10a.
Economy and ecology – a single system

The three pillars of sustainability Economy is regularly defined as one of the (three) pillars, or dimensions, of sustainable development - Environmental, Social and Economic - all of which need to work to achieve a sustainable society. While environmental concerns have dominated the discussion for a long time we now see a change. Increasingly the language of sustainability comes closer to that spoken by politicians and businessmen. People start to realize that environmental issues need to be seen in a much broader perspective than before. They are not just a matter of environmental protection, but also a matter of long-term economic strategies. Below we will illustrate how economy is connected to environmental development but also how it influences the social situation of a country.

The science of ecological economics attempts to study economy, the environment and natural resources together. It is obvious that economy depends on natural resources and those in turn depends on how the economy - e.g. forestry or agriculture or industrial production, which may lead to pollution - is conducted. Society, economy and nature together form a single system, in which all components influence each other.

Many environmental goods are traded on a market just as any other goods. Timber, agricultural products, mined metals and fossil resources are traded and have prices, and are thus part of the normal economy. When this trade have negative effects, which are not paid for - it may be both environmental and social negative effects - these are called externalities. Typical externalities include pollution by factories, roads that intrude in the landscape, and carbon dioxide emissions from transport e.g. air traffic. Pollution may decrease the health of the people leading to higher medical costs, or reduce the production of nature and thus lower the income from forests, fields and the sea.

When the price of a product does not represent its true costs we have a market failure. Market economy does not automatically take care of the environmental costs of the economy. In fact it never does as “free” ecosystems services are supporting all activities in the system Nature-Economy. The value of all ecosystems services on Earth has been estimated and the result is much larger than the value of the total economy, that is, the world Gross Domestic Product, GDP.

One way to deal with this is that the State introduces an environmental tax. In this way an externality may be included or even avoided, for example when a factory finds it economically better to develop a production without pollution. The State may also use the tax money to restore the environment, for example when a tax on e.g. emissions of air pollutants such as SOx is used for the liming of acidified lakes.

Brownfield lands An environmental tax that makes the polluter pay at least some of the cost of polluting, is fulfilling the so-called Polluters Pay Principle, meaning that those who pollute should pay for the damage caused, most typically for the cost of remediation. In real life it is often difficult or impossible to find the polluter, e.g. when a country is hit by acid rain. Instead too often it is the victim who pays. Today we are fighting to remedy quite much of the consequences of earlier environmental sins, e.g. by remediation of brown fields. Those are much polluted earlier industrial areas, which are often extremely expensive to clean up. This is the environmental debt of earlier generations.

But what about environmental goods and services which are never sold and bought on a market? Can they be given a price? Sometimes a price can be calculated as an indirect cost. Thus the prices of all properties at the shore of a sea before and after it has been polluted reflects the price of a clean sea. In absence of a market price one may simply ask people what they are willing to pay (willingness to pay, WTP method), for example for the possibility to pick mushrooms in the forest, or to be able to swim in a nearby lake.

There are also services, which do not have a price, that are priceless, such as the beauty of a mountain range or the existence of the biodiversity of a coral reef, they have existence value. It is also obvious that monetary methods have limits. We have to preserve the basis for our lives regardless of what the market says. “When the last tree is cut, the last fish is eaten, it will be obvious that we cannot eat money.”

When asking who owns the environment, the answer above is “the state”, as the state is able to collect environmental tax. Sometimes this does not apply. The World’s Oceans for example do not have an owner in this sense. Therefore fishing fleets may harvest as much fish as they can, not to let someone else do it. As a consequence the resource is partly or completely destroyed, a reality of today’s ocean fishing. This is called the tragedy of the commons. An unregulated common resource is at danger. We see national states regulating their common resources, and some international regulations, e.g. fishing within the European Union waters, but the so called global commons – Antarctica, the oceans, the atmosphere - are in danger. Global warming can be seen as the failure to regulate the use of the atmosphere as a recipient for greenhouse gases.

GDP per Capita 2018, Source: IMF

The environment is thus valuable, but where is the wealth of nations? The collected value of all goods and services sold and bought in a nation is traditionally expressed as Gross National Product, GNP. The weakness is that it includes transactions, which are not understood as wealth, such as health services, and excludes others, which are percieved as wealth, such as natural resources. These are included in a green GNP and green budgets. The absolute value of a green GNP is not possible to establish. The large value of working with a green budget or green GNP is rather to follow the changes from one year to the next. Green budgets include traditional statistics (production values, processing value, employment), but also adds positive items (energy as biomass etc, and natural resources such as forests, fisheries etc) and subtract negative ones, such as emissions. The World Bank, which in this way has reported on the wealth of nations, emphasise the importance of agriculture, especially in the developing world.

But equally important as the wealth of nations is the distribution of wealth. The economic inequity between, as well as within, countries has typically increased since the 1970s. Large income inequalities are by many considered a problem as serious as the environmental crisis. A country with large personal income inequalities has larger problems in medical and psychological health, crime, gender equity, social trust etc. In Europe a key task for the welfare state is to function as a huge re-distributor of income to reduce inequity by collecting taxes and supporting those without income. (See further Chapter 10c).

World wealth distribution

We see that many countries, especially in Asia, which a generation back was considered developing or underdeveloped, are today counted as middle-income states. Especially in Asia the economic development has been dramatic. Still there are a number of countries, most of them in Africa, with enormous poverty. The redistribution of economic means to these through e.g. loans, development support etc., is minimal compared to for example international trade or military budgets. The United Nations asked the countries of the world to address this question in the Millennium Development Goals adopted by the General Assembly in year 2000 to be reached by 2015. Reducing poverty is one of the goals; it will be met by the target year. It will help to meet a number of other key development goals both social (child survival, education, population growth) and environmental (food production, resource use and environmental impact).

One finally needs to reflect on the meaning of economy. Money is there not for its own sake, but rather as a mean to achieve welfare and a good life. Is there enough for us to share (equity within the existing generation) and save for the coming generations (equity between generations)?

Materials for session 10a

Basic level

Study Environmental Science, chapter 19: The Cost of Pollution - Environmental Economics, pages 569 - 574: Basics of Ecological Economics.
Study Environmental Science, chapter 19: The Cost of Pollution - Environmental Economics, pages 574 - 579: Cost of environmental impact and green budgets.
Study Environmental Science, chapter 19: The Cost of Pollution - Environmental Economics, pages 583 - 589: Environmental taxes.

Medium level (widening)

Study how to perform Green Accounting, by Geir B. Asheim.
Learn about different measure of economic standard (e.g. GDP/Capita), wealth distribution (Gini coefficient or quintiles)
Read about the book The Spirit Level on social consequence of unequal distribution of wealth
Study distribution of wealth in your own country.
Watch the presentation by Elinor Ostrom on Tragedy of the Commons.
Read Raymond De Young’s Tragedy of the Commons, Adaptive Muddling and Durable Behaviour: Bringing out the best in people faced with difficult environmental circumstances.
Hans Rosling: New insights on poverty.

Advanced level (deepening)

Read Environmental Science, chapter 19: The Cost of Pollution - Environmental Economics, pages 569 - 589: The Cost of Pollution - Environmental Economics.
Study The Sustainable Development Goals; Find out what they are and how far they are from being reached. On the UNDP web site (first). On the Sustainable Development Goals (SDG) homepage (second).
Study the World Bank report Where is the Wealth of Nations. Find out how it is calculated and look up your own country in the tables in the back.
Read Chapters 9 and 10, pages 1- 47 in: Branko Milanovic (2005), Worlds Apart: Measuring Global and International Inequality.

References

Milanovic, B. 2005. Worlds Apart: Measuring International and Global Inequality. Princetone University Press.

Rydén, L., Migula, P. and M. Andersson (eds). 2003. Environmental Science - understanding, protecting and managing the environment in the Baltic Sea region. Baltic University Press. Uppsala, Sweden.

Wilkinson, R. G. and Pickett, K. 2009. The Spirit Level: Why More Equal Societies Almost Always Do Better. Allen Lane.

World Bank. 2005. Where Is the Wealth of Nations? Measuring Capital for the XXI Century. The International Bank for Reconstruction and Development / The World Bank, Washington, D.C.

Zylicz, T. (ed.). 1977. A Sustainable Baltic Region. Session 8, pp. 23-29. Baltic University Press. Uppsala, Sweden.

BUP Sustainable Development Course

10b.
The dilemma of economic growth

We live in a society in which economic growth has become a mantra for all policymakers and business people. Even if the overwhelming focus on growth is only some 30 years, the history of economic growth is long. Only during the 20th century, global GNP increased 16 times, see Chapter 1a. Among the several factors behind growth, energy stands out as the most important. The access to cheap fossil fuel is closely linked to economic growth during over a long period. Easy access to energy made labour productivity rise by some 3-4 % yearly over more than a century. A person equipped with a machine can do much more than when just using muscle power!

But where does a never ending economic growth take us? Suppose that all inhabitants should have the standard of living typical for Western Europe (or OECD countries). This means another 15 times increase, and by the end of the century after further growth a 40 times bigger economy in the world. Is this possible? Can growth go on forever – still growth is the basis of present modern economy.

Not surprising when thinking about what happens if there is no growth. Consumption would decrease, companies would not be able to sell their products and would go to bankruptcy, unemployment would mount and so on. The “engine of growth” in market economies allows companies to gain a net profit, which is invested in a development that leads to more growth and jobs. In short, it seems like modern economy has to choose between eternal growth and collapse, both of which are unsustainable. The growth dilemma may be the largest problem for the vision of a sustainable future society.

Engine of growth

It is clear that economic growth is crucial up to a point for quality of life, happiness, prosperity, education, health etc. But after that, it appears that economic growth is not so important. In international studies, life expectancy, infant mortality, education, or happiness itself do not increase after a GDP of about 10,000 USD/capita (purchasing power parity using 1995 dollars). In investigations one finds that factors which are important to individual satisfaction and wellbeing do not cost much or cannot be bought at all, such as family, friends, leisure time, enjoying nature etc. Increased income, however, is still a priority in all societies. Why do people rather get richer than happier?

To come to grips with the growth dilemma, we need to ask ourselves which is the role of material possessions. One important aspect is that in society, we tend to judge our prosperity by comparison with others. As long as we are enough equal to our neighbours all is fine, but if they have a better car or even two cars or a nicer house etc. we want the same. Social positioning is the engine of personal ambition and is also fuelling economic growth. It is the social logic behind increased consumption, which the companies need, to develop their businesses, increase profit and – grow!

If economic growth could be unrelated to flows of natural resources, the growth would not be problematic. It could go on forever as long as material consumption does not increase. Increased economy without increasing material flows is called decoupling. Decoupling has been typical for affluent societies, in the sense that economy is growing faster than consumption of resources. The productivity of for example 1 unit of energy (energy intensity) has increased for many years in western societies. But the result of decoupling is offset by an absolute increase in growth, called the rebound effect. We talk about Jevons paradox, meaning that technological progress or efficiency increase, typically leads to increased consumption. We thus have a relative decoupling. On the other hand, absolute decoupling – that the material flow is actually decreasing, while economic growth is increasing – is not seen in our societies.

Sustainable economic growth? What kind of solutions do we see for the growth dilemma? One is to dematerialize the economy, that is, an ever-increasing economic value can be given to smaller material things. For example, computers may be quite small and still be very efficient, or that we buy services, for example concerts, much more than material possessions. Much of this has happened. In a modern society, a large proportion of the economy is in the service sector (in Sweden, only about 15% of the workforce is in industry and less than 2% in agriculture and forestry). The efficiency of the production is thus enormous (or relies on imported goods) but it is still offset by increased consumption, and we do not see absolute decoupling.

Another road is green growth. This was a main theme at the 2012 Rio + 20 Conference. Green economy in short only refers to an economy where environmental concerns are taken into account. Here, one component is that material flows become cyclic (recycle all components of products) so that they do not contribute to resource extraction or environmental loads. The economy needs to rely on renewable resources, especially in energy sector. Obviously we need a green sector of the economy, but so far we have not seen it contribute to absolute decoupling. According to the Limits to Growth studies, even very extreme assumptions about technical developments did not in itself solve the problem of limits to growth. They only pushed the peaks further into the future. We have to make lifestyle changes.

Research & Degrowth As a response to mounting concerns about the growth dilemma, the de-growth movement has developed as a protest against the all-embracing concern with material possessions. The de-growth movement want other ways to measure success. The common practice of using Gross Domestic Product, GDP, as a measure of the success of a country is therefore brought into question. GDP is just the sum of all economic transactions in a country (many of which may be very negative) and was never intended to be a measure of success. The de-growth movement want to focus on welfare, prosperity, or even happiness. See further Chapter 10c.

Macroeconomic modelling has been used to explore factors, which might push a capitalist market economy into a steady state, that is non-growth, but still on a high level of prosperity. It turns out that in the common economy, the state or fiscal economy has a large role. Much of the investments are directed to long-term development, such as infrastructure, rather than short-term investments, which are more typical for the private sector. Employment stays on a high level when working hours decrease. No country has tried this recipe, so we do not have practical experience, but the topic is a key point in the British report Prosperity without Growth from 2008.