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Part 1 - Global issues and response strategies: Overview
2. Past issues and new problems: A plea for
action
3. Policy measures for global environmental
problems: A Japanese perspective
4. Environment, economy, energy, and
sustainable development
2. Past issues and new problems: A plea for action
Giuseppe M. Sfligiotti
Much has been written, and possibly more has been said, in recent years on the subject of economic development, energy, and the environment. So when I was invited to give a keynote speech at this conference, I must admit that I had some qualms about accepting. The fact is, I do not feel that I have a particularly profound, specialized knowledge of any of the subjects being discussed here and I was afraid that anything I could offer would be a case, as the English say, "of bringing coals to Newcastle." In the end, I decided to accept the honour because, as I see it, a keynote speech does not necessarily have to deal in detail with any one particular problem, but it can - or even should - set forth some considerations of a general and global nature on the links between economic development, energy, and the environment; the whole - at least in my case - seen in the light of experience gained inside a large industrial group operating in the energy sector and which, therefore, has had to face the problems that are the subject of this conference: "Global Environment, Energy, and Economic Development."
I have worked for 35 years in a large Italian industrial group [ENI] that is very active both nationally and internationally in the energy sector (oil and gas in particular) and in fields of engineering related to the energy sector, as well as in chemicals and other industrial sectors. Looking back over my own professional experience, I can see that in the 1950s and 1960s our group was mainly concerned with contributing to the economic development of my country by supplying, in particular, energy required to fuel this economic and industrial growth.
I do not, for a moment, think that this concern was unique to my group. It was - and still is - a characteristic that can be found in energy companies all over the world. Perhaps in ENI the trait was accentuated by some elements peculiar to the situation in Italy. Like in Japan, Italy's entire productive system (industry, infrastructure, services) had been massively destroyed during the Second World War. The overriding need, therefore, was for rapid reconstruction. To do this and to fuel the productive system it was necessary to have ever-growing quantities of energy a problem common to all countries, but one that was particularly acute in Italy, which, historically and throughout its struggle to industrialize, had always suffered from a chronic lack of domestic energy sources.
However, in its reconstruction and development during the decades following the war, the country found itself able to take advantage of the large quantities of cheap oil available during the 1950s, 1960s, and early 1970s. One might even say that Italy's historical disadvantage of not possessing domestic coal resources, as compared with other European countries such as the UK, Germany, Belgium, and France, turned to its advantage in that it could profit of the worldwide availability of oil at very competitive prices.
With the first oil crisis in 1973-1974, and then the second in 19791980, all the oil-importing industrialized countries woke up to the fact of just how delicately balanced and vulnerable their position had become due to their heavy dependence on imported fuels. Being heavily dependent on oil imports means that the availability of supplies can be at risk and that the trade balance has negative repercussions, with all the consequences that these factors can have on the country's economic growth, employment, and inflation. In the case of Italy, three-quarters of the country's total energy demand in 1974 was satisfied by oil, and almost all this oil was imported from North Africa and the Middle East. The impact on the balance of payments when the price of oil quadrupled between October 1973 and January 1974 was simply enormous: in 1974 as much as 30 per cent of Italy's export earnings went to cover the nation's oil bill. It was only logical, therefore. that the oil-importing countries began to implement a policy aimed at reducing dependence on oil imports so as to decrease the negative effects on their balance of payments, the inflation rate, and employment.
A clear and unmistakable testimony to the worry the two oil crises generated within governments of the industrialized oil-importing countries can be found in the declarations of the G7 summit meetings held in those years. Here is what the Heads of State of the Governments of France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States (Canada was not present) declared at their first meeting at Rambouillet, France, in November 1975:
World economic growth is clearly linked to the increasing availability of energy sources. We are determined to secure for our economies the energy resources needed for their growth. Our common interests require that we continue to cooperate in order to reduce our dependence on imported energy through conservation and the development of alternative sources. Through these measures as well as international cooperation between producer and consumer countries, responding to the long-term interests of both, we shall spare no effort in order to ensure more balanced conditions and a harmonious and steady development in the new world energy market. (G7 Economic Summit, 1975)
From this first summit onwards, references to energy under the double aspects of cost and security of supply were constant in the declarations of the G7.
I do not wish to take up your time here with too many quotations but I would just like to add that anyone who goes back to look at these declarations will be struck by the intense atmosphere of uncertainty about the future and the preoccupation felt by the Heads of State and Government of the major industrialized countries regarding the safety and cost of their energy supplies. I shall limit myself here to making two further brief quotations.
The first is from the Tokyo Summit of 1979, which - like many others -devoted ample space to the energy problem: "Higher oil prices and oil shortages have reduced the room for maneuver in economic policy in all our countries. They will make inflation worse and curtail growth, in both industrial and developing countries. The non-oil developing countries are among the biggest sufferers."
The second comes from the Venice Summit Meeting held in June 1980 during the second oil crisis. This declaration had a long chapter dedicated to energy and began with the following words of warning and concern: "In this, our first meeting of the 1980's, the economic issues that have dominated our thoughts are the price and supply of energy and the implications for inflation and the level of economic activity in our countries and for the rest of the world as a whole. Unless we can deal with the problem of energy, we cannot cope with the other problems."
Attention to the energy problem, at least in its security and cost aspects, diminished gradually over the first half of the 1980s, in step with an improvement worldwide in the general petroleum situation. In 1986 the excessive supply of oil on the market brought about a sudden drop in oil prices, and something like a "counter oil shock" took place. An actual or potential scarcity of oil and gas, and the corresponding high prices, seemed a thing of the past, although there was no lack of experts ready to exhort the public, and their governments, to keep in mind that the structure of the world supply of and demand for petroleum was such that a return to another crisis was by no means to be excluded. At any rate, the Gulf crisis of 1990-1991 was easily overcome without any serious problems regarding both physical availability of energy (oil) and prices.
The availability of energy at a reasonable price - the twin problems that were the source of greatest concern and had raised doubts about the possibility of being able to maintain the pace of economic growth - now seemed no longer to be difficult problems along the road of steady human progress. The reality, however, was quite different because another problem was gradually emerging and taking shape: the impact of energy on the environment in the various phases of production, processing, and end use. Thus, while the lack of energy, or its excessively high cost, may be obstacles to economic development, the impact on the environment of its production, processing, and use can prove to be a hindrance of equal magnitude.
The problem of the environment is certainly not a new one, but until a few years ago it was not widely perceived as a source of major concern. In the report published by the Club of Rome more than 20 years ago (Meadows et al., 1972), and entitled The Limits to Growth, the environmental consequences of continuous economic development were examined, together with other specific development problems such as the availability of food, raw materials, energy, etc. This report by the Club of Rome was widely publicized and gave rise to heated debates, but it is fair to say that it did not leave much effect on the actions of industry and business at large, or on governments' policies or on the behaviour of consumers in general. Consumers continued quite happily as before to consume energy and other goods and services without excessive worries about the environment. The only restraint they balked at was the increase in price. As for industrialists, their main worry still was the availability of energy and its cost. There was, of course, concern for the environment, but in all honesty - except in a few special cases - it does not seem to me that protection of the environment became a top priority among entrepreneurs and businessmen. Even in the case of governments, I also have the impression that any serious interest in the environment is a recent phenomenon.
One demonstration of the low priority attached to environmental matters can be found in the previously mentioned declarations of the G7 summits. In fact, it is only at the fourth summit, held in Bonn in 1978, that we come across the first rather timid reference (barely two lines) to the environmental question: "In energy development, the environment and human safety of the population must be safeguarded with the greatest care." And that is all!
In the following summit, which was held in Tokyo in June 1979, the environmental issue received more than lip-service: "We need to expand alternative sources of energy, especially those which will help to prevent further pollution, particularly increases in carbon dioxide and sulfur dioxides in the atmosphere." By contrast - and this should be noted - ample space is given to the problem of energy supply and oil prices. It is worth quoting a few lines dealing with the problem of oil prices: "We deplore the decisions taken by the recent OPEC Conference. We recognise that relative moderation was displayed by certain of the participants. But the unwarranted rise in oil prices nevertheless agreed are bound to have very serious economic and social consequences. They mean more worldwide inflation and less growth. That will lead to more unemployment, more balance of payments difficulties and will endanger stability in developing and developed countries of the world alike. We remain ready to examine with oil-exporting countries how to define supply and demand prospects on the world oil market."
I have made frequent references to the G7 summit meetings because there is little doubt about the fact that their declarations accurately reflect both the importance of the problems themselves and what governments think about them and the way they would like to resolve them at the international level. It is quite interesting, therefore - by glancing through the various summit declarations - to see just how, at a certain particular moment, the environmental problem began to acquire - together with other important international problems - a growing importance, while the concern for the issue of energy supply and oil prices, which had been of such importance in the 1970s, began to wane. Starting in the early 1980s, as you may recall, the worry about secure oil supplies disappeared and the rapid decline in the price of crude began. The drop in prices reached its lowest point in July 1986 when the price of Arabian Light, which had been US$41.25 per barrel (bbl) in November 1980, dropped to US$8.69/bbl (expressed in current dollars).
The problem of energy, therefore, gradually became less important, while the attention being paid to the environment increased. So, in the declaration of the Bonn Summit in May 1985, we find no reference to energy, while a whole ad hoc chapter is dedicated to "Environmental Policies" and at the beginning of it we read: "Economic progress and the preservation of the natural environment are necessary and mutually supportive goals. Effective environmental protection is a central element in our national and international policies."
Subsequently, more and more attention was focused on the environmental issue, not only at the G7 summits. The latter, in any case, only reflect world problems as they are perceived and felt by politicians, experts, entrepreneurs, industrialists, and ordinary citizens, all of whom, in recent years, have recognized the environmental question - or, to be more precise, the question of compatibility between development and the environment - as the problem for future generations as well as ours. We are all aware that in these last few years there has been a dramatic change in emphasis regarding the gravity and urgency of coping with the issue of sustainable development. The real issue at stake is not so much whether the world will have enough food, energy, and other raw materials to meet the requirements of present and future generations, but rather, whether, in spite of having enough food, energy, and raw materials, the environment will be able to stand up to the impact that the production, transformation, and consumption of such food? energy, and other raw materials will have on our planet.
This shift in the priority of our concerns is entirely justified. But I am afraid, as regards energy, that this new attitude may be revealed to be inadequate in the long term. I do not believe, in fact, that the present situation of plentiful oil and low prices should allow us to think that the problems of the physical availability and the price of energy have been definitely resolved. In spite of the progress made in the fields of energy conservation through improved efficiency, the inevitable increase in world energy consumption that will accompany the ongoing growth in world population will, sooner or later, give rise to tensions in the physical supply of energy, even if only for the fact that the present imbalance between the geopolitical areas of consumption and the geopolitical areas of production (especially in the case of oil and natural gas) is bound to become more acute. It would be a serious error if we were to assume that the problems of the physical availability and cost of energy have been solved, and that we can concentrate, therefore, all our attention on the problems of the environmental impact of production, processing, and the end use of energy.
A balanced and more realistic attitude towards the intertwined problems of energy and the environment has been set forth recently (June 1993) by the Governing Board at the Ministerial Level of the International Energy Agency [IEA]:
The member countries established the IEA in 1974 as a forum in which to cooperate in enhancing their collective energy security. The challenges faced in the energy sector have evolved over the past two decades. The goal of energy security, which remains a primary one, has been complemented in recent years by increasing awareness of the significance for energy policy, and for energy security, of two further factors: concern over the environmental impact of energy-related activities, and the growing globalisation of energy issues, as different countries' economics and energy markets become increasingly interdependent.
The list of IEA "shared goals" that, according to the ministers, must "provide a basis for developing their energy policies" is sensible and worth noting. I do not have the time here to comment on these decisions taken by the IEA ruling body, but there is one point in particular that I believed should be noted.
The Governing Board of the IEA, the G7, as well as many governments of the industrialized countries and various other experts on the subject, all make frequent reference to the need to base energy policies on the "free and open market," or to rely on the "free forces of the market," and so on and so forth. Quite frankly, I get the impression that these references to "free market forces" are another case of lip-service being paid to an institution that is dear to the hearts of all of us in the developed countries and that, for quasi-ideological reasons, can only be the subject of praise - praise that now seems all the more justified in the light of the recent disasters of the Soviet-type planned economies in Eastern Europe.
Nevertheless, I think we should be more intellectually honest on this matter and admit that the problems related to energy, the environment, and economic development, in their growing global interdependence, cannot be coped with by adopting an ideological approach, be it based on the ideas of Karl Marx or on those of Adam Smith.
Already back in 1945, a well-known scholar of the oil industry, paraphrasing the words of George Clemenceau, said that: "Oil is too serious an affair to be left to oilmen." In any case, what has happened over the past decades in the field of energy, and of oil in particular, has shown quite clearly that the rules of the "free market" have often been violated by various governments for reasons of foreign policy and security, or to protect the interests of national companies. The examples that come to mind are the acquisition by the British government of control over Anglo Persian that Winston Churchill so much wanted in 1914, and the "open door" policy that the US administration pursued during the 1930s in the Middle East. There are plenty of other examples available to show that quite often the energy policies of governments have diverged completely from the "golden rule" of the free market (we may as well recall here the "proration" and the "import quotas," both introduced in the oil industry by the US administration).
One recent and very eloquent example of how heavily the "free market" was conditioned by governments can be found in the way the 1990-1991 Gulf crisis was handled. As many of you will recall, the Yom Kippur crisis in 1973-1974 and the Iranian crisis in 1979-1980 both resulted in sharp oil price rises even though there was no great imbalance in the energy market between supply and demand. On both these occasions, the absence of any political will to face up to the emergency in an organic and coordinated way permitted the market to react in total freedom, with deplorable results that were evident to all. But the Gulf crisis was handled differently. Here, too, the market played a fundamental role, but it did not operate "freely"; it was heavily conditioned by two important factors. The first of these was the political decision of some producing countries to increase production, thus forgoing the opportunity to profit from the free play of market forces. The second conditioning factor was the political decision of the government members of the IEA to adopt and implement a "contingency plan," which prevented all forms of speculation and helped maintain an overall global balance between the supply and demand for energy. In fact, far from shooting up, the price of oil, which prior to the outbreak of war was over US$30/bbl, dropped to around US$21/bbl when the hostilities actually began. This marked a considerable success not only for the market, which was able to face the new emergency, but also for all those forces that conditioned the market by preventing it from behaving according to its natural logic and inclination, which, as in the oil crises of the 1970s, would have resulted in a jump in prices and, even worse, in difficulties in supply.
If it is now acceptable that the energy market may in the real world be conditioned by government decisions, then this same principle should work when we move to the fields of economic development and the environment; in other words, to the field of "sustainable development." In my view, whether we like it or not, a "Sustainable Society" cannot be brought about without rational government intervention to complement and correct market forces. My conviction is based on the following three arguments.
First, the market frequently reacts far too slowly and, paradoxically, the time-span of its outlook is too short. The seriousness and the urgency of the problems posed by sustainable development suggest that the famous warning of Lord Keynes should always be borne in mind: "In the long run we are all dead."
Second, the free market does not always behave in a way that can be considered to be for the general good. You will agree that the reactions of the market during the first and second oil crises caused serious difficulties that could certainly have been eased, or even avoided, if the market itself had been corrected by appropriate actions by governments, as happened later at the time of the Gulf Crisis.
Third, the market itself does not have at its disposal all the necessary inputs to be able, spontaneously, to arrive at the most rational and appropriate solutions. External environmental costs are not yet part and parcel of the fundamental inputs on the basis of which the market "fixes" prices and, more generally, reaches its decisions. In other words, we are already using up our planet without making any allowance for this in our costs. What would happen to a businessman who decided on his company's business strategy (prices, investments, etc.) without making allowances in his production costs for such items as depreciation of plant and equipment? The answer is easy: he would soon go bankrupt.
This problem of the ability, or rather the "inability," of the market to provide the accurate and complete inputs required for rational decision-making was recently taken up by the Business Council for Sustainable Development. This is an organization made up of around 50 large international corporations that drew up a report for the UN Conference on Environment and Development that was held in Rio de Janeiro in June last year [1992]. The title of the report itself - Changing Course - is quite revealing and its content points out how companies and governments can render the ecological imperatives an integral part of those same market forces that govern production, investments, and business.
The Business Council's report contains important statements on the need for companies to adopt profoundly different attitudes, and a new way of doing business, if sustainable development is to be achieved. Since the enterprise is the principal promoter of world economic development, I think it would be worth our while to take note of the points of view expressed by some prominent business leaders on the subject of sustainable development in their report Changing Course:
So long as creating wealth ranked far above protecting nature as the major objective of society, markets guided economic actors such as consumers and producers toward maximizing wealth creation without concern for the resulting degradation of nature.
Today the world's nations - to different degrees and with different priorities -appear ready to base a reassessment of their long-term objectives on the realisation that economic progress can only be achieved amid plentiful environmental resources and within healthy global eco-systems.
Changing course in accord with this new realisation does not imply abandoning a system that has proved its merits. But it does mean that economic actors need the right signals to steer them toward the new objective.
The fundamental signals guiding market decisions are prices reflecting the relative scarcity of goods based on supply and demand.
This basic mechanism has never been given a real chance to work for the environment. The use, exploitation and degradation of nature has not created signals of scarcity because those who "own" nature and its services - society, expressing its wishes and intentions through government have - tended to give away environmental resources and services for free. (Schnmidheiny, 1992)
It is necessary, therefore, to make due allowance for environmental costs; even if, as the same report points out, "it will be a long and complex task to make prices reflect the ecological impact of resource use and the production of goods and services. This task is also laden with difficulties: assessing values and determining unknown costs associated with ecological impacts; changing basic elements of existing industrial structures; introducing potentially distorting elements into international trade, which may put a higher burden on the poor and tempting governments to abuse a potentially important source of revenue, by using it for purposes other than guiding choices toward sustainable development."
These extensive quotations from the Business Council report Changing Course are justified in my view because the business community is often perceived to be rather reluctant to accept a new approach to doing business. A new attitude is apparently taking shape and it cannot but be of great help in solving the complex and intricate problem of sustainable development.
Here I should like to underline, in particular, the difficulties inherent in the process of "internalizing" environmental costs. These are not theoretical difficulties either. To introduce such a system, which can only be international in character, will mean overcoming enormous obstacles since the process will evidence the contrasts that exist between the diverse economic sectors and different countries: "just demands," economic vested interests, various types of "sacred national selfishness," will all meet head on during the definition of the rules for such an international agreement for sustainable development, as well as during the actual control and enforcement of it. Nevertheless, in spite of all the difficulties of a theoretical and practical nature, it is essential to go ahead with all the necessary precautions, but with determination, before the present trend of irrational development makes it even more difficult and painful to "change course" towards sustainable development.
Being conscious of the difficulties must not, in Hamlet's words, "make cowards of us all," or allow "the native hue of resolution [to be] sicklied o'er with the pale cast of thought." In this difficult but absolutely essential undertaking of saving our planet for future generations, rather than give way to the doubts and fears of Shakespeare's Hamlet, we must be spurred on by the teaching of the Roman philosopher Seneca, who said: "Multa non quia difficilia sunt non audemus, sed quia non audemus sunt difficilia." Which can be translated as follows: "Many deeds we do not dare, not because they are difficult; rather they are difficult because we do not dare."
References
G7 Economic Summit. 1975. Declaration of Rambouillet. Rambouillet, France.
IEA (International Energy Agency). 1993. Communique. Meeting of Governing Board at Ministerial Level. Paris: IEA.
Meadows, D. L., et al. 1972. The Limits to Growth. A Report for the Club of Rome's Project on the Predicament of Mankind. New York: Universe Books.
Schmidheiny, S., ed. 1992. Changing Course. A Global Business Perspective on Development and the Environment. Cambridge, Mass.: MIT Press for the Business Council for Sustainable Development.