Chapter 15 Questions, Questions, Questions – and Some Answers We are now about to end a long journey that took us from vague anecdotal and even spiritual descriptions of environmental problems to more systematic measurement and assessment. We then extended these assessments into prediction and policy analysis. Figure 15.1 illustrates how we set out from viewing environmental problems as symptoms of overcharged ecological carrying capacities (what’s the problem?). Economic activities are responsible for this overuse of environmental services, but they also offer solutions to mitigating environmental impacts (what’s economics got to do with it?). Integrative environmental-economic policies face trade-offs and need to set priorities. Before taking action (what can be done?), one has to compare, therefore, the significance of environmental impacts with the benefits of economic activity – now and in the future (how bad is it?). The interaction of environment and economy spans nearly everything under the sun, and in fact the sun as well. It is no surprise that there are no definite answers to the four questions of Figure 15.1. Lack of knowledge and empirical evidence are P. Bartelmus, Quantitative Eco-nomics, 263 © Springer Science + Business Media, B.V. 2008 Fig. 15.1 Towards sustainability – conclusive questions 264 15 Questions, Questions, Questions – and Some Answers the reasons. All one can do now, at the end of the book, is to raise these questions again and summarize the – sometimes contradictory and partial – answers in a brief synopsis of 15 questions. The solution of remaining problems will have to be left to future research. 15.1 What Is the Problem? History tells about the downfall of societies because of overuse of natural resources and local climate changes, but also because of overpopulation, excessive taxation and war (Section 1.1). Current data reveal environmental problems of natural resource depletion, pollution and deteriorating health of humans and ecosystems (Table 1.1). Q1: Do available data describe the ‘problem’? Environmental indicators assess different symp- toms of environmental deterioration. They alert us to actual or potential violations of environ- mental standards. They do not provide a com- prehensive picture of the overall sustainability of economic growth or development (Sections 1.3, 4.2.3). Q2: Is it a matter of limits? The ecological point of view sees non-sustain- ability as the transgression of planetary and local carrying capacities (Sections 1.3, 2.4.1). Available data do not assess unequivocally the closeness to, or ultimate violation of, global or regional limits (Sections 1.3, 4.2.3). 15.2 What Has Economics Got To Do with It? The initial assessment of selected environmental problems (Section 1.3) indicates interdependence of economic activity and environmental deterioration, and human welfare effects from both. The question is if and how the powerful integra- tive concepts and tools of economics apply to environmental and social concerns. Environmentalists and ecological economists reject the commodification of envi- ronmental and social services through market valuation. Environmental econo- mists, on the other hand, describe environmental impacts as the result of market and policy failures, which can be remedied by market instruments and policy reform (Sections 2.1, 13.3). The following questions reflect this dichotomy. Q3: Is the assumption of a rational, utility maximiz- ing homo oeconomicus of practical use in an imperfect world? Yes, because - Economics in a vacuum throws light on complex problems (Section 2.1) - Markets reveal individual preferences, which experts or governmental fiat should not override (Sections 2.3.2, 13.3.2). No, because - Economic rationality ignores the altruistic side of a homo politicus [FR 2.1] - Of the history of wrong diagnosis and projections, and of misleading policy advice by economists (Section 2.1) - Environmental experts are better equipped to see the loom- ing violation of planetary limits than short-sighted econo- mists and policymakers (Sections 1.3, 2.2.3). Q4: Is economic growth the solu- tion of the environmental problem? Yes, because - Post-industrial service economies are dematerialized and can afford environmental protection (Section 2.2.2) - Policy tools of environmental cost internalization fos- ter innovation and seek optimality and sustainability in economic performance and growth (Section 2.3.2, 12.3, 13.3.2). No, because - The environmental Kuznets curve hypothesis is generally rejected (Section 11.1) - Vital environmental thresholds have been transgressed in a full-world economy (Sections 1.3, 2.2.2) - Complementarities of critical natural capital prevent sub- stitution by other production factors (Section 2.4.2). Q5: Is sustainable development the solution? Yes, because - The paradigm alerts us to interactions with other, notably social, development goals, beyond economic and environ- mental ones (Section 3.2.2) - Of the need to introduce ethics and social values into policymaking so as to counteract irrelevant or misleading advice by puzzle-solving economists (Sections 2.1, 13.4.2) - Economic wealth does not make us happy (Section 3.2.1). No, because of: - Failure of development strategies (Section 3.1.1) - Lip service to, and hidden agendas behind, the opaque cor- nucopian development paradigm (Section 3.2.1) - Normative (expertocratic or governmental) targets and standards that blur scientific analysis (Section 3.3, 13.4.2) - Lack of comparable measures of social (and other) sus- tainability effects (Sections 3.1, 3.3.2). 15.2 What Has Economics Got To Do with It? 265 266 15 Questions, Questions, Questions – and Some Answers 15.3 How Bad Is It? Assessing the comparative significance of environmental and economic costs and benefits is the core issue of this book. To this end, one can either look back and ask how bad it has been, or look forward and see how bad (or good) it will be. 15.3.1 How Bad Has It Been? The environmental-economic dichotomy trickles down to measurement. On the one hand, we have physical statistics, indicators, and material and energy balances (Chs. 4 to 6). On the other hand, welfare indices (Section 7.1) and greened national accounts (Ch. 8) attempt to synthesize the physical data in money terms. Physical and monetary accounts confirm (rather than overcome) the dichotomy. The ques- tion is, what does this mean for assessing sustainable growth and development? Q6: Can non-economic indicators assess sustainable economic growth and devel- opment? Indicators warn us about environmental and social risks and measure progress in reaching particular targets (Section 4.2.3). Aggregation of indicators into indices fails to assess the question of how bad ‘it’ (the overall environ- mental-economic situation) is. The reasons are judgemental indicator selection, aggrega- tion problems and lack of operational sustain- ability concepts (Sections 5.3, 7.1). Q7: Accounting for sustainability: weighting by weight or pricing the priceless? - Environmentalists opt for physical measures of the violation of collective sustainability targets (Sections 2.4, 6.2.3, 6.3.1). Economists object to overriding individual preferences and rely on market prices to evaluate environmental scarci- ties and sustainability (Section 2.3, 8.1). - Physical balances indicate pressure on natural systems (Section 6.3.1) but fail to integrate environmental and economic effects (costs and benefits) (Section 6.3.3). - Integrated (monetary) accounts assess the inte- grative notion of sustainable economic growth (Section 8.2.1). Q8: Has economic growth been sustained? - The short answer is yes – weakly, and no – strongly. - For strong sustainability, most countries show only relative dematerialization, i.e. delinkage of material input from economic growth at levels below sustainability targets (factors 4 or 10) (Sections 6.3.2, 10.1.2). (continued) - For weak sustainability, case studies of green accounting generally indicate capital mainte- nance, i.e. positive environmentally adjusted net capital formation, except for some low-income African countries (Sections 8.3, 10.1.3). Q9: Are we better off? - No: some welfare calculations (ISEW/GPI) confirm the threshold hypothesis of declin- ing welfare at high levels of economic growth (Section 10.1.1). - Probably: several GPI calculations fail to con- firm the hypothesis (Section 10.1.1). - Yes: in terms of wealth and consumption, which might not make us happy, but reflect the continuing human quest for more prosperity (Section 3.2.1). Q10: What are the causes of environmental deterioration? - Structural profiles (Section 10.2.1), input-out- put analyses (Section 10.2.2) and decomposi- tion analyses (Section 10.2.3) show economic growth and growth-based energy use as the principal cause of CO 2 emission, counteracted to some extent by eco-efficient technology. - Critique: model assumptions and use of placeholders (CO 2 ) impair the assessment of total environmental impact (Sections 4.3, 10.2.3, 12.1.2). Q11: Will economic growth be sustainable? - Yes: some economists support the EKC hypothesis of environmental improvement (after initial decline) with high standards of living (Sections 2.2.2, 11.1); they reject the LTG model’s predictions of environmental and social collapse, citing model flaws (Section 11.2.2). - No: ecological economists and environmentalists reject the EKC hypothesis on empirical (valid only for selected pollutants) and moral (inaction in a full world invites disaster) grounds (Sections 11.1.2,3; 13.1); they adopt the LTG model as the theoretical and empiri- cal underpinning of likely environmental disaster (Section 11.2.1). (continued) 15.3.2 How Bad Will It Be? Descriptive models of structural analysis (Section 10.2) look backward: they seek to quantify the causes (driving forces) of past developments, whose influence can be expected to reach into the future. Predictive models such as the Environmental Kuznets Curve (EKC) and the Limits-to-Growth (LTG) model (Ch. 11) make such implicit trend analysis explicit. Prescriptive models try to give a direct answer to the final question of ‘what can be done?’ (continued) 15.3 How Bad Is It? 267 268 15 Questions, Questions, Questions – and Some Answers Q13: What is the policy advice of models? - EKC: correlation between economic growth and envi- ronmental improvement is mostly rejected: active policy intervention is needed (Section 11.1). - LTG: business as usual leads to collapse: we need a radical change in social values; questionable model assumptions and denial of adaptive behaviour (Section 11.2; Ch. 13, Introduction) raise doubts about this policy advice. - CEG: market instruments obtain optimality and mar- ket equilibrium, taking environmental scarcities into account; the unrealistic assumption of perfect markets (Sections 2.3.2, 12.1.2, Annex I) impairs the claim of optimality in reality. - Linear programming and optimal growth models: depend- ing on assumptions, the models indicate compatibility of optimality and sustainability (mainly through technological progress) or incompatibility (due to complementarity of critical capital) (Section 12.3). Q12: Does globalization help or hinder sustainable develop- ment? - Helps: trade liberalization accelerates economic growth, which facilitates environmental protection and equitable distribution of income and wealth (EKC and trickle- down hypotheses) (Section 14.1). - Hinders: competitive pressure (race to the bottom) and global bureaucracies (WTO, Bretton Woods organiza- tions) force governments to sacrifice social and environ- mental goals for economic ones (Section 14.1). - The evidence is inconclusive, in the absence of a com- prehensive database and model for assessing the effects of globalization. (continued) (continued) 15.4 What Can Be Done? Part I raised the possibility of environmental disaster. The international reaction was to advance sustainable development as a balanced, integrative approach to economic, social and environmental policies. However, the opaque concept (Section 3.2.1) leads to different conclusions about both the severity of the situation and what should be done about it. The pictogram of the last question in Fig. 15.1 indi- cates policy options of sermonizing rhetoric, fighting the worst symptoms, and national and global partnerships. Chapter 13 advanced strategic principles of deal- ing with environmental limits. They include laissez-faire, command and control, eco-efficiency in production, and sufficiency in consumption. The question is, what works best for sustainability at local, national and global levels? This book focuses on assessment rather than policy advice; it can only raise a few generic questions and conditional answers for stimulating further policy analysis and its feedback to the assessment process. 15.5 Some Non-conclusive Answers Two main issues emerge from the scrutiny of the environment-economy interaction: ● The all-pervading economic-ecological dichotomy in measuring and analysing sustainable economic performance and growth ● The question of addressing the sustainability of economic growth or of development. Even if there are no definitive answers, one can take some plausible positions based on the lessons from this book. Chapter 2 describes the opposing views of environmentalists and economists about environmental concerns. Environmentalists and ecological economists dis- trust materialistic market preferences for assessing environmental impacts. Lacking a comprehensive theory they rely on their insight and selective evidence for setting 15.5 Some Non-conclusive Answers 269 (continued) - Conclusion: models help to conceptualize sustainabil- ity and optimality, show theoretical connections and options but fail to provide unequivocal policy advice (cf. Section 12.3.3, Ch. 13, introduction). Q14: Tackling market or policy failure? - Market instruments of environmental policy include soft and hard measures (Table 13.3). High and imminent environmental risks require the use of harder and faster instruments at the cost of decreasing economic and ecological efficiency. Sufficiency in consumer behaviour can supplement eco-efficiency in production (Section 3.2.1, 13.4.1). - Correcting policy failure requires critical monitoring by civil society. Sharing policymaking with NGOs and/or corporations risks abdication of legitimate governmental power and accountability (Sections 9.1.1, 14.2.3). - Conclusion: we do not have a blueprint for attaining sus- tainable economic growth and development. Q15: From vision to mission? - No: jumping from vision to advocacy foregoes quantita- tive assessment and analysis and opens the door to unre- flected advocacy and agitation (Sections 1.2,3, 3.3). - Yes: non-countables count: development goals of equity, security, or environmental and cultural heritage require collective agreement and policy (Sections 3.2.2, 13.4.2). - Yes but: alarmist doomsday proclamations (Sections 1.2, 11.2.1) may cause costly overreactions (Section 4.3). The rhetoric of cornucopian sustainable development (Section 3.2.1) carries the risk of inaction but may alert to non-economic trade-offs. Institutionalized social and environmental goals may support particular social and environmental policies (Sections 1.2, 3.3). 270 15 Questions, Questions, Questions – and Some Answers limits to economic activity. Environmental economists, on the other hand, reject the mixing of normative environmental goals with positivist economic analysis. One way to overcome the deep-rooted dissent is to make the normative vision more vis- ible in terms of explicit standards and targets, and see if economic activities can play out within this normative framework. A more realistic step towards bridging – rather than overcoming – the dichotomy is compiling hybrid accounts. At least, these accounts connect the two, physical and monetary, sides of the sustainability coin. The accounts cater to the ecological sus- tainability concept of decoupling physical material throughput from monetary GDP growth. The problem with this concept is the question of how much dematerializa- tion do we need? As long as we leave this question open our bridge might lead us either into denial of environmental problems or into the visionary fog of looming disaster. Setting targets, e.g. of reducing overall resource productivity by certain factors, lifts the fog but remains judgemental. Moreover, the weight of material flows cannot capture the significance of environmental effects – a prerequisite for the rational setting of policy priorities. Referring to market preferences and prices in the integrated environmental-economic accounts appears to be the only way of assessing the – integrative – concepts of economic sustainability, i.e. produced and natural capital maintenance. However, the pricing of priceless, i.e. non-marketed, environmental services faces its own problems. Most environmentalists consider human preferences and markets – whether influenced by environmental policy instruments or not – as incapable of grasping the importance of deteriorating life support systems. On the other hand, meeting human needs and wants with scarce economic and environmental resources requires choices among production, consumption and saving/investment options. Efficient choice requires, therefore, the comparative quantitative assessment of environmental and economic costs and benefits. Mixing normative and factual information in an ethically committed ‘soft sci- ence’ (Funtowicz & Ravetz, 1991) opens the door to advocacy and proselytizing. It also prevents transparent scrutiny and discussion of environmental concerns by individuals, experts, governments and civil society. This is not to deny the signifi- cance of visionary and ethical beliefs in shaping human motives and convictions. In fact, the power of such beliefs makes it essential to separate them from ‘hard’ scientific assessments of environmental conditions and trends. Both concepts of ecological and economic sustainability refer to narrowly defined environmental sustainability of economic activity and growth. They ignore the achievements in other non-economic areas of multidimensional development. For sustainable development, one could, in principle, extend the linear programming framework to introduce further social (and other) limits to economic activity. However, any standard setting and suppositious modelling are bound to be judgemental. Expressing, alternatively, overall progress or regress with regard to these standards as welfare gains or losses is hardly possible given the problems of utility measurement and aggregation. All these drawbacks in defining and measuring a comprehensive concept of sus- tainable development suggest repeating our initial question (Section 3.3.2): has the paradigm run its course? The answer is again a guarded yes – guarded because of the goodwill attached to the concept in national and international constitutions and conferences, and in participative implementation at local levels. Considering the rhetoric surrounding the cornucopian paradigm we might lower our guard, though. Packing everything in hardly comparable indicators or opaque indices may indeed yield nothing. Worse, the hazy paradigm might conceal ‘hidden agendas’ of public and private agents and institutions. This book concentrated, therefore, on what can be measured, compared and combined, i.e. the environmental sustainability of eco- nomic performance and growth, in other words: realistic eco–nomics. 15.5 Some Non-conclusive Answers 271 Annexes [...]... compounds), whose emissions are measured in the official environmental statistics Natural resource depletion is less significant in Germany (0.6% of total environmental cost), as there are few mineral resources and the use of renewables (water and forests) appears to be sustainable at the national level Some exhaustible resources, notably coal, are subsidized to the extent that they do not show a positive economic... other non-marketed 1 Non-excludable and non-rival environmental sinks and (re)sources are sometimes considered to be public goods (in the public domain): in general, however, only produced (usually by the government) such goods are deemed to be public Non-produced environmental assets are more in the nature of open-access resources, especially when their use reduces availability I.2 Internalizing Externalities... categorization of the main areas of potential market and policy failure with regard to environmental and, to a limited extent, social concerns of non-sustainability Most environmental impacts are so-called externalities, i.e unintended side effects of consumption and production They are mostly negative, i.e welfareimpairing effects, marked by a minus (−) sign in segment I Some externalities are positive such... effects distort an otherwise Pareto-optimal situation, in which relative prices allocate scarce resources in the most efficient manner To correct the misallocation of resources, governments may prompt economic agents to internalize the environmental (damage) costs they generate by market (economic) instruments Typical means of cost internalization by market instruments are ● ● ● The establishment of... natural resources is another difficult-to-categorize activity On the one hand, the exploitation of natural resources is a deliberate act of production and consumption On the other hand, the actual loss of an (open-access) natural resource due to overuse – the tragedy of the commons described in Section 2.3.2 – might not be the intention of any of the users Acting out a prisoner’s dilemma, resource depletion... value and hence economic value loss The only depletion costs are for selected fish stocks, and some minerals (mostly oil and gas) and metals In the absence of usable market prices for these resources, the net price served as a proxy for the net present value Actual environmental protection expenditures are part of the conventional accounts However, the national accounts do not usually present these... significantly to about DM 28 billion or 1.4% of NDP When considering the much lower depletion cost of natural resource use (0.02% of NDP) one should note Germany’s dependence on resource extraction in other countries In 1990 natural resource imports were about 6% of NDP Not all of it represents non -sustainable natural capital consumption, but the figure is a first indication of the country’s need to ‘import’... S*), under given market conditions and with available production technologies The question is, how can we make this hypothetical situation a reality? In other words, how can we prod the enterprise into actually internalizing environmental costs so as to attain the optimal levels of production and emission shown in part B? Part C illustrates the answer The Pigovian tax rate t should be at the level determined... Failure Market failure in dealing with environmental problems is the raison d’être for eco–nomics The failure lies in diverting economic activity from Pareto optimality, a situation where nobody’s welfare (utility) can be improved without lowering the welfare of anybody else It is textbook knowledge that such optimality is achieved under perfect market conditions in a state of general equilibrium Taking... agents produce public and private non-marketed goods and services (segment II) Private non-market goods are especially relevant in the case of developing countries where a large amount of production is undertaken as subsistence (PH → C) Other private nonmarket activities include corporate services to neighbourhood communities, reflecting corporate social responsibility (Section 9.1.1) (PE → C) Public goods . environmental sinks and (re)sources are sometimes considered to be public goods (in the public domain): in general, however, only produced (usually by the government) such goods are deemed to be public emissions are measured in the official environmental statistics. Natural resource depletion is less significant in Germany (0.6% of total environ- mental cost), as there are few mineral resources. (water and forests) appears to be sustainable at the national level. Some exhaustible resources, notably coal, are subsidized to the extent that they do not show a positive economic value and