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close this bookEco-restructuring: Implications for sustainable development (UNU, 1998, 417 pages)
close this folder1. Eco-restructuring: The transition to an ecologically sustainable economy
View the document(introductory text...)
View the documentIntroduction: On sustainability
View the documentThe need for holistic systems analysis
View the documentEnvironmental threats and (un)sustainability indicators
View the documentSharpening the debate
View the documentNon-controversial issues: Population, resources, and technology
Open this folder and view contentsControversial issues: Pollution, productivity, and biospheric stability
View the documentFinding the least-cost (least-pain) path
View the documentConcluding comments
View the documentNotes
View the documentReferences

Finding the least-cost (least-pain) path

To summarize, there are three technical elements to a programme leading to long-term sustainability. The first is to reduce, and eventually eliminate, inherently dissipative uses of non-biodegradable materials, especially toxic ones (such as heavy metals). This involves process change and what has come to be known as "clean technology." The second is to design products for easier disassembly and re-use, and for reduced environmental impact, known as "design for environment" (DFE). The third is to develop much more efficient technologies for recycling consumption waste materials, so as to eliminate the need to extract "virgin" materials that only make the problem worse in time.

There is also an important socio-economic and political dimension to the problem that we do not address sufficiently in this book. To state it very briefly, the strategies that maximize profits for an individual firm in the manufacturing sector of our competitive economic system tend to be the ones that exploit economies of scale and do so by maximizing sales and production. The downstream consequences, in terms of energy consumption, pollution, and final disposal of worn out goods, are not the responsibility of the producer and are, there fore, not taken account of in either product design or pricing. Thus, competitive markets, as they currently function, tend to over-produce both goods and pollution, while simultaneously over-consuming natural resources. In short, there is an inherent dissonance - economists call it an externality - in the economic system that must be eliminated or compensated.

It does not follow that the resolution of this fundamental dissonance is to be found in public ownership. That "solution" clearly does not work. The next most obvious solution seems to be regulation. But the regulatory approach works well only when the regulations are simple and easy to enforce. It has worked well mainly in the case of outright bans on the production of certain products, such as DDT, PCBs, and tetraethyl lead. But this strategy is also limited. It does not work well, for instance, when applied to widely used consumer products such as cigarettes, liquor, drugs, hand-guns, or pornographic literature. "Green" taxes on resource consumption, or on pollution per se, are another possibility. But, there are at least two major drawbacks. One is that taxes on resource consumption - or pollution - tend to be regressive (hitting low-income consumers most heavily). The other drawback is that they would be complex to administer, because of the need to provide exceptions and exemptions, e.g. for farmers, health workers, exporters, et al. In practice, green taxes are probably not feasible at the national level. There would have to be major efforts at cross-border "harmonization" in order to maintain international competitiveness. Still other approaches are currently being explored, such as tradable permits and quotas. However, there is very little experience of actual implementation for these newer ideas.

But, having said this much, the fundamental issue of compensating for externalities in the economic system is not addressed further in this or the following chapters.

It is not easy to discern a long-term trend toward increasing recycling/reuse. Indeed, anecdotal evidence would suggest the contrary: poor societies recycle and re-use far more efficiently than rich ones do. Also, the increasing complexity of both materials and products has made recycling and re-use more difficult in many cases. For instance, old wool clothes were once routinely collected by rag-merchants and recycled (after a complicated process of washing, unpicking, bleaching, re-spinning, re-weaving, and readying) into blankets and pea jackets. Today, because of the prevalence of blends of natural and synthetic fibres, recycling is almost impossible. Much the same problem occurs in many other cases. To increase re-use and recycling, it may be necessary to induce manufacturers to sell services, rather than products, and/or to take back products they have previously made.

Remanufacturing avoids many of the problems of recycling. It is not an important economic activity at present. However, it may grow, especially as the shortage of landfill sites induces municipal authorities (or, perhaps, original equipment manufacturers forced by law to accept trade-ins) to offer subsidies. Remanufactured refrigerators, cars (or engines), and other large appliances can offer a good low priced alternative to low-income workers in the rich countries, or they could fill an important economic niche in the developing countries. Actually, since remanufacturing will always be more labour intensive than original equipment manufacturing, it is inherently a suitable activity for border regions such as Mexico, Eastern Europe, or North Africa. (As these countries develop, of course, the "border regions" will shift too.)

In the case of municipal waste (mostly paper products and containers), recycling is already increasing in importance. Again, the shortage of land for disposal is mainly responsible. More efficient technologies for separating materials will certainly be developed in coming decades. In any case, there is no technical reason why the recycling/re-use rate for most types of materials should not be dramatically increased from the low levels of today. This will happen, eventually, when material prices better reflect the true environmental costs of both extraction and use.

It is not really necessary to know in detail how this will be accomplished. It is sufficient to know that it is technically and economically feasible. (It remains, still, for policy makers to create the appropriate incentives to harness market forces. But this is a separate topic.) Of course, specific "scenarios" might be helpful in making such a conclusion more credible to doubters. However this would serve a communications purpose rather than an analytic one.

Assuming the existence of a collection of potential technological "fixes," the last question follows: is there a feasible political/ institutional pathway to get from "here" to "there"? What, in particular, is the role of economics? This question can be rephrased to make the underlying problem clearer. Assuming technical and economic feasibility, it is reasonable to assume political feasibility if (and only if) there exists a painless (or near-painless) development trajectory, such that each incremental socio-economic change leaves every politically powerful interested party better off- or at least no worse off than before. Along such a path there must be very few or no losers. Everybody gets richer more or less automatically. This is called a "win-win" strategy, in the language of game theory. In more literary terms, it might be termed a "Panglossian" path.

To restate the question then: is there a Panglossian path? The fundamental problem is that an affirmative answer (i.e. that low-cost "win-win" solutions, or "free lunches," do exist) is essentially inconsistent with most economists' fundamental belief in profit-maximizing behaviour and perfect information. Given these assumptions, the economy would always be in (or close to) equilibrium and this equilibrium would reflect the most efficient (i.e. Ieast cost) choices of technology. If this were true, energy and natural resource conservation should cost a lot more money ("there is no free lunch"). This view seems to be supported by econometric data, based on historical responses of energy demand to price changes. These data indicate that higher prices encourage lower consumption, and vice versa. Reduced physical consumption is commonly interpreted by economists as "anti-growth."

It happens to be convenient to incorporate this set of assumptions in long-term forecasting models based on the assumption of a quasi-general equilibrium varying slowly along an optimal path over time (e.g. Edmonds and Reilly 1985; Manne and Richels 1990, 1992; Jorgenson and Wilcoxen 1990 a,b; Nordhaus 1994)12. However, such models do not - and cannot reflect the endogenous nature of technological change. How can an optimal path be determined that takes into account unpredictable technological change? Nor do these models reflect the distortions due to institutional barriers and "wrong" prices.

To explain the dilemma in non-economic terms, if a lot of "win win" opportunities really do exist, then somehow these opportunities must have been overlooked by entrepreneurs. Assuming entrepreneurs always do what is in their own best (economic) interest, any real opportunities to make profits would be instantly snapped up; consequently no more such opportunities can exist.

The obvious flaw in this reasoning is that entrepreneurs are constantly finding opportunities for making extraordinary profits. If no profitable opportunities existed, there would be no entrepreneurs. Since there are many entrepreneurs, it follows logically that many more such profit opportunities must exist. In recent years, since environmental concerns have become more pressing, surprisingly many profitable opportunities have been found to reduce environmental pollution. To explain this, it must be assumed that industry and consumers have not always chosen the optimal energy technologies, even at present (too low) prices. Entrenched oligopolies or monopolies, established regulatory bodies, institutional separation between technological decision makers and final consumers who pay the costs, and lack of technical information are the most likely reasons (see, for instance, Sant 1979; Lovins et al. 1981; Goldemberg et al. 1987; Ayres 1990, 1994; Mills et al. 1991). Inappropriately low prices due to subsidies (e.g. to coal mining and nuclear power) compound the problem.

Fortunately, there is a potential link between increasing resource productivity and reducing unemployment. Unemployment is becoming a very serious political issue in Europe. Conservative (business oriented) economists tend to blame the problem equally on high wages and benefits and "labour market rigidity" (i.e. the network of taxpayer-supported measures known as the "social safety net"). But there is growing recognition that the tax system itself may be more to blame than the size of the public sector. The problem is that the "safety net" in Europe is financed almost exclusively by taxes on labour, whereas the use of energy and materials by industry is virtually untaxed (except for motor fuel) and, in many countries, fossil energy is heavily subsidized.13

Up to now, environmentalists have approached the issue of environmental protection largely as a regulatory problem. Regulations in this field are now numerous, burdensome, and - in many cases inefficient. As an alternative, environmental economists have recommended schemes such as effluent taxes, but this approach has not been strongly supported by the business community (which, surprisingly, is less opposed to regulation than its rhetoric would suggest). Environmental economists argue that revenue from effluent taxes and resource-based taxes could be used to reduce other unpopular taxes, such as taxes on savings or investment. Conservatives fear that "revenue neutrality" would not be adhered to in practice, and that any increase in government revenue would be used to finance more "spending. "

In recent years another scheme ("tradable permits") has received some support. The idea here is that "rights to pollute" would be issued, but in limited amounts corresponding to the total target level for a given pollutant. The initial allocation system could be either "free" to current polluters or based on an auction (as with offshore oil rights). Once allocated, these rights would be tradable. Those firms able to reduce their emissions below their entitlements could sell the excess entitlement. This possibility would induce firms to innovate. The revenues would remain in the private sector and government revenues (after the initial auction, at least) would not be increased by such a system.

The tradable permit is opposed by many environmentalists on moral grounds. It is argued that there should be no "right to pollute," and certainly it is repugnant that such a right should be purchased for money. But, to some extent, this issue is a matter of perception. For instance, consumers now have an implicit "right" to pollute by virtue of the fact that they have a right to consume. Thus, the right to consume gasoline, for instance, could be rationed equally. Those able and willing to consume less than their "share" could be allowed to sell the excess. This would actually provide a kind of minimum income for the poor and elderly (if they do not drive cars) and could serve as a partial substitute for existing and increasingly unaffordable social services provided by the government from taxes.

The main alternative to regulation is to use emission-based or resource based taxes or exchangeable permits as a method of internalization of environmental damage costs. For both regulation or standard-setting and for the use of emissions taxes or permits, there is still a problem of enforcement and a role for government. On the one hand, bureaucrats must determine the standards; on the other hand, they must set the scale of fees or fix the allocation of permits, and regulate the operation of the market mechanism to minimize opportunities for fraud. In any case, government must also monitor the effects of the policy.

Unfortunately, a "win-win" path is not necessarily painless. Those now receiving subsidies will experience pain. Those who cannot reduce their pollution levels by innovation will have to pay more. This being acknowledged, the obvious implication is that a truly painless pathway to an ecologically sustainable future may not exist! If a painless path does not exist, or cannot be found, it means that to get from our present techno-economic state to one capable of permanent sustainability - even by the "least-pain" route - significant short-term adjustment costs must eventually be borne by some groups or institutions. This means, in turn, that some very hard decisions will have to be taken, and soon. Unfortunately, experience suggests reason to doubt that our chaotic world of nearly 200 sovereign nation-states can make such a transition successfully. Nevertheless, if the human race is to have a long-term future, we must make the attempt.

Notwithstanding the difficulties, I think there is a "win-win" path to sustainability, or at least a policy that could take us a good part of the way in the right direction. I have noted that, if a single "objective function" for societal sustainability were to be selected, it would probably have to be something like the following: sharply to increase the productivity of natural resources, especially non-renewable. The reason this could turn out to be a "win-win" strategy is that increasing resource productivity implies decreasing the use of natural resources as a substitute for human labour. This, in turn, implies increasing employment! Since high unemployment (together with increasing associated costs of social security) is one of the most persistent socio-economic problems in the West, it seems only logical to explore possibilities for solving both the sustainability problem and the unemployment problem with a single common policy approach. It may not be too much to hope that this approach will also be beneficial to the less developed countries and the developing countries.

At first glance, increasing employment seems to imply decreasing labour productivity, which is not consistent with continuing economic growth. In the short run, some measures to increase resource productivity - especially by using less energy - may temporarily have this effect. Recycling tends to be more labour intensive than manufacturing with virgin materials, for instance. However, in the longer run, the object is to increase total factor productivity while using a lot fewer resources and a little more labour. This can be done, I believe, by reducing the cost of labour and increasing the cost of material resources while encouraging technological innovation and the development of new (but not resource-intensive) services.

At any rate, it seems clear that there are some promising possibilities to be explored. This exploration is critically important. Some will say that society must seek pathways to long-run eco-sustainability regardless of what the cost in conventional economic terms turns out to be, whether high or negative (i.e. profitable). If the latter turns out to be the case, so much the better. However, society will be much slower to adopt a high-cost path than a profitable one. Indeed, there is good reason to fear that, if the cost (or pain) appears too high, the difficult decisions will be delayed too long - perhaps until it is too late.