What is Ecological Economics, as distinct from the neoclassical Environmental Economics?

Transcription

1 What is Ecological Economics, as distinct from the neoclassical Environmental Economics? University of Cambridge, UK March 6, Introduction Ecological economics takes a whole-systems approach to understanding economic behaviour as opposed to environmental economics, which approaches the topic in the traditional reductionist manner common in neoclassical literature. The economy in the whole-system approach is seen to be embedded as a subsystem within that of the natural environment, using the natural resources of plant, animal and fish populations, soils and minerals for production and consumption and using the atmosphere, waterways and seas and land to discharge waste and pollutants. It is to be distinguished from environmental and resource economics, which is the application of neoclassical equilibrium economics to the problems associated with the natural environment. Ecological economics allows for complexity and evolutionary theory and emphasises institutions, non-linear dynamics, and deep uncertainty. The global ecosystems are seen as highly complex and as being threatened by deforestation, loss of biodiversity, and global warming. It is pluralist and transdisciplinary in that it includes the disciplines necessary to study specific problems, i.e. it is oriented towards problem-solving. This definition follows the development recommended by Spash (1999), who points out that there is a tension within ecological economics because it is a pluralist, open approach and therefore formally includes the traditional environmental and resource economics. This article maintains the distinction, in keeping with the focus on radical thought, and discusses 1

2 aspects of ecological economics that contrast with those of traditional equilibrium economics. History Ecological economics is a relatively new movement in economics that has developed partly in response to the limitations of neoclassical economics in its treatment of the interaction of human society and the natural environment. The roots of the subject go back to the 19 th C (Martinez-Alier, 1990; Spash, 1999). A modern pioneer was Boulding on the economics of spaceship earth (1966). The International Society for Ecological Economics (ISEE) was founded in 1988, following a conference organised by Juan Martinez-Alier in Barcelona in 1987, and the Society s journal Ecological Economics was founded in 1989, with its first editor the ecologist Robert Constanza (1989). Introductory textbooks include those by Common and Stagl (2005) and Day and Farley (2005). The contrast with traditional neoclassical environmental economics It is important to distinguish between ecological economics and the particular approach to environmental economics in most of the literature, which following Beinhocker (2006) can be called traditional environmental economics defined as the set of concepts and theories articulated in... textbooks. It also includes concepts and theories that peerreviewed surveys claim, or assume, that the field generally agrees on. (p. 24). Traditional economics, or the narrower neoclassical economics, is focused on a model of utility maximisation and the allocation of resources via the price mechanism (Bergh, 2001). It crucially assumes that all natural services can be converted to money and back again at any time, i.e. that there are no irreversible effects (Ackerman and Heinzerling, 2004). This is not the case, so future generations face the risk that they will be deprived of vital resources if economic growth continues without constraints. In contrast, ecological economics encompasses a more general view of values, including intrinsic rights of ecosystems to exist. It emphasises uncertainty in effects and the major intergeneration problems associated with irreversible damage to natural systems caused 2

3 by human activity. In its application to partial systems (e.g. wetlands) economics is only one of a set of disciplines required to understand the problems. There is an emphasis on the interconnections within and between natural and social systems. Environmental problems are seen as highly specific in terms of physical effects, location and timing. Their solution in terms of portfolios of policies adopted by government is to be set in a social context, allowing for institutions and inertia. Sustainability The fact of irreversible effects, the second law of thermodynamics, is associated with the concept of strong sustainability. Sustainability is the ability of an activity to continue indefinitely without upsetting the balance between the resources used by the activity and the wastes it creates. Sustainable development was defined in the Brundtland Report (WCED,1987) as "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts: the concept of needs, in particular the essential needs of the world's poor, to which overriding priority should be given; and the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs." Strong sustainability does not allow for the substitution of natural by produced capital; weak sustainability allows for the substitution. Ecological economics generally assumes strong sustainability because of an assertion of the intrinsic values for ecosystems; traditional environmental economics generally assumes weak sustainability. Ecological economics and economic growth Ecological economics studies how ecosystems (large and small) interrelate with economic systems and how the economy is constrained by the natural environment. The approach emphasises that production and consumption involve energy and material flows and are therefore subject to the physical laws of energy conservation and entropy Georgescu-Roegen (1971). This recognition is also common to evolutionary and complexity approaches to economics. It means that time becomes essential in the 3

4 analysis of production and consumption; so that the traditional approach embodied in the neoclassical production function is invalid. In its approach to economic growth, ecological economics is also radical (Daly, 1977). The basic premise is that the environment imposes eventual limits on the growth of material consumption. The biosphere has utilized solar energy for millions of years to convert sunlight into carbon-rich deposits on land and ocean floor. Geological processes have concentrated and modified the carbon into coal, oil and natural gas. From the industrial revolution in Britain in the 18 th C, economies have been using these concentrated sources of energy, but eventually the accessible sources will be exhausted. As the fossils are burned, CO 2 is released, raising concentrations of greenhouse gases in the atmosphere. Daly (1992) argues for a steady-state economy, which recognises the appropriate scale of the economy in relation to the capacities of the natural environment. As the economy uses up more and more land, fossil fuels, and degrades or exhausts populations of fish and land animals, then the risks increase that the some vital support for human life will be damaged and destroyed. Economic growth will eventually come up against the carrying capacity of the atmosphere in terms of safe concentrations of greenhouse gases, the global warming problem, or will entail irreversible damage to some vital ecosystem service involving the land and water resources, so that the price mechanism can no longer work to provide the service. He argues that scale is not determined by prices, but by a social decision reflecting ecological limits. Distribution is not determined by prices, but by a social decision reflecting a just distribution of the newly created assets. (Daly, 1992, p. 188) Limits to economic growth and technological change One feature of ecological economics has been a repeated debate about the possibilities of technological change overcoming the limits to growth imposed by the environment. One school of thought argues that as limits on resources are approached, various social responses, including higher prices, will encourage new technologies to be developed. 4

5 These are the technological optimists by Costanza (1989) in his definition of ecological economics. The pessimists argue that economic growth must eventually stop for ecological and physical reasons (Daly, 1977). The debate continues, since clearly technologies have been developed to overcome scarcity and the economy is flexible to allow re-allocation of consumption and production to less-resource-intensive goods and services. Policies can encourage technologies that allow and encourage sustainable development (Faucheux and Nicholai, 1998). Intrinsic and monetary valuations of natural services There has been an emphasis on valuation of environmental services in the ecological economics literature. This is partly because of the practical demands for such valuation in cost-benefit calculations or multi-criteria analyses (Munda et al. 1994). There is recognition of the fact that such valuation is implicit in many social decisions, so one task is the making explicit of such valuations, usually in money terms. Allied to this task is the study of ways of eliciting valuations via study of institutions that value environmental services, such as governments, the legal system, and insurance companies. Ecological economists have been critical of cost-benefit calculations, both on ethical grounds and as a way of promoting an unwarranted technocratic approach to valuation (Ackerman and Heinzerling, 2004). They have proposed new measures of sustainability (Daly and Cobb, 1989; Hamilton, 1999; Lawn, 2003) so as to include the costs of environmental degradation and the loss of natural capital. Ecological footprints Ecological economics includes topics, such as the calculation of ecological footprints (and carbon or other footprints) that give rise to. An ecological footprint is defined as the area of productive land and water ecosystems required to produce the resources that the population consumes and assimilate the wastes that the population produces, wherever on Earth that land and water may be located (Rees, 2000). As such is it is measure, which is specific to assumptions about technologies available, the date chosen, and many other assumptions about resources and spatial requirements. It has been used to justify local as opposed to global production, and indeed it implies a value judgement 5

6 that local is better. Bergh and Verbruggen (1999) criticise the concept as an example of false concreteness in that the assumptions are arbitrary and usually not sufficiently specific to give meaningful results. In addition, the method does not distinguish between sustainable and unsustainable agriculture. It aggregates different environmental problems together without justification. There is a related literature on the effects of trade on the environment, with the usual expectation that more trade give more environmental destruction. Ekins et al. (1994) summarise the arguments for and against trade, balancing the usual case for free trade by taking into account environmental externalities, price volatility, the distribution of incomes between countries, and the dynamics of technological change. The evolution of collective action A key issue in ecological and environmental economics is the relationship between private behaviour and social goods, such as clean air and water. The social problems of over-use and pollution arises from the use of inadequately regulated common resources, i.e. open resources such as the atmosphere, rivers, seas, or public land or infrastructure, such as parks or roads. Suppose that each individual, social group or country is free to consume and produce within the framework of national or international law and social custom. Suppose also that the consumption or production also entails damaging use of the common resources, e.g. burning of fossil fuels and emissions of waste gases, smoke and other pollutants into the air. The benefits accrue in the form of private or marketed use or acquisition of goods and services, such as transportation. The costs are not only the direct private or marketed costs of the activity, e.g. the cost of the fuel, but the social costs of the pollution. The costs of pollution are generally social because they are borne by society as a whole rather than by the private individual, group or the country who generates them. Ostrom (1990) shows how institutions have evolved to manage the collective goods. Social groups are also concerned with effects on others, e.g. future generations, especially when the open resource is a basic need (clean air and water). Free riding is 6

7 if some individuals seek to avoid or evade the regulations or prices and use the common resource for their benefit at the expense of others. If those benefiting are less well-off, then costly action by the better-off group can improve equity. There are also interactions between social problems and solutions, so that actions in one area by one group may be offset by actions elsewhere by another group. In other words there may be potential for alliances, so that institutions can be developed to ease or remove the free rider problem. The tragedy of the commons (Hardin, 1968) is a myth, which has been used to justify the replacement of socially management by private property rights. The idea is that if the social costs are not paid, the use of the open resource will continue increasing indefinitely, as long as the private or market benefits exceed the costs, since those polluting do not take into account the social costs of the activity. The common resource can be over consumed to the point of destruction if the rate of depletion exceeds the rate of assimilation. It is not in the interest of any single party to undertake action to preserve the common resource unless others also act. However, as Spash (1999, p. 430) says the historical tragedy has been the destruction by private profiteers of customs and cultures which managed resources in common and prevented overexploitation. Pollution and its control The problems associated with pollution may be made much worse by the pursuit of development and growth by governments. Pollution takes many forms (dust, heat, noise, toxics, smell, unsightliness) and there is the added difficulty that often the accumulation is very slow and we are ignorant of its toxic effects. Irreversibilities arise through accumulation of stocks e.g. those of heavy metals or greenhouse gases. Technological change is often central to the solution of the problem, since technologies are often instrumental in producing the emissions and controlling them. And there are uncertainties in the costs of changing technologies and in the eventual damage and its location from emissions. The evolutionary option of exploiting and polluting natural resources until an area becomes uninhabitable, then moving on, is less and less viable as the whole planet has become affected via the ozone layer, chemical residues, or climate change. 7

8 There are various methods of controlling pollution can be listed: The Outright Ban: Certain poisons are so potent and have such long-term effects that a complete ban on their production and use seems appropriate. However, this is an extreme measure: most pollutants are associated with activities which also produce desired outputs, which may more than compensate for the undesired pollution. Fierce penalties must be imposed on those who ignore the ban if it is to succeed. Prescribed Limits: Very often a low pollution content (as in river water) is not harmful to life or noticeable to the nose or the eye. Once the tolerable limit has been decided, then the would-be polluters can bid among themselves for the right to pollute up to the limit, with the state benefiting from the auction. Or, more simply, the state can allow unhindered pollution as long as it is beneath the limit, as for example it does at present with noise levels. Again there is a need for penalties if the limits are exceeded and they must be graded to suit the social and personal costs imposed by the excess. Taxes: This is a very flexible means of imposing the social costs of the pollution directly on the producer or consumer. This encourages them to absorb or restrict their waste wherever possible, or to use more expensive but less polluting techniques of production or consumption. It also makes high-polluting products more expensive, and therefore cuts back their demand. Property Rights: Provided the costs of transactions and litigation are low, the information is available and the individual s property rights in the environment were clearly and precisely defined, a system of property rights could ensure that some forms of pollution were held down to socially acceptable levels. However, the justice of the outcome depends on the distribution of income and property also being acceptable. Unfortunately, so many forms of pollution affect so many people (e.g. jet exhaust in the upper atmosphere) that it would be very difficult to enforce the property rights even if they could be defined. Portfolios of policy instruments are needed The complexity of each environmental problem suggests that a portfolio of instruments may be needed to solve them (regulations, taxes and government spending) depending 8

9 on climate, geography, institutions and technologies. Since problems often interact, solving one may help or hinder solving others. In addition, instruments have different side-effects. These effects suggest that the portfolio should contain complementary policies to address the unwanted side-effects of some of the instruments, and to address interacting problems. The case for a radical approach Some ecological problems global warming, loss of biodiversity, accumulation of pollutants in the biosphere are long term and systemic. They also have an ethical dimension in that they affect future generations and their impact is greater on more vulnerable populations. They pose a risk of catastrophic damage to life, which (even if the risk is small) justify taking a precautionary approach. Just as these problems have become recognised by governments across the world, economists have shown that beyond a rather modest income level, happiness or well-being is not associated with indefinite increases in real income, calling into question the conventional utility theory of traditional economics. Ecological economics addresses this wider agenda, exploring the economics of strong sustainability and climate stabilisation. REFERENCES Ackerman, F Heinzerling L (2004) Priceless: On Knowing the Price of Everything and the Value of Nothing. New York, The New Press. Bergh, JCJM van der (2001). Ecological economics: themes, approaches, and differences with environmental economics," Regional Environmental Change, 2(1), pp Bergh, JCJM van der, Verbruggen, H., Spatial sustainability, trade and indicators: an evaluation of the ecological footprint. Ecol. Econ. 29 (1), Boulding K (1966) The economics of the coming Spaceship Earth pp in H. Jarrett (ed.), Environmental Quality in a Growing Economy, Baltimore, MD: Resources for the Future/Johns Hopkins University Press. Common, M. and Stagl, S Ecological Economics: An Introduction. New York: Cambridge University Press. Constanza, R.(1989) What is ecological economics? Ecological Economics, Vol 1 pp

10 Daly, Herman E Steady-state economics: the economics of biophysical equilibrium and moral growth. W. H. Freeman, San Francisco. Daly, H.E., Allocation, distribution, and scale: towards an economics that is efficient, just, and sustainable. Ecological Economics 6, Daly H and Cobb J, (1989) For the Common Good: Redirecting the Economy Toward Community, the Environment and a Sustainable Future, Beacon Press, Boston, Mass. Daly HE and Farley JC (2005) Ecological economics: principles and applications, Island Press, Washington DC. Ekins, P. Carl Folke, Robert Costanza (1994), Trade, environment and development: the issues in perspective, Ecological Economics, Volume 9, Issue 1, January 1994, Pages Faucheux, S., Isabelle Nicolai, I. (1998) Environmental technological change and governance in sustainable development policy, Ecological Economics, Volume 27, Issue 3, December 1998, Pages Georgescu-Roegen, N. (1971) The Entropy Law and the Economic Process. Harvard University Press, Cambridge, MA. Clive Hamilton (1999) "The Genuine Progress Indicator: methodological developments and results form Australia", Ecological Economics, vol. 30, pp Hardin, Garrett (1968) "The Tragedy of the Commons", Science, Vol. 162, No (December 13, 1968), pp Lawn, Ph.A. (2003), "A theoretical foundation to support the Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), and other related indexes", Ecological Economics, Vol. 44, Issue 1, pp Martinez-Alier, J. (1990) Ecological Economics: Energy, Environment and Society. Oxford, England: Basil Blackwell. Munda, G., Nijkamp, P., Rietveld, P., (1994). Qualitative multicriteria evaluation for environmental management. Ecological Economics 10, Ostrom E (1990), Governing the Commons: The Evolution of Institutions for Collective Action, Cambridge University Press. Rees, W.E., ((2000). Eco-footprint analysis: merits and brickbats. Ecological Economics 32 (3), Røpke, I. (2005) Trends in the development of ecological economics from the late 1980s to the early 2000s. Ecological Economics 55(2): Spash, C. L. (1999) The development of environmental thinking in economics. Environmental Values 8(4): World Commission on Environment and Development (WCED). Our common future. Oxford: Oxford University Press, 1987 p