Fighting Fire with Fire

Day 18 Blog Post

In the stricter economic circles, recommendations for policy concerning pollution and other environmental problems are known to be unfortunately taken with a good deal of skepticism and perhaps even distrust. This is because, to the economist, the environment is a scarce resource that contributes to human welfare; and the allocation of such scarce resources to essentially unlimited human needs and wants is given top priority. The problem here is that economic policy caters to the preferences of individuals, and has two properties: substitutionability and an absence of limits/wants. The market system will reach economic efficiency if given certain conditions: a) all goods must be capable of being bought and sold in markets, and b) all markets are perfectly competitive. When one connects the dots, it is apparent that these basic economic principles do not fit well to an environmentally healthy outlook. The use of the environment in economics involves trade-offs, and therein lies the ethics of decision-making.

But because there is no market for environmental services, the decentralized decision-making of individuals will result in the misallocation of environmental resources. Such traditional use of environmental services causes unowned or commonly held resources to be overused, some goods (like fossil fuels and clean water) to be used up too quickly or in the wrong ways, and imposes burdens on the people who didn’t consent to pollution in their backyard. And this leads to market failure in the form of, mostly, externalities. An unfortunately popular example of this is when the typical chemical manufacturing plant produces waste that seeps into the groundwater of a nearby town; the people of which clearly didn’t ask for dirty drinking water. This is an example of market failure, and in order to correct it economists can then either establish property rights or use various forms of government regulations, taxes, and subsidies to replicate the incentives and outcomes that a perfectly functioning market would produce. The idea is to bring these externalities back into the playing field of the economy so that they may be properly accounted for.

There are a few ways that economic policy can correct for market failure: environmental quality standards and charging for pollution (cap-and-trade falls within this strategy). Environmental quality standards are legally established minimum levels of cleanliness or maximum levels of pollution that can be the basis for enforcement actions against a polluter whose discharges cause the standard to be violated. However, the environmental quality standard will almost never call for a complete elimination of pollution. In charging for pollution, the government taxes the firm according to how much damage its pollution costs to others. The firm then basically pays taxes equal to the damages caused by their remaining pollutive discharges and the government uses these tax revenues to compensate those who are damaged by the pollution. This method insinuates an economic value of life, which is actually thought to be able to be calculated from information on a person’s trade-off between money and risk. It has even been proposed to discount future generations for our soiling of their world, and this debate is ethically charged as well. In my opinion, this is all reminiscent of the Monsignor’s tossing of a couple of gold coins to the father whose son he had run over with his carriage in A Tale of Two Cities.

Now, if anything is to be done about the treatment of the environment, perhaps an economic approach would be a more effective step in realizing large-scale change. But the stemming problem with the economic machine is that our satisfaction wants are not equal to our welfare. When was the last time you got McDonald’s for its nutritional value?

In Robert Repetto’s essay Earth in the Balance Sheet, he uncovers the frightful disconnect between a country’s account of its wealth and its natural resources. The aim of national income accounting is to provide an informational framework suitable for analyzing the performance of a country’s system. The current “System of National Accounts” (SNA), promoted by the United Nations and in use since the 1930’s Keynesian era – a “historical artifact” as Repetto calls it – focuses on economic concerns that were most relevant back when it was created, such as the business cycle and persistent unemployment. It pays little attention to national resource scarcity.

The SNA gives inconsistent treatment to the consumption of capital goods and natural resources. In other words, it values the existence of buildings and other man-made resources that directly contribute to the economy over natural entities like rivers and forests. The scary part is that the SNA records deforestation, soil erosion, and overfishing as all contributors to income and investment; however, the loss of such natural capital is not recorded in national income and investment. But we know the truth is that no nation can stand without a healthy ecological foundation. This then creates the illusion of income development when, in fact, national wealth is being destroyed. In such a method, economic AND ecological disaster masquerade as progress.

Repetto gives a good case study in the example of the Costa Rican economy and how it serves as a microcosm of all these complex economic factors coalescing in a dangerous downward spiral. Like in many other developing countries, natural resources were the most important economic asset for Costa Rica. The country’s natural resource deterioration is indisputable, but the loss wasn’t reflected in national accounts. Instead, net revenues from overexploiting its forests, soil, fisheries, and water resources were treated by national accounts as factor income. More than 60% of Costa Rica’s territory is only suitable for forests, yet only 40% of the land remains as forests. Even worse is that only 8% of its land is suitable for cattle pasture, but they’ve spread over 35% of the land. Repetto says that had the Costa Rican government constructed balance sheets that included this loss of natural resources they would have been properly accounted for. However, never did the annual accounts of national income, expenditure, savings, and capital information reflect ongoing loss, but rather they showed only continuing growth in national income and a high rate of capital formation… until the economy crashed in the 1980’s. The national accounts gave no warning that the basis for continuing growth was being destroyed because of this disconnect between natural resource depletion and national income.

Repetto recommends that this outdated SNA be revamped with corrective environmental and economic policies that can reverse this disconnect. Policy-makers have this false sense of a dichotomy between having to choose between the economy or the environment (and frequently pushing the latter under the bus to save the former). That needs to be stopped. So, in resource-dependent countries, national accounting systems must be changed so that economic policy-makers don’t make misguided decisions. He proposes closer dialogue between scientists and policy-makers.

I agree with Repetto’s recommendations. Capitalist consumer nations (though mainly ours) weave a self-destructive culture that relies on forgetting about where all our stuff comes from. Until something disastrous occurs, something out of a sci-fi movie that raises important questions (EDIT: HURRICANE SANDY?!), the free market cannot play nicely with the environment, and in today’s world that’s a problem we literally and figuratively cannot afford. Also, rather than try to place a price on the cost of replacing organisms, the cost of replacing biological functions like photosynthesis and nitrogen fixation, “we should acknowledge that certain ecological effects are not commensurable with economic effects measured in dollars.” To me, the answer to our country’s recession problem lies in creating jobs that tend to the environment. With all this talk about creating new jobs, why not create jobs that work toward mending our relationship to the land, finding new energy alternatives, and find ways that allow our capitalistic tendencies to help maintain a healthier environment for everyone?


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