out as we shift to a more ef- ficient way of life. However, as pointed out in the next section, many new jobs will emerge as our priorities shift.

Appropriate technology, like other suggestions in this chapter, is not a panacea. It is one part of the solution. (See Table 25-3 for a summary of the ideas.) The choice for ap- propriate technologies belongs to us and the business world.

Table 25-2 Characteristics of Appropriate Technology

• Machines are small to medium sized. • Human labor is favored over automation. • Machines are easy to understand and repair. • Production is decentralized. • Factories use local resources. • Factories use renewable resources whenever possible. • Equipment uses energy and materials efficiently. • Production facilities are relatively free of pollution. • Production is less capital intensive than conventional

technology. • Management stresses meaningful work, allowing workers to

perform a variety of tasks. • Products are generally for local consumption. • Products are durable. • The means of production are compatible with local culture.

Table 25-3 Steps Essential to Building a Sustainable Economy

Goals

• Reduce population growth, then gradually reduce popula- tion size through attrition.

• Reduce resource consumption and waste by reducing de- mand, increasing product durability, and increasing effi- ciency.

• Recycle, reuse, and compost to the maximum extent possible.

• Develop a wide range of renewable energy resources. • Protect and conserve renewable resources, such as farmland,

fisheries, forests, grasslands, air, and water. • Improve renewable resource management to ensure

sustainability. • Repair past damage to natural resources by replanting

forests and grasslands, reseeding roadsides, restoring streams, cleaning groundwater, and reducing overgrazing.

• Increase national and regional self-sufficiency by using re- newable resources whenever possible.

• Support sustainable development projects in developing nations.

• Develop sustainable ethics and promote individual and cor- porate responsibility and action.

• Improve social conditions by promoting democracy, justice, and a more equitable distribution of wealth.

• Work for global peace and cooperation.

Some Policy Tools

• Environmental education programs. • Green taxes and full-cost pricing requirements for business. • Alternative measures of progress, such as the NEW and GPI,

that look at a wide range of economic, social, and environ- mental conditions.

• Laws that harness market forces, including (1) economic disincentives, (2) economic incentives, (3) tradeable and marketable permits, (4) laws that eliminate market barri- ers that promote inefficient resource use, and (5) laws that remove subsidies of environmentally destructive activities.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 585

KEY CONCEPTS

A Hopeful Future “Throughout most of its tenure on Earth,” economist Her- man Daly points out, “humanity has existed in near steady- state conditions. Only in the past two centuries has growth become the norm.” As pointed out earlier, continual eco- nomic growth may be the norm today but is very likely not sustainable. If we are to create an enduring human presence, our economic system must conform to the design princi- ples of the ecosystem. The human economy must operate within the limits of the economy of nature. However, that does not mean that the economic future is bleak. The sustainable economy need not be a prescription for dull living and stag- nation. In fact, it may entail growth in some sectors, such as solar energy and energy efficiency, while others, such as oil and steel production, are phased out. A sustainable economy based largely on renewable resources does not mean a retreat into the Dark Ages of drafty, cold domiciles. Solar heating and insulation could mean even more comfortable living spaces. Many nonrenewable resources (metals, for instance) would remain in use, recycling through the system many times. Some mining would be necessary to replace what is lost or locked up permanently in structures. Renewable fuels such as ethanol and perhaps even hydrogen could power our transportation system. Photovoltaics (such as the panels on my roof, which supply 100% of my electricity) along with wind energy might provide the electricity we need.

Clearly, today’s economy and that proposed by a grow- ing number of people are worlds apart. One of the principal differences is the continued high level of consumption and waste in the former, which is bound to deplete our nonre- newable (oil and aluminum) and renewable (wood from the tropical rain forest) resources and possibly create a popula- tion crash. In contrast, a truly sustainable economy would achieve a level of production and consumption that could be sustained forever.

KEY CONCEPTS

Environmental Protection Versus Jobs: Problem or Opportunity?

During the 1992 presidential election campaign, then-Pres- ident George Bush repeated a theme that arose many times during his campaign: We need environmental protection but not at the cost of jobs. He pointed out that we can’t have higher-mileage cars because it would put tens of thousands of American autoworkers out of work. We can’t save the

25.6

A sustainable economy conforms to ecological design princi- ples and is dynamic and full of opportunity.

Appropriate technologies are an essential part of a sustainable future. They rely on local resources, are efficient, and produce little if any pollution.

spotted owl because it will cost jobs. Ignoring the loss of employment from automation and other factors (which cost the timber industry 12,000 jobs from 1977 to 1987), Bush and others hammered on the point over and over again, while Bill Clinton and Al Gore asserted that the choice be- tween jobs and environmental protection was a false one.1

Who’s right in this debate? Do environmental regulations cost jobs? Do they cripple businesses?

Environmental regulations and permits can delay proj- ects, such as dams and power plants. However, several stud- ies show that delays are often the result of poor planning on the part of the companies and government agencies over- seeing the work. Delays could be greatly reduced if corpo- rations and governmental agencies were willing to invite the public to give input early on. As it is, citizens often be- come involved late in projects, and—because their concerns have not been incorporated—they oppose them.

Business leaders argue that environmental regulations also cut productivity and reduce income, resulting in loss of jobs. Productivity is the dollar value of goods per hour of paid employment. This figure is often used to determine how healthy an economy is. Businesspeople argue that environ- mental regulations divert workers from productive jobs (miner) to nonproductive ones (mine safety inspector), which raises the cost of doing business and lowers produc- tivity. Careful analysis shows that environmental regulations do indeed diminish the output of industry. By various esti- mates, environmental regulations decrease productivity by an estimated 5 to 15%. However, they decrease output much less than other factors, such as high energy prices and the gen- eral shift to a service economy. Efforts to prevent pollution and other problems can actually increase productivity, as pointed out in previous chapters.

In an article in International Wildlife, Curtis Moore de- scribed the efforts of Germany to protect the environment. He wrote: “More than anywhere else on Earth, Germany is demonstrating that the greening of industry, far from being an impediment to commerce, is in fact a stimulus.” He went on to say, “Precisely because it is so environmentally ad- vanced, Germany is lean, competitive, and poised to domi- nate the global marketplace.” Through end-of-pipe controls and numerous sustainable strategies that address the root causes of the problem, Germans have shown that cleaning up industry can stimulate business. How? For one, tough standards stimulate innovation, and nations with the most rigorous requirements for pollution control often become leading exporters of control technologies. In addition, en- vironmentally responsible business can result in better em- ployment opportunities.

Several studies show that far more jobs are created by environmental controls than have been lost. The Clean Air Act and Clean Water Act have created at least 300,000 jobs in pollution control. Studies by the EPA show that very few jobs are lost as a result of environmental regulation. Only

1 Another 35,000 jobs in the timber industry could be lost in the next 45 years as a result of mechanization, according to the Asso- ciation of Forest Service Employees for Environmental Ethics.

 

 

586 PART VI. Ethics, Economics, and Environment

companies that are hanging on for dear life are affected. Even the AFL-CIO admits that not one plant shutdown can be attributed to environmental regulations.

This is not to say that tighter controls on pollution, re- ductions in timber cutting, or other environmental regula- tions are always benign. They do affect communities, sometimes profoundly. Environmental protection measures, especially the kinds of changes needed to develop a sus- tainable system, will result in massive shifts in employment. As Chapter 23 notes, employment will very likely shift from the ends of the present linear system of production and con- sumption (mines, forests, and waste dumps) to the center of an efficient, cyclic system.

Numerous studies suggest that this shift will result in a net increase in the number of jobs. Thus, restructuring the economy and our way of life to rely more on energy effi- ciency, recycling, mass transit, and alternative fuels will cre- ate far more jobs than are lost. As Chapter 15 notes, a large nuclear power plant employs 100 workers. A coal-fired power plant that generates the same amount of electricity em- ploys 116 workers, whereas a solar thermal facility employs more than twice as many workers, about 250. However, a wind farm employs more than twice as many people again, 540 in all. Furthermore, wind and solar thermal energy are less expensive and more environmentally benign than nu- clear power.

Studies in the United States show that energy efficiency also creates jobs. Michael Renner of the Worldwatch Insti- tute estimates that weatherizing all U.S. households could create 6 to 7 million job-years—that’s 300,000 jobs lasting 20 years each!

A 1985 European study that examined the employment potential of six energy conservation and renewable energy technologies in four countries (Great Britain, Denmark, France, and the former West Germany) found that these technologies could create 142,000 job-years—7,000 jobs lasting 20 years. A full-fledged program for all 12 European nations could create 530,000 job-years.

Michael Renner notes that “although a shift from fossil fuels to solar energy entails job losses in the oil, coal, and gas industries, there are overlaps among the kinds of supplies and skills required by the solar industry that will minimize over- all job loss.” Companies that produce the materials needed for solar panels are already in existence. Many of the skills needed to tap renewable energy supplies are similar to those required for conventional construction and heating system installation. Work opportunities could spring up in a vari- ety of existing occupations, among them carpentry, plumb- ing, and construction.

Shifting to mass transit may also create more jobs than are created by our current system of automobile transit. A Ger- man study showed that spending $1 billion on highway con- struction yields only 24,000 to 33,000 direct and indirect jobs. Spending the same amount on railway and light-rail con- struction creates 38,000 to 40,000 jobs. Furthermore, the shift from cars and trucks to railroads, subways, light rail lines, and buses offers alternative job opportunities for much of the workforce.

Recycling offers similar employment opportunities, as pointed out in Chapter 23. Alcoa estimates that at least 30,000 people in the United States are employed in alu- minum recycling, nearly twice as many as in aluminum pro- duction. Vermont’s recycling facilities employ 550 to 3,000 people for each 1 million tons of materials they handle. On the other hand, incinerators equipped to handle the same amount employ only 150 to 1,100 people, and landfills em- ploy only 50 to 360.

Environmental protection can help save companies money. Pollution prevention measures, for instance, cut down on the production of hazardous waste and substantially reduce waste disposal costs. They also eliminate future lia- bility for cleanup and may reduce or eliminate employee health effects and future claims for health impacts. Pollution prevention can reduce lawsuits and greatly slash the cost of compliance—installation and operation of pollution con- trol equipment. Many examples cited in this book highlight companies that have saved considerable amounts of money by preventing pollution, using energy more efficiently, and recycling and reusing wastes.

Worldwatch Institute’s Cynthia Pollock Shea notes that “businesses that protect the environment can make a healthy profit.” As German and Japanese companies are showing us, environmental protection is a precondition for success.

KEY CONCEPTS

A penny will hide the brightest star in the Universe if you hold it close enough to your eye.

—Samuel Grafton

Environmental protection, rather than being an impediment to economic progress, may be a stimulant. Many sustainable strate- gies result in cost-competitive goods and services that create as many or more jobs, with little environmental impact. A sustain- able economy, however, will involve a major employment shift.

 

 

CHAPTER 25: Sustainable Economics: Economics and Challenges Facing the Industrial Nations 587

CRITICAL THINKING

Exercise Analysis Two essential critical thinking rules are to examine one’s biases and to consider the big picture. These rules are important in analyzing the assertions made in this exercise. Consider bias first.

Many people in positions of power are wedded to the notion that all growth is good. As noted in the chapter, however, much of the economic growth occurring in the United States has not improved our well- being. Growth results in extraordinary costs, such as lost wildlife, lost open space, polluted air, crowding, and so on. As pointed out in the chapter, a substantial portion of the growth of the U.S. GNP has resulted from “bad” economics—pollution cleanup, repair of damage from pollution, and unnecessary healthcare expenses. Statistics also show that economic growth tends to benefit the wealthiest members of soci- eties; that is, economic benefits of the growing economy are not trickling down to the less fortunate, as they’re supposed to.

Also noted in this chapter is the assertion that to improve an economy it is not always necessary to manufacture more goods. One of the fastest and most profitable ways of improving an economy is to use resources more efficiently. By using energy, water, and materials more efficiently, for instance, companies can produce goods more cheaply, make a higher profit, and/or compete more effectively. Pollution preven- tion is another strategy with extraordinary economic benefits. All of these strategies permit companies to produce goods while improving the bottom line and the environment.

CRITICAL THINKING AND CONCEPT REVIEW 1. Define the following terms: command economy, market

economy, and law of scarcity. 2. Describe the law of supply and demand. What is the

market price equilibrium? What are the major weak- nesses of the law of supply and demand? How can they be corrected?

3. Define your own economic goals. Would you classify them as consistent with a frontier economy or a sus- tainable economy?

4. Using your critical thinking skills, analyze the follow- ing statement: “Economic growth is essential to a healthy economy.”

5. In your view, is continued economic growth in the de- veloped nations possible? If so, why, and for how long? If not, what are the alternatives?

6. Describe the gross national product (GNP) and its strengths and weaknesses.

7. Define the term net economic welfare (NEW). How does it differ from the GNP? Is it greater than the GNP, or less? Does it grow as quickly as or more slowly than the GNP? Is this good or bad?

8. Describe the index of sustainable economic welfare (GPI). How does it differ from the GNP?

9. Using your critical thinking skills, analyze the follow- ing statement: “The GNP is a fundamentally sound eco- nomic measure and a good indicator of the well-being of a nation’s people because economic health means a higher standard of living for all.”

10. Discuss how time preference, opportunity costs, and discount rates are related. How do they affect the ways in which people manage natural resources?

11. Define the term economic externality and describe how externalities can be internalized. What are the benefits of doing this?

12. How can externalities be avoided? 13. What is the economically optimal level of pollution

control? Why is it impractical to consider reducing pol- lution from factories and other sources to zero via pol- lution control devices?

14. Describe the law of diminishing returns. How does it apply to pollution control? Can you think of any other examples where the law applies?

15. The analysis of the economic system and of economic thinking suggests a number of weaknesses when viewed through the lens of sustainability. What are they? Describe each one and discuss how each can be corrected.

16. Describe a sustainable economy. What are its main goals? In your view, is it a practical alternative to the current economic system? What are its strengths and weaknesses?

17. Using your critical thinking skills, analyze this state- ment: “Cleaning up the environment will put thousands of people out of work. We simply can’t afford to do it.”

 

 

588 PART VI. Ethics, Economics, and Environment

KEY TERMS

appropriate technology benchmarks command economy consumer-pays option demand descriptive economics direct costs discounting ecological economics economic externality economics environmental auditing free-market system full-cost pricing gas guzzler tax Genuine Progress Indicator (GPI) green products

green taxes gross domestic product (GDP) gross national product (GNP) Index of Sustainable Economic

Welfare (ISEW) indicators of sustainability indirect costs inputs law of diminishing returns law of scarcity law of supply and demand macroeconomics market economy market price equilibrium point marketable permit microeconomics natural capital

natural capitalism net economic welfare (NEW) net present value normative economics opportunity cost outputs pollution taxes productivity repercussion costs replacement cost supply sustainable economics sustainable economy taxpayer-pays option time preference user fees

Connect to this book’s website: http://environment.jbpub.com/9e/ The site features eLearning, an online review area that provides quizzes, chapter outlines, and other tools to help you study for your class. You can also follow useful links for in-depth information, research the differing views in the Point/Counterpoints, or keep up on the latest environmental news.

REFERENCES AND FURTHER READING To save on paper and allow for updates, additional reading recommendations, and the list of sources for the information discussed in this chapter are available at http://environment .jbpub.com/9e/.

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