The Greening of Industrial Ecosystems. 1994.

Pp. 90–97. Washington, DC:

National Academy Press.

Economics and Sustainable Development

PIERRE CROSSON and MICHAEL A. TOMAN

Sustainable development has become a new watchword for assessing human impacts on the natural environment and resource base. A concern that economic development, exploitation of natural resources, and infringement on environmental resources are not sustainable is expressed more and more frequently in analytical studies, conferences, and policy debates. To identify what may be required to achieve sustainability, however, it is necessary to have a clear understanding of what the concept means. In particular, it is necessary to understand what is new in the concept of sustainable development as distinct from concepts that already are well established in environmental and natural resource economics.

The World Commission on Environment and Development (known popularly as the Brundtland Commission) labeled sustainable development in its 1987 report Our Common Future as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Thus, sustainability involves concern for the interests of future generations.

A second common feature in discussion of sustainability is the question of substitutability between natural resources (including the environment) and human-made capital, including human capital itself. The Brundtland report foresees “the possibility for a new era of economic growth, one that must be based on policies that sustain and expand the environmental resource base.” This view gives special emphasis to the natural endowment but sees preservation of this endowment as entirely consistent with economic growth. Some scholars, notably the economist Julian Simon (1981), even question whether sustainability is a significant issue, pointing out that humankind consistently has managed in the past



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The Greening of Industrial Ecosystems The Greening of Industrial Ecosystems. 1994. Pp. 90–97. Washington, DC: National Academy Press. Economics and Sustainable Development PIERRE CROSSON and MICHAEL A. TOMAN Sustainable development has become a new watchword for assessing human impacts on the natural environment and resource base. A concern that economic development, exploitation of natural resources, and infringement on environmental resources are not sustainable is expressed more and more frequently in analytical studies, conferences, and policy debates. To identify what may be required to achieve sustainability, however, it is necessary to have a clear understanding of what the concept means. In particular, it is necessary to understand what is new in the concept of sustainable development as distinct from concepts that already are well established in environmental and natural resource economics. The World Commission on Environment and Development (known popularly as the Brundtland Commission) labeled sustainable development in its 1987 report Our Common Future as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Thus, sustainability involves concern for the interests of future generations. A second common feature in discussion of sustainability is the question of substitutability between natural resources (including the environment) and human-made capital, including human capital itself. The Brundtland report foresees “the possibility for a new era of economic growth, one that must be based on policies that sustain and expand the environmental resource base.” This view gives special emphasis to the natural endowment but sees preservation of this endowment as entirely consistent with economic growth. Some scholars, notably the economist Julian Simon (1981), even question whether sustainability is a significant issue, pointing out that humankind consistently has managed in the past

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The Greening of Industrial Ecosystems to avoid the specter of Malthusian scarcity through resource substitution and technical ingenuity. Others, however, notably the ecologists Paul and Anne Ehrlich (1990) and the economist Herman Daly (see Daly and Cobb, 1989), believe that the scale of human pressure on natural systems already is well past a sustainable level. They point out that the world’s human population most likely will at least double before stabilizing, and that to achieve any semblance of a decent living standard for the majority of people, the current level of world economic activity must grow, perhaps fivefold to tenfold. They cannot conceive of already stressed ecological systems tolerating the intense flows of materials use and waste discharge that presumably would be required to accomplish this growth, no matter what level of investment in built capital and technology occurs. On the contrary, an implication of the Ehrlich/Daly argument is that even the present global population and economy are unsustainable. KEY CONCEPTUAL ISSUES As noted above, intergenerational fairness is a key component of sustainability. The standard approach to intergenerational trade-offs in economics involves assigning benefits and costs according to some representative set of individual preferences, and discounting costs and benefits accruing to future generations just as future receipts and burdens experienced by members of the current generation are discounted. The justifications for discounting over time are first, that people prefer current benefits over future benefits (and weigh current costs more heavily than future costs); and second, that receipts in the future are less valuable than current receipts from the standpoint of the current decision maker, because current receipts can be invested to increase capital and future income. Critics of the standard approach take issue with both rationales for unfettered application of discounting in an intergenerational context. They maintain that invoking impatience to justify discounting entails the exercise of the current generation’s influence over future generations in ways that are ethically questionable. The capital growth argument for intergenerational discounting also is suspect, critics argue, because in many cases the environmental resources at issue—for example, the capacity of the atmosphere to safely absorb greenhouse gases or the extent of biological diversity—are seen to be inherently limited in supply. These criticisms do not imply that discounting should be abolished (especially since this could increase current exploitation of natural and environmental capital), but they do suggest that discounting might best be applied in tandem with safeguards on the integrity of key resources such as ecological life-support systems. Critics also question whether the preferences of an “average” member of the current generation should be the sole or even primary guide to intergenerational resource trade-offs, particularly if some current resource uses threaten the future well-being of the entire human species. (Adherents of “deep ecology” even taken

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The Greening of Industrial Ecosystems issue with putting human values at the center of the debate, arguing instead that other elements of the global ecological system have equal moral claims to be sustained.) The first part of the question is ill-taken: if anyone speaks for the interests of future generations, it inevitably must be members of the present generation. The second part of the question has content and is inherently hard to answer because members of the current generation cannot be sure, beyond a few generalities, of what will constitute the future well-being of humans. People to the farthest generation will need “adequate” nutrition, health care, education, and housing. But apart from problems of defining “adequate,” these components of welfare by no means constitute the whole. Adequately fed, housed, educated, and healthy individuals will value a wide range of other services provided, directly and indirectly, by the natural environment and resource base. Our generation can only dimly perceive many of these values, and many more must be completely out of our sight. A second key component of sustainability involves the specification of what is to be sustained. If one accepts that there is some collective responsibility of stewardship owed to future generations, what kind of “social capital” needs to be intergenerationally transferred to meet that obligation? One view, to which many economists are inclined, is that all resources—the natural endowment, physical capital, human knowledge, and abilities—are relatively fungible sources of well-being. Thus large-scale damages to ecosystems through drainage of wetlands, loss of species diversity, widespread deforestation, global warming, and so on are not intrinsically unacceptable from this point of view; the question is whether compensatory investments in other forms of capital are possible and are undertaken to protect the welfare of future generations. Investments in human knowledge, technique, and social organization are especially pertinent in evaluating these issues. An alternative view, embraced by many ecologists and some economists, is that such compensatory investments often are infeasible as well as ethically indefensible. Physical laws are seen as limiting the extent to which other resources can be substituted for ecological degradation. Healthy ecosystems, including those that provide genetic diversity in relatively unmanaged environments, are seen as offering resilience against unexpected changes and preserving options for future generations. For these natural life-support systems, no practical substitutes are possible, in this view, and degradation may be irreversible. In such cases (and perhaps in others as well), compensation cannot be meaningfully specified. In addition, environmental quality may complement capital growth as a source of economic progress, particularly for poorer countries. Such complementarity argues against the notion of substituting human-made capital to compensate for natural degradation. In considering resource substitutability, economists and ecologists often also differ on the appropriate geographical scale. Scale is important because opportunities for resource trade-offs generally are greater at the level of the nation or the

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The Greening of Industrial Ecosystems globe than at the level of the individual community or regional ecosystem. However, a concern only with large regional or global aggregates may overlook unique attributes of particular local ecosystems or local constraints on resource substitution. There also is sharp disagreement on the issue of the scale of human impact relative to global carrying capacity. As a crude caricature, it is generally true that economists are less inclined than ecologists to see this as a serious problem, putting more faith in the capacities of resource substitution (including substitution of knowledge for materials) and technical innovation to ameliorate scarcity. Rather than viewing it as an immutable constraint, economists regard carrying capacity as endogenous and dynamic. Ecologists, in contrast, emphasize that large-scale ecological impacts are precisely those that may be the most damaging and least irreversible. THE SAFE MINIMUM STANDARD Concerns over intergenerational fairness, resource constraints, and human scale provide a rationale for the concept of a “safe minimum standard” (SMS), an idea first advanced by an economist (Circacy-Wantrup, 1952), developed later by another economist (Bishop, 1978) and subsequently adopted, at least in part, by other scholars (e.g., Norton, 1992). To illustrate what is involved in this approach, suppose for simplicity that damages to some system or systems of natural resources can be entirely characterized by the size of their social cost and degree to which other substitute resources can compensate for the damage. These two dimensions of resources are depicted in Figure 1. The social costs of resource use (the vertical axis) range, at the limits, from zero to catastrophic. Substitutability (the horizontal axis in Figure 1) refers to the ability of human-made resources, including knowledge embedded in people, to substitute for natural resources, thus compensating for damages imposed on the natural system by human action. Social costs in Figure 1 have two key characteristics: (1) They include all losses, currently and into the indefinite future, of goods and services that people in the present and all future generations do, and will, value. Unmarketed goods and services as well as those exchanged in markets are included. (2) The costs are relative to the benefits gained through unfettered market exploitation of resources. Thus, movement up the vertical axis in Figure 1 denotes rising social costs of resource use relative to the benefits of use received through the market. The corners in Figure 1 depict four limiting cases of the two dimensions of natural resource and environmental management. These are (1) complete substitutability among resources and zero social costs (southeast corner); (2) complete lack of substitutability and zero social costs (southwest corner); (3) complete lack of substitutability and catastrophic costs (northwest corner); and (4) complete substitutability and catastrophic social costs (northeast corner). Exploitation of resources that by a general consensus lie near the southwest

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The Greening of Industrial Ecosystems FIGURE 1 The safe minimum standard (SMS) in natural resource and environmental management. SOURCE: After Norton (1992). or northeast corners of Figure 1 probably would excite little social concern. If the social costs of exploitation are low, then even though the resource may have few substitutes, its loss would be of little social consequence (southwest area). Exploitation of resources in the northeast area would cease well before the potentially catastrophic costs were incurred because the rise in costs, signaled either by rising prices or signs of increasing ecological stress, would induce a shift out of the resources into one or more of the readily available substitutes. The critical area in Figure 1, the area in which potentially difficult choices have to be made about how to manage resources to assure sustainability, is an ill-defined space running from southeast to northwest. Resources which fall in the southeastern part of Figure 1 have many substitutes and low social costs of exploitation. This means that decisions about their use can be left to the play of the market where trade-offs among resources can safely occur and discounting of future costs and benefits is consistent with sustainability and intergenerational equity. Resources for which substitutes are few and the social costs of exploitation high fall in the northwestern part of Figure 1. The closer these resources approach the northwest corner, the less management of them can be left to the play of the

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The Greening of Industrial Ecosystems market or to corrective policies based on standard benefit-cost comparisons if intergenerational equity is to be respected. Under these conditions, imperatives to protect socially determined minimum stocks of the resources increasingly govern resource management, placing more severe constraints on trade-offs among resources and on discounting. In the limit, where the resource has no substitutes and additional exploitation would impose catastrophic costs, no further draw-down or degradation of the resource would be permitted. For any particular resource or resource system the notion of the SMS comes into play when a judgment is made that the combination of limited substitution possibilities and (long-lived) social costs of exploitation is too risky to base exploitation of the resource entirely on market valuations or standard benefit-cost trade-offs. These judgments are made in the face of great uncertainty about the physical consequences of present and prospective exploitation (e.g., present and prospective species loss and prospects for finding substitutes for those lost) and the social values to be placed on the consequences. Recall that many of the resources at stake are unpriced, and the social Values assigned to them must reflect current judgments about the interests of future generations. Because of these uncertainties, judgments about when the SMS should come into play can, and do, vary widely among individuals and groups. In the end, the judgments are made through a complex social process involving the individuals and groups with contending interests in the resource or resource system. No effort is made here to describe this process, but its nature is suggested by several exam-pies. Until recently, Americans generally were content to leave the exploitation of old-growth forests in the Pacific Northwest to the play of market forces and, for public land, the decisions of the U.S. Forest Service. But now strong efforts are made to constrain these forces to protect the spotted owl, a species seen by many to have few if any substitutes and whose extinction, and loss of associated habitat, would pose, in this perspective, high current and future social costs. In effect, a social decision has been made to shift the exploitation of the forest habitat of the spotted owl out of the southeastern part of Figure 1 into the northwestern part. Another possible example of social decisions to relocate resource management from southeast to northwest in Figure 1 is constraints put on the previously unfettered rights of farmers and land developers to destroy plant and animal habitat by draining wetlands through a mandate for "no net loss" of wetlands. In this case, however, controversy continues about what constitutes a wetland under the mandate and the extent to which different types of sites are substitutes. The social decisions to place increasing constraints on exploitation of old-growth forests and wetlands were surrounded by enormous controversy. In terms of Figure 1, groups interested in the outcomes disagreed about the degree to which other resources could substitute for those at the center of controversy and about the social costs of unconstrained exploitation of the resources. The wavy lines in Figure 1 illustrate how these differing positions might be depicted. Because differences between economists and ecologists about these issues seem especially

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The Greening of Industrial Ecosystems deep, the lines are labeled by these groups. However, this is done only to sharpen the contrasting positions. Differences about where to place particular resources or resource systems in the Figure 1 framework cut across many groups in society. The key point made by the wavy lines is that “economists” would leave many more resources to management by the market or marketlike control policies than “ecologists” would. This is to say that for “economists” the boundary at which market (or marketlike) processes would be increasingly constrained and the SMS come increasingly into play would be farther up toward the northwest comer than the boundary that “ecologists” would draw. One implication of the wavy lines, as drawn in Figure 1, is that “economists” and “ecologists” can agree about a class of resources that can be left to the play of the market, and about another class to which the SMS must apply. Reaching a social consensus about how to manage those two classes of resources should be relatively easy. The resources for which no management consensus exists, and which therefore pose especially difficult problems of resource and environmental policy, are those lying between the SMS boundaries of the two groups. The difference between the SMS boundaries in Figure 1 reflects different judgments by “economists” and “ecologists” about both the technical possibilities for substitution among resources and the social values that should be attached to resource losses. Most Americans probably would agree that the scenic grandeur of the Grand Canyon has few if any substitutes and that the social costs of fundamentally altering it, say by building a major dam between Lake Powell and Lake Mead, would far exceed any likely benefits. A strong consensus would place the Grand Canyon in the area northwest of the “economists” SMS boundary. However, controversy continues about the spotted owl, wetlands, climate change, and many other instances of resource exploitation. Because the degree of substitutability among resources is in good measure a technical matter (it also has an economic component), advances in knowledge about substitution possibilities should help to narrow differences on this score. However, there are probably limits to this: adequate knowledge about long-lived, large-scale effects like climate change may not be available before the die is cast. Differences about the values to attach to resource losses are more intractable. Two people may come to agreement about the potential for other forms of social capital to compensate for extinction of the spotted owl and destruction of its habitat, while disagreeing profoundly about the social costs. (Note the vertical differences between the “economists” and “ecologists” SMS boundaries for any given degree of substitutability.) The processes by which people form the values they hold, and by which values change over time, are poorly understood. Yet value formation does not appear to be a wholly inscrutable process. Evidence suggests that values do not emerge willy-nilly but are shaped, at least in part, by people observing the consequences of acting on them. That is, values seem to be shaped to some extent by processes of personal and social learning. This suggests that as people jointly observe the consequences of exploiting re-

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The Greening of Industrial Ecosystems sources in certain ways, a process of social learning may, over time, narrow differences among them in the values they assign to the consequences. The decline in the number of Americans who smoke cigarettes—the increasing number who agree smoking is not a good idea—seems clearly to reflect a process of social learning of this sort. This line of argument suggests that if we are to succeed in shaping policies to ensure sustainable management of natural and ecological resources, we badly need more information about the possibilities for substitution of human-made resources for those represented by the natural system and about the processes by which human values are shaped over time. There is a challenge here for joint work among economists and other social scientists, ecologists, and philosophers. It is a daunting challenge. Responding to it also has promise of high payoff in betterment of the human condition. REFERENCE Bishop, R. D. 1978. Endangered species and uncertainty: The economics of the safe minimum standard. American Journal of Agricultural Economics 60(1)(February):10-18. Circacy-Wantrup, S. V. 1952. Resource Conservation. Berkeley, Calif.: University of California Press. Daly, H., and J. Cobb. 1989. For the Common Good. Boston, Mass.: Beacon Press. Ehrlich, P. R., and A. H. Ehrlich. 1990. The Population Explosion. New York: Simon and Schuster. Norton, B. 1992. Sustainability, human welfare and ecosystem health. Environmental Values 1(2)(summer):97-111. Simon, L. 1981. The Ultimate Resource. Princeton, N.J.: Princeton University Press. World Commission on Environment and Development. 1987. Our Common Future. New York: Oxford University Press.