Environmental economics

As a background for the workshop, a small scoping study has been prepared by the consultant GUA. This study outlines the main concepts in the domain of the analysis of the environmental and economic consequences of resource use.

General comments

The experts agreed on the need to keep clearly apart the basic principles of resource use, the methods to calculate and evaluate resource use and the measures to steer resource management. Among the main schools of thought, there is a distinction between classical/neo-classical economics claiming that the market is to a very large extent capable of determining the optimal rates of raw materials use and alternative schools suggesting fundamental market failures which threaten the long-term sustainability of our society. This parallels the distinction between the supporters of "weak sustainability", i.e. natural capital may to a large extent be replaced by man-made capital and those of "strong sustainability" i.e. only the long term preservation of natural capital will guarantee sustainable welfare for future generations.

There is a need to distinguish between scarcity and equity issues and the environmental impacts associated with resource use. Scarcity/equity issues are linked to the facts that a resource we are consuming today is no longer available for future generations and that there may be an unfair distribution of resources use between the richer and poorer parts of the world. Although there is hardly any evidence that we are running out of non-renewable resources in the short to medium term, some participants underlined that in the long term shortages might become inevitable. There may, however, be more immediate problems as regards environmental impacts resulting from resource use, including over-use of life supporting resources such as water, soil, biodiversity etc.. On the question how this relates to the more traditional environmental policies and its evaluation through cost-benefit analysis, there was a broad agreement that there is no fundamental difference but that the correct valuation of externalities is a key issue on which opinions may differ.

Resource use entails different consequences depending on the nature of the resource considered. Material quantities in terms of weight will be insufficient to determine the importance of the impact of resource use.

Some participants felt that there should be a stronger focus on the empirical evidence of over-use of resources and that the chapters in the GUA study on the classical/neo-classical economic schools needs further elaboration. Others were of the view that it is necessary to show the long-term limits of resource use in an easily understandable manner that allows communication to the broad public.

Mass flow - factor 4/factor 10; MIPS and rucksacks; environmental space etc.

The concepts of factor 4 and factor 10 are simple and visible instruments that can alert the broad public to the need to increase the resource efficiency of our society. There was an agreement that there is a need for differentiation and prioritization between various resources and their use since the impacts linked to some of them are worse than others. There were, however, some doubts as regards the feasibility and desirability of factor 4/10 improvements over all our economy. The question was raised how much such concepts should be underpinned by more detailed scientific analysis.

As regards prioritization, the difficult task is to identify which resources are over-used and/or how much of the environmental impacts linked to the use of a particular resource the earth can tolerate. There seemed to be an agreement that movement of mass alone is not a good parameter for prioritization but that it needs to be supplemented by qualitative parameters. Hidden resource flows ("ecological rucksacks") need to be taken into account appropriately. An option for prioritization is to compare the exergy changes linked to the use of various resources (cf. below). Important issues are also the contribution to climate change, accumulation of metals in soils etc.

Carrying capacity - ecological footprints

Like the concepts of factor 4 and 10, the ecological footprints are an instrument to make complex problems understandable to a broader public. They evaluate competing options for the use of limited land surface to show how much of these resources we are currently using compared to the long-term carrying capacity of the planet which preserves the natural capital and prevents climate change. Again, a key issue is whether the underlying goal is strong or weak sustainability, on which there were different views among the experts. For policy making, the footprints can give broad indications as to where we stand in overall resource use but in detail more factors such as technological change, evolution of human consumption patterns over time etc. need to be taken into account.

Thermodynamics

The contribution of thermodynamics to the discussion on market failures in the context of resource use is not fundamentally different from other concepts but uses the specific parameter of exergy as a yardstick for measuring the impacts of resource use. The more reactive a substance is, and the more it is dissipated into the environment, the bigger are the problems associated with its use. In this sense, it can contribute to the discussion on prioritization for resource management policies. Some participants felt that more work is needed to identify clear messages on how concretely thermodynamics can assist in the preparation of policies.

Classical/neo-classical economics

The concepts of classical and neo-classical economics should not be reduced to the Hotelling’s rule which is the most simple textbook model on the scarcity of non-renewable resources. Extended models which include technological developments may be more relevant. In general, it is difficult to give a concrete prediction about future developments in scarcity and prices of non-renewable resources and so far no major crisis has been observed. Nevertheless, in the long term it may not be excluded that certain valuable resources (e.g. Platinum) may no more be available due to dissipation.

The more immediate problem seems, however, to be environmental impacts which are not accounted for by current price structures, i.e. externalities. There seemed to be a consensus that there should be a stronger focus in the GUA study on the valuation of externalities. There is also more discussion needed on intergenerational issues/discount rates, questions of valuation techniques (which should be broader than contingent valuation) and on substitution issues. Similarly, possible political measures need to be carefully analyzed as to possible undesired consequences. There is the risk that a policy failure may be more important than the original market failure it was supposed to correct.

Resource accounting

There is a need for further elaboration of better measures of how to measure societal welfare. GDP should be adjusted by environmental indicators which then should be used in a consistent way. However, there are problems with the valuation of environmental assets which works in some cases better than in others.

Generally, the feeling was that the most pressing action should be on pollution abatement and the preservation of life supporting resources such as water, soil, biodiversity etc. For these, optimal conservation measures of natural assets, including policies influencing the resource input into the economy, are needed. Some participants underlined the link between resource management and development policies.

Prices play a very important role in our resource use. Therefore, the correction of market failures via economic instruments (taxes, tradeable permits, abolishment of counter-productive subsidies) was generally seen as the most obvious instrument. It might, however, not always be easy to identify the existence and the dimension of market failures, also with a view to the key question whether weak or strong sustainability should be the yardstick. Other instruments mentioned were Integrated Product Policy (target setting etc.) and boosting technological developments through support for research and development and early movers in the application of resource-efficient technologies.

Once the externalities are identified, it will be necessary to study possible policy measures on their effectiveness. Finally, the capacity of a resource management policy to achieve substantial changes in resource efficiency will also depend on an appropriate communication strategy to show the problems linked to resource use and to support the creation of the necessary political will.