Macroeconomics and ecological sustainability
World economic production has more than quadrupled since the early 1960s. Further economic growth is clearly desirable in developing nations in order to improve the well-being of over a billion people who are now living in desperate poverty. Continued economic growth has been a principal policy objective in developed countries. But as we enter the 21st century, we must consider whether it is possible, or even desirable, to continue along the economic growth trajectory of the 20th century. Economic growth has been accompanied by an increasing demand for natural resources, as well as increases in waste, pollution, and ecosystem damages. Many ecologists warn us that the current scale of human impacts on the natural world is already unsustainable. The ecological implications of a further doubling, quadrupling, or more, of human economic activity is an issue which, to date, has received little attention from macroeconomists. In this section we consider the implications of current environmental issues for economic growth and development. First, we present an overview of some of the most pressing global environmental problems. Then we explore the relationship between economic growth and environmental quality, and discuss policies to promote ecologically sustainable development.
Contents
Major Environmental Issues
A number of environmental issues are closely related to economic growth. These include:
- Global population. Economic and technological growth since the Industrial Revolution has fostered a dramatic increase in the world’s population. Global population was approximately one billion in 1800, increasing to two billion around 1930 and three billion in 1960. By 2000, it had increased to six billion. Human population growth contributes to increases in many environmental pressures, including those related to food production. While intensification of food production has so far kept pace with population growth, it has led to significant costs in terms of land degradation, pollution from fertilizers and pesticides, and overdraft of water supplies. Global population growth rates are currently declining and many projections indicate that the human population will peak sometime in the 21st century. A stable or declining global population would eventually ease environmental pressures, but a substantial population increase is still predicted in the coming decades. The United Nations projects a global population of approximately nine billion in 2050, with almost all future population growth occurring in developing nations.
- Resource Depletion. Depletion of important renewable and non-renewable resources has accompanied economic growth. Many of the world’s fisheries are in decline due to over-fishing. Tropical forests are being lost at a rapid rate. Nearly a billion people live in countries where water is in scarce supply. In almost all of these areas, water supplies continue to be overdrawn and polluted. Stocks of key mineral resources, such as aluminum and copper, are for the most part not close to exhaustion, but high-quality reserves are being depleted, and recovery of lower-quality reserves tends to involve higher energy and environmental costs.Probably no other natural resource has been more critical for modern economic growth than fossil fuels. These fuels (oil, coal, and natural gas) currently provide 86% of global energy supplies. The U.S. Department of Energy projects that global demand for fossil fuel energy will increase approximately 60% between 2006 and 2030. However, many estimates suggest that global production of oil, the most-used energy source, will peak within the next few decades. If this occurs – and global demand continues to climb – it will create a situation of increasing scarcity and rising prices. Given the current dependence on fossil fuels, this threatens both the potential for developed countries to maintain their living standards and for developing countries to reduce poverty.
- Pollution and Wastes. Damages from pollution are not reflected in traditional national accounting measures, even though they clearly reduce welfare. Industrial countries generate the vast majority of the world’s pollution and waste. While the rich countries have only about one-sixth of the world’s population, they generate about two-thirds of global industrial wastes by volume. But pollution also jeopardizes economic development in poorer nations. For example, a “Green GDP” estimate for China’s Shaanxi province indicated that costs attributed to pollution alone amounted to over 10% of the official gross domestic product (GDP) for 2002. In some cases, toxic wastes are exported from industrialized countries to low-income nations that are ill-equipped to receive them. Rapid future development will mean that such problems are likely to grow, despite efforts to control them with environmental regulations.
While all of these issues are important, global climate change (Causes of climate change) has recently emerged as the primary environmental challenge of the 21st century. Research over the last several years has virtually eliminated any doubts that human activities are affecting the Earth’s climate. Emissions of various greenhouse gases, particularly carbon dioxide, trap heat near the Earth’s surface, leading not only to a general warming trend but to sea-level rise, ecological disruption, and an increased frequency of severe weather events such as hurricanes, floods, and droughts.
Greenhouse gases persist for decades or more in the Earth’s atmosphere. In addition, there is a time lag between the time a gas is emitted and the time when its effects are fully realized. Thus even if annual emissions of greenhouse gases were immediately stabilized at current levels, the concentration of these gases in the atmosphere would continue to rise for some time. Global emissions of greenhouse gases will eventually need to be reduced significantly – from 25 to 70% lower than current levels by 2050 if we are to avoid the most dangerous effects of climate change (Causes of climate change), with further reductions in the second half of the 21st century. However, rather than declining, emissions of the major greenhouse gases are rising rapidly, primarily driven by fossil-fuel-based economic growth. According to the U.S. Department of Energy (U.S. DOE), global emissions of carbon dioxide rose by 13% between 2000 and 2004. U.S. DOE projects a further increase in global carbon dioxide emissions of over 60% by 2030.
Figure 1: Range of Predictions of Global Average Temperature Increase over Pre-Industrial Levels, 2000-2100. Global average temperature is predicted to be between 1.5 and 6 degrees Celsius warmer in 2100 compared to pre-industrial levels. (Source: IPCC) Predicting the precise effects of climate change (Causes of climate change) is subject to substantial uncertainty. In 2001 the Intergovernmental Panel on Climate Change (IPCC) produced a report summarizing the predictions of various climate change models. They reported a range in which the average global temperature was expected to be between 1.4 and 5.8 degrees Celsius (2.7 and 10.8 degrees Fahrenheit) warmer in 2100 when compared to pre-industrial levels, as illustrated in Figure 1. The IPCC’s median-range projection is for a temperature increase of about 2.8 degrees Celsius (5.0 degrees Fahrenheit). The likely effects of only a 2°C increase in global average temperature include:
- A 20-30% decrease in water supplies in already vulnerable regions such as Southern Africa and the Mediterranean;
- Significant declines in crop yields in tropical regions;
- 40-60 million more people exposed to malaria in Africa;
- Up to 10 million more people affected by coastal flooding each year, with major low-lying areas swamped and coastal cities endangered;
- 15-40% of species may face extinction.
While these conclusions regarding the effects of a 2°C increase in global average temperature have gained additional scientific support, findings since the 2001 IPCC report have made use of new data and new analysis to conclude that climate change (Causes of climate change) will likely occur more rapidly than was anticipated just a few years ago, and that the impacts will be more severe. A report sponsored by the British government in 2006 finds that under a “business as usual” scenario there is at least a 50% chance of an average temperature increase of more than 5 °C (9 °F) by the early 22nd century. Climate change of this magnitude could lead to catastrophic effects such as the irreversible melting of the Greenland ice sheet, the collapse of the Amazon forest, and flooding of major cities including London and New York.
The 2006 British report estimates the costs of climate change in the 21st century as equivalent to 5-20% of global gross domestic product (GDP), while the most severe effects of climate change could be avoided at a cost of around only 1% of global GDP. Thus it now appears that the benefits of current actions to minimize climate change significantly exceed the costs.
Two other climate change issues should also be mentioned. First, while the most dangerous impacts of climate change will not occur for several decades or more, the actions taken in the next few decades will have a profound effect on those ultimate impacts. Delaying action for a decade will lead to a much greater risk of catastrophic effects. Second, the impacts of climate change will fall disproportionately on the developing countries, including coastal flooding, agricultural yield reductions, spreading of tropical diseases, and water supply shortages. While the rich nations will, to some extent, be able to adapt to many of the effects of climate change, the poor countries lack the financial and technical resources to adapt. As the IPCC notes, climate change will likely exacerbate global inequalities and impede economic development in poorer nations.
The Relationship between Economic Growth and the Environment
Figure 2. Environmental Kuznets Curve (EKC) for Sulfur Dioxide Emissions. The empirical relationship between sulfur dioxide emissions and the level of economic development in a nation supports the EKC hypothesis. (Source: Panayotou, T., “Empirical Tests and Policy Analysis of Environmental Degradation at Different Levels of Development,” 1993.) Some researchers have suggested that economic development eventually reduces environmental damages per capita when sufficient wealth and technology allows nations to adopt clean production methods and move towards a service-based economy. Further, environmental quality is generally considered a “normal good” – meaning that people will demand more of it as they become wealthier. The Environmental Kuznets Curve (EKC) hypothesis posits an inverted U-shaped relationship between economic development and environmental damages. According to this logic, environmental damage per capita increases in the early stages of economic development, reaches a maximum, and then diminishes as a nation attains higher levels of income (Figure 2). If the evidence supported this hypothesis, then it would imply that economic development will eventually promote a cleaner environment.
Does this principle really work? The EKC relationship does seem to hold for some pollutants. Figure 2 shows the findings of a study that estimated the relationship between per capita sulfur dioxide emissions (the primary cause of “acid rain”) and the level of economic development in a nation. Sulfur dioxide emissions per capita peak at a gross national product (GNP) per capita of around $5,000 and decline as incomes rise further. Studies of some other pollutants, predominantly other air pollutants, also give limited support to the EKC hypothesis.
Figure 3: Carbon Dioxide Emissions vs. GDP per Capita, 2002. Carbon dioxide emissions per capita tend to increase with higher levels of economic development in a country. (Source: World Bank’s World Development Indicators database) However, the EKC relationship does not appear to hold for many other environmental problems. Studies of municipal waste and energy use find that environmental impacts generally continue to rise as incomes rise. Perhaps most importantly, carbon dioxide emissions tend to show a positive relationship with average income, as shown by the upward-sloping trend line in Figure 3. This means that carbon emissions can be generally expected to increase as economies grow, unless current dependence on fossil fuel energy is drastically altered.
Thus economic development alone appears unlikely to provide a guaranteed path towards environmental sustainability. The relationship between economic development and the environment is, in reality, more complex. Not only is the level of economic development a relevant factor in determining environmental impacts, but the distribution of resources also plays a key role. Most definitions of sustainable development focus on the imperative of reducing economic inequalities along with preserving the environment.
Some environmental damages, such as soil erosion and deforestation, often occur because poor people undertake unsustainable practices simply to survive. Programs to eliminate poverty in developing nations can provide people with choices that are less destructive towards the environment. Meanwhile, environmental degradation typically hits the poorest people the hardest.
Policies that improve the environment can thus also act to reduce poverty and economic inequality. So we see that the objectives of human development (Macroeconomics and human development) and environmental protection are actually interlinked goals. The promotion of human development in poor nations can improve environmental quality while policies to improve the environment can also reduce economic disparities. This suggests the need for a coordinated policy response that considers the linkages between human development and the environment.
Policies for Sustainable Development
Much of macroeconomic theory and policy is currently oriented towards promoting continuous economic growth. What kind of policies would be required to promote ecological sustainability? How can these policies be designed to also maintain well-being and promote human development (Macroeconomics and human development), especially in developing countries?
Some ecologically-oriented economists view "sustainable growth" as a contradiction in terms. They point out that no system can grow without limit. However, some kinds of economic growth seem essential. For the large number of people in the world who cannot satisfy their basic needs, an increase in consumption of food, housing, and other goods is clearly required. For those who have achieved a high level of material consumption, there are possibilities for improved well-being through expanded educational and cultural services which do not necessarily have a large negative environmental impact. But there is nothing in standard macroeconomics which guarantees that economic growth will be either equitable or environmentally benign. Specific policies for sustainable development are therefore needed.
Figure 4: Environmentally-Based Taxes as a Share of Total Tax Revenue, Selected Developed Countries. Environmentally-based taxes account for over 10% of total tax revenue in Denmark but only about 3.5% of total revenue in the United States. (Source: Organization for Economic Cooperation and Development) What might such policies involve? Some possibilities include:
- "Green" taxes which make it more expensive to undertake activities that deplete important natural resources or contribute to degradation of the environment. They discourage energy- and material-intensive economic activities, while favoring the provision of services and labor-intensive industries. An example of a green tax would be a tax on fuels such as gasoline and diesel in proportion to the carbon emissions of the fuel. All countries have implemented environmentally-based taxes to some extent. As shown in Figure 4 environmental taxes in industrial countries can range from 3.5% to over 10% of total tax revenues.Green taxes are strongly supported by economic theory as a means to internalize negative externalities such as pollution. When there exists a negative externality like pollution, an unregulated market will result in an inefficient allocation. Two common objections arise to green taxes. First, green taxes would likely fall disproportionately on lower-income households. A rebate or credit to these households could be implemented to avoid making a green tax regressive. The other criticism is that green taxes are politically unpopular – no one particularly wants higher taxes. Increases in green taxes can be offset by decreases in other taxes, such as income taxes, so that the tax burden on a typical household remains unchanged. And unlike income-based taxes, households would have options to lower the amount of green taxes they pay by undertaking energy conservation measures and other environmentally-friendly practices.
- Elimination of agricultural and energy subsidies which encourage the over-use of energy, fertilizer, pesticides, and irrigation water. Sustainable agricultural systems rely on the recycling of nutrients, crop diversification, and the use of natural pest controls, minimizing the use of artificial chemicals and fertilizer. These systems also tend to be more labor-intensive and thus could boost employment.
- Policies to promote greater recycling of materials and use of renewable energy. Through research and development grants, subsidies, and tax breaks, governments can support the expansion of energy from solar power, wind (Wind farm), and geothermal heat. Strategic public investment in new technologies such as fuel cells and high-efficiency industrial systems can eventually make these technologies cost-competitive.
- Tradable permit systems that set an overall limit on pollution by offering a limited number of permits which allow permit holders to emit specific quantities and types of pollution. These plans are based on the principle that a process of pollution reduction may be most efficiently achieved by allowing businesses to choose between finding economical ways to reduce their emissions or paying to buy permits. Once the permits are distributed to firms, they can then buy or sell them from or to other firms. Pollution reduction will occur first where it can be done most economically. This efficiency characteristic makes tradable permit systems popular among economists. While environmentalists have sometimes objected, on principle, to the idea of government issuing “permits to pollute,” it is recognized that tradable permits have been used successfully in several instances, most notably to reduce sulfur dioxide emissions in the United States. Such permits can also be purchased by environmental groups or private citizens in order to retire them and thus reduce the overall level of pollution.
- Policies to promote efficient transportation systems that replace energy-intensive automotive transport with high-speed trains, public transit, greater use of bicycles, and redesign of cities and suburbs to minimize transportation needs. In countries like the United States where automobile-centered systems are already extensively developed, the use of highly fuel-efficient cars would be important; in some developing countries automobile dependence might be avoided altogether.
- Debt-for-nature swaps where the debt of developing countries would be forgiven if they agree to protect nature reserves or pursue environmentally-friendly policies. For example, in 2002 the United States canceled $5.5 million of debt owed by Peru to the U.S. in return for Peru’s agreement to conserve 10 rainforest areas covering more than 27.5 million acres. This innovative international form of international fiscal policy was authorized by the Tropical Forest Conservation Act of 1998.
As many modern environmental problems are global in scope, they require a coordinated international response. The challenge of global climate change (Causes of climate change) presents an illustration of how difficult this can be in practice. The Kyoto Protocol, drafted in 1997, committed developed nations to reduce their greenhouse gas emissions an average of 5% below their 1990 emissions by 2008-2012. Enough nations ratified the treaty so that it entered into force in 2005. The United States, the world’s largest emitter of greenhouse gases, has refused to ratify the treaty on the grounds that it would hurt the U.S. economy, and because it does not bind developing nations to any emissions targets. It also now appears that many of the nations that have ratified the treaty will not meet their emissions targets. In November 2006 representatives from 189 nations met in Kenya to begin the process of drafting a climate change treaty to replace the Kyoto Protocol when it expires in 2012.
Sustainability and Consumption
| Table 1. Global Population Classification by Income and Environmental Impacts, | |||
|---|---|---|---|
| Global Lower- Income Class | Global Middle- Income Class | Global Upper- Income Class | |
| Population (millions) | 2,343 | 3,018 | 1,004 |
| Average income per capita (US dollars) | 507 | 2,274 | 32,112 |
| Energy use per capita (kg oil equivalent) | 501 | 1,373 | 5,410 |
| Electricity power consumption per capita (kWh) | 358 | 1,720 | 9,503 |
| Carbon dioxide emissions per capita (metric tons) | 0.8 | 3.3 | 12.8 |
| Passenger cars per 1,000 population | 6 | 51 | 433 |
|
Source: 2006 Little Green Data Book, the World Bank. Classification based on Durning, How Much is Enough: The Consumer Society and the Future of the Earth. | |||
As discussed earlier, global inequalities currently mean that many people in the world have too little to live, while others consume at high levels. Some theorists have suggested replacing the goal of ever-increasing consumption with the goal of sufficiency. This idea is developed at two levels. On the individual level there is the question of what levels of consumption are sufficient to support human well-being. On the macro or global level there is the question of what kinds and amounts of consumption can be continued, by humanity as a whole, without destructive environmental consequences. Note that the second question includes two importantly different issues: the kinds of consumption, and the aggregate quantities consumed. Alan Durning, author of How Much is Enough: The Consumer Society and the Future of the Earth, has proposed dividing the global population into three groups classified according to their consumption levels and environmental impacts. Table 1 presents a similar classification using updated data. We see that energy use, carbon emissions, and vehicle use for those in the global lower-income class are all much lower than in the rest of the world. While these households are often forced to undertake ecologically unsustainable actions simply to survive, their impact on global environmental problems is relatively minor. Durning identified “the global middle class” as the group that leads the most environmentally sustainable lifestyle. They rely primarily on bicycles and public transportation, eat a grain-based diet, and use a moderate amount of energy. Durning suggests that the entire world population could live at this level of affluence without overstepping the ecological carrying capacity of the planet. The global upper-income class relies on private vehicles and air transportation, eat a diet with daily meats, and use a significantly greater amount of energy than the other classes. Their lifestyle could not be emulated by the rest of the world without exceeding the capacity of the biosphere.
Each group must approach environmental sustainability with different objectives. For the lower-income group, the focus must be on improving material living standards and expanding options while taking advantage of environmentally-friendly technologies. The challenge for the middle-income group is to keep overall environmental impacts per capita relatively stable by pursuing a development path that avoids a reliance on fossil fuels, disposable products, and ever-increasing levels of material consumption. Finally, the high-income group must find a way to reduce environmental impacts per capita through technological improvements, intelligently-designed policies, and changes in lifestyle aspirations.
Sustainability and Investment
If an ecological perspective implies limits on consumption, what happens to investment? Investment spending has often been crucially important for aggregate demand and employment. Yet additional investments in traditional sorts of plant and equipment, heavily reliant on fossil fuels, may work against environmental sustainability. This dilemma can only be resolved by forms of investment which improve well-being but do not increase “throughput” of natural resources and creation of wastes. Fortunately the social and environmental challenges that have been outlined in this article define the need for large investment expenditures, many of which are not directly related to increasing material consumption. Rather than being a burden or threat, the need for such investment expenditures may be the solution to maintaining employment with limited consumption.
Many countries in the past used industrial policies successfully to push an economy from one phase to another. The United States could not have gone from a mostly agrarian economy to an industrial one without government assistance in developing transportation and communication systems. Japan’s government carefully selected a sequence of industries to support, going from low-tech, labor-intensive, to high-tech, information-intensive. All of the successful European, Asian and North American economies have depended on essential support from national investments in education and public health. Many such investments are “public goods” because, while they provide widespread benefits, it is hard to collect payment from the people who benefit from them; hence, if they are to occur, they need to be supported through national action. A similar set of strategic investments, focused on areas such as public transportation and alternative energy, could move nations towards a more environmentally sustainable economy. Such investments contribute to economically and environmentally positive development, but may not themselves pay the kind of return that would encourage private companies to undertake them. Yet with such strategic investments in place, the private sector can be relied on for much of the follow through – much as, in the past, the United States government provided interstate highways, while the private sector supplied cars and trucks.
It is also important to remember that “investments” should really refer to much more than just factories and equipment. Environmental policy is concerned with protecting – that is, avoiding disinvestment in – the global commons – the oceans, the atmosphere, the world’s store of living species, and other aspects of natural and social capital that greatly affect the possibilities and the quality of life for present and future human generations.
This kind of long-term investment requires a more future-oriented perspective than is used for most business investments. The use of market discount rates tends to limit the planning horizons of most businesses and individuals to about twenty to thirty years. But long-term sustainability demands a generational perspective, since many of the most severe impacts of problems like global climate change (Causes of climate change) will take decades, or even centuries, to unfold.
Further Reading
- Global Development And Environment Institute, Tufts University
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