WHO 2018 Final Motion: Environmental Cost Accounting
The Winter Holidays Open in Zagreb features a final motion on environmental cost accounting:
An Investopedia post on True Cost Economics begins:
True cost economics is an economic model that seeks to include the cost of negative externalities into the pricing of goods and services. Proponents of this type of economic system feel products and activities that directly or indirectly cause harmful consequences to living beings and/or the environment should be taxed accordingly to reflect their hidden costs.
Externalities are a key challenge and not easy to measure and deal with through regulation, law, or litigation. It is fairly straightforward to force factories to “internalize” pollution. A factory might initially release pollution out a smokestack or dump it into a river because it’s less expensive than designing and deploying production processes that don’t pollute. But landowners nearby and downstream suffer the consequences of this pollution. State regulations can fine companies for polluting and force them to reduce pollution. Alternatively, property owners nearby and downstream can take go to court asking for compensation or cessation of the factory’s pollution.
There is a long debate over whether the legal system or the regulatory system is best suited to address water and air pollution. Pollution Controls, an Encyclopedia of Economics entry, begins with skepticism of top-down pollution regulations:
There is general agreement that we must control pollution of our air, water, and land, but there is considerable dispute over how controls should be designed and how much control is enough. The pollution control mechanisms adopted in the United States have tended toward detailed regulation of technology, leaving polluters little choice in how to achieve the environmental goals. This “command-and-control” strategy needlessly increases the cost of pollution controls and may even slow our progress toward a cleaner environment.
Is the Common Law the Solution to Pollution, (PERC, June 9, 2011) notes:
…Many major environmental concerns are related to pollution. Such problems arise out of conflicts between competing property uses. Activities undertaken on some lands cause the generation of waste streams or other byproducts that, when uncontrolled, infringe upon the use and enjoyment of other lands or degrade resources that are held in common. Air and water pollution are prime examples, and global environmental concerns, such as climate change, loom large on the horizon.
The common law developed over centuries to address and resolve community disputes and social frictions, including pollution. The common law rule for rivers that flowed through private property was that the water quality needed to be as good when it flowed out as when it flowed into private land. So though a landowner could do what he wanted on private property, if he polluted the water, downstream landowners could take him to court for compensation. No legislature or parliament passed this regulation, instead it was “judge-discovered” law from adjudicating disputes in common law courts. See, for example: The Common Law Solution to Water Pollution (April 1, 1992):
Before passage of the Clean Water Act (CWA), the right to pollute water was determined primarily by state common law rules of nuisance and of water rights. The common law rules were strict. As a Texas court noted, “any corruption of water which prevents its use for any of its reasonable purposes is an infringement of rights of riparian owners.”[1]
For water pollution it is much less complicated to deal with factory pollution than “non-point source pollution” caused by hundreds or thousands of farmers or families fertilizing fields and lawns. Tiny amounts of fertilizer can flow off private property ending up polluting lakes and rivers. How could damage caused to downstream landowners and fisheries be priced into bags of fertilizer? Some farmers are more careful and little fertilizer or pesticide escapes their property. Other farmers are more careless and much more pollution flows off their land.
Externalities: Prices Do Not Capture All Costs (Finance and Development, International Monetary Fund) explains:
Consumption, production, and investment decisions of individuals, households, and firms often affect people not directly involved in the transactions. Sometimes these indirect effects are tiny. But when they are large they can become problematic—what economists call externalities. Externalities are among the main reasons governments intervene in the economic sphere.
Many then look to taxation as a way to address the WHO motion by pricing pollution costs into production:
In The Economics of Welfare, British economist Arthur Pigou suggested that governments tax polluters an amount equivalent to the cost of the harm to others. Such a tax would yield the market outcome that would have prevailed with adequate internalization of all costs by polluters. … Some economists argued that market mechanisms can correct for the externalities and provide for efficient outcomes. People can resolve the problems through mutually beneficial transactions.
Pollution is one “environmental burden” of producing goods relevant to in the WHO final motion, and post-use resource disposal is another. An aluminum can or plastic bottle has a cost of production, but perhaps also a cost of disposal. If careless users throw empty cans and bottles out their car window, or drop them along streets, someone has to pick them up and recycle or dispose of them. How can the costs of recycling or disposal best be incorporated into the cost of production, so the buyer pays for the full social cost of production?
Environmental burdens from todays goods might fall on future generations. A Value Clash? Freedom versus Intergenerational Equity, an Economic Thinking post for a 2014 Lincoln-Douglas topic, looks at United Nations claims over “ecological footprints” and “total biocapacity.” Maybe today’s developed economies are somehow burning up the Earth’s resources so that future generations will be trapped in a dystopian nightmare. This was a popular claim and fear in the 1990s. Discussing the Random House Encyclopedia, 1990 edition:
Will mankind crash into a natural resource wall in the not too distant future? An entry in the Random House Encyclopedia on “Earth’s dwindling resources” pictures a dump truck and charts the dates that reserves of key resources used to construct it “may be exhausted” (Third Edition, 1990, p. 290). Platinum and lead may be gone in 2000, mercury and zinc in 2010, silver and tin in 2015, copper in 2030. Reserves for thirteen metals are shown running out before 2050, with the implication that this dump truck and the rest of modern society may collide with natural resource limits in our lifetime.
This discussion is part of a study guide on Resources and Recycling prepared for teachers and students (and available as pdf here: FEE-Perc). A note to teachers and students in the Resources and Recycling study guide argues:
Environmental issues bring together many separate disciplines, including
science, politics, ecology, economics, and history. For students, environmental issues provide an opportunity to glimpse interconnections between these separate disciplines. …
Ecology and economics are closely related words, both meaning the study of interrelationships and connections—the study of complex cause and effect. Economic analysis can contribute valuable insights to environmental education and research. Entrepreneurs, Enterprises and the Environment takes its title from the understanding that it is human beings, individually and organized in enterprises, that will find solutions to today’s most pressing environmental problems. People are blamed for all manner of environmental degradation. But it is people too—with their skills as engineers, ecologists and entrepreneurs—who will steadily discover solutions to today’s pressing environmental problems.
This OECD publication, Environmental Taxation A Guide for Policy Makers (September, 2011), outlines the ways taxes can achieve the WHO motion to “oblige companies to price in environmental burden in the cost of their products.”
There are a great many challenges and complications, but the case for pollution taxes seems strong. Government regulations can mandate particular pollution-control technologies or limit the amounts of pollutants factories are allowed to release, but government regulators lack key information about costs. Some factories might be able to easily and inexpensively reduce emissions while similar reductions at other factories could put them out of business.
How might pollution taxes benefit from the local information that only factory managers have? One popular proposal are “cap and trade” policies. Los Angeles, for example, suffers from atmospheric inversions that hold emissions in. When officials decide what pollution levels are safe, they can cap total pollutants and grant “pollution permits” that basically allow current factories to emit the amounts of pollution they have in the past. Regions can decide that the ecosystem has a certain “carrying capacity” for emissions. That is, an amount of pollution that the local ecosystem can clear without hurting residents.
When pollution levels need to be reduced, rather than mandating that every factory and company has to reduce emissions by some fixed amount, say 10%, officials can establish a “cap and trade” system that encourages current polluters to earn income from reducing pollution substantially when they can. So a barely profitable company could choose to shut down and sell its “pollution permits” to a more profitable firm. Other companies can buy and sell pollution permits from each other, and the city or region can “tax” each pollution permit exchange by, say 10%, so the more pollution permits are exchanged, the faster total pollution levels fall.
Pollution reduction is a natural process even without “cap and trade” systems because technology innovations tend to reduce emissions as they become more efficient. Low-till and no-till farming significantly reduces pesticide and fertilizer runoff but the incentives for farmers is more to reduce the amount they have to spend on fertilizer and pesticides which are usually expensive.
Similarly, automobiles pollute less as their engines become lighter and more fuel-efficient. Even without federal mileage regulations, car manufacturers know that car buyers prefer higher-mileage cars. The 2016 VW Jetta has a small (by U.S. standards) 1.4 liter engine, but with turbocharger it has plenty of power. Highway mileage is 40 miles-per-gallon, far higher than VW Jettas of the 1990s and early 2000s. Current Jettas use less gasoline, emit fewer pollutants, and are smaller and lighter, requiring less raw materials to produce. And the factories that produce them use less energy and pollute less.
Consider car pollution success in Los Angeles, as reported by Treehugger LA’s Pollution from Car Exhaust is Down 98% from the 1960s. Even as LA’s population has increased a lot since the 1960s and gasoline use tripled, emissions are way, way down:
In fact, the National Oceanographic and Atmospheric Administration has just released a new study of the air quality in Los Angeles, and the findings are stunning. They corroborate my almost fantastical impressions of the gridlocked city: Since the 1960s, the amount volatile organic compounds (VOCs) found in L.A.’s air has declined by an astonishing 98%. VOCs are primarily the products of car exhaust, and are among the biggest contributors to the city’s air pollution problem. They’re “a key ingredient in the formation of ground-level ozone, which, at high levels, can harm people’s lungs and damage crops and other plants,” NOAA says.
So what counts as a pollutant?
A big, big challenge with “cap and trade” approaches to pollution reduction is deciding what counts as a pollutant. Originally the U.S. Clean Air act along with pollution regulations in other countries, restricted smoke and chemical pollutants that harmed people and ecosystems.
As concern about global warming or climate change increased, more and more environmental organizations and regulators called for carbon dioxide (CO2) to be considered a pollutant too, and included in pre-existing environmental regulations like the Clean Air Act.
That then involves at least two separate debates, one about increased CO2 contributing to climate change, and the second over whether new legislation or treaties restricting CO2 emission regulations require legislation, or whether federal executives and bureaucracies can enact these measures on their own.
Industrialization and economic growth are seen by many as a problem, and source of increased environmental burdens. But the opposite is also the case. In Environmental Quality, (Library of Economics and Liberty) economist Terry Anderson reviews environmental progress in recent decades:
There are many different measures of environmental quality, and most of those in use show that environmental quality is improving. For example, from 1970 to 2000, concentrations of carbon monoxide, a pollutant, fell by 75 percent in the United States and by 95 percent in the United Kingdom. From 1975 to 2000, nitrogen oxides declined by 35 percent in the United States and by 40 percent in the United Kingdom. The percentage of beaches in Denmark not complying with local or European Union regulations fell from 14 percent in 1980 to approximately 1 percent by 2000. Between 1969 and 1994, DDT and PCB contamination of fish fell by more than 80 percent. Indeed, it is difficult to find measures indicating that environmental quality is deteriorating in countries enjoying relatively high incomes.
The correlation between environmental quality and economic growth is incontrovertible. Comparing the World Bank’s environmental sustainability index with gross domestic product per capita in 117 nations shows that richer countries sustain environmental quality better than poorer countries do (see Figure 1).1 Indeed, every systematic study of environmental indicators shows that the environment improves as incomes rise. When per capita incomes reach $4,000 to $8,000 (this would include countries such as Brazil, Ukraine, and Indonesia, for example), arsenic pollution, sulfur dioxide emissions, and deforestation decrease, while dissolved oxygen in streams, a necessary element for healthy aquatic plants and animals, increases.
See also this related Economic Thinking post: