An Introduction to Ecological Economics: Chapter 4

Published: September 18, 2008, 5:17 pm

Topics:

Ecological Economics (main)

Policies, Institutions, and Instruments

"...while purity is an uncomplicated virtue for olive oil, sea air, and heroines of folk tales, it is not so for systems of collective choice."
—Amartya Sen^[3]

In this section we discuss some general and specific policy ideas that follow from the previously discussed principles, and introduce instruments that may be useful in implementing these policies. We advocate a broad, democratic process to discuss and achieve consensus on these important issues. This is distinct from the polemic and divisive political process that seems to hold sway in many countries today. What is needed is deep discussion and consensus about long-term goals, not constant quibbling over short-term details.

Democracy is not merely the process of voting. The two are far from the same thing. Voting, without broad-based discussion, information exchange, and, most importantly, agreement on shared goals and visions for the future, is merely the façade of democracy. We have a long way to go to actually achieve the kind of participatory, “living democracy” which Frances Moore Lappé and Paul DuBois, and many others advocate^[4]. It is within this context of living, participatory democracy that the policies and instruments we describe below need to be evaluated. They are not answers, they are inputs to the process of living democracy, which must involve all of society in a meaningful way. The starting point is the development of a shared vision of the goals of society.

The Need to Develop a Shared Vision of a Sustainable Society

A broad, overlapping consensus is forming around the goal of sustainability, including its ecological, social, and economic aspects as described above. But movement toward this goal is being impeded not so much by lack of knowledge, or even lack of “political will,” but rather by a lack of a coherent, relatively detailed, shared vision of what a sustainable society would actually look like. Developing this shared vision is an essential prerequisite to generating any movement toward it. The default vision of continued, unlimited growth in material consumption is inherently unsustainable, but we cannot break away from this vision until a credible and desirable alternative is available. The process of collaboratively developing this shared vision can also help to mediate many short-term conflicts that will otherwise remain irresolvable. There has actually been quite a lot of success in using envisioning and “future searches” in organizations and communities around the world^[5]. This experience has shown that it is actually quite possible to get disparate (even adversarial) groups to collaborate on envisioning a desirable future, given the right forum. The process has been successful in hundreds of cases at the level of individual firms and communities up to the size of large cities. The challenge is to scale it up to whole states, nations, and the world.

Meadows^[6] discusses why the processes of envisioning and goal-setting are so important (at all levels of problem solving); why envisioning and goal-setting are so underdeveloped in our society; and how we can begin to train people in the skill of envisioning and begin to construct shared visions of a sustainable society. She tells the personal story of her own discovery of that skill and her attempts to use the process of shared envisioning in problem solving. From this experience, several general principles emerged, including:

Really Want	Settle For
Self-esteem	Fancy car
Serenity	Drugs
Health	Medicine
Human happiness	GNP
Permanent prosperity	Unsustainable growth

1. In order to envision effectively, it is necessary to focus on what one really wants, not what one will settle for. For example, the lists below show the kinds of things people really want, compared to the kinds of things they often settle for.
2. A vision should be judged by the clarity of its values, not the clarity of its implementation path. Holding to the vision and being flexible about the path is often the only way to find the path.
3. Responsible vision must acknowledge, but not get crushed by, the physical constraints of the real world.
4. It is critical for visions to be shared because only shared visions can be responsible.
5. Vision has to be flexible and evolving.

Probably the most challenging task facing humanity today is the creation of a shared vision of a sustainable and desirable society, one that can provide permanent prosperity within the biophysical constraints of the real world in a way that is fair and equitable to all of humanity, to other species, and to future generations. This vision does not now exist, although the seeds are there. We all have our own private visions of the world we really want and we need to overcome our fears and skepticism and begin to share these visions and build on them, until we have built a vision of the world we want.

In the previous sections we have sketched out the general characteristics of this world—it is ecologically sustainable, fair, efficient, and secure—but we need to fill in the details in order to make it tangible enough to motivate people across the spectrum to work toward achieving it. The time to start is now.

Nagpal and Foltz^[7] have begun this task by commissioning a range of individual visions of a sustainable world from around the world. They laid out the following challenge for each of their “envisionaries”:

Individuals were asked not to try to predict what lies ahead, but rather to imagine a positive future for their respective region, defined in any way they chose—village, group of villages, nation, group of nations, or continent. We asked only that people remain within the bounds of plausibility, and set no other restrictive guidelines.

The results were revealing. While these independent visions were difficult to generalize, they shared at least one important point. The “default” Western vision of continued material growth was not what people envisioned as part of their “positive future.” They envisioned a future with “enough” material consumption, but where the focus has shifted to maintaining high-quality communities and environments, education, culturally rewarding full employment, and peace.

Much more work is necessary to implement living democracy and within that to create a truly shared vision of a desirable and sustainable future. This ongoing work needs to engage all members of society in a substantive dialogue about the future they desire and the policies and instruments necessary to bring it about. In the following sections we discuss the history of some current Western institutions and policy instruments that have been used to address environmental issues, and offer some new ideas to expand this range. They are not “solutions” to the problems of environmental management or sustainability, but rather inputs to the broad democratic discussion of options and futures. They need to be used in various combinations and modified to fit different cultural contexts. They also can serve as the starting point for development of new policies and instruments which are better adapted to unique circumstances.

History of Environmental Institutions and Instruments

As noted above, severe anthropogenic damage to some regions of the earth began as soon as humans learned to apply entropy-increasing technology processes to agriculture, and was sharply escalated by factory production in Europe during the industrial revolution. Massive loss of life from the spread of water-borne disease continued to be accepted as part of the human condition until advances in scientific knowledge concerning the role of microorganisms prompted public health research to develop sewage treatment systems. Vast urban expenditures on such systems eventually reduced the enormous loss of human capital from the uncontrolled discharge of sanitary waste into waterways. The application of appropriate science, appropriate technology, and community will was necessary to reduce the costly loss of human capital which had resulted from unprecedented population expansion, concentration of humans into unplanned urban areas, and uncontrolled appropriation of open-access resources.

In the U.S., pollution of harbor waters, fear of human disease, and financial loss from contamination of oyster fisheries in the Chesapeake Bay finally forced the city of Baltimore to become the first major city in the nation to construct, during the period from 1909 to 1912, a municipal sewage treatment plant, with Washington, D.C., not following suit until the late 1930s^[8]. The Bethlehem Steel Company persuaded the State of Maryland to permit the company to run Baltimore City’s sewage effluent through the company’s plant as coolant. This was arranged on terms very favorable for the company, but to the considerable discomfort of the labor force in the plant^[9].

Unfortunately no such zeal was applied to the removal or treatment of toxic wastes from this steel plant or other factories polluting the Chesapeake Bay and the estuaries, rivers, lakes, and oceans of the earth until late in the last half of the 20th century. Appropriate policies and management instruments had been discussed by physical and social scientists, but the political will necessary to confront the economic power of the dominant industrial establishment was unequal to the task. Under the federal system in the U.S., the central government left environmental management to the states. This was a system which virtually guaranteed environmental degradation, since competition among states for economic growth was a convenient excuse for avoiding effective regulation. Nor, in the face of abdication of environmental responsibility by all levels of government, could victims of environmental damage count on redress in the court system. Although award of damages for injury was a time-honored principle of common law, the burden of proof was on the plaintiff and it was formidable. Victims had to prove not only that they had suffered injury, but that a specific party had caused the injury, to the exclusion of other sources of the injury.

This combination of institutionalized pollution permissiveness and lack of recourse from government or courts, combined with the global expansion of energy and material throughput into a finite environment following World War II, set the stage for a series of ecological catastrophes. These events not only energized the then small community of those concerned about the ecological health of the earth, but they also increased the awareness of some leaders that ecological damage could reduce the profitability of economic systems, which had been their primary concern. Although academic scientists and even a small minority of economists were on record with their serious concerns about what they perceived as a collision course with ecological catastrophe, it took a best-seller authored by a scientist, Rachel Carson’s Silent Spring^[10], to capture the public imagination. Silent Spring presented a dramatic message in a lyrical form which alerted the public to the long-run ecological consequences of the toxics-laden waters, urban smog, and accumulating litter, which were becoming all too evident to increasing numbers of citizens. Local but increasingly severe and frequent environmental catastrophes such as the Cuyahoga River catching fire in Cleveland, the near death of Lake Erie, ubiquitous toxic spills, toxic dumps, fatal smog incidents in Pennsylvania, and smog in the Grand Canyon gradually convinced the majority of Americans that action was needed. Similar reactions followed in Western Europe. Finally a new and intensive inquiry into the state of the earth and the policies and instruments needed for its protection could begin. The public awareness of the need for innovation in policy, however, moved far in advance of recognition of the need for innovation in instruments for carrying out these policies.

The U.S. legislative response to accelerating environmental damage was President Richard Nixon’s National Environmental Protection Act of 1969. The goal was to halt the accelerating environmental degradation, and the policy instrument for implementing this objective was the traditional recourse to direct regulation. Reflecting the conventional wisdom of the time, the federal government legislated broad policy guidelines in general terms, leaving implementation primarily to the states. State compliance was sought through the pragmatic U.S. practice of offering generous federal grants for participation combined with potential federal intervention in cases where states failed to formulate effective plans. This federal approach had served the nation well since the early federal period when it was introduced by President Thomas Jefferson in the era of “internal improvements”^[11].

Given the legislative history of the U.S., as polluters were forced to recognize that some form of control was inevitable, they reluctantly accepted the familiar regulatory approach as that with which they were most familiar, and which they could most easily manipulate to their own advantage. Legislators and bureaucrats recognized new opportunities for funding, power, and careers at both the federal and state levels, which was the time-honored formula and quid pro quo for gaining acceptance of innovative programs.

Unfortunately, the new environmental regulations, though designed for acceptance by the major interest groups, lacked two dimensions that were essential for adequately confronting the accelerating pollution problems: sound scientific grounding and economic efficiency. Predictably, environmental protection lagged behind the expanding throughput of pollutants into air and water, and onto the land.

The major objection to the inefficiency of the regulatory approach came initially from the economics profession, in which a small minority had broken with the traditional preoccupation with promoting economic growth to focus on evaluating and ameliorating the unanticipated detrimental side effects of growth, especially pollution. The existence of these spillover phenomena, now termed externalities, had been recognized in the economics literature since their identification by A. C. Pigou^[12], but were regarded as more of an academic anomaly than a real-world problem. Ayers and Kneese^[13] confronted the economics profession with the proposition that pollution externalities, far from being an anomaly, were actually pervasive in industrial economies with their massive throughputs. Furthermore, regulatory approaches were not proving equal to the task of coping with the vast throughput of mass and energy with which industrial economies were converting low-entropy inputs into high-entropy pollutants. More-efficient instruments of pollution control were needed.

The scientific basis for this phenomenon had actually been worked out in impressive detail by another economist, Nicholas Georgescu-Roegen^[14], who, as noted above, argued eloquently for the need to reformulate economic thinking and models for consistency with the fundamental physical laws of thermodynamics and entropy, hitherto almost totally neglected by the profession. Casting the environmental problem in terms of externalities, a concept familiar to economists, focused attention directly on policy instruments since Pigou had demonstrated that an offsetting tax on detrimental externalities, such as pollution, could restore economic efficiency and increase welfare in otherwise competitive economies. Thus, a large literature emerged in support of replacing inefficient regulations with economically efficient taxes on pollution. This notion failed initially to gain wide support outside of the economics profession, but, because of its compelling potential efficiency gains, has begun more recently to become imbedded in U.S. and other management programs, as will be explored below. As society was forced in Western nations to expand the amount of real resources allocated to protecting their populations and resources, the need for greater economic efficiency in the use of these scarce resources became more urgent. However, strict application of the efficiency principle appeared to neglect distributional issues and to threaten the now vested interests of polluters and regulators alike, delaying and limiting its acceptance in the political arena. And, as we have previously noted, the issue of sustainable scale had not yet been recognized and incorporated.

As the U.S. and other nations began curbing some of the grosser environmental insults from point source emissions of pollutants, ecologists and resource managers could begin to address more subtle but more ominous phenomena, such as sharp declines in species diversity, natural habitats, and ecosystem health. Ecologists and others began to point out that the human economy was a subsystem of the earth’s total ecology, and could not long function sustainably or even efficiently without a healthy life-support system^[15]. This brings us to ecological economics’ efforts to reintegrate social and natural science around the three goals of sustainable scale, fair distribution, and efficient allocation.

Despite this growing awareness of threats to the global ecology, the intensity of the Cold War simultaneously accelerated the generation of nuclear (Nuclear waste management) wastes, along with other long-lived toxic wastes, and diminished the will to contain or to control them. The greater openness in both the East and the West since the end of this 40-year arms race is beginning to reveal the appalling extent of the chemical, nuclear, and biological wastes produced, stored, and discarded both deliberately and accidentally. Without drastic and costly remedial action, vast areas of the earth will remain contaminated and unfit for habitation for long periods. The seriousness of this problem and its complexity demonstrate the need for a new generation of policies and instruments which will be based upon science, which is sufficiently sophisticated to deal with the complexity of the problem, economically efficient enough to accomplish the goals with the funds available, and socially equitable enough to win the consensual, democratic support required nationally and internationally. Ecological economics offers just such a transdisciplinary approach for approaching these formidable challenges.

Various conclusions can be drawn from this brief overview of the evolution of thinking about environmental policy instruments. The management structure developed by a society for protection of its environment tends to reflect the distribution of economic and political power of interest groups within that society. However, without the inclusion of broader scientific perspectives such as ecology, thermodynamics, uncertainty, and sustainability, and without broader social concepts such as fairness, equity, and ethical values, the most well-intentioned efforts at environmental protection will be overwhelmed by the continued exponential growth of production, consumption, technology, and population (Human population explosion). The magnitude of remedial work to be accomplished means that the instruments used must be economically efficient. But they must at the same time be fair and lead to an ecologically sustainable scale of activity. The following sections investigate these issues in more detail.

Successes, Failures, and Remedies

For purposes of achieving the environmental and other social values identified here, society has created an array of interlocking institutions. For satisfying material needs and wants, competitive markets have evolved as efficient though not perfect institutions. For addressing market failures, pursuing equity goals, and other community purposes, governmental institutions have evolved, though few would defend them as totally satisfactory. Therefore, in order to address the intervention failures of government, citizens have banded together to form voluntary non-governmental organizations. However, it should come as no surprise that even these NGOs have their failures and shortcomings, as will be examined below. These formal institutions, markets, governments, and voluntary organizations, though potent forces, should not cause us to overlook the most fundamental source of power in an open society, namely, the actions and values of individuals.

Individual actions and values are the ultimate determinants of environmental quality and of the possibility for sustainability. Individual decisions about what to purchase, consume, wear, and drive, about where and how to live, what jobs to seek, how many children to have, will decide the future. Each of these consumption decisions determines what resources, renewable or irreplaceable, must be used in its production, and what pollutants will be emitted when they become waste, as all produced goods inevitably must become sooner or later. It is individual and family choices about family size, lifestyle, residential style, career paths, and voting choice that will determine the viability of the environment, the life span of our natural resources, the diversity of the biosphere, and the possibility of global sustainability. Obviously, the amount of freedom and latitude we have in making these choices varies widely and is a function of affluence and education. Therefore it follows that the responsibility for wise choice (and example) falls most heavily on the rich, the privileged, the educated, the famous, and the powerful. Choosing sustainability is thus ultimately a matter of moral, ethical choice and thus a result of individuals’ fundamental values. Although these human values are basically independent of the biophysical constraints that limit their realization, we nevertheless believe that they are affected in part by knowledge. Knowledge about ecology, about economics, and about their interrelationships will help modify some of the values that lead to excessive consumerism, to the search for satisfaction in materialism, and to the search for social salvation through quantitative [[growth] of economic throughput].

The Policy Role of Non-Government Organizations

Although governments are now (since the 1970s) staffed at many levels with agencies nominally charged with environmental protection, it is difficult, upon close examination of the performance of these agencies, for those working for effective environmental management to avoid disillusionment. Indeed, it would be naive to have any other expectation than that these agencies will faithfully reflect the distribution of political and economic power of the society in which they are embedded. Therefore, environmental agencies have not only been limited in their ability to achieve environmental improvement, they have at times obstructed it and even dismantled environmental programs. James Watt as Secretary of the U.S. Department of Interior and Ann Gorsuch Burford as Administrator of the U.S. EPA are examples of officials who were appointed to turn back the clock on environmental protection, and who succeeded in creating damage that will be difficult to repair. The 1996 “contract with America,” despite good intentions, envisions even greater environmental retrogression.

It is one of the strengths of a pluralistic society that alternative institutions emerge in order to protect vital interests. One response to governmental intervention failures in managing the environment is the emergence of NGOs (non-governmental organizations). Work by Buchanan^[16] and others in the public choice field helps explain this phenomenon of intervention failures. While there are many able, idealistic public servants who are dedicated to the public interest, with Watt and Burford being extreme examples of those serving special interests, few would argue that government alone, relying upon current practices, can be depended upon for environmental protection. However, some steps should be taken in order to make existing institutions more effective in carrying out their legal responsibilities for protecting and managing environmental resources. One, for example, would be to establish awards that would provide additional financial and professional incentives with which to reward resource managers who perform outstandingly efficient, innovative work in environmental protection.

Another step would be for citizens to provide more support for conservation groups such as the Sierra Club, the Nature Conservancy, the Chesapeake Bay Foundation, and the Natural Resources Defense Council which have responsible records in providing environmental protection where public agencies have failed, and for these groups to coordinate their programs.

Adaptive Ecological Economic Assessment and Management

It is undeniable that technological innovation has generated significant advances in human welfare. However, in retrospect, not all technologies have resulted in positive net improvements in human welfare. Nor have advanced technologies been managed responsibly. The most obvious cases of technologies without which humanity would be better off are the military technologies of mass destruction, such as nuclear and biochemical weapons, which society is struggling to ban. Additionally, it is possible to cite some nonmilitary technologies, such as nuclear energy, agricultural chemicals, and even the internal combustion engine, which have had large unintended negative environmental consequences. Certainly the final judgment of history has yet to be rendered on these technologies, but at the minimum, all but the most doctrinaire libertarians would concede that there is room for better management of these technologies. However, once these technologies are introduced, it is difficult to squeeze the genie back into the bottle. A reasonable inference to be drawn from experience is that lessons might be gained from history that can guide and manage the introduction of massive technological systems which potentially have far-reaching consequences for humanity.

Granted that the law of unintended consequences makes it impossible to anticipate all of the impacts for better or for worse of technology, this does not mean that it is totally impossible or undesirable to devise minimal guidelines in advance of introduction for assessing and managing technologies, especially those having global implications. While technological laissez faire may have been appropriate in a relatively empty world, now that humans have the capability of rendering the earth uninhabitable, we no longer can afford to let survival depend upon the benevolence and wisdom of naive technological enthusiasts.

The shaping of policies and instruments for technology assessment is a difficult task requiring transdisciplinary research of a high order, but some minimal guidelines can be offered^[17].

• Exceptional caution should be exercised before the introduction of high-entropy systems, such as fossil fuels and nuclear energy.

• Low-entropy systems, such as solar energy, are less irreversible and less damaging than high-entropy systems.

• Technologies that depend upon a high ratio of human intelligence and information to material and energy throughput have a higher probability of advancing human welfare than do high-entropy technologies.

Examples of low-entropy technologies depending upon high input ratios of intelligence and information to mass and energy include notably the telescope, the microscope, reading glasses, the compass, the sextant, the chronometer, and other navigational instruments that literally opened up new worlds to humanity. It remains to be seen whether the much higher entropy exploration of space will bring comparable benefits to humanity. Other examples of benevolent technologies are transistors and silicon chips, which have made possible the computer, yet save energy.

Obviously, any technology, even that characterized by lowest entropy can be applied to antisocial purposes of crime and warfare, so no guarantees of benevolence can be realistically expected, and the distinction must be made between the potential environmental impact of the technology and the purposes to which it is applied. What technology essentially does is to extend the power of humans to accomplish constructive or destructive ends. Thus the mastery of technology requires both its assessment before adoption and the responsible social control of its application as well as a realistic understanding of human motivation.

Several guidelines for the management of technology can be drawn from regrettable lessons of history. We should have now learned that before adopting new systems, it would be desirable to examine the full life cycle of the technology. This elementary precaution could save us from such disasters as making major commitments to nuclear energy before understanding the problems of storing radioactive wastes, safeguarding them from terrorists, and decommissioning contaminated plants.

Another guideline for the management of technologies is to require, before the acceptance and adoption of new systems, the implementation of mass balance and energy balance accounting systems so that a comprehensive tracking of wastes is assured.

Habitat Protection, Intergenerational Transfers, and Equity

Many options exist for habitat protection, including purchase, easements, and gifts, each having a role^[18]. Protection should begin as soon as possible, before adverse uses and property rights are established. This section explores priorities for acquisition and relates habitat protection to equity across regions, groups, and generations.

The central point of this section is that in selecting the stock of environmental resources to be passed along to future generations, emphasis should be given to such resources as large-scale living ecosystems containing species diversity, complex interrelationships between species, and, above all, the capability of supporting evolutionary processes over sufficiently long enough time frames that species can evolve and adapt to both man-made and natural changes in climate and other environmental conditions. Obvious candidates include rain forests, estuaries, wetlands, lakes, river basins, grasslands, polar regions, and coral reefs. However, the ultimate selection of the highest priorities for protection of sustainable ecosystems should be made by transdisciplinary teams including not only ecologists, but other representatives of life sciences, earth sciences, physical sciences, and social sciences preferably with insights also from the arts and humanities.

After the identification of the scientific principles and priorities for selecting sustainable ecosystems for intergenerational transfer, the challenge of designing the most effective policy measures for acquiring and protecting these ecosystems will remain.

A major challenge will be gaining acceptance for large-scale current sacrifices that will produce uncertain benefits in an uncertain future. Another complicating factor is the need for consensus on goals for global cooperation in implementation. The fact that serious intragenerational inequalities exist in the distribution of current income and wealth will make it difficult to achieve consensus on the need for intergenerational transfers and will complicate the problem of apportioning sacrifices. A related problem is that, in an uncertain future, the continuity of a commitment to pass on ecological resources cannot be guaranteed for future generations that are not parties to the agreement. Therefore, intermediate generations may be tempted to consume all or part of an inheritance that was intended for the more distant future. There is the danger of a prisoners’ dilemma in which uncertainty about the action of intermediate generations could reduce the welfare of more distant future generations. However, as successful experience is gained in protecting intergenerational transfers, uncertainties could be reduced and welfare gains increased.

Well known public goods problems could pose additional difficulties in making intergenerational transfers, to the extent that future benefits will be shared by all regardless of which group made the sacrifice to provide them. In the case of global public goods like the atmosphere and oceans, those groups making current sacrifices to protect the resources could not reap the entire benefits. This free-rider problem could reduce incentives to sacrifice unless measures could be designed to spread the burden widely.

Therefore, in choosing policy instruments for acquiring and protecting sustainable ecosystems, new courses must be charted utilizing what limited insights are available from the fields of public choice and policy science. It is unlikely that acceptable policies can be derived from any one discipline such as economics, with its primary focus on efficiency, or ecology with its limited institutional content, or from any other single discipline. Therefore, it seems self-evident that policy instruments for intergenerational transfers must be drawn from a transdisciplinary approach.

Given the fact that making bequests requires sacrifices and therefore involves scarcity problems, economic efficiency concepts can be helpful in achieving the maximum amount of resource protection for a given amount of resources available, or they can assist in achieving specified resource endowments at minimum total cost. The field of economics can also offer some limited insights into problems of distribution and equity. An especially important concept is that of Pareto improvement, which suggests that policies are most likely to gain acceptance if they can be designed so that there are no losers, or alternatively so that the gains from the policy are great enough to compensate the losers, and that compensation actually occurs.

The criteria for ecological bequests must be based upon good science which should emphasize protecting species diversity and minimizing entropy increase. Finally, in order to gain acceptance, policies for making intergenerational transfers must be realistically based upon acceptance by the major interest groups involved. Society has already begun the process of making intergenerational environmental transfers in the form of wilderness areas, wildlife sanctuaries, protected parts of the polar regions, and similar set-asides. These programs have been initiated not only by local, state, national, and international governmental organizations, but also by non-governmental organizations (NGOs) such as the Nature Conservancy. Significantly, many families and individuals have demonstrated the value they place upon intergenerational environmental transfers through their willingness to bear the opportunity cost of holding land and resources in their natural state. These public and private initiatives in protecting living ecosystems offer guideposts for the much greater future efforts that will be necessary for achieving sustainable global environments.

In cases where governments already own very large tracts, such as in the western United States, the task of acquisition and set-aside can be relatively easily accomplished. Setting aside tracts currently held by governments has the advantage of not requiring additional expenditure, but it must be recognized that there is an opportunity cost equal to the value of the highest alternative use to which the asset could be put. The least-cost way of protecting valuable ecosystems is through simple appropriation, but this approach may fail the equity test. In cases where high-priority ecosystems are in private hands, a wide array of policy instruments for acquisition is available. The most straightforward method is through purchase, which has the equity advantage of fully compensating current owners, but has the budgetary disadvantage of being very costly. The funds available for acquiring ecosystems can be stretched through the purchase of easements strong enough to protect the desired ecological feature but sufficiently permissive to grant current owners lifetime estates or limited use in return for long-run protection.

In the cases where funds are raised by the government for acquisition, the cost to current generations is made explicit through the taxing and budgeting process, and in democratic societies can be achieved only through consensus. Transfers of funds from the general public to the current owners of the ecologies are made explicit under this procedure. An important economic consideration is what the taxpayers must give up in order to make the transfer possible, and what the recipients of the funds do with the proceeds. Thus, when government purchases of ecological assets occur, redistribution occurs not only between generations, but within current generations.

Policy Instruments

An important element in the evolution of ecological economics has been a serious concern not only with the goals, policies, and programs needed for environmental sustainability but also with the design of improved and innovative policy instruments needed for the successful accomplishment of these goals. Thus far, we have emphasized the basic principles of ecological economics and derived from them an agenda of programs that seem to us to be essential in changing our course from the current policy of looting the planet to that of protecting species diversity and of building a sustainable human society on earth with concern for equity among groups, regions, and generations.

However, one critical factor which is often given short shrift in discussions of environmental protection is analysis of the policy instruments which are fundamental to the achievement of program objectives. For example, Gore’s Earth in the Balance^[19] provides a visionary set of programs which, if implemented, could advance us significantly toward the goal of a sustainable society. However, he gives much less attention to the policy instruments needed for achieving the admirable goals he enumerates. This is not intended as criticism, but as an observation that even some of the most serious and dedicated environmentalists, among whom Gore has certainly been in the forefront, are more comfortable in dealing with the large issues of goals and purposes than with the technical aspects of instruments for achieving them. We, on the other hand, believe that a serious approach to environmental management must include analysis of the management instruments to be used as an integral part of the program to be implemented.

One reason for the typical neglect of policy instruments is the widespread dependence, especially in the U.S., on a regulatory approach to environmental management. Beginning with the National Environmental Protection Act of 1969 which established the EPA, the primary approach to environmental protection has continued to be the promulgation of regulations intended to achieve the desired objectives. This approach has achieved a great deal and unquestionably has left the U.S. in a much better position than we would have been in without it. However, few would agree that the results have been entirely satisfactory, and questions must be raised:

• Might some other approaches have given better results?

• Are present approaches inadequate for dealing with the growing problems of the future?

• Can improved policy instruments be designed to provide better results, or lower costs, or both?

Many who have studied these problems have concluded that all of these questions can be answered in the affirmative.

Although pollution is only one of the many causes of environmental damage, it is the one that best illustrates the evolution of policy instruments, and from which insights can be drawn for addressing related environmental issues. For controlling pollution, policy makers have devised a wide menu of instruments, ranging all the way from moral exhortation to imprisonment. Some of the most important include regulating emissions, taxing emissions, taxing products whose use pollutes, requiring permits to pollute, paying polluters to abate, labeling products as to contents, educating consumers, and imposing deposit-refund systems on polluting products. One useful way of classifying this wide range of options is to divide them into two general categories: conventionally defined as either regulatory or the incentive-based (IB) use of economic measures.

The regulatory approach is sometimes referred to, especially by those who disapprove of it, as the command-and-control or CAC approach. However, the CAC terminology is more appropriately applied to central planning for an entire economy, such as that of the former Soviet Union, rather than as a description of a subset of environmental policy instruments, which are entirely consistent as a correction to market failures in a predominantly market economy.

Rather than casting the evaluation of policy instruments in terms of regulatory versus incentive systems, a more constructive approach is to investigate the conditions under which incentives yield better results as compared with conditions under which regulations make more sense. Cropper and Oates^[20], among others, have provided much needed insight into this issue.

Incentive systems are potentially more appropriate for the control of some pollutants rather than others. For example, regulation will continue to be the preferred instrument in the case of severe threats to human health, such as radionuclides and severely toxic carcinogens, where the optimal level of emission approaches zero. The prevalence of scientific uncertainty about all but the most simple damage functions is a powerful argument for explicitly recognizing the limitations on knowledge and for acknowledging them in formulating pollution control policies. Therefore environmental policies such as the precautionary principle and instruments such as assurance bonding, which are discussed further on, have been developed in order to preserve the advantages of economic incentives in the face of incomplete scientific knowledge about the effects of pollutants and about the interactions among them.

In the face of uncertainty, appropriate public policy is to prevent emissions (which is usually much cheaper than cleaning them up), and thus to limit exposure initially. This can be achieved by ending the assumption of safety for emissions unless damage has been proven, and by shifting the burden of proof to emitters by requiring the demonstration of safety by the emitter before use, rather than the more costly procedure of requiring regulators to prove damage. Economic incentives can be effective instruments for this purpose, particularly when used in conjunction with regulations.

Policy instruments based upon economic incentives can be powerfully efficient methods for achieving allocation objectives, but it is important to avoid the error in logic into which the economics literature often lapses of assuming that markets, just because they can be such powerful guides in achieving allocative goals, are equally valid for determining the other two critical goals: sustainable scale and equitable distribution. We need to put in place separate instruments for achieving the prior goals of sustainable scale and equitable distribution before applying efficient methods of reaching them.

Regulatory Systems

Environmental management in the U.S., as noted above, is based upon a federal regulatory system under which the Congress has enacted national guidelines for regulations, with implementation left largely to the states. This approach evolved from growing recognition in the second half of this century that serious environmental damage could not be prevented by relying exclusively upon state and local governments, whose competition for economic development was an impediment to effective local environmental management. Federal efforts to implement environmental management have been characterized as the regulatory system to distinguish them from alternative approaches such as the use of economic incentives, or incentive-based (IB) systems. In the United States, the regulatory approach predominates. For stationary sources of air pollution each state is required to develop a State Implementation Plan (SIP) to ensure that emissions of particulate matter, sulfur oxides, and nitrogen oxides are in compliance with national air quality standards. In all these cases, enforcement is left primarily to the states. In theory, failure to meet local air quality standards is penalized by termination of federal subsidies for major highway and other programs. However, continued failure to achieve local air quality goals in many major metropolitan areas with strong political and economic power has resulted in repeated postponement of deadlines for meeting air quality goals. The Clean Air Act of 1990 was intended to provide an improved approach to these problems.

U.S. water pollution control also relies upon a state–federal division of responsibilities with emphasis upon both emissions and ambient quality. Ambient quality is defined not in terms of quantitative standards but in terms of more qualitative objectives, such as fitness for supporting swimming and fishing.

The regulatory approach has had only limited success in achieving the desired levels of environmental protection in the U.S. market economy and the system has failed disastrously in the centrally directed economies of the former USSR^[21] and Eastern Europe. In general, the regulatory system can work well where there are clear environmental goals with overwhelming political consensus, similar costs of abatement across all actors, relative certainty about what is being emitted, and easy and effective enforcement. These conditions hold in all too few cases and we have already identified and controlled many of them (i.e., large industrial point sources and sewage treatment plants). Making further progress with only the regulatory system will be much more difficult.

The limits of the regulatory approach in achieving acceptable levels of environmental protection and the high cost of these traditional policies have led economists and others to propose less costly, more effective incentive-based management instruments, such as pollution charges, marketable emission permits, and performance and assurance bonds. The lack of widespread acceptance to date of alternatives to regulation suggests that current practices are viewed as possessing superior political and historical acceptability, or at least of not being as unacceptable as the proposed innovations. Among the nominal advantages of regulation are:

1. Simplicity, familiarity, and acceptance.
2. Historical U.S. reliance upon legislative regulation in order to deal with perceived problems.
3. Acceptance by major emitters and interest groups.
4. Long-term incorporation into the legal system.

However, despite these advantages, the regulatory approach has failed to meet rising expectations for environmental quality and contains numerous inherent disadvantages, especially in the case of diffuse, chronic, non-point-source pollution. These disadvantages include:

1. Effective regulation requires a level of technical and proprietary information which is seldom available to regulators.
2. Successful enforcement of regulation requires high monitoring and enforcement costs.
3. The costly bureaucracies associated with regulation result in high expenditure per unit of pollution reduction.
4. Environmental regulations are easily evaded or avoided.
5. The lack of strong incentives to reduce pollution below the mandated level reduces motivation for technological advance and for preventing pollution before it is generated.
6. Polluters are permitted to ignore the costs their actions impose upon society at the time decisions are made.

In addition, the regulatory system, having its roots in the legal system, is based on a presumption of no damage on the part of polluters until they can be proven to have violated the regulations or to have caused demonstrable damages. Given the high degree of uncertainty about the fate and effects of pollutants, this presumption can lead to significant difficulties, especially in those cases where this uncertainty is high.

Despite these limitations associated with regulatory systems, especially with respect to problems like pollution where incentives are significant, regulatory systems still have a major role to play in addressing the basic environmental problems of concern here: population, technology, habitat, and species diversity. Our point is that the efficiency of regulatory systems can be substantially enhanced by incorporating economic incentives within them.

Incentive-Based Systems: Alternatives to Regulatory Control

The urgent need for alternative approaches to environmental management that are less costly and more efficient than traditional approaches has long been recognized^[22]. The major, but not only, alternatives suggested to the regulatory approach have been based on some form of economic incentives^[23].

The accumulating evidence suggests that the present regulatory approach to environmental management in the U.S. and throughout much of the earth, though leaving us better off than we would have been without any management system, does not inspire confidence in its adequacy for addressing the twin challenges of explosive global population growth coupled with growing expectations of exponential increases in per capita consumption by the growing billions of passengers on spaceship earth. We therefore emphasize that problems of achieving sustainable scale and distributional equity are basic to the human condition. Once these goals have been addressed, it becomes important to devise efficient instruments for accomplishing them. Unfortunately, it is inefficiency that characterizes most of the regulatory environmental control instruments now in place, though they have gained grudging acceptance. These shortcomings of the current regulatory approach are evident in the limited results from the excessive levels of bureaucracy and expenditures involved, compounded by the inadequate scientific basis for current programs. Reform efforts must therefore aim at improving both the efficiency of environmental protection programs and the scientific bases upon which they rest. We turn first to the role of economic efficiency, and to its limitations.

The Role of Economic Efficiency

From the perspective of economic efficiency, the regulatory approach appears to be both cumbersome and costly. Indeed, now that most of the nations on earth have rejected command and control methods in favor of competitive markets for guiding economic policy, it seems anachronistic to rely so heavily upon regulatory techniques for organizing environmental policy rather than attempting to reap in the policy arena some of the efficiency advantages that economic incentives have demonstrated in the organization of markets.

Proposals for economic incentive-based (IB) instruments for environmental management encompass a wide range of alternatives, including:

• taxes on pollution emissions (Pigouvian taxes or charges)

• product charges (levied on products whose use causes environmental damage, such as CFCs, carbon fuels, agricultural chemicals, and fertilizers)

• subsidies for pollution abatement (similar to taxes in concept but not in distributional consequences), especially for agriculture and sewage treatment

• marketable permits for pollution emissions

• creation of property rights for open access and other environmental resources

• creation of economic incentives for acting in the common interest

Several themes run through the literature that advocate more extensive use of these IB instruments as alternatives or supplements to current regulatory policies. The most important is the achievement of economic efficiency through correction of market failures such as:

• externalities, especially pollution

• open-access resources

• inadequate provision of public goods (because of nonexcludability and nondepletability)

• poorly defined property rights

• uncertainty and incomplete information

• myopic time discounting

IB instruments are designed to correct or offset these market failures as shown below.

Pollution Fees and Subsidies

Figure 4.1. Optimal pollution control and environmental quality. (Source: Costanza and Cumberland 1990^[1])

The classic incentive-based alternative to regulation of pollution is a tax, fee, or charge per unit of pollution emitted, known as a Pigouvian tax after A. C. Pigou^[24]. However, the intellectual foundation for the incentive approach is Adam Smith’s concept of the invisible hand operating in free, competitive markets. In this model, which emphasizes economic efficiency, rational utilitarian consumers attempting to maximize utility, and competitive producers attempting to maximize profits, will automatically generate optimal allocation of scarce resources. Thus free competitive markets are assumed to permit the pursuit of self-interest by producers and consumers to result in socially desirable outcomes, except where the (rigorous) conditions for competitive markets are not achieved and any of a number of well-defined market failures (listed above) are present.

The significance of this approach for environmental management is that if markets existed, or could be created, for environmental goods and services, consumers could purchase the types and quantities of environmental quality and sustainability they desired relative to their means and their competing wants, just as they do now for marketed goods and services. Obviously, for the true believer the market approach is a compelling one since, if it could be made to work, it would effectively dispose of the environmental problem, which would then be reduced to a level of seriousness no greater than, say, of selecting one’s household detergent. For readers interested in economic theory and graphics, a simple diagram typically found in texts on environmental economics (a version of which is presented and discussed in Figure 4.1) is provided.

Popular Critiques of the Incentives for Efficiency Approach

Given the strong theoretical case in favor of IB pollution controls^[25], it is appropriate to inquire into the reasons for their low level of acceptance in the U.S. Some objections to IB pollution controls are based upon popular misconceptions, myths, and imagery, and interest group pressures. Other objections to IB policies are more firmly based upon legitimate concerns, and merit thorough analysis. They include concerns about data requirements, spatial differentiation, gaps in scientific knowledge, and inadequate transdisciplinary research. These are valid objections, but they may also be raised with respect to regulatory instruments or any other environmental control instruments.

As we have discussed, a criticism to which economic efficiency policy instruments are vulnerable is that of inadequate sensitivity to issues of sustainability, equity, welfare, and fairness. Indeed, much of the economics literature explicitly accepts the dichotomy and trade-off between equity and efficiency, recognizing that while efficiency is the proper concern of economics, it generally speaks with less credibility about equity, and has until recently ignored sustainability. We have noted, however, one principle dealing with equity that appears throughout the economics literature and which is relevant to policy analysis. This is the concept of Pareto fairness. This concept is drawn from the more general notion of Pareto optimality worked out by the Italian sociologist Vilfredo Pareto^[26], dealing with the necessary conditions for efficient general equilibrium solutions^[27]. However, inherent in the more general case of Pareto optimality is the concept of Pareto fairness, which in its simplest form requires that changes in policies or other arrangements should not be undertaken unless they make some people (or even one person) better off without making any party worse off. Although this theorem has extensive and significant implications for the analysis of human welfare^[28], we only note here that policy changes are more likely to be acceptable and successful if they can be designed to make no one worse off.

This Pareto fairness principle is one reason for proposing that marketable pollution permits be given without charge to existing polluters, even though there may be objections to this course on both efficiency and ethical grounds. The same principle can be used to justify compensating property owners at public expense for potential losses resulting from zoning changes, and for other “takings.” Compensation, though costly to the public, may be a valid price to pay in other cases where the general welfare is improved by a policy change. These are all examples of the equity vs. efficiency conflict emphasized above.

In terms of popular misconceptions, real and imaginary, opponents of incentive-based systems have persuaded large elements of the public that emission charges constitute a “license to pollute” and that this is somehow reprehensible. Actually both pollution charges and the current system of regulations represent “licenses to pollute,” or property rights to pollute, but these rights now are free to the polluter in the case of the regulatory system and there are no dynamic incentives for polluters to reduce pollution below the currently permitted levels. The IB system would require payment for each unit of emission and thus would generate the appropriate continuous dynamic economic incentives to reduce pollution further, develop new pollution control technologies, and generate public revenue which could be used for mitigation of the remaining pollution or for other public purposes.

In terms of interest group pressures, emitters object to emission charges because they would then have to pay for the privilege of expropriating common property resources (the assimilative capacity of air and water) which they now enjoy without charge. Estimates of the costs of emission permits and revenue raised from emission charges on only particulate and sulfur oxides from stationary sources range from $1.8 to 8.7 billion in 1984 in 1982 dollars^[29]. Initially, the switch from free emissions to charges would amount to a transfer of income and wealth from emitters to the general public. The political and economic obstacles to such an innovation are obvious. In the long run, however, since the IB system leads to a improvement of economic efficiency, both the emitters and public would benefit. It is this initial short-run hurdle that must be overcome if IB systems are ever to be implemented.

One way of addressing this interest group problem, as noted above, would be to give, rather than sell, emission permits to present emitters. This has the ethical disadvantage of “grandfathering in” present polluters who would stand to benefit in direct proportion to the damage they are currently imposing upon the environment but it also has the advantage of creating property rights which could generate incentives to reduce pollution in that unused permits could be sold, adding efficiency to the system thereafter^[30].

In addition to the political and interest group objections to incentive-based pollution control methods, there are also substantive scientific problems of knowledge and uncertainty, especially in terms of optimizing approaches. Derivation of optimal pollution charges (Figure 4.1) requires knowledge of the marginal treatment cost function and the marginal damage functions. Conceptually, marginal treatment cost functions should be computable from engineering and other data^[31]. Computing marginal environmental damage functions is more difficult and involves at least three steps even in the simplest case of damage to a single species from a single pollutant at one point:

1. Estimating the reduction in ambient concentrations associated with reductions in emission levels.
2. Estimating biological damage functions associated with levels of ambient concentrations.
3. Assigning economic values to the relevant levels of biological damage.

Early assumptions by economists about the existence of damage functions for individual pollutants derivable by scientists from dose–response relationships and relevant for efficiency-based policy, appear to have been overly optimistic, now that ecological economists are learning actually to develop transdisciplinary working relationships with physical scientists. Clearly, the more realistic case of multiple emission sites, multiple species, plus positive and negative synergism between multiple pollutants involves formidable problems of research, analysis, and uncertainty^[32]. The formal information requirements for deriving optimal water quality standards and optimal emission charges for ecologies as complex as estuaries are so demanding that they may never be fully met.

Epidemiological research on human exposure to toxic chemicals has revealed some of the limits of science in determining safe standards, given problems of gender, age, concentration, genetic heritage, synergism, and other variables. However, this situation need not preclude efforts to establish standards based upon best current scientific judgment. This is particularly essential in the case of multiple pollutants, as in an estuary, where interrelationships among toxic substances are most likely to be synergistic and nonlinear. In such cases, damage functions could be estimated on the basis of best current judgment for the total mix of pollutants, and average emission charges applied to the discharge of every pollutant. The use of economic incentives could provide a least-cost (i.e., cost-effective) route to achieving environmental goals, however they are set, and thus is not dependent upon achieving an improbable level of scientific certainty (i.e., optimization).

Advantages and Disadvantages of Incentive-Based Systems of Regulation

In a realistic, dynamic situation, the use of IB pollution charges has several potential efficiency advantages over regulation. The most important advantage is that there are differences in the costs of pollution control between firms and the regulatory approach gives inadequate incentives to abate for lower-cost firms. With an IB system, more modern firms with lower-cost pollution control technologies will undertake more abatement rather than pay the charges, while firms with higher pollution control costs will prefer to pay the charges rather than abate. Society will then obtain more pollution control at lower total costs than if all firms, including those with higher abatement costs, are required to impose the same level of control, as is typical under a regulatory approach.

Comparable cost savings and efficiency increases might be achievable in water pollution control as well. Under the effluent charges system, more of the total clean-up is performed by low-cost firms than is the case under regulation. The potential cost savings are greatest when there are significant differences in treatment costs among polluters. Incentives are greater for continual improvements in pollution abatement technology under a pollution charge system than under a regulatory system under which all firms abate equally or under which abatement technology is specified.

Under an alternative IB system based upon transferable pollution permits (TP), firms have economic incentives to find cost-saving abatement technology because of the property rights they then have in their unused abatement permits which can be sold to firms having higher cost abatement technologies. These cost-reduction incentives have the merit of shifting the marginal treatment cost curve downward and to the left (Figure 4.1), further increasing the optimal level of environmental quality. If competitive markets could be created for transferable pollution permits, their price per unit of emission would approximate the same shadow price as that for pollution charges (P in Figure 4.1).

Incentive-based pollution control policies have many other potential advantages over regulatory approaches:

1. They have the ethical advantage of consistency with the OECD “polluter pays” principle.
2. They raise public revenues.
3. They pass the cost of pollution control along to the consumer of pollution-intensive products, providing the public with the proper signals for modifying consumer behavior and imposing the costs of environmental damage upon those who cause it and those who benefit from it.
4. They provide polluters with economic incentives to prevent pollution, thus saving society the much greater cost of attempting to clean up the pollution after it occurs.
5. Marketable permits do not require that regulators have the level of technical proprietary information required for efficient regulation.
6. They can provide incentives for shifting the burden of monitoring from the government to the polluter.
7. They offer profitable opportunities for industry to undertake development projects for improvements in pollution abatement technology.
8. They can shift the incidence of tax burdens away from socially desirable objectives (incomes and jobs) toward reducing socially undesirable phenomena (pollution).

On the other side of the balance sheet, a number of substantive problems limits the applicability of the market approach to environmental management. Among the most serious are that market theory does not directly address the issues of:

1. sustainable scale;
2. income distribution, or equity, and therefore of unequal access to environmental protection among individuals, nations, regions, and generations;
3. limitations of scientific information and of knowledge by individuals may impair their ability to make wise choices; and
4. additionally, the market failures that would need correction in order to make markets work for environmental quality are numerous and pervasive. They include externalities, excessive time discounting, common property resources, open-access resources, public goods, and noncompetitive markets.

Recognition in recent decades of the pervasiveness of market failures has resulted in much effort by economists to develop a wide range of compensatory methods for offsetting market failures. The conventional economic wisdom has been that, although market failures are serious impediments to economic efficiency, most markets are sufficiently robust that with the judicious application of corrective measures such as taxes on pollution, the overwhelming efficiency advantages of market economies can be retained and are well worth saving.

The major problem with the strictly efficiency-based economic approach to environmental management is that even if all market failures could be corrected or offset by compensating countermeasures such as pollution taxes, the resulting outcomes, though economically efficient, would not necessarily be universally perceived as an improved state of affairs. Society does not exist for or by economic efficiency alone. Though economic efficiency is important, and should be an element in any successful management approach, society will also insist upon the protection of other crucial, deep-seated values such as fairness, equity, scientific validity, democratic pluralism, and political acceptability. Therefore one lesson that can be drawn from environmental management practices to date and from efforts to reform them, is that unidimensional approaches, whether regulatory, efficiency-based, or science-dominated, have a low probability of success as compared to more broadly based, multiobjective, eclectic, transdisciplinary approaches. It is for this reason that ecological economists have developed a range of policy instruments that meet all of the above criteria of equity, efficiency, scientific validity, and political acceptability. Examples of policy instruments designed to meet these multiple public policy criteria are given in the following sections.

Three Policies to Achieve Sustainability

In this section three fairly broad, interdependent proposals are described and discussed. Taken together they would go a long way toward achieving sustainability. The market incentive-based instruments suggested to implement the policies are intended to do the job with relatively high efficiency and effectiveness. They are not the only possible mechanisms to achieve these goals, but there is considerable evidence that they could work rather well in certain cultural and legal circumstances. By focusing on specific policies and instruments, we can also address the essential changes that need to be made in the system and begin to build a broad enough consensus to implement these changes.

Various aspects of the proposals have appeared in various other forms elsewhere^[33]. This section represents an attempt to synthesize and generalize them as the basis for developing an “overlapping consensus”^[34] . A consensus that is affirmed by opposing theoretical, religious, philosophical and moral doctrines is most likely to be fair and just, and is also most likely to be resilient and to survive over time.

In summary, the policies are:

1. a broad natural capital depletion tax to assure that resource inputs from the environment to the economy are sustainable, while giving strong incentives to develop new technologies and processes to minimize impacts^[35];
2. application of the precautionary polluter pays principle (4P) to assure that the full costs of outputs from the economy to the environment are charged to the polluter in a way that adequately deals with the huge uncertainty about the impacts of pollution and encourages technological innovation^[36]; and
3. a system of ecological tariffs as one way (short of global agreements that are difficult to negotiate and enforce) to allow countries to implement the first two proposals without putting themselves at an undue disadvantage (at least on the import side) relative to countries that have not yet implemented them.

Natural Capital Depletion (NCD) Tax

One way to implement the sustainability constraint of no net depletion of natural capital is to hold throughput (consumption of total natural capital) constant at present levels (or lower truly sustainable levels) by taxing natural capital consumption, especially energy, very heavily. Nobel Laureate Robert Solow has emphasized the importance of replacing depleted natural capital by an amount of human-made capital sufficient to maintain the aggregate social capital intact in order to ensure sustainability and intergenerational equity^[37]. Not everyone would share Solow’s optimism about the extent to which other forms of capital can be substituted for natural capital, but to the extent that this is feasible, a NCD tax would be an efficient instrument for achieving it. Society could raise most public revenue from such a natural capital depletion tax, and compensate by reducing the income tax, especially on the lower end of the income distribution, perhaps even financing a negative income tax at the very low end. Technological optimists who believe that efficiency can increase by a factor of ten should welcome this policy which raises natural resource prices considerably and would powerfully encourage just those technological advances in which they have so much faith. Skeptics who lack that technological faith will nevertheless be happy to see the throughput limited since that is their main imperative in order to conserve resources for the future. The skeptics are protected against their worst fears; the optimists are encouraged to pursue their fondest dreams. If the skeptics are proved wrong and the enormous increase in efficiency actually happens, then they will be even happier (unless they are total misanthropists). They got what they wanted, but it just cost less than they expected and were willing to pay. The optimists, for their part, can hardly object to a policy that not only allows but offers strong incentives for the very technical progress on which their optimism is based. If they are proved wrong at least they should be glad that the rate of environmental destruction has been slowed.

Implementation of this policy does not hinge upon the precise measurement of natural capital, but the valuation issue remains relevant in the sense that the policy recommendation is based on the perception that we are at or beyond the optimal scale. The evidence for this perception consists of the greenhouse effect, ozone layer depletion, acid rain, and the general decline in many dimensions of the quality of life. It would be helpful to have better quantitative measures of these perceived costs, just as it would be helpful to carry along an altimeter when we jump out of an airplane. But we would all prefer a parachute to an altimeter if we could take only one thing. The consequences of an unarrested free fall are clear enough without a precise measure of our speed and acceleration. But we would need at least a ballpark estimate of the value of natural capital depletion in order to determine the magnitude of the suggested NCD tax. This, we think, is possible, especially if uncertainty about the value of natural capital is incorporated in the tax itself, using, for example, the refundable assurance bonding system discussed below.

The political feasibility of this policy is an important and difficult question. It certainly represents a major shift in the way we view our relationship to natural capital and would have major social, economic, and political implications. But these implications are just the ones we need to expose and face squarely if we hope to achieve sustainability. Because of its logic, its conceptual simplicity, and its built-in market incentive structure leading to sustainability, the proposed NCD tax may be the most politically feasible of the possible alternatives to achieving sustainability.

We have not tried to work out all the details of how the NCD tax would be administered. In general, it could be administered like any other tax, but it would most likely require international agreements or at least national ecological tariffs (as discussed below) to prevent some countries from flooding markets with untaxed natural capital or products made with untaxed natural capital (see further on). By shifting most of the tax burden to the NCD tax and away from income taxes, the NCD tax could actually simplify the administration of the taxation system while providing the appropriate economic incentives to achieve sustainability.

The Precautionary Polluter Pays Principle (4P)

One of the primary reasons for the problems with current methods of environmental management is the issue of scientific uncertainty. At issue is not just its existence, but the radically different expectations and modes of operation that science and policy have developed to deal with it. If we are to solve this problem, we must understand and expose these differences about the nature of uncertainty and design better methods to incorporate it into the policy-making and management process.

Problems arise when regulators ask scientists for answers to unanswerable questions. For example, the law may mandate that the regulatory agency come up with safety standards for all known toxins when little or no information is available on the impacts of these chemicals. When trying to enforce the regulations after they are drafted, the problem of true uncertainty about the impacts remains. It is not possible to determine with any certainty whether the local chemical company contributed to the death of some of the people in the vicinity of their toxic waste dump. One cannot prove the smoking/lung cancer connection in any direct, causal way (i.e., in the courtroom sense), only as a statistical relationship.

As they are currently set up most environmental regulations, particularly in the United States, demand certainty, and when scientists are pressured to supply this nonexistent commodity there is not only frustration and poor communication but mixed messages in the media as well. Because of uncertainty, environmental issues can often be manipulated by political and economic interest groups. Uncertainty about global warming is perhaps the most visible current example of this effect.

The “precautionary principle” is one way the environmental regulatory community has begun to deal with the problem of true uncertainty. The principle states that rather than await certainty, regulators should act in anticipation of any potential environmental harm in order to prevent it. The precautionary principle is so frequently invoked in international environmental resolutions that it has come to be seen by some as a basic normative principle of international environmental law^[38].

Implementing this view of science requires a new approach to environmental protection that acknowledges the existence of true uncertainty rather than denying it, and includes mechanisms to safeguard against its potentially harmful effects, while at the same time encouraging development of lower impact technologies and the reduction of uncertainty about impacts. The precautionary principle sets the stage for this approach, but the real challenge is to develop scientific methods to determine the potential costs of uncertainty, and to adjust incentives so that the appropriate parties pay this cost of uncertainty and have appropriate incentives to reduce its detrimental effects. Without this adjustment, the full costs of environmental damage will continue to be left out of the accounting^[39], and the hidden subsidies from society to those who profit from environmental degradation will continue to provide strong incentives to degrade the environment beyond sustainable levels^[40].

Over the past two decades there has been extensive discussion about the efficiency that can theoretically be achieved in environmental management through the use of market mechanisms^[41]. These mechanisms are designed to alter the pricing structure of the present market system to incorporate the total, long-term social and ecological costs of an economic agent’s activities. Suggested incentive-based mechanisms, in addition to pollution taxes, and tradable pollution discharge permits discussed above, include financial responsibility requirements and deposit–refund systems. Dealing with the pervasive uncertainty inherent in environmental problems in a precautionary way is possible using some new versions of these incentive-based alternatives.

An innovative incentive-based instrument currently being researched to manage the environment for precaution under uncertainty is a flexible environmental assurance bonding system^[42]. This variation of the deposit–refund system is designed to incorporate both known and uncertain environmental costs into the incentive system and to induce positive environmental technological innovation. It works in this way: in addition to charging an economic agent directly for known environmental damages, an assurance bond equal to the current best estimate of the largest potential future environmental damages would be levied and kept in an interest-bearing escrow account for a predetermined length of time. In keeping with the precautionary principle, this system requires the commitment of resources now to offset the potentially catastrophic future effects of current activity. Portions of the bond (plus interest) would be returned if and when the agent could demonstrate that the suspected worst-case damages had not occurred or would be less than originally assessed. If damages did occur, portions of the bond would be used to rehabilitate or repair the environment and possibly to compensate injured parties. Funds tied up in bonds could continue to be used for other economic activities. The only cost would be the difference (plus or minus) between the interest on the bond and the return that could be earned by the firm had they invested in other activities. On average one would expect this difference to be minimal. In addition, the “forced savings” which the bond would require could actually improve overall economic performance in economies like the U.S. that chronically undersave.

By requiring the users of environmental resources to post a bond adequate to cover uncertain future environmental damages (with the possibility for refunds), the burden of proof (and the cost of the uncertainty) is shifted from the public to the resource user. At the same time, agents are not charged in any final way for uncertain future damages and can recover portions of their bond (with interest) in proportion to how much better their performance is than the worst case.

Deposit–refund systems, in general, are not a new concept. They have been successfully applied to a range of consumer, conservation, and environmental policy objectives^[43]. The most well-known examples are the systems for beverage containers and used lubricating oils that have both proven to be quite effective and efficient. Another precedent for environmental assurance bonds are the producer-paid performance bonds often required for federal, state, or local government construction work. For example, The Miller Act (40 U.S.C. 270), a 1935 federal statute, requires contractors performing construction contracts for the federal government to secure performance bonds. Performance bonds provide a contractual guarantee that the principal (the entity that is doing the work or providing the service) will perform in a designated way. Bonds are frequently required for construction work done in the private sector as well.

Performance bonds are frequently posted in the form of corporate surety bonds, which are licensed under various insurance laws and, under their charter, have legal authority to act as financial guarantee for others. The unrecoverable cost of this service is usually 1–5% of the bond amount. However, under the Miller Act (FAR 28.203-1 and 28.203-2), any contract above a designated amount ($25,000 in the case of construction) can be backed by other types of securities, such as U.S. bonds or notes, in lieu of a bond guaranteed by a surety company. In this case, the contractor provides duly executed power of attorney and an agreement authorizing collection on the bond or notes if they default on the contract^[44]. If the contractor performs all the obligations specified in the contract, the securities are returned to the contractor and the usual cost of the surety is avoided.

Environmental assurance bonds would work in a similar manner (by providing a contractual guarantee that the principal would perform in an environmentally benign manner) but would be levied for the current best estimate of the largest probable potential future environmental damages. Funds in the bond would be invested and would produce interest that could be returned to the principal. An “environmentally benign” investment strategy would probably be most appropriate for a bond such as this.

These bonds could be administered by the regulatory authority that currently manages the operation or procedure (for example, in the U.S. the Environmental Protection Agency could be the primary authority). But a case can be made that it is better to set up a completely independent agency to administer the bonds. The detailed design of the institutions to administer the bond is worthy of considerable additional thought and analysis, and will depend on the details of the particular situation (see further on).

The bond would be held until the uncertainty or some part of it was removed. This would provide a strong incentive for the principals to reduce the uncertainty about their environmental impacts as quickly as possible, either by funding independent research or by changing their processes to ones which are less damaging. A quasi-judicial body would be necessary to resolve disputes about when and how much refund on the bonds should be awarded. This body would utilize the latest independent scientific information on the worst-case ecological damages that could result from a firm’s activities, but with the burden of proof falling on the economic agent that stands to gain from the activity, not the public. Protocol for worst-case analysis already exists within the U.S. EPA. In 1977 the U.S. Council on Environmental Quality required worst-case analysis for implementing NEPA (National Environmental Protection Act of 1969). This required the regulatory agency to consider the worst environmental consequences of an action when scientific uncertainty was involved^[45].

One potential argument against the bond is that it would select for relatively large firms that could afford to handle the financial responsibility of activities that are potentially hazardous to the environment. This is true, but it is exactly the desired effect, since firms that cannot handle the financial responsibility should not be passing the cost of potential environmental damage on to the public. In the construction industry, small “fly-by-night” firms are prevented (through the use of performance bonds) from cutting corners and endangering the public in order to underbid responsible firms.

This is not to say that small businesses would be eliminated. Far from it. They could either band together to form associations to handle the financial responsibility for environmentally risky activities, or, preferably, they could change to more environmentally benign activities that did not require large assurance bonds. This encouragement of the development of new environmentally benign technologies is one of the main attractions of the bonding system, and small, start-up firms would certainly lead the way.

The individual elements of the 4P system have broad theoretical support, and have been implemented before in various forms. The precautionary principle is gaining wide acceptance in many areas where true uncertainty is important. Incentive-based environmental regulation schemes are also gaining acceptance as more efficient ways to achieve environmental goals. For example, the U.S. Clean Air Act reauthorization contains a tradable permit system for controlling air pollution. Both the precautionary and the [[polluter pays] principles] are also incorporated in Agenda 21, the final resolutions of the 1992 United Nations Conference on Environment and Development^[46]. By linking these two important principles we can begin to effectively deal with uncertainty in an economically efficient and ecologically sustainable way.

In a sense, we are already moving in the direction of the 4P system. As strict liability for environmental damages becomes more the norm, farsighted firms have already started to protect themselves against possible future lawsuits and damage claims by putting aside funds for this purpose. The 4P system is, in effect, a requirement that all firms be farsighted. It is an improvement on strict liability because it:

1. explicitly moves the costs to the present, where they will have the maximum impact on decision making^[47];
2. provides “edge-focused, second-order scientific” assessments of the potential impacts from a comprehensive ecological economic perspective in order to ensure that the size of the bond is large enough to cover the worst-case damages;
3. ensures that appropriate use of the funds is made in case of a partial or complete default.

Because of its logic, fairness, efficiency, ability to implement the precautionary and [[polluter pays] principles] in a practical way, and use of legal and financial mechanisms with long and successful precedents, the 4P system promises to be both practical and politically feasible. We think it can do much to help head off the current environmental crisis before it is too late.

Ecological Tariffs: Making Trade Sustainable

If all countries in the world were to adopt and enforce the 4P system and NCD taxes there would be no problem (at least from an ecological point of view) in allowing “free” trade. Given recent commitments of the global community to the idea of sustainable development^[48] it does not seem totally out of the question that a global agreement along these lines could someday be worked out. But in the meantime, there are alternative instruments that could allow individual countries or trading blocks to apply the 4P system and NCD taxes in their local economies without forcing producers overseas to do so. It is within at least the spirit of the GATT guidelines to allow countervailing duties to be assessed to impose the same ecological costs on internally produced and imported products. The key is fairness. A country cannot impose duties on imports that it does not also impose on domestically produced products. But if a country chose to adopt the 4P and NCD tax systems domestically, it could also adopt a system of ecologically based tariffs that would impose equivalent costs on imports. This is a different use for tariffs than the usual one. In the past, tariffs have been used to protect domestic industries from foreign competition. The proposed (and more defensible) use of tariffs (in conjunction with the 4P and NCD taxes) is to protect the domestic (and global) environment from private polluters and nonsustainable resource users, regardless of their country of origin or operation. The mechanisms for imposing tariffs are well established. All that we are changing is the motive and the result. The proposed ecological tariffs would result in patterns of trade that do not endanger sustainability.

Toward Ecological Tax Reform

Taken together, the three policy instruments suggested above Capital Depletion (NCD) taxes, the Precautionary Polluter Pays Principle (4P), and Ecological Tariffs (ETs) would go a long way toward assuring ecological sustainability, while at the same time taking advantage of market incentives to achieve this result at high efficiency. They represent components of what is coming to be called “ecological tax reform.”

There is a growing consensus among a broad range of stakeholder groups in the U.S., and even more so in Europe, concerning the need to reform tax systems to tax “bads” rather than “goods.” Taxes have significant incentive effects which need to be considered and utilized more effectively. The most comprehensive proposed implementation of this idea is coming to be known under the general heading of “ecological tax reform”^[49]. Earlier discussions of similar schemes were given by Page^[50] who considered a national severance tax, and Daly^[51] who discussed a depletion quota auction.

The basic idea is to limit the throughput flow of resources to an ecologically sustainable level and composition, thus serving the goal of a sustainable scale of the economy relative to the ecosystem, a goal that was neglected until recently. The more traditional goal of efficient allocation of resources is also served by this instrument because it raises the tax on bads and lowers the tax on goods—it internalizes externalities in a blunt general way, without getting stuck in the informational tar baby of calculating Pigouvian taxes and fretting over “second best” problems. The third goal of distributive equity is both helped and hindered. Since the throughput tax is basically a capturing for public purposes of the scarcity rent to natural capital as economic and demographic growth increases its value, it has some of the equity appeal of Henry George’s rent tax. However, like all consumption taxes it is regressive. This could be counteracted by retaining a zero tax bracket for very low incomes, and a progressive income tax structure for the rest of the population. Of the three major goals of economic policy (sustainable scale, efficient allocation, and just distribution) ecological tax reform serves the first two quite well, and the third partially, requiring some supplement from a progressive income tax structure.

The idea is to gradually shift much of the tax burden away from “goods” like income and labor, and toward “bads” like ecological damages and consumption of nonrenewable resources. Such a shift would have far-reaching implications, and should simultaneously encourage both employment and ecologically sustainability.

There are three basic problems that need to be addressed: (1) the research problem: what would be the quantitative effects of various forms of ecological tax reform on the three policy goals discussed above? Would it significantly induce efficient resource-saving technologies? Would that raise or lower employment? What taxes would most effectively limit scale? How close can we come to the efficient and equitable ideal of taxing mainly rent? What are the implications for international trade of raising revenue by ecological taxes rather than income taxes? (2) the communication problem: how do we adequately develop and communicate with the relevant stakeholder groups the options for ecological tax reform and their implications? and (3) the political problem: how could such an idea be implemented in the current political climate? We believe that these three problems are best addressed in an integrated and coordinated manner, as described above.

The time for action is running short, but the political will to implement significant changes seems to be finally at hand. The tax reforms suggested embody the mix of environmental protection and economic development potential necessary to make them politically feasible. The next steps are to further elaborate and test the instruments, and to build a broad, overlapping consensus to allow their ultimate implementation. It is not too late to protect our natural capital and achieve sustainability.

A Transdisciplinary Pollution Control Policy Instrument

As pointed out earlier, when economists deal with common environmental issues but analyze these issues with the use of models that are both differing and partial, they may arrive at conflicting policy prescriptions. Above we emphasized the complexity of these issues and the need to find common ground. In moving on from policy prescriptions to policy instruments for implementing policies, it is therefore not surprising to find economists in disagreement (e.g., pollution taxes vs. tradable permits) not only among themselves, but, more to the point, to find economists in disagreement with ecologists (nature sanctuaries vs. ecotourism), who in turn are opposed by regulators who prefer a bureaucratic command-and-control structure. If sustainable development is to be achieved, the need to find common ground is compelling. This section suggests how the search for common ground might contribute to the design of a policy instrument for pollution control.

The proposed transdisciplinary framework, which supplements economic insights through a team approach by explicitly including concepts from ecology and the physical sciences as well as concerns for equity, distribution, and political feasibility, is illustrated in Figure 4.2^[52].

Figure 4.2. An ecological economic approach to pollution control. (Source: Cumberland 1994^[2])

This model is proposed as an alternative to the purely economic model, which is predicated upon marginal damage and treatment cost functions whose intersection yields a single uniquely efficient level of pollution tax, treatment, and environmental quality. In contrast, the proposed approach recognizes three separate ranges of environmental quality or levels of ecological health, each with its appropriate policy measure. The model allows for a range, band, or zone of low levels of emissions within which damage is too low to measure, or too low to reduce the productivity of the system. Until emissions and concentrations of pollutants reached a level at which damage could be detected, emitters would be permitted to release waste within legal limits without charge as under the present practice in the U.S. This is termed the property right zone. For equity reasons, emitters are not taxed for emission levels below which (1) no damage occurs, (2) no accumulation results, and (3) ecological productivity is not impaired. Here emissions fall well within the assimilative capacity of the environment. Within this range or band of emissions, the marginal cost of monitoring and administration would probably exceed marginal ecological damage, and thus not justify the expense of administration costs.

The next level of policy concern is that at which ecological criteria indicate that pollution emissions and concentrations have measurably damaged the environment and threatened the productivity of the system. Within this emission range, a pollution charge, calibrated like the optimal tax in Figure 4.1, and set at a level sufficient to prevent transgressing into the cumulative damage zone is imposed upon each additional unit of pollution emitted. This is termed the incentive range because the pollution tax is used as an economically efficient measure for confronting emitters with financial incentives to reduce pollution to efficient levels, as in Figure 4.1. Despite an understandable reluctance by regulators to place exclusive reliance on financial incentives, establishing an incentive range or band could serve the important goal of achieving the highest level of environmental safety per unit of social cost. The establishment of an incentive zone also creates a discrete threshold within which emitters are given the incentives to limit their emissions to nondamaging, assimilable levels. The central importance of the incentive zone here and of IB policies in general is that they apply the powerful forces of competition to the reduction of pollution through economic rewards to those who act in the public interest. Thus, they shift entrepreneurial talents away from regulatory evasion toward efficient, less entropic technical improvement. Within these first two management bands, the proposed instrument is similar to a Pigouvian tax.

However, even the ability and willingness to pay pollution taxes should not permit the privilege of purchasing rights to unconstrained emissions beyond ecologically acceptable limits. A third level of policy concern is therefore reached when pollution emissions and concentrations threaten to rise to the point that ecological criteria indicate irreversible, nonsustainable damage to the system. This is the regulatory zone, because at this threshold, the option of pollute-and-pay would be superseded by regulatory prohibition of any further increases in emissions. While an efficient pollution tax would have been designed to preclude taxed emissions from reaching an unsustainable level, back-up regulatory authority would serve as a safeguard against miscalculation and uncertainty.

There is an efficiency disadvantage in the proposed approach. Strict efficiency requires that each unit of emission be taxed at the same rate. However, in this proposal, those emitting within a no-damage range could continue to emit at initial levels even after new emissions pushed the total into the taxable incentive range. This equity–efficiency trade-off in the incentive zone is introduced in order to provide a measure of protection to existing firms against the possible impact of future entrants having greater market power. Also, the absolute cutoff of further emissions once the regulatory range has been reached would preclude the entry of new, more efficient firms.

Both the equity and efficiency goals, however, could be served by a variant of this tripartite approach, using tradable permits instead of charges. Provided that markets could be established for them, permits would be issued without charge in the property right range of no measurable damage. After the threshold of measurable damage was crossed, additional permits would be offered for sale on the open market, but their number would be limited to a level set by ecological criteria to prevent irreversible damage and transgression into the regulatory range. Therefore, additional emission permits would not be available at any price once the regulatory range had been reached. Economic efficiency would automatically result from the equilibrium price of permits set by bidders in the market.

Thus, limitations on sales of marketable permits to [[ecological]ly] safe levels combine the best features of both regulation and economic incentives. The option of selling emission permits in competitive markets would automatically allow new and technologically efficient producers to emerge and to phase out those more pollution intensive producers, but only if the latter found this to be an attractive option. Resale of permits would also automatically adjust markets for inflation, unlike Pigouvian emission charges which would require administrative action for efficient response to price level changes. In fact, transferable permits for emissions in all ranges would have efficiency advantages over limiting charges to the incentive range by permitting new, efficient emitters to purchase permits and by requiring all emitters to pay the same price per unit of emission rather than merely cutting off all new emissions beyond the efficiency limit.

Implementation and Operational Considerations

Clearly, practical problems would have to be faced in implementing these proposals, depending upon local and other conditions. In deriving the damage and treatment cost functions, difficult decisions would have to be made concerning multiple pollutants, multiple species affected, and multiple spatial jurisdictions, depending upon the availability of data and knowledge. For example, Tietenberg has discussed techniques for dealing with multiple sources and multiple receptors of pollution damage^[53]. Fine tuning would require different tax levels appropriate spatially and temporally for different pollutants, again depending upon the state of data and knowledge. Given the limitations of scientific knowledge and the extent of uncertainty, a pragmatic approach could require simply proceeding on the basis of scientific consensus concerning the best current information. Given problems of assessing the differential impacts and synergisms among different pollutants, simple estimates of relative toxicity could serve as the basis for setting pollution charges or permit fees subject to the accumulation of additional data. Monitoring and enforcement would be essential. Nevertheless, it must be emphasized that these imperatives are just as compelling for all environmental management systems, including those now in place.

Some of the features of this proposal would be precluded in places where pollutants were already causing measurable damage, which is unfortunately already the case in much of the world. In such instances, the property right zone would be forfeited and pollution taxes would become relevant on all emissions. Rates on these taxes could then be increased to keep damages within the incentive range and prevent spillover into the nonsustainable damage range. Where nonsustainable damage has already occurred, drastic regulatory and punitive (negative incentive) action is justified. Examples include the fines and damage judgments incurred from oil spills and the damage assessments against hazardous waste disposal under the U.S. Superfund (Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), United States) program^[54].

It should be noted that a variant of this approach has already been applied in the Netherlands^[55]. Farmers are permitted to discharge the manure equivalent of 125 kg of phosphate per hectare per year without charge. However, beyond that level, they are then charged the equivalent of 0.1 ECU ($0.11) per kg from 125 to 200 kg per hectare. Above 200 kg, the charge increases progressively to 0.2 ECU ($0.22) per kg per hectare per year, with a typical charge per farm of about 730 ECU ($810) annually. This innovative policy instrument, though similar in many respects to the tripartite approach suggested in this paper, utilizes in place of a regulatory level of capped maximum discharges a level of increased emission charges at twice that in what is termed here the incentive zone. The two approaches can be made to converge formally by raising the emission charge in the zone of unacceptable damages to a prohibitively high level. Like the proposals here, the practice in the Netherlands diverges from the strict efficiency rule of taxing each unit of emission at the same price in order to provide some equity consideration to emitters.

Appropriate Policies, Instruments, and Institutions for Governance at Different Levels of Spatial Aggregation

The Local Level

Although the legal and institutional framework for environmental management is typically determined at the national level, and for some issues is shifting slowly to the international level, the individual events which in total determine environmental quality actually occur at the local level. Examples are the conversion of natural habitats to agriculture, subdivision of land for residential, commercial, or industrial development, and construction of a factory and the disposal of its waste. More generally, the most important decisions made at the local level are those dealing with land use. Land use decisions affect the full spectrum of environmental problems, from those of human habitat to those of habitat for protection of species diversity. The basic problem is that market processes do not necessarily result in land use densities that are consistent with local carrying capacity or with growth on a scale that is sustainable.

Just as most political issues are said ultimately to be local (Tip O’ Neill), so are the sources of most environmental impacts. Therefore, although broad environmental policy issues should be coordinated at higher levels of governance, the struggle for ecological sustainability must ultimately be won or lost at the local level. While the NIMBY (Not In My Back Yard) response to local economic development^[56] threats is deprecated by growth advocates, this type of local feedback provides valuable information that merits serious consideration in the planning and decision processes. “Not in my backyard” can be a perfectly rational and responsible local reaction which sophisticated developers as well as ultimate decision makers are learning to factor into the management process, since this is where the detrimental externalities are felt most acutely. A recent example is the decision of Disney to cancel plans to build a multimillion dollar theme park near Washington, DC, close to Civil War battlefields and open countryside, in the face of strong opposition by historians and local citizens. The lesson to be learned from this experience is that the professional developers usually prevail (because of their well-financed mastery of legal and political intricacies of the development process, which indeed they have designed precisely for this purpose) except in those rare cases where conservationists mobilize the resources and will required to organize the legal, public relations, planning, and other professional skills needed to defend their rights and environment^[57]. Unfortunately, few communities have the means and resolution available in Middleburg, Virginia, and environmental activists too often confine their efforts to their own backyards. Therefore there is opportunity and urgent need for NGOs to make their experience and expertise more widely available to local communities facing serious environmental damage from ill-advised, poorly designed development projects.

Although this section emphasizes policy instruments, discussion of these instruments should involve some reference to the interest groups that affect them, the management agencies that apply them, and the processes through which they are applied.

A major obstacle to environmental protection that is readily verifiable through observation at the level of local government is the heavy bias of economic and political power toward growth and against ecological preservation. There are many reasons for this:

• Local economic growth decisions are typically based upon private cost and benefit, rather than upon total social cost and benefit.
• The economic benefits of particular development projects are immediately observable in quantifiable terms and measurable in monetary terms, while the benefits of ecological protection are often qualitative, future oriented, and therefore heavily discounted.
• The beneficiaries of development are sharply focused and can command the financial resources required to retain the top, politically connected legal talent which controls the development process and can persevere until they achieve their objectives. The economic and political power of the development establishment becomes institutionalized in the laws and procedures governing land use and environmental regulation.
• Local development establishments suboptimize by competing for growth with other jurisdictions and by subsidizing growth to inefficient, unsustainable levels.
• Though the total benefits of a decision to preserve an ecology may significantly outweigh the benefits of development, the beneficiaries of environmental protection are less sharply focused, are scattered throughout the general public and, unless they can rally thinly spread organized environmental associations to their cause, must rely upon part-time volunteers to protect their interests.
• The diffused nature of environmental benefits inclines many of the potential beneficiaries of ecological protection to become “free riders” on the activism of the minority, reducing their apparent total representation to below a socially warranted level.
• Subsidies from all levels of governance to transportation via cheap energy and infrastructure aggravate the bias toward excessive levels of local economic growth.

Together, these factors all contribute to the current dilemma of biases toward excessive, ecologically unsustainable rates of local economic growth. The problem is made particularly acute by the fact that the efforts of the local growth establishment to privatize the beneficial externalities of common property resources such as estuaries, public waterways, wetlands, forests, scenic areas, parklands, and other stocks of natural capital, too often target economic growth in the most sensitive ecological areas.

As the results of these biases toward development, the resulting privatization of natural capital assets began in the 1970s to cause unacceptably polluted air, water, and land, and the need to correct some of the developmental excesses became more obvious. This is why the NGOs have been able to assume a major role in providing the public with environmental protection against major polluters, protection that is particularly crucial in cases where government agencies at all levels have been sufficiently co-opted by those they were established to control that they have in effect abdicated their obligations to the public interest. Such incidents have been cited in the case of the Chesapeake Bay^[58].

Institutional biases toward local economic growth have resulted both in excessive aggregate levels of economic growth and economic growth concentrated in ecologically sensitive areas. Belated recognition of this problem has led to the emergence of policy instruments for its control, but these instruments are demonstrably not adequate to the task.

In the U.S., the primary policy instrument for management of land use and economic growth is the planning and zoning process. This is a regulatory process that typically reflects accurately the distribution of local political and economic power. Consequently, local land use decisions tend to be made on the basis of private rather than community benefits and costs.

Improving the quality of local land use will depend most importantly upon giving appropriate weight to:

• assigning priority to net social welfare gains over net private gains;
• scientific evaluation, protection, and management of local ecological resources for sustainability;
• equitable participation in the decision process by all affected parties;
• oversight and review at higher levels of governance to prevent interregional competition for growth from degenerating into competitive sacrifice of natural capital and of critical areas.

Specific policy instruments are necessary for achieving these objectives. Rather than the present policy of subsidizing excessive levels of local economic growth, policy instruments are needed that confront developers with the full economic and social costs of growth. One such instrument is full-cost pricing of local government services.

Land Purchasing and Conservation Easements. Another alternative policy instrument for managing local land use and protecting sensitive ecosystems is outright acquisition of sensitive ecosystems through purchase by governments, by other agencies, by citizens, by the Nature Conservancy, or by other NGOs as discussed elsewhere. Before approving land for development it should be evaluated in terms of soil type, hydrology, habitat, archaeological significance, and other scientific criteria. Strengthening local land use authorities through strong transdisciplinary science input is essential to sustainable land use. Evaluation of land for development suitability prior to development could have saved residents of Los Angeles, to cite a single example, billions of dollars in losses from fire, flood, landslides, and earthquakes. Many of these losses are shifted to the general public, who pay the bills for publicly subsidized insurance relief efforts and often for rebuilding in the same disaster areas. The lethal combination of federally subsidized insurance and incompetent, development-biased local planning and zoning has caused billions of dollars worth of social and personal loss not only in California, but also along the floodplains of the Mississippi and the hurricane alleys of the American Southeast.

In terms of equity and Pareto fairness, when specific parcels of land are taken from owners or are subjected to prohibition from all uses because of ecological and other scientific or public purposes, compensation is a reasonable policy instrument to be considered. However, no such equity consideration is appropriate in the case of speculative pursuit of gain at public expense, since real estate activities should be recognized as subject to both profit and loss possibilities. The case for compensation is weak when some land uses are affected by broad federal, state, or local planning, zoning, or legislation, as has been widely recognized by the courts. The misnamed “wise use” movement to block environmental legislation by threatening compensation demands in retaliation for the exercise of legitimate governmental functions is an effort to carry the compensation principle far beyond reasonable limits.

Full-Cost Pricing. Local taxes, utility fees, and other services should reflect the full cost to society of additional residential, commercial, and industrial growth, both during the period of construction and throughout the life of the project. Among the unpriced social costs of residential, commercial, and industrial real estate development are environmental impacts from sewage disposal, storm water non-point-source runoff of silt and sediment, runoff of lawn and garden chemicals, and loss of open space. Unless local land prices and taxes fully reflect all of these costs, the resulting subsidization of the real estate and economic growth establishment causes excessive densities and misallocation of land resources.

The typical practice of avoiding full-cost pricing subsidizes new growth at the expense of current residents. The use of impact fees on new developments is a variant of this full-cost approach. In addition to these initial fees, continuing monthly fees should be set at levels sufficiently high to cover the full cost of sustainable environmental protection. The adoption of full-cost pricing may not be a sufficient policy instrument for achieving sustainability, but it is a necessary condition for confronting developers with the social cost of their actions and for sending proper signals to purchasers concerning the full social cost of moving to environmentally sensitive areas. Economically efficient instruments of this type can assist in limiting population densities to the carrying capacity of the local environment.

Getting the prices right may seem to be a rather simplistic instrument for achieving the many important goals of good land use, and it obviously must be supplemented with other regulatory instruments such as regional planning for watersheds, air sheds, and life-support ecologies. However, incorporating full social and ecological costs into land prices is a potentially powerful instrument for achieving ecologically responsible development decisions. To the extent that consumer sovereignty can be preserved in free societies, getting the prices right is a necessary precondition for assisting markets to make decisions that serve the public interest. Most advanced societies found early on that rather than relying exclusively on markets to make land-use decisions, the introduction of planning and zoning was essential for capturing the benefits of positive externalities and avoiding the costs of negative externalities.

The Regional Level: Reducing Counterproductive Interregional Competition for Growth

Although this section addresses policies that regional governments can utilize in pursuing sustainable development, it should also be recognized that national governments play a major role in setting the rules of the game for interregional competition and they bear the responsibility for providing for sustainability. The goal of national policy should be to assure that the means used by states and localities in interregional competition lead constructively toward improving the quality of development, and not merely toward the competitive subsidization of quantitative growth. Incentives to standards-lowering competition among states should be avoided, just as among nations. This problem is particularly egregious when states engage in competitive bidding wars to attract such facilities as factories, sports arenas, theme parks, industrial parks, housing developments, shopping centers, and industrial complexes. The now familiar give-away instruments used for such competition include tax relief, relaxation of zoning and environmental standards, subsidization of access roads and public facilities, and the disguised transfer of funds through the issuance of tax-free municipal bonds^[59].

Although these types of subsidies to regional growth have become so widespread as to seem commonplace, it is important to recognize that they run against the public interest by violating the principles of efficiency, equity, and sustainability in numerous ways. They are inefficient because those projects that are economically viable would have been undertaken in any event without public subsidies. Therefore, from the national perspective, the subsidy is unnecessary and merely represents an unjustifiable transfer of publicly raised tax revenues from taxpayers to private developers in a zero-sum game. The bidding contest among states may influence where the project will actually be located, but it may not since fiscal subsidies are only one factor and usually a minor factor entering into the benefit–cost calculus of developers. In such cases the subsidy is an unnecessary public-to-private transfer from the viewpoint of both the region and the nation. In cases where the project actually would not proceed without subsidization, this indicates that its proponents are unable or unwilling to pay for its fair share of public services, and that it should probably not be built at all.

In the best-case scenario, a state may succeed in outcompeting other states for the location of a new activity. An example is the case of a theme park, for which a typical benefit–cost study indicates total state economic benefits exceeding total state economic costs, including the cost of the subsidy. If resources can be raised to finance it, an objective, professional benefit–cost study should be undertaken in advance of any major local development. However, benefit–cost studies typically deal only with totals, and rarely with the environmental, distributional, and equity issues of which groups receive the benefits and which groups bear the costs. Typically, the promised new jobs go to immigrants from outside the region, and the promised tax relief gets transformed into tax increases needed to pay for the new social services caused by the development. Obviously, the beneficiaries of growth are the economic development establishment, the tourism industry, and related activities. Not coincidentally, these are the groups which have the economic and political incentives to dominate planning, zoning, and development processes. Despite possible net economic benefits to these groups, heavy economic and other costs fall upon local taxpayers, residents, and commuters, all of whom are affected by the widespread environmental and ecological externalities imposed by large-scale economic growth. All economic growth increases throughput, accelerates entropy, and threatens sustainability.

Although subsidizing the location of growth (which would occur in any event) is, from the national viewpoint, a zero sum game, there are other constructive forms of interregional competition that can benefit both the competing regions and the larger society. States and regions can compete in terms of improving the quality of public services, such as education and environmental management, thus making their areas more attractive to innovative firms whose major locational requirements are the need to attract and retain highly trained, highly paid, but highly mobile human resources^[60]. This might be termed “standards-raising competition,” in contrast to standards-lowering competition to reduce taxes, regulations, and so on.

Rather than perpetuating the spread of economic inefficiency, distributional inequity, and environmental damage through allowing competitive interregional subsidization of economic growth, national governments could encourage interregional competition in the quality of development by disallowing fiscal transfers from state and local governments to private firms. This could easily and appropriately be accomplished through minor changes in the internal revenue code.

The National Level: Toxic Release Inventory and the Public’s Right to Know

The hard-won democratic right to freedom of information can be especially valuable as an instrument for improving environmental management^[61]. In particular, the collection and public release of environmental data on emissions could, if more widely used, serve as a powerful management instrument. For example, a promising first step toward a system of materials balance and waste tracking has already been put into place in the U.S. EPA Toxic Release Inventory (TRI). Following the 1984 disaster at the Union Carbide plant in Bhopal, India, which killed more than 2,000 persons and injured some 500,000, the EPA began requiring chemical manufacturers in the U.S. to file annual reports on releases of toxic substances into the air, water, and land. In 1986, the Emergency Planning and Right to Know legislation was passed over the objections of the Reagan administration and industry groups, requiring disclosure of toxic chemical releases by some 24,000 U.S. chemical plants^[62].

The potential policy leverage of this approach is illustrated by a recent publication in the popular press that listed by name the 10 cleanest major U.S. corporations, the 10 “most improved, “ and the 10 “laggards,” along with analyses of their environmental policies^[63]. Although it would not be realistic to attribute the entire decline in toxic releases achieved since this system was initiated in 1986 to this one factor, the 30% reduction that has occurred does illustrate its public relations impact.

An excellent example of the effective use state and regional authorities can make of TRI data is the study done under the EPA’s Chesapeake Bay Program by Maryland, Pennsylvania, Virginia, and the District of Columbia^[64]. The potency of this study lies not only in the detail presented in terms of types of releases and water basin and subbasin affected, but in that the names of emitters, both public and private, are cited along with the estimated pounds per year of each type of pollutant released by each establishment. The policy significance of this information lies in the fact that while the fact of “regulatory capture” through economic and political power can limit the ability of regulators to curb pollution, citizens’ associations and NGOs can and have used this type of information in the courts to obtain judgments against polluters when regulators have not acted. The data show the worst polluter of the Chesapeake to be the Bethlehem Steel Corporation plant at Sparrows Point near Baltimore. As would be expected, in addition to steel producers, chemical plants, meat processors, and electric power plants are major offenders. Somewhat less expected are the huge pollution loadings released from public wastewater treatment plants. This enormous and ironic pollution impact by the very facilities intended to reduce pollution reflects in part the failure of public environmental policy and the huge amount of pollutants illegally discharged by polluters into public sewers.

This TRI system, if extended to all existing toxics producers and made a requirement before new operations could begin, could provide comprehensive information on total waste flows and be integrated with the improved social accounting systems discussed elsewhere in this study.

The EIS as a National Policy Instrument. We noted above that as the results of biases toward local development began in the 1970s to become painfully obvious in terms of unacceptably polluted air, water, and land, the need to correct some of the developmental excesses became more acute. An effort was made principally in the U.S. through the National Environmental Policy Act of 1969 to constrain uncontrolled environmental damage and to initiate environmental protection, especially at the national level. One key provision of this Act, as noted above, almost inadvertently gave a new weapon to local residents provided that they develop the skills to use it. This was the section of the Act requiring development promoters to file environmental impact statements. The EIS deserves recognition as an important policy innovation, since for the first time, it also gave the general public national opportunities heretofore systematically withheld from them to learn about and participate in decision making about environmentally impacting programs affecting their lives. These decision-making processes had previously been closely controlled by polluters and their often captive regulators. The EIS process provided new opportunities for citizens to confront the organized political and economic power of polluters.

We emphasized above the potential empowerment local communities could gain from using the environmental impact statement as a weapon against the imposition upon them of detrimental externalities from local economic growth excesses. This same policy instrument can be used effectively by citizens’ groups and NGOs at the national level. One of its earliest and most successful applications in the U.S. was to cite estimates of the probable extent of sonic boom damage to prevent the costly federally subsidized development of a commercial supersonic transport aircraft.

Ecological Labeling. After prolonged resistance by the food industries, the U.S. has recently begun to label foods as to their nutritional and other contents providing an urgently needed source of information to consumers. The urgency of this need was aggravated by the billions of dollars spent annually by the food industries on the bombardment of consumers by advertising which spreads false and misleading information in unconscionable pursuit of consumers’ expenditures.

In the interest of truth in advertising, exciting opportunities exist for introducing ecological labeling, comparable to nutritional labeling, on a wide range of products, goods, and services. Some obvious candidates for information to be included in ecological labeling per unit of product are inputs per unit of energy, recycled vs. virgin materials, amounts and types of toxic and other wastes generated in both the product’s production and consumption, amounts of nonrenewable vs. renewable resources used, and related information. Such ecolabeling could become a powerful instrument for informing consumers, persuading producers to improve products, and rewarding good practices.

Other National Policies. In order to highlight the potential contributions of incentives, we have drawn a sharp contrast above between IB and regulatory national policy instruments. In reality, there are many instruments that combine features of both, as well as other altogether different types of options. Since government procurement is a major portion of many markets and products, government purchase directly and by example can influence environmental policy. Examples include:

• purchase of recycled paper and other products;
• purchase of vehicle fleets that operate on natural gas and other alternative fuels;
• construction and operation of energy-efficient public structures;
• management, cleanup, and prevention of wastes on military and civilian government installations.

In addition to using their procurement powers for green purposes, governments can take direct steps such as subsidizing the shift from use of nonrenewable to renewable energy sources and subsidizing research and development of sustainable technologies. Besides forging cost-effective new policies and instruments for environmental protection, national governments already have at their disposal efficient and virtually cost-free opportunities for making major environmental improvements by eliminating expensive subsidies and other obsolete programs which currently add to environmental damage. These perverse national policies have been referred to as “intervention failures” since they result from deliberately undertaken government actions which, whether purposely or inadvertently, cause environmental damage.

Examples include:

• underpricing the sale of publicly owned timber;
• underpricing the sale of public lands for mining;
• subsidizing the construction of roads for private harvesting of timber in national forests;
• subsidizing grazing and permitting overgrazing on public lands;
• subsidizing the sale of irrigation water to special-interest users;
• subsidizing the production of crops in excess supply (e.g., sugar cane in the Everglades), or which damage human health (e.g., tobacco);
• subsidizing highly entropic technologies for which no generally acceptable method of waste management has yet been found and which are regarded by the private insurance industry as too hazardous to qualify for commercial insurance (e.g., nuclear power (Nuclear power reactor));
• subsidizing the use of virgin materials and penalizing recycling by imposing uneconomically high transportation rates on the former;
• subsidizing the construction of costly environmentally damaging dams, levees, and irrigation projects.

Obviously, special interest groups, the subsidized polluters, benefit handsomely from the public largesse expended upon such programs, but continuation of such subsidies cannot be justified on public policy principles. Taxing citizens and using their money to pay the subsidized polluters to then damage these taxpayers is a double insult. A politically unlikely but perfectly rational alliance of conservatives concerned about downsizing government and liberal environmentalists concerned about governmentally sponsored environmental damage is emerging under the banner of “green scissors.” They regard these and similar intervention failures as expensive self-inflicted ecological wounds whose early termination would permit immediate damage control and generate significant net public benefits. Intervention failures become particularly egregious at the regional level when they damage entire ecosystems such as estuaries, like the Chesapeake Bay.

The International Level and the Third World

The end of the Cold War and reductions in expenditures on weapons of mass destruction offer opportunities for addressing neglected international environmental issues that have been held hostage to the armament race for almost a half century. One of the most comprehensive proposals for meeting this challenge is embodied in Vice President Gore’s plan for a global Marshall Plan. It is based upon the U.S. program which succeeded brilliantly in achieving the economic reconstruction for both our allies and adversaries after World War II. Although the analogy is not exact, the same spirit of common purpose and the growing recognition of the urgency for shifting from the present policy of devastating our habitat to one of lengthening the human tenure on earth could reactivate the idealism and generosity, which after that cataclysm proved to be major sources of enlightened self-interest for the U.S. We have suggested that funding for international environmental protection could be made self-financing through a system of Pigouvian pollution charges^[65]. A modest international tax on carbon emissions, which would be an obvious candidate with which to begin, could have many advantages of the type discussed above in the sections on economic efficiency. Positive financial incentives would accrue to nations and enterprises which reduced emissions, innovated cleaner technologies, and conserved resources. The charges would raise revenue that could be used for research, administration, and compensation in hardship cases. The global threat of climate change would be reduced, and equity adjustments could be made in hardship cases and for developing nations.

Further recognition of the special needs of developing nations is embodied in the “debt-for-nature swaps.” Unfortunately, many nations have borrowed so heavily that crushing pressures of servicing their debts are forcing them to deplete their environmental capital at rates that are causing problems not only internally, but which are of global concern, as in the Amazon Basin. The discount at which this debt is traded in international capital markets, and which unfortunately provides de facto evidence of its excess, also fortunately provides low-cost opportunities for purchasing this debt economically and liquidating it in return for the debtor nations’ agreements to undertake specific environmental projects. Although excessive borrowing should not be encouraged, debt-for-nature swaps are a constructive policy instrument for salvaging ecological benefits from previous mistakes.

Economic incentives can contribute positively to environmental protection in developing nations especially through the strengthening of property rights by making these rights explicit, enforceable, and marketable. A problem of developing nations that threatens all of the fundamental goals of sustainability, equity, and efficiency is the loss of rain forests and other habitats, which not only damages indigenous cultures, but destroys forever endangered species. In some cases, rain forests can yield higher economic returns if left in their natural state than if destroyed for timber cutting and grazing. Rain forests are now recognized as vast reservoirs of potential life-saving drugs and sustainable nontimber products. However, in the absence of property rights to these products, incentives are inadequate for their discovery and cultivation as contrasted to the clear-cutting of the forests.

Various policy instruments are available to mitigate this tragedy of the commons. One of the best ways to protect rain forests and other vital habitats is to create and protect property rights to the sustainable yields these resource systems can produce on a continuing basis in their natural state, rather than clear-cutting them for unsustainable short-run profits.

The creation of property rights can be established in the form of patents, royalties, and discovery rights. These would be paid by developed nations to create incentives in the LDCs to protect and harvest these resources sustainably, rather than destroying them forever for short-term gain. Another promising approach is that pioneered in Costa Rica, which has negotiated a “prospecting fee” with Merck Pharmaceuticals, giving the company rights for two years to screen forest products for valuable drugs. In return, the nation has agreed to set aside and protect the extraordinary amount of one quarter of its total land. Potential benefits to both parties could be great, and Costa Rica has undertaken an action that makes it a world leader in the struggle for sustainable development. Other similarly situated nations could benefit from this and similar initiatives.

Innovative as this Costa Rica–Merck agreement is, Durning points out a major opportunity for improving such policies^[66]. Emphasizing the importance of secure property rights and tenure in the management of resources, he notes that vesting these rights in central government agencies is one step toward correcting the tragedy of the commons. However, if it ignores the rights of indigenous tribes, in addition to being unfair to them, it results in a loss of their traditional knowledge of how to manage these resources for sustainable harvest of medicinal and other products. Thus, from the perspective of our approach, providing secure property rights to indigenous people in the management of forests, fisheries, and other environmental resources could provide significant improvements with respect to all of our criteria of scale, equity, efficiency, acceptability, and sustainability.

The Global Level

Increasingly, environmental and ecological problems are spilling over national borders and becoming not only transboundary phenomena, but, more seriously, threats to the global commons. Recognition of these increasingly serious global dimensions of the problem will require international solutions. One proposal, as noted above, has been to empower international agencies, such as OECD or the UN, to impose emission charges on transboundary pollutants with the proceeds used for monitoring, enforcement, and research^[67].

One of the potentially most serious global environmental problems is that of greenhouse gases. Although much uncertainty remains concerning atmospheric science, there is considerable consensus that the growing concentration of carbon dioxide and other greenhouse gases in the atmosphere since the industrial revolution will, at current rates of accumulation, eventually raise global temperatures. The release of other gases, such as chlorofluorocarbons (CFCs) depletes the earth’s protective atmospheric ozone, even causing periodic holes in this shield. Probable consequences include higher incidence of skin cancer, damage to human immune systems, to marine larvae, and to germinating crops. The accelerated melting of glaciers and polar ice caps could raise sea levels around the globe, inundating low-lying cities and coastal regions.

Reducing damage to the atmosphere is even more difficult than dealing with transboundary problems because atmospheric emissions eventually encircle the globe, affecting all nations, not just two or several. Furthermore, the atmosphere is a truly global public good, because only a small fraction of the benefits from any efforts to protect or improve it can accrue to those nations taking individual action. This is a classical situation almost guaranteed to result in suboptimal control efforts unless international efforts are undertaken^[68].

As demonstrated by the 1992 UN Rio Conference, international efforts to protect the atmosphere are fraught with multiple problems. Among the most serious, in addition to scientific uncertainty, are those of national sovereignty, North–South value conflicts, and population issues. The Montreal Accords to control the emissions of CFCs was a step in the proper direction, establishing a program of phased future reductions for all parties. However, much greater efforts will be necessary in the future for a comprehensive approach to protect the ozone shield, atmosphere, and climate. As has been noted throughout this book, successful policy measures must meet the multiple criteria of scientific validity, interregional and intergenerational fairness, political acceptability, and economic efficiency. Richard E. Schuler^[69] has discussed a promising effort to address these issues and meet these criteria by the United Nations Environmental Program (UNEP).

The UNEP proposal addresses equity by protecting the interests of all stakeholders in developing as well as industrial nations. It addresses the national sovereignty issue by making the program voluntary with a distribution of emission rights (ERs) to all signatories, recognizing the two fundamental realities of high current emissions by industrial nations and growing Third World populations. This would be accomplished by basing the ERs on the average per capita emissions of greenhouse gases of the five most advanced industrial nations and by allocating them to nations according to their current (but not future) populations. Economic efficiency would be achieved by making the ERs marketable. Developing nations would benefit by receiving large population-based allocations of currently unused permits, which they could choose either to hold for use in prospect of future industrialization or sell, using the proceeds in lieu of growth. These nations could also be awarded additional ERs in return for protecting forests and grasslands which offset greenhouse gases, benefiting themselves and other nations through incentives for managing population and growth. Each nation would thus have options for choosing its preferred development strategy. The marketable value of these permits would also reduce the temptation for the LDCs to attempt to reduce the initial distributions to levels that would create problems for industrialized nations.

Industrialized nations would benefit from having the alternative opportunities of reducing emissions and thus freeing permits for sale or purchasing permits from others if this appeared less costly in their particular situation. Choice and market incentives would encourage economic efficiency and technological advance. The incentives for industrial nations to press for high numbers of initial distributions would be tempered by awareness of the global danger from having excessive unused permits in existence, jeopardizing the planet in the event of their simultaneous future use.

Ecological goals would be served under this scheme by phased proportional reductions in each nation’s ERs. Scientific validity would be served by using the best current transdisciplinary scientific consensus as the basis for the periodic changes in the number of total allowable permits.

Numerous refinements of this approach are possible, including a central banking feature under which the UN or other international organizations such as OECD could make a market for buying and selling the permits. Carrying this concept to the point of permitting nations to borrow permits from the future for current use, however, would create the potential for intergenerational inequity by letting current populations increase damage to the planet at the expense of as yet unborn future generations who would thus have no voice in the decision, despite its effects upon them.

Schuler’s paper^[70] concludes with the observation that a critical requirement for implementing this type of regime is estimates of the value of current and future reductions in the risk of global climate change. We consider that creating a transdisciplinary ecological economic research program would be an appropriate and challenging means for addressing the complex issues involved in this problem. This could serve as a model for dealing with other global environmental problems that confront the planet.

Warfare, especially that using technologies of mass destruction, is the ultimate environmental threat, as the environmental aggression against the Kuwaiti oil fields demonstrated during the 1992 Desert Storm conflict. Following this war, the Iraqi draining of marshes in order to drive out the tribes who have inhabited them since Biblical times is an unprecedented example of turning ecological fragility into a form of environmental genocide.

The accumulation of nuclear (Nuclear waste management) waste from weapons production and testing during the Cold War leaves a deadly heritage that will require costly monitoring for thousands of years, longer than the total life span of any human civilization to date. Even the peacefully intended use of nuclear energy has left a similar problem for which acceptable solutions have yet to be found. We suggest that the quest for policy instruments capable of addressing these global issues be guided and facilitated by observing the above criteria of equity, efficiency, and scientific validity.

ConclusionsIn retrospect, some obvious conclusions can be drawn about the human efforts to date to manage our global habitat (An Introduction to Ecological Economics: Chapter 4) . The adoption of industrial technology has both satisfied and, with positive feedback, accelerated human appetites for material consumption, thereby generating throughputs of materials and energy far in excess of the capacity of the earth’s ecosystems to assimilate sustainably. Exponential expansion of human populations has crowded out other species. The 40-year armament race during the Cold War both absorbed resources which might have been devoted to environmental protection and weakened the resolution needed for reversing centuries of damage to the global habitat. The end of the Cold War has unveiled a heritage of nuclear (Nuclear waste management) and toxic wastes that leaves vast areas at risk or even uninhabitable in both the East and the West.

But the end of the Cold War also creates a historic worldwide opportunity to reallocate resources away from looting the planet and toward restoring a sustainable human habitat. The former global competition for dominance precluded serious efforts to replace economic growth with sustainable development (qualitative improvement without increasing throughput). The barriers to acceptance of sustainable development will be well-entrenched consumer materialism in developed societies and the understandable aspirations of the Third World to emulate Western material affluence. Success in meeting and overcoming these barriers will require learning from the historical record, avoiding the mistakes of the past, and creating innovative solutions for the future. One mistake of the past to be avoided is that of letting appetites for material consumption blur our sensitivity to the conditions essential for sustainable development. Another lesson we must learn with respect to population growth is that a positive exponential growth rate, no matter how limited, of any variable (such as population) in a closed system (such as the earth) will eventually overpower the system, and cannot be sustained. Kenneth Boulding warned during the height of the Cold War that citizens of all nations are passengers on a single, finite Spaceship Earth, whose continued existence is totally dependent upon a more fundamental understanding of its owner’s manual and operating instructions. Among the most important of the earth’s operating instructions are the policy instruments we use as tools for maintenance, safe operation, and repair. In the past, we have attempted to make do with a tool kit of insufficient and faulty tools.

Our tools and instruments for operating our spaceship have been designed too much for administrative regulation of what comes out of smokestacks and not enough for providing economic incentives for limiting throughputs of energy and materials to sustainable levels. Our management of habitats has been based excessively upon highly entropic conversion of land, forest, and water resources with unsustainable levels of harvesting and cultivation and too little upon scientific understanding of the complexity of ecological interrelationships. Our management of species diversity has been dominated more by market exploitation of open-access resources than by responsible stewardship of our common heritage and infrastructure. Our debate over human population growth (Human population explosion) has been dominated more by doctrinaire ideological confrontation and defense of male power structures than by a good-faith search for common ground. Our management of energy resources has been based too much upon short-run market considerations, excessive discounting of the interests of future generations, and too little sensitivity to either intergenerational equity or intragenerational justice.

In short the historical record indicates that our efforts to protect our earthly environment have been defective with respect to scientific understanding, economic efficiency, and equity as between individuals, regions, and generations. The early warning indicators and their combined patterns as perceived by Rachel Carson, Kenneth Boulding, and others suggest that if we continue on the current trajectory of naive growthmanship, the probable ultimate consequence will be overshoot and collapse of painful proportions. Our choices lie between using our educational and democratic institutions for gaining acceptance of consensual solutions, or of continuing on into disaster and social chaos, from which democratic processes are unlikely to survive. Forging a new set of policies and tools capable of meeting these new challenges is urgent. We are in a race between educating ourselves about how the planet functions, and destroying it through acts of greed and hubris, against which the better part of human wisdom has warned since the time of the Greeks. Forging a new set of policies and tools capable of meeting these new challenges will require the emerging science of complex systems, the search for true economic sufficiency that acknowledges nature as an equal partner, and the concern for fair and participatory democratic processes that have been emphasized throughout this work.

Clearly, the momentous adjustments required for moving onto a path of sustainable development will require a global commitment by all nations. Daly has emphasized the opportunity offered by a global social contract between North and South. The North, which accounts for most of the global throughput, should undertake to abandon mindless quantitative growth in favor of sustainable qualitative development. The North should also emphasize intragenerationally equitable distribution by aiding the South to achieve levels of welfare which will permit a demographic transition to stable populations and intergenerational equity through restoring the stock of natural capital. The South, in response, could undertake to stabilize human populations and provide permanently protected habitats needed for assuring species diversity.

Making this transition from the present unsustainable course of plundering the earth to a sustainable course is the major challenge to humankind today, but it can be accomplished by learning from past mistakes and overcoming the failures we have discussed throughout this work. Although many of our institutions have served us well, we must continue to reduce the economic failures in markets, the intervention failures in governments, and even the failures in the non-governmental organizations that we have created to offset failures in markets and in governments. Above all, and in many ways most difficult of all, we must confront personal failure in our individual choices about consumption, lifestyles, habitation, and work styles, and recognize that these are the decisions that ultimately determine environmental quality. Furthermore, the more affluence and education we are privileged to enjoy, the greater our opportunities and moral responsibilities are for making personal choices consistent with a sustainable civilization for the planet.

The new transdiscipline of ecological economics attempts to draw wisdom from our past in order to provide new generations with both the capability to envision a desirable and sustainable future and the navigational instruments with which to find the way.

Related Links

• Griesinger Films: Ecological Economics videos

Notes (An Introduction to Ecological Economics: Chapter 4)

Further Reading

• Barbier, Edward B., Joanne C. Burgess, and Carl Folke. 1994. Paradise lost? The ecological economics of biodiversity. London: Earthscan.
• Boulding, Kenneth. 1985. The world as a total system. Sage Publications.
• Cairncross, Frances. 1991. Costing the Earth: The challenge for governments, the opportunities for business. Boston: Harvard Business School Press.
• Costanza, Robert (ed.). 1991. Ecological economics: The science and management of sustainability. New York: Columbia University Press.
• Costanza, Robert, Bryan G. Norton, and Benjamin D. Haskell (eds.). 1992. Ecosystem health: New goals for environmental management. Washington, DC: Island Press.
• Costanza, Robert, Charles Perrings, and Cutler J. Cleveland. 1997. The development of ecological economics. Cheltenham, U.K.: Edward Elgar.
• Costanza, Robert, Olman Segura, and Juan Martinez-Alier (eds.). 1996. Getting down to earth: Practical applications of ecological economics. Washington, DC: Island Press.
• Culbertson, John Mathew. Economic development: An ecological approach. Knopf.
• Daily, Gretchen C. 1997. Nature’s services: Societal dependence on natural ecosystems. Washington, DC: Island Press.
• Daly, Herman E. 1978. Steady state economics: The economics of biophysical equilibrium and moral growth. W. H. Freeman & Co.
• Daly, Herman E. 1996. Beyond growth: The economics of sustainable development. Beacon Press.
• Daly, Herman E., and John B. Cobb, Jr. 1994. For the common good: Redirecting the economy toward community, the environment, and a sustainable future. Beacon Press.
• Faber, Malte, Reiner Manstetten, and John Proops. 1996. Ecological economics concepts and methods. Cheltenham, U.K.: Edward Elgar.
• Faucheux, Sylvie, David Pearce, and John Proops. 1996. Models of sustainable development. Cheltenham, U.K.: Edward Elgar.
• Folke, Carl, and Kåberger, Tomas (eds.). 1991. Linking the natural environment and the economy: Essays from the Eco-Eco group. Dordrecht: Kluwer Academic Publishers.
• Gowdy, John. 1994. Coevolutionary economics: The economy, society and the environment. Boston: Kluwer Academic Publishers.
• Gunderson, Lance H., C. S. Holling, and Stephen S. Light (eds.). 1995. Barriers & bridges to the renewal of ecosystems and institutions. New York: Columbia University Press.
• Jackson, Tim (ed.). Clean production strategies: Developing preventive environmental management in the industrial economy. London: Lewis Publishers.
• Jansson, AnnMari, Monica Hammer, Carl Folke, and Robert Costanza (eds.). Investing in natural capital. Washington, DC: Island Press.
• Knight, Richard L., and Sarah F. Bates (eds.). 1995. A new century for natural resources management. Washington, DC: Island Press.
• Meadows, Donella H., Dennis L. Meadows, and Jorgen Randers. 1993. Beyond the limits: Confronting global collapse, envisioning a sustainable future. Chelsea Green Publishing Co.
• Myers, Norman. 1993. Ultimate security: The environmental basis of political stability. New York: W. W. Norton & Co.
• Prugh, Thomas, Robert Costanza, John H. Cumberland, Herman Daly, Robert Goodland, and Richard B. Norgaard. 1995. Natural capital and human economic survival. Solomons, MD: ISEE Press.
• Schmidheiny, Stephan. 1992. Changing course: A global business perspective on development and the environment. Cambridge, MA: MIT Press.
• Schulze, Peter C. 1996. Engineering within ecological constraints. Washington, DC: National Academy Press.
• van den Bergh, Jeroen C. J. M., and Jan van der Straaten (eds.). 1994. Toward sustainable development: Concepts, methods, and policy. Washington, DC: Island Press.

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Costanza, R., Norgaard, R., Daly, H., Goodland, R., & Cumberland, J. (2008). An Introduction to Ecological Economics: Chapter 4. Retrieved from http://editors.eol.org/eoearth/wiki/An_Introduction_to_Ecological_Economics:_Chapter_4