Sustainable scale

Published: September 5, 2013, 12:37 am

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Introduction

Sustainable scale is one of three defining goals (along with efficient allocation and just distribution) of ecological economics. It “refers to the physical volume of the through put, the flow of matter-energy from the environment as low-entropyraw materials, and back to the environment as high-entropy wastes”. Whereas neoclassical economics considers the ecosystem (Sustainable scale) to be a component of the economy, ecological economics assumes the economy to be a subsystem of a fixed ecosystem. Earth, the global ecosystem, is a closed system of a finite size in which only energy passes through. The economy is an open system of variable size in which matter and energy from the ecosystem enter as resource inputs and exit as waste outputs. As the economy expands within the ecosystem, it uses increasing amounts of inputs and expels increasing amounts of waste outputs, requiring larger amounts of waste absorption (sinks). An economy can encounter issues of scale at one or both ends of the throughput flow – it could deplete its stock of natural resources on the input side, or it could produce more waste than can be assimilated by waste sinks on the output side. In order to ensure the continuation of our global ecosystem for future generations, we must maintain a sustainable economic scale that does not degrade the environment through excessive pollution nor reduce its capital stock through overuse of its natural resources.

It is important to note that the maximum ecologically sustainable scale may not be the optimal scale for the economy. As Lawn (2001) explains “should net benefits of a growing macroeconomic system be falling…even if the rate of throughput is ecologically sustainable, growth of the macroeconomy is undesirable. Indeed, in such circumstances the macroeconomic system will have exceeded its optimal scale." Obtaining the optimal scale requires the efficient allocation of resources – the second defining goal of ecological economics – which can be determined by the relative scarcities of resources as defined by the market.

Neoclassical Economic View of Scale

Micro-economists focus on economies of scale, the “phenomena in which an increase of inputs within some range results in more than proportional increase of outputs”. Economies of scale is a different matter than the scale of the economy. While neoclassical economics does address allocation and distribution issues, it does not address the issue of sustainable economic scale. As mentioned above, neoclassical economists view the ecosystem as a component of the economy; they do not see the constraints imposed by the fixed ecosystem. This allows for the possibility of unending growth.

(Meadows, Meadows, Randers and Behrens (1972)) investigated the causes, relationships, and implications of “five major trends of global concern – accelerating industrialization, rapid population growth, widespread malnutrition, depletion of nonrenewable resources, and a deteriorating environment." Their “standard” world model assumed business as usual, meaning no significant changes in human behavior. The result was that:

Food, industrial output, and population grow exponentially until the rapidly diminishing resource base forces a slowdown in industrial growth. Because of natural delays in the system, both population and pollution continue to increase for some time after the peak of industrialization. Population growth is finally halted by a rise in the death rate due to decreased food and medical services.

In this model, excessive use of natural resources led to a collapse in industrial output per capita, as well as food per capita. According to Meadows et al. (1972), unrestricted economic growth is not a possibility in the long-term due to nature-imposed limits. Thirty years later, Meadows, Randers, and Meadows (2004) updated their world model and reported that the scenarios they had described still appeared to be “surprisingly accurate." Since their original study, Meadows et al. (2004) found that the “possible paths into the future have narrowed” yet there still remain a “great variety of paths." However, “the possible futures do not include indefinite growth in physical throughput. That is not an option on a finite planet”.

Gross domestic product (GDP) has traditionally been the method of measuring welfare – the higher the GDP, the higher the quality of life. While GDP may be a good measure of economic activity, it does not seem to accurately correlate with human welfare and progress. For example, GDP leaves out activities that contribute to human welfare, such as volunteering and housework, because these same activities do not generate economic activity. At the same time, GDP includes economic activities that many would consider detrimental to human welfare – pollution, crime, and loss of leisure time, among others. Ecological economists have proposed a Threshold Hypothesis – “for every society there seems to be a period in which economic growth (as conventionally measured) brings about an improvement in the quality of life, but only up to a point – the threshold point – beyond which, if there is more economic growth, quality of life may begin to deteriorate”. As Costanza (2008) reminds us, “the goal of an economy is to sustainably improve human well-being and quality of life. Material consumption and GDP are merely means to that end, not ends in themselves."

Alternative measures to GDP, such as the Index of Sustainable Economic Welfare (ISEW) developed by (John Cobb and Herman Daly in 1989) and the Genuine Progress Indicator (GPI) developed by (Redefining Progress in 1995), take into account these concerns and have been proposed as new means to measure economic welfare. There is a consistent trend in these alternative measures – “up to a point, the growth of macroeconomic systems is beneficial to human well-being. Beyond this point, growth appears to be detrimental”. This trend supports the assertion that GDP does not correlate to quality of life. There has been criticism of these alternative measures, the most important of which is the argument that such a measure requires subjective judgments and “is arbitrary in what it includes or implicitly excludes as contributors to or detractors from welfare”.

It is necessary here to note the difference between growth and development. Growth refers to an increase in number (quantitative), whereas development refers to an improvement in efficiency (qualitiative). The Threshold Hypothesis and measures of quality of life, such as ISEW and GPI, indicate that it is necessary at a certain point to cease the pursuit of economic growth in favor of sustainable development.

Jackson (2009) pointed to the 2008 financial crisis as evidence that “the myth of growth has failed us." He proposed that the current macroeconomy is not suitable for lasting prosperity and called on governments to develop a new macroeconomy based on sustainability that would provide for fulfilling lives and integrate environmental limits. This new macroeconomy would allow prosperity without growth – a “financial and ecological necessity."

Empty World vs. Full World

During the Age of Industrialization, the world was relatively empty – the global population was much smaller than today with .98 billion in 1800, there were more uninhabited spaces, and the available stock of natural capital was much higher. In such an “Empty World” there was little need to be concerned about the rate of depletion of nonrenewable resources. Demand for resources and sinks was so small compared to the supply, that it might have seemed as though they were limitless. In today’s “Full World” – population 6.8 billion – there are more people using a smaller stock of resources. As human population has increased exponentially, so too has resource throughput. There is a significantly higher amount of built capital, requiring much energy and resources, which contributes to a greater global demand for natural capital than existed during the Empty World of the past. Average individual resource throughput in the economy since the early 1800s has more than doubled, leading to an increase in total resource throughput by an order of magnitude. Boulding (1966) describes today’s economy as a “spaceman” economy, “in which the earth has become a single spaceship, without unlimited reservoirs of anything, either for extraction or pollution.” According to Costanza and Daly (1992), “we are now entering an era, thanks to the enormous increase of the human scale, in which natural capital is becoming the limiting factor” to economic progress.

Ecological carrying capacity

All ecosystems have a carrying capacity. Carrying capacity refers to the maximum number of individuals of a species that can live within an ecosystem without reducing the ability of the ecosystem to provide for that same species in the future. There are multiple ways in which a population can reach the carrying capacity of an ecosystem: a gradual decrease in the growth rate or an overshoot of the limit with a resultant decrease. It is also possible for a population to overshoot the carrying capacity of an ecosystem to such a high degree that it consumes some nonrenewable resource which in turn decreases the carrying capacity to a lower level. As Arrow et al. (1995) point out, “imprudent use of the environmental resource base may irreversibly reduce the capacity for generating material production in the future.” According to Daily and Ehrlich (1992), “the human enterprise has not only exceeded its current social carrying capacity Capacity of various social systems, but it is actually reducing future potential biophysical carrying capacity by depleting essential natural capital stocks.”

Natural Capital

Natural capital is defined as a stock of natural resources that provides a flow of new resources (i.e. new trees that can be harvested for goods) and services (such as waste recycling and erosion control, collectively referred to as natural income) into the future. Natural capital can be divided into two types: renewable natural capital and nonrenewable natural capital. Nonrenewable natural capital, such as fossil fuel, must be extracted before it will provide services and is fully exhaustible. Renewable natural capital, however, is able to provide a constant yield of services and maintains itself using solar energy. In order for natural capital to be fully sustainable and available in the future, natural income should be used for economic activity, leaving the amount of natural capital intact. If the natural resource throughput exceeds the sustainable yield of natural income, tapping into the natural capital, “the yield drops irreversibly as the underlying natural system collapses”.

As noted above, the market can assist in obtaining optimal scale by efficiently allocating resources. This is accomplished through relative prices of resources. Yet, as Lawn (2001) makes clear, the market does not deal with absolutes and it is the absolute scarcity of resources that is important in determining ecologicalsustainability. Biophysical assessments, on the other hand, can be used to determine the absolute limits of natural capital.

One such biophysical assessment was compiled by Vitousek, Erhlich, Erhlich, and Matson (1986), who estimated that about 40% of net primary production (the total food resource on the planet for all inhabitants) on land is being used, co-opted or is foregone due to human activity each year. The remaining 60% must be shared among the numerous million other species on earth. Such a concentration of resources to one species is leading to an increased level of competition among the rest, as well as a large rate of biotic extinction. Vitousek et al.’s calculations assumed a human population of 5.0 billion, 1.6 billion less people than today. Assuming that there has been no significant change in consumption rates, it is more than likely that the percentage of net primary production diverted to human use has grown and is getting ever closer to the limit. Our planet is increasingly becoming human-dominated. The growth of human population and the increasing rate of its use of the natural resource base are inciting major changes, such as transformation of land surface and alterations of bio-geochemical cycles, that are in turn leading to possibly irreversible losses of natural capital.

Wackernagel and Reese (1996) introduced the concept of the Ecological Footprint, which “accounts for the flows of energy and matter to and from any defined economy and converts these into the corresponding land/water area required from nature to support these flows” through a quick and inexpensive assessment. Wackernagel et al. (1999) used the EcologicalFootprint methodology to determine the national footprints of 52 countries, comprising 80% of global population, that generate 95% of world domestic product. They found that for “most industrial regions, a significant part of the footprint area exceeds what is available locally. This leads to their appropriation from the global carrying capacity”. Wackernagel et al. (1999) reminds the reader that “ecologicalfootprints do not overlap, the carrying capacity appropriated by one economy is not available to another – people are competing for ecological space.”

Another framework for assessing limits of natural capital is through planetary boundaries, proposed by Rockstrom et al. (2009). Planetary boundaries “define the safe operating space for humanity with respect to the Earth system and are associated with the planet’s biophysical subsystems or processes”. By estimating the threshold levels for nine processes – climate change, ocean acidification, stratospheric ozone depletion, interference with the nitrogen and phosphorus cycles, global freshwater use, change in land use, biodiversity loss, atmospheric aerosol loading, and chemical pollution – and our current level for each process, Rockstrom et al. (2009) determined that three boundaries have already been crossed: climate change, interference with the nitrogen cycle, and biodiversity loss. The boundaries for ocean acidification, interference with the phosphorus cycle, global freshwater use, and change in land use may soon be reached. Although there remain data gaps, the planetary boundary framework is a useful tool to examine human development within the context of the global ecosystem.

While biophysical assessments are important to understanding the limits of natural capital, ecosystem resiliency must also be understood. Successive disturbances can weaken an ecosystem to the point where it can no longer provide the necessary life-support services upon which humans rely. Knowledge of ecosystemresilience and its stress indicators can help measure environmental sustainability, and our effects on it.

Neoclassical economics tends to ignore the cost of natural capital. Natural resources have often been viewed as free resources, and as such, are not emphasized in economic models. Yet, if we accept the view that there are limits to natural capital, that it is not an unlimited resource and that our excessive use of natural resources can lead to collapse of that resource, then we must include natural capital as a factor of production in economic models alongside manufactured capital.

Technology and Substitutability

Neoclassical economics emphasizes the substitutability of factors of production. If all factors of production are substitutable, then it follows that complete exhaustion of one factor will not make a difference in the economic system as its role can be filled by another factor. In this view, through technology we can create any needed substitutes in order to drive economic growth. Therefore, natural capital, as a factor of production, can be substituted with technology. But is there really a technological substitute for every natural resource? Ecosystem services are particularly difficult to determine – an ecosystem is a complex system that very possibly provides services necessary for our survival of which we are unaware. Further, it may be possible to create a substitute for a specific function of a natural resource, but once that substitute is in place, we may find out that the original resource actually contributed to an entirely separate function. For this reason, it behooves us to stick to the precautionary principle.

Another argument against the sustainability of natural resources is based in the first and second laws of thermodynamics– there is a constant quantity of matter and energy whose entropy cannot be decreased in an isolated system. New technology may be able to increase the efficiency of resource use by decreasing the amount of high-entropy production waste; however, “there is no 100% production efficiency; there can never be 100% recycling of matter; and there is no way to recycle energy at all”. No matter how efficient a technology is, it will always require some amount of low-entropy resource throughput. For this reason, natural and manufactured capital can be seen as complements, rather than substitutes.

In addition to those who believe that technology can stand in for natural resources, there are also those who believe that technological advances can increase the carrying capacity of the planet, as well as those who believe that technological innovation can decrease the impact of human activity. Environmental impact {ref{I} has been described as the product of three variables: population (P), affluence (A), and technology (T), or I = P x A x T. The IPAT equation was developed during the 1970s by Ehrlich and Holdren, in dialogue with Commoner, and continues to be used to analyze anthropogenic environmental impact today. While the early uses of this equation were to determine which variable contributed most to environmental impact, it has evolved to support the idea (particularly in industrial ecology) that technology can aid in sustainable development. According to this view, if population and affluence (or GDP) increase simultaneously – as can be the case in today’s Full World that focuses on economic growth – then more efficient technology with less throughput offers the possibility to offset these increases.

Technology can be beneficial for sustainable development, but it should be considered as one tool in a diverse approach. As Meadows et al. (1972) ask, “is it preferable to go on growing until some other natural limit arises, in the hope that at that time another technological leap will allow growth to continue still longer?” Further, one must recognize that past promises of technology have not always been fulfilled. In Meadows et al.’s world model (1972), the most optimistic estimates of technological benefits were unable to prevent the collapse of industry and population, merely delaying it until the year 2100.

Possible policy options

Recognizing that there are natural limits to our global ecosystemand that the continued growth of the global economy not only will lead us to those limits, but also does not equate with human welfare, a sustainable economic scale must be found. Based upon their world model, Meadows et al. (2004) conclude that:

The only real choices are to bring the throughputs that support human activities down to a sustainable level through human choice, human technology, and human organization, or to let nature force the decision through lack of food, energy, or materials, or through an increasingly unhealthy environment.

Herman Daly has argued for the adoption of a steady-state economy, defined as an economy whose scale:

remains constant at a level that neither depletes the environment beyond its regenerative capacity nor pollutes it beyond its absorptive capacity. Such an economy adapts and improves in knowledge, organization, technical efficiency, and wisdom; and it does this without assimilating or accreting an ever greater percentage of the matter-energy of the ecosystem into itself, but rather stops at a scale at which the remaining ecosystem (the environment) can continue to function and renew itself year after year.

In order to move towards a sustainable economic scale, government policies will need to be employed. One policy instrument that has been proposed to address the issue of sustainable scale by limiting use of natural capital is the cap-auction-trade system. A cap would put quotas on the amount of natural capital available for use, which would be auctioned off to private companies by the government. Companies would be able to trade these quotas, allowing for efficient allocation. This concept has been proposed by Barnes et al. (2008) as a method to stabilize global warming. Barnes et al. (2008) suggest that revenue from the auction of emissions permits should be deposited into an Earth Atmospheric Trust, “administered by trustees serving long terms and provided with a clear mandate to protect Earth’s climate system and atmosphere for the benefit of current and future generations.” Such a system would limit the scale of carbon dioxide emissions, and “enhance and restore the atmospheric asset” through funding for development of renewable energies and payments for ecosystem services.

The Earth Atmospheric Trust draws upon another policy option – increasing the commons. As Costanza (2009) makes clear, “a complex range of property rights regimes are necessary to adequately manage the full range of resources that contribute to human well-being.” He explains that many natural and social capital assets that are currently undervalued economically do not fit into the traditional notion of private property, thus requiring a new way “to propertize these resources without privatizing them”. The Earth Atmospheric Trust draws upon the notion of the commons, extending it to the global scale, and employs a common property trust to manage it. Government should play a role in increasing the commons sector and managing its assets.

Taxes have also been proposed as a method to reduce the scale of natural capital use. Daly (2009) suggests an ecological tax reform in which taxes are no longer applied to value-added good and services, but to “the entropic throughput of resources extracted from nature (depletion) and returned to nature (pollution).” A Pigouvian tax equal to the estimated marginal external cost of pollution might be a possible way to incentivize firms to reduce their amount of pollution ^[1].

In order to end the drive of limitless economic growth, widespread adoption of alternative measures of welfare and human progress, such as ISEW or GPI, would be helpful. Such a change has the potential to gradually change goals, expectations, and behaviors of individuals and firms. Costanza (2009) recommends new institutions based on these alternative measures to replace current global institutions, particularly the World Bank, World Trade Organization, and International Monetary Fund. These new institutions would favor a new sustainable development model appropriate to the Full World, rather than the current “Washington consensus” development model that focuses on the growth of GDP as a solution to problems. To assist in sustainable development, Jackson (2009) suggests that a “global technology fund” should be created “to invest in renewableenergy, energy efficiency, carbon reduction, and the protection of ‘carbon sinks’ (e.g. forests) and biodiversity in developing countries.” Funding could come from levies on imports from developing countries. The purpose of this global technology fund would be to help poorer countries grow and develop in a sustainable manner.

Unfortunately, the value of unlimited economic growth is deep-seated in today’s world. In order to achieve a sustainable economic scale, a significant change in human behavior is required. This is especially difficult to encourage when the benefits to the behavior change are not immediately apparent, but the costs are. Additionally, political mobilization is necessary to make any policy changes. James Q. Wilson theorizes that the likelihood of political mobilization is determined by the concentration of costs and benefits of the proposed policy. The costs of environmental regulation can be seen as concentrated on firms who must adjust to the regulation while benefits are diffused among the global population. In such a scenario of concentrated versus diffused, the concentrated interests (those who bear the cost in this situation) will mount a strong, organized campaign while the diffused interests (the global population who will benefit from environmental regulation) are likely to remain passive and unorganized.

Sustainable scale (About the EoE)

Contents

Sustainable scale

Introduction

Neoclassical Economic View of Scale

Empty World vs. Full World

Ecological carrying capacity

Natural Capital

Technology and Substitutability

Possible policy options

Further Reading

Citation

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