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This paper seeks to answer the question: does the achievement of environmental sustainability necessarily mean a reduction in rates of economic growth? If not, under what conditions can the two objectives be met simultaneously?
Definitions Growth
It is important in this debate to clarify and distinguish between three difference kinds of 'growth':
These three kinds of growth have a complex and by no means fixed relationship to each other. This paper is concerned with the relationship between biophysical throughput and GDP. Based on the evidence given earlier, it is assumed that sustainability requires the overall rate of biophysical throughput to contract. The question is then whether this requires a contraction - or at least a slowing down - of income growth. Since GDP is the variable of most concern to macroeconomists and politicians, and the fear of negative impacts on growth is probably the principal source of resistance to environmental policy, this is an important question.
It is not the same, however, as asking whether environmental sustain ability would reduce welfare. There is no agreed definition or measurement of welfare, and its relationship to GDP growth is a matter of dispute. The conventional economic view, defended for example by Beckerman (1974), is that GDP and welfare are closely correlated; and therefore that any reduction in GDP almost certainly implies a reduction in welfare. By contrast Mishan (1967, 1977) argues that, at a certain stage of development, the costs of GDP growth come to exceed its benefits, so that the growth paths of welfare and GDP diverge.
Both Mishan and Beckerman call GDP growth 'economic growth', a terminology that is hotly disputed by Hueting (1986:244), who contends that the objective of economics is to increase human welfare, not production, and that welfare has several contributing components apart from production. Hueting actually identifies the components of welfare as production (GDP), environment, employment, leisure, working conditions, income distribution, and safety of the future.
Assuming that GDP and environmental quality are both important components of welfare, it is important to know what is the nature of the trade-offs which can be made. Even if it were the case that protecting the environment requires a major reduction in GDP growth, this could increase rather than reduce welfare, depending on the relative weight given to the components' production, environment and 'safety of the future'. These issues are discussed further in Ekins 1993, but are not further addressed here.
In fact GDP is a poor measure, not simply of welfare, but of production itself. This is not just because GDP does not include the great majority of non-monetary economic production and therefore understates production by the huge amount of unpaid and household voluntary work undertaken in the economy; GDP is not even an accurate indicator of monetized production, because of its treatment of environmental inputs, and of the defensive expenditures in environmental and other areas associated with some of its outputs (defensive expenditures are discussed in Leipert 1989; taking environmental issues into GOP accounting methods is discussed in Ahmad et al 1989, Lutz 1993; literature on national accounting and the environment is reviewed in Ekins 1994a, forthcoming).
Sustainability
Sustainability literally means the capacity for some state or condition to be continued more or less indefinitely. For economic development to be termed sustainable, it is normally considered that it is the level of economic welfare that must be sustained. As discussed above, economic welfare derives from, inter alia, income and from the environment, which performs various functions, some of which contribute to welfare directly. Income is generated by stocks of capital, including manufactured, human and natural capital. Natural capital also performs the welfare-creating environmental functions. Non-declining economic welfare requires, ceteris paribus, that the stock of capital be maintained (Pezzey 1992:14).
There is then the issue as to whether it is the total stock of capital that must be maintained, with substitution allowed between various parts of it, or whether certain components of capital, particularly natural capital, are non-substitutable, ie they contribute to welfare in a unique way that cannot be replicated by another capital component. 'Weak' environmental sustainability conditions derive from a perception that welfare is not normally dependent on a specific form of capital and can be maintained by substituting manufactured for natural capital. 'Strong' sustainability conditions derive from a different perception that substitutability of manufactured for natural capital is seriously limited by such environmental characteristics as irreversibility, uncertainty and the existence of 'critical' components of natural capital, which make a unique contribution to welfare. (Pearce and Atkinson 1992, Turner 1992). An even greater importance is placed on natural capital by those who regard it in many instances as a complement to man-made capital (Daly 1992).
The difference between weak and strong sustainability is important to the argument about the compatibility of sustainability and GDP growth. In general, it may be said that value added (GDP) is generated by transforming energy and materials from the natural environment into human-made goods and services. Ferwer environmental goods can be permanently transformed into human-made capital under strong sustainability than under the weak version. All other things being equal, strong sustainability conditions could therefore be expected to make the generation of GDP more difficult. This paper discusses the general conditions for compatibility of GDP growth and environmental sustainability, making no distinction between weak and strong versions of sustainability. But it should be noted that the fewer the substitution possibilities allowed, the more stringent the conditions in practice become.
Base case GDP growth
In discussing whether the achievement of sustainability would reduce GDP growth it is important to distinguish between absolute reductions in GDP - ie negative growth - and reductions in the rate of growth in comparison with a 'base case' in which policy measures for sustainability are not taken. The question at issue might be simply; can sustainability be compatible and GDP growth, at any positive level? Or it could be: would policies for sustainability reduce growth below the rate which it would otherwise be?
The discussion below principally concerns the first question, that of general compatibility of sustainability and positive rates of growth. Since neither the exact rates of growth achievable under sustainability constraints, nor the precise rate level of growth in the 'base case' (particularly in the long term) are known, the second question cannot be answered definitively, although as will be seen later, there is little evidence that environmental policy to date has acted as a serious constraint on growth. However it should be pointed out that if policies for sustainability could generate positive rates of growth which are within, say, 0.25 per cent pa of the expected base case, this would at least calm macroeconomic and political fears of a 'collapse in living standards' associated with moves towards sustainability.
A further point may be made. Most of the literature in the field (for example, on reduction of carbon dioxide emissions) assumes a base case in which growth continues at historical trend rates, and then compares the growth rate which would result from environmental policies. However it is not clear that historical trends will continue - for environmental reasons. Firstly, growth rates may decline for reasons quite unconnected with environmental problems. Secondly, in the absence of more stringent environmental policies GDP growth might eventually slow down because of environmental constraints.
There are a number of reasons to suppose that the environment may eventually act as a constraint on GDP growth:
All these trends will tend to increase the intermediate input costs of each unit of real output, ie reduce the value added. (Though note that if pollution control is carried out by governrnent or households it will not be counted as an intermediate input in GDP, and will therefore - illogically register as final production.) Put another way, a higher proportion of final output will have to be devoted to maintaining output, and less will be available for increasing it. Unchecked, these trends would retard growth. This is the familiar classical formulation of a rising capital-output ratio.
It is not clear to what extent these trends will occur, or will be offset by 'autonomous' technological change (ie not induced by environmental policy). But if they do, then the base case is of lower growth than generally anticipated. In turn this may cast a more favourable light on the growth rates achievable with sustainability policies.
The Environmental Impacts of Growth
There is no dispute that the negative environmental effects of
production are associated with the economy's biophysical
throughput: its conversion of energy and material resources into
wastes. However, this process is not part of production's desired
objective, which is to add value to its resource and energy
inputs. When aggregated this added value becomes Gross Domestic
Product. The key consideration as to whether GDP growth is or can
be environmentally sustainable is the extent to which production
processes can add value without increasing associated
environmentally negative biophysical throughputs.
All economic activity requires three functions from the environment:
In order to examine how this trend might be reversed, use can be made of the concept of the environmental impact coefficient (EIC) of output Jacobs 1991): that is, its average unit impact on the environment through the consumption of resources and production of wastes. The three systematic changes in production processes which can theoretically reduce the EIC and thus enable value-added to increase while reducing environmental impacts are, as identified by Lecomber (1975):
The same idea is expressed thus by the World Bank: 'Whether (environmental) limitations will place bounds on the growth of human activity will depend on the scope for substitution, technical progress and structural change.' (World Bank 1992:9)
By reducing the EIC, each of these changes counteracts the rising capital-output ratio, and can therefore put off the moment when growth runs up against environmental limits. In principle, so long as EIC rises faster than growth, the environmental limits can be postponed indefinitely.
Environmentally sustainable GDP growth thus depends on the achievement of substitution and technical and structural change in order to keep environmental impacts within conditions of environmental sustainability. However, this is not sufficient, since first a state of environmental sustainability must be achieved, and, as shown previously, the global economy is far from such a state. Remedying the environmental impacts caused by past economic activities is likely to reduce growth. In addition, because of the environmental unsustainability of current activity, substitution and change must reduce the environmental impact of current output as well as of further growth in that output, if environmental sustainability is to be attained. Where environmental damage is irreversible, of course, improving EIC will not be effective.
The 'all-important equation' (Ehrlich and Ehrlich 1990:228)
expressing the relationship between environmental impact and
human activity was written (Holdren and Ehrlich 1974:288) as I =
PCT
where I is environmental impact, P is population, C is
consumption per head, and T is impact per unit of consumption,
earlier called the environmental impact coefficient (EIC). T can
be thought of as indicating the technology of consumption (and
production). In some cases it will mainly reflect the inputs of
production, the processes of transformation of production and
consumption, and the disposal of wastes; in other cases it may be
influenced by social arrangements such as property rights and the
effectiveness of legal systems.
I (and therefore the numerator of T) could be one of a large number of environmental impacts with no common unit of measurement. To express multiple impacts, the equation should, strictly, be written in vector form
I=PC'T
where, T are column vectors of individual impacts, C is a vector of consumption quantities relating to those impacts and P is a scalar.
Holdren and Ehrlich recognise that P. C and T are not independent; for example, T may vary with consumption per head. It is even possible that falls in consumption could increase environmental damage, as expressed, for example, in the South Commission report's statement that 'poverty is also a great degrader of the environment' (South Commission 1990:279). Such interdependencies raise serious problems for attempts to use the equation to identify the separate contributions of individual factors to past environmental degration (as discussed in Amalric's chapter in this volume) but do not prevent the equation being a useful device to illustrate the improvements in environmental efficiency reductions in T) required to achieve environmental sustainability under alternative scenarios.
In accordance with the reports already cited, and the
widespread agreement at UNCED, it is assumed that current levels
of I are unsustainable. As we saw earlier with regard to global
warming, the IPCC calculates that carbon dioxide emissions will
quickly have to fall by a minimum of 60 per cent to stabilize
atmospheric concentrations of CO2, and three other
greenhouse gases - N2O, CFC-11, CFC-12 - need cuts of more than
70 per cent. With regard to other environmental problems, the
Dutch National Environmental Policy Plan (MOHPPE 1988) argues for
cuts in emissions of 80-90 per cent for SO2, NOX,
NH3 and waste dumping, 80 per cent for hydrocarbons
and 100 per cent for CFCs. Thus with regard to I overall, it
seems conservative to suggest that sustainability demands that it
should fall by at least 50 per cent. With regard to consumption,
what is considered a moderate economic growth rate of 2-3 per
cent results in a quadrupling of output over 50 years. With
regard to population the UN's recent projections indicate a
global figure of 10 billion by about 2050 (Sadik 1991:3), about
twice today's level, with 95 per cent of population growth in the
Third World. Using this assumption and classifications and data
from World Bank 1992, the necessary reductions in T (TR) in order
to reduce environmental impacts to 50 per cent of the current
value by 2050 would be as follows (see Appendix for detailed
calculation):
| 1. No growth in P or C: | TR1 = 50% |
| 2. Growth in P. no growth in C: | TR2 = 65% |
| 3. Growth in P. growth in C in South: | TR3 = 81% |
| 4. Growth in P. growth in C in North: | TR4 = 89% |
| 5. Growth in P and C in North and South: | TR5 = 91% |
These figures clearly illustrate some important aspects of the technology/sustainability relation. Comparing TR1 and TR2, expected population growth at existing consumption levels increases the required cut in T from one half to two thirds. Although 95 per cent of the population growth takes place in the South, the detailed calculation shows that the far higher level of consumption in the North means that the growth of population in the North (5 per cent of total population growth) accounts for well over one half of the increase in environmental impact due to population growth as a whole and thus over one half of the extra required reduction in T due to that growth.
Comparing TR4 with TR2 (89 per cent to 65 per cent) shows the extent to which growth in the North makes the achievement of environmental sustainability more technologically demanding. Comparison of TR4 with TR3 shows that the sustainable quadrupling of just the North consumption per head, from a high base, demands considerably greater technical change than sustainably quadrupling the South's consumption per head for more than double its present population (89 per cent as opposed to 81 per cent reduction in T). In the latter case the calculation shows that even after quadrupling the South's per capita consumption, this is still only about one sixth of current levels in the North. It is also clear that the required technological improvement in the North, even without Northem growth, is substantial if the South is to have 'ecological space' for environmentally sustainable growth (Goodland and Daly 1992:130, also make this point).
Finally, the size of the necessary improvement in T (91 per cent) given growth in both North and South, which remains the principal, practically unchallenged global aspiration, must be noted. The remainder of this paper examines the feasibility and implications of changes on this scale.
THE COSTS OF ACHIEVING ENVIRONMENTAL SUSTAINABILITY
Theoretical Discussion
Reducing the EIC provides the basic physical condition
for the compatibility of sustainability and growth. But there is
also an economic condition. Reducing the EIC is likely to require
resources in new capital and often in more expensive inputs. If
the cost of reducing EIC rises faster than output growth,
postponement of the environmental limits will have
been bought only at the expense of higher intermediate costs,
which will have the same effect of retarding growth as a rising
capital-output ratio. Therefore for sustainability not to
constrain GDP growth, the net costs of reducing EIC must be
neutral or negative.
There are two broad ways in which improving the environmental efficiency of production might also involve raising general productivity (ie where policy for environmental sustainability will also promote GNP growth):
The first kind of situation may be considered an example of double government failure (policies that are economically and environmentally flawed), and the second exhibits a kind of double market failure (environmental externality and economic inefficiency). There is substantial evidence, some of which will be reviewed in the next section, that both these kinds of failure are surprisingly widespread.
It is important to recognize that the cost reductions need not accrue to the economic agent undertaking the environmental measure as when a requirement for a manufacturing firm to cut water emissions reduces the cost of water treatment undertaken by the water utility.
If some environmental improvement measures may in themselves be net cost-reducing, while others are net cost-increasing, this gives us three broad scenarios:
The financial implications of scenarios 1 and 2 are shown in sectors A, B and C of Figure 2.2, in which the total benefits can be regarded as the 'demand curve' for environmental quality, and the costs incurred as the 'supply curve'. Either the policies cost nothing and result in both financial and environmental gains, because they represent the correction of government policy that was economically inefficient as well as environmentally damaging (sector A); or the policies have a financial cost which is outweighed by the financial gain, in addition to the environmental gain (sector B); or the policies have a net financial cost which is outweighed by the environmental gain (sector C). The first two cases may be characterized as 'win-win changes' corresponding to scenario 1, and the third as 'trade-off situations' corresponding to scenario 2. Essentially, the question of whether sustainability and GDP growth are compatible then becomes one concerning the relative sizes of Sectors A, B and C. The empirical evidence on this will be reviewed in the next section. First, however, it may be helpful to summarize the theoretical position. There are two requirements for growth not to run up against environmental limits:
Source: adapted from World Bank, 1992: 66
2.2Benefits and costs of environmental policies
The average environmental impact coefficient must be reduced.
There is no question in principle, both that each of the three methods for reducing EIC is possible, and that some methods of reducing EIC will also lead to general productivity improvements. But the theoretical possibility of 'delinking' biophysical throughput from GDP growth does not guarantee its practical achievability. As Lecomber has put it, this establishes the logical conceivability, not the certainty, probability or even the possibility in practice, of growth continuing indefinitely. Everything hinges on the rate of technical progress and possibilities of substitution. This is perhaps the main issue that separates resource optimists and resource pessimists. The optimist believes in the power of human inventiveness to solve whatever problems are thrown in its way, as apparently it has done in the past. The pessimist questions the success of these past technological solutions and fears that future problems may be more intractable.
Lecomber 1975:42
Ultimately it is an empirical matter whether the two requirements for reconciling sustainability and GDP growth, under the four given conditions, can be achieved in practice.
Empirical Evidence
In a Background Paper for the World Bank's World Development Report 1992, Anderson (1992) provides impressive evidence that the potential exists, or soon will exist, to reduce EICs on the scale required by the Ehrlich equation in each of the major fields of global environmental impact: water, food production, pollution from energy, global warming and pollution from industry (Table 2.5). (The analysis focuses on substitution between factor inputs and raising technical efficiency; only in energy production is changing the composition of output considered). He further argues that many of these methods themselves raise productivity. On the basis of this analysis Anderson concludes that - so long as the correct policies are put in place -growth over the next thirty to forty years need not be constrained, and indeed can be enhanced, by protection and improvement of the environment. (He acknowledges that time lags in investment will mean that environmental problems, particularly in the South, will get considerably worse before they get better.)
Anderson does not attempt to integrate the results in the different fields, so it is not clear whether (for example) the additional commercial energy and industrial inputs required to improve agricultural productivity can be accommodated within the win-win energy and industrial pollution scenarios. Nor is it clear whether the gains in general productivity made in some sectors outweigh overall the losses acknowledged in others. (In effect the losses are regarded as so small in relation to total output that they are deemed not to be sufficiently serious to inhibit growth.)
The potential of new technologies to enable production to be considerably less damaging environmentally would seem indubitable. Whether such potential is realized in practice depends on whether government and market failures can be successfully addressed.
Government failure
The notion that government is in some sense a natural protector of the environment was dealt a probably terminal blow by the revelations of environmental damage in Central and Eastern Europe and the former Soviet Union (see WRI 1992, Chapter 5 for a survey). It is clear that there are many other governmental contributions to environmental destruction that are also economically inefficient.
Table 2.5 Polluting and low-polluting practices
| Source | Basis of index | Practice | Nature of | |
| of damage | Polluting | Non-polluting | alternatives | |
| Particulate matter | Emissions | 100 | <0.1 | Natural gas;
clean coal technologies; scrubbers; low sulphur fuels |
| CO | 100 | <0.1 | ||
| SO2 | 100 | 0 to <5 | ||
| NOx | 100 | 5 to <10 | ||
| CO2 | 100 | 0 | Renewables New octane enhancers; catalytic converters |
|
| Pb | 100 | <0.1 | ||
| VOCs | 100 | <2 | ||
| Marine pollution(oil) | Spills and wastes | 100 | <10 | |
| Surface water Pollution |
Volume of wastes |
100 | negligible | Sewerage works; effluent control technologies |
| Soil erosion | Soil loss | 100 | negligible | Agro-forestry;
soil erosion prevention practices |
| Forestry | Areas cleared in
damaging ways |
100 | negligible | 'Sustainable' practices |
| Industrial effluents and wastes |
Emissions and wastes (by weight and volume) |
100 | small | Effluent control Technologies; waste reduction or 'prevention' |
Source: Anderson 1992:6
One of the largest examples of such governmental lose-lose policies is the Common Agricultural Policy (CAP) of the European Community. The basic mechanism of the CAP is price support of marketed farm products, which, because of intensification of production involving greater specialization and greater use of chemicals and machinery, has led to a number of adverse environmental effects including soil degradation, water pollution and the loss of amenity and diversity (OECD 1991a:184). In aggregate the energy intensity of OECD agriculture increased by 39 per cent over the period 1970-88 (OECD 1991a:173).
In 1984 the net economic costs of the CAP, including losses to taxpayers and consumers, were nearly 14 billion Ecu, leading a study in 1990 to conclude: 'What is certain, therefore, is that... on narrow economic grounds a fundamental reform of current policy would be beneficial, even before the environmental benefits of reform are taken into account.' Jenkins 1990:47) In terms of Figure 2.2, such a policy reform is in sector A, where both economic and environmental benefits can be obtained at zero cost.
Just as price supports for output can inefficiently increase both output and associated environmental damage, so can subsidies for inputs. As the World Bank notes, 'both economic and environmental benefits will be achieved by removing subsidies that encourage the use of coal, electricity, pesticides and irrigation and promote expansion of grazing and timber extraction on public lands.' Such subsidies are common. In China, Poland and Mexico users pay less than 40 per cent of the production cost of electric power; the figure for coal in the former USSR is 10 per cent and for Sri Lanka for nitrogen fertilizer is about 60 per cent; in India and Bangladesh irrigation water is practically free (World Bank 1992:68-9). A string of publications from the World Resources Institute (Kosmo 1987, Repetto 1985, 1986, 1988) gives many other examples of inefficient, environmentally-damaging policies in energy, agriculture and forestry. Policies to rectify these economic and environmental inefficiencies also fall with sector A of Figure 2.2.
Of major importance to both environmental conservation and poverty alleviation in developing countries is the regeneration of degraded land, which alone covers some 69 million hectares. Chambers (1992:222-3) has written:
Paradoxically, degradation often protects potential for the poor. Because land is degraded - deforested, eroded, waterlogged, saline, bare from overgrazing,flooded or unsustainably cropped - it has low value, especially where current management practices seem likely to persist. But again and again, when management priorities are changed, remarkable bioeconomic potential is revealed.
Conventional 'development' practice has to date been more concerned with harvesting biomass, or even destroying it through industrial projects, than with regenerating it, so a focus on such regeneration would mark a significant change of development direction and approach, with two essential ingredients. The first is a high level of motivation and commitment of both individuals and communities, both to carry out the environmental reparations on a long-term basis. Such commitment will only be forthcoming if the people involved are assured of rights of use of the biomass they have produced. Inalienable rights of tenure, usufruct and control over the regenerated land is an essential condition for the regeneration to take place.
This is a fundamental policy issue for countries with skewed land distribution and a history of concentrated ownership, unsustainable use of land and biomass, and exclusion of peasant farmers from land or their insecure title to it. The World Bank identified the clarification and enforcement of property rights as a key zero cost (sector A, Figure 2.2) policy geared to both development and environmental conservation (World Bank 1992:66, 68-70).
Secondly, the regeneration of biomass often demands low rather than high levels of financial investment, offering the prospect of sector B gains, in terms of Figure 2.2. However, development 'projects' teased on biomass regeneration will only succeed if they are rooted in communities' skills, technologies and own perceived priorities. Participation, of course, has been a buzzword in development parlance for some years, but it rarely extends to 'beneficiary' communities both setting the agenda for their development and playing the principal decision-making role in achieving it. Biomass regeneration demands both.
Where these ingredients are present, there is not the slightest doubt, on the basis of successful examples from different countries, that biomass generation is both feasible and yields large, sustainable benefits to the populations concerned. Conroy and Litvinoff (1988) report successful experiences of this kind from north India, Nepal, Honduras, Niger, Burkina Faso and Haiti. Harrison (1987) gives many examples from Africa. Pangare and Pangare (1992) give an in-depth account of regenerative success in Maharashtra, central India.
A relevant question for this chapter is whether, if biomass regeneration were to be achieved on a large scale by participatory processes under the control of the rural poor, this would result in GDP growth. To the extent that the new biomass found its way onto the market it obviously would, but it is likely that a considerable portion of the output would be consumed for the producer's own subsistence and so would not be thus recorded. It is essential, therefore, that measures of the effectiveness of such processes take account of subsistence production if they are not seriously to understate the results achieved.
Market failure and business successes
With regard to market failures, a number of case studies now
attest to corporate improvements in environmental performance
which have also yielded economic benefits. Thus the Business
Council for Sustainable Development states: 'Many of the waste
reduction and environmentally positive programs in business are
economically viable and are providing positive rates of return in
relatively short time periods.' (Schmidheiny 1992:96) Sometimes
the benefit comes in the form of straight cost reductions, a
well-known example of which is the Pollution Prevention Pays (3P)
programme the 3M Corporation, which from 1975-1990 cut air
pollutants by 122,000 tons, water pollutants by 16,000 tons,
solid waste by 400,000 tons and waste water by 1.6 billion
gallons - and saved $482 million (Business International
1990:188). Similarly, Northern Telecom, in phasing out its use of
ozone-depleting CFC-113 between 1988 and 1991, spent $1 million
putting a substitute in place, but saved $4 million on purchasing
the CFC, associated taxes and waste disposal (Schmidheiny
1992:230). In India Harihar Polyfibres implemented 200 projects
at its pulp mill between 1983 and 1989, aimed at resource
efficiency. Although its production increased by 20 per cent in
this period, energy consumption fell by 60 per cent, chemical
consumption by 55 per cent and the effluent load by 55 per cent.
$69.5 million was invested in the projects, but the payback
period was less than two years (ibid:272-3). In California
several companies have found that investment in industrial water
conservation can result in substantial savings of water with a
payback period of a year or less. For example, the California
Paper-Board Corporation cut its water consumption by 72 per cent
from 2.5 to 0.7 million cubic metres per year with a payback
period on investment of only 2.4 months (Brown et al 1993:34). In
another example, Ayres and Walter (1991:251) report that the
average return on investment for 167 energy saving projects
undertaken by the Louisiana Division of Dow Chemical Co over the
years 1982-88, as part of an 'energy-context' initiative, was 198
per cent.
All these examples fall within sector B of Figure 2.2. Some investment is required (which could be public as well as private), but it yields net financial as well as environmental gains, and so can be justified in terms of financial return irrespective of environmental considerations. In a competitive market it is surprising that there are so many opportunities for profitable investment that appear to have been overlooked. It appears that business managers have been widely unaware of the economic, let alone the environmental, costs of resource use and waste disposal, and needed the pressure of public opinion drawing attention to the latter before they gave serious consideration to the former. As it happens, Harihar Polyfibres' environmental improvements failed to keep up with public opinion, and it was taken to court in 1988 - it has now installed a comprehensive waste water treatment plant (Schmidheiny 1992:273).
Environmental pressure can also achieve economic benefits by stimulating creativity and innovation which results in new products or new business opportunities. Thus the Costa Rican firm RICALIT developed a fibre cement in 1981-2 to replace its asbestos cement which was subject to increasing concern over safety. The substitute proved both less expensive and more manageable than asbestos cement, and was highly profitable, with sales more than doubling to over $6 million in 1991 (ibid:215-6). An example of a new business opportunity is that presented by energy conservation to traditional energy supply companies. The New England Electric (NEE) company realized as long ago as 1979 that energy conservation made more economic sense than providing new supply, but it was not until 1989 that the utilities' regulatory system permitted the company to make a financial return on investments in conservation. In 1990 NEE spent $71 million on energy conservation projects, saving
194,300 MW-hours of electricity and $161 million. NEE retained $8.4 million (9 per cent) of this $91 million net saving, the rest being passed on as benefits to customers. NEE projects that it could spend $100 million a year to the year 2000 on economically viable conservation projects in its service area (ibid:187-8).
It should be noted that all the examples given so far represent unequivocal increases in production - cost-saving investments that either increase production themselves or free up resources for use elsewhere in the economy, as well as improving the environment. They are a special (and perhaps exceptional) subset of the environmental protection industry, which is worth $70-100 billion in OECD countries and probably half as much again worldwide (OECD 1991a:198, Business International 1990:157). While this sector undoubtedly offers many business opportunities to individual companies, at the same macro level much of it (but not the examples above) represents a cost to society, increasing the price of goods or services, or using investment, in order to restore or maintain environmental quality. This point will be discussed further below.
Trade-off situations
In contrast to sectors A and B in Figure 2.2, sector C involves real tradeoffs between the production of goods and services for the market and the production, or conservation, of non-market environmental goods and services. Economic resources are allocated for the production of the latter rather than the former which must, therefore, have a negative effect on GDP growth. It is important to recognize that, because the environmental and other benefits from such an allocation are greater than the costs, it still represents an increase in economic efficiency, being a correction of an externality or some other resource misallocation; but it still reduces GDP growth. As Lecomber says:
It is misleading to regard environmental policies of this sort as alternatives to reducing economic growth, since this would be their incidental effect. Benefits which are not included in GNP would be traded for other (smaller) benefits which are. GNP would fall and, during the period of transition to such policies, growth would fall, probably substantially.
Lecomber 1975:59
Two points follow. The first is that, if the methodology for calculating GDP were to be changed to take into account environmental costs and benefits, then GDP would increase as a result of these environmental policies. One such change in methodology is proposed in Hueting et al 1991. This involves the setting of sustainability standards of environmental quality; the calculation of the costs that would be incurred in reaching those standards; and the subtraction of these costs from the GDP figure. As the application of policies causes the sustainability standards to be approached, this shows up as an increased (adjusted) GDP, because the subtractions become less.
The second point is that, although the cost curve in Figure 2.2 can normally be calculated with a fair degree of reliability, the same is not true of the total benefits curve. In fact, for the most pervasive environmental effects (global warming, ozone depletion, species extinction), it is difficult to put any meaningful figure on the benefits of conservation (stable climate, undepleted ozone layer, biodiversity). (See Ekins 1994b, forthcoming, for a discussion of this issue.) This introduces a level of uncertainty into the practical situation which belies the theoretical simplicity of Figure 2.2 and which is certain also to result in controversy where substantial values are at stake. Because some of the costs and benefits are likely to arise in the future, the benefits curve will also be dependent on the discount rate chosen to convert these into present values. This is certain to be the cause of further controversy.
