Lynne Kiesling
Today’s Wall Street Journal has a commentary from Al Gore and David Blood that asks the question: when will we start accounting for environmental costs?
Gore and Blood begin by invoking the concept of sustainability, and the relationship between capitalism and sustainability. Sadly, they do not bother to define what they mean by either term, and as “sustainability” is a very wooly concept, they can proceed to use it as they see fit to suit their argument. The Wikipedia entry on sustainability, which is extremely thorough, offers some insight into the breadth, and subjectivity, of the various definitions of sustainability.
I have always been quite skeptical about the definition and uses of the concept of sustainability, particularly when they start from a position of antagonism between long-run resource supplies and economic growth. This antagonism is implicit in Gore and Blood’s introduction to their commentary today, and reflects the widely-held belief in “the sustainability crowd” that resource preservation and economic growth are incompatible.
I reject that argument. Resource preservation and economic growth can be compatible. Under what conditions are they compatible? Under conditions in which information about relative resource scarcity can be communicated across time and place in a low-cost manner. In other words, clear price signals and complete capital markets are the fundamental foundations of aligned economic and environmental sustainability. Capital markets provide agents in the economy with ways to shift resource use through time depending on the intertemporal opportunity costs they see. As a resource becomes more scarce, its price rises. Instruments like futures contracts and financial derivatives enable agents to communicate information about expected future scarcity and opportunity costs into today’s resource use decisions.
But what do we need to have clear price signals and complete capital markets? In reality, completely clear price signals and full caital markets are impossible, but the way to get them as close to that benchmark as possible is to focus on reducing transaction costs and increasing the clarity of property rights definitions. When transaction costs are low and property rights are as well defined as is economical, then scarcity information flows across time and space.
Thus I think Gore and Blood come at the question of accounting for environmental costs from the wrong direction. Not surprisingly, they think top down, and want to see accounting costs reflected in national income accounts. Gore and Blood put too much trust in national income accounts, when they should instead be focusing on the fundamental economic and policy reasons why agents do not take into account the interdependence of their actions.
In other words, if Gore and Blood want, as they say in their commentary:
Not until we more broadly “price in” the external costs of investment decisions across all sectors will we have a sustainable economy and society.
then they should advocate policies that reduce transaction costs and create better opportunities for agents to trade off their decisions across time and space. That means better-defined property rights and using capital markets. This idea may currently be anathema to those who think that economic growth and resource preservation are incompatible, but if those people are really intellectually committed to resource preservation, then they should advocate this approach instead of the business-as-usual political, regulatory, top-down approach.
Messrs. Gore and Blood should think more bottom-up than top-down if they want to see that alignment happen.
Monetizing environmental externalities costs is an issue that rears its ugly head every decade or so, as soon as most people have forgotten the last round of discussions of the issue.
In the mid-1990s, the protagonists could not even agree on the method of calculating externalities costs: damage cost or control cost. There was no semblance of agreement on the values to be used under either scenario. California, which preferred the damage cost approach, had three separate values for damage cost: one for emissions in the LA basin; one for emissions in CA outside the LA basin; and, one for emissions outside CA to serve markets in CA. One might suggest that this approach was just a bit cynical! I certainly would.
Establishing environmental externalities costs is an effort which could occupy a legion of environmental scientists and a gaggle of politicians until the second coming. As an experimental economist, Lynne apparently holds out some hope for a bottom-up approach to the issue. As long as politicians are involved in the process, this old techie holds out no hope for any approach.
My favorite American philosopher, Yogi Berra, is reputed to have said: “You’ve got to be careful, if you don’t know where you’re going, because you might end up somewhere else.” That is a risk with an uninformed and unscientific approach to environmental externalities.
Blood and Gore? Is that real? LOL.
Blood and Gore? Is that real? LOL.
I haven’t read the WSJ article (it’s requiring a login), but I’m not so sure that’s what Blood and Gore are talking about.
I think there is a lot of concern that a lot of countries receiving or trying to receive aid or foreign investment are punished or rewarded based on their GDP. It becomes like their “credit rating.” This metric does nothing to consider the value of resources, except for resources that have been consumed and are in this year’s GDP. Countries actually are given an incentive to discount the value of their natural resources, except as those resources can increase their chances of improving their aid or investment outlook. The point that Gore at least has made in the past is that as such countries squander their resources, their credit rating ought to go down, not up. Well, depending on the value of the goods produced, it maybe shouldn’t go down, but it should at least have an appropriate component of downward pressure due the the lost resources.
I have to agree with Ed. I don’t see bottom up working here as the only approach. Blood and Gore are right. Top down has to be part of the approach on this one. Theoretically, investment by private firms should consider the value of remaining resources (which might be a kind of bottom up approach), but they tend to follow some of the same rating rules of other large institutions giving aid, whose reform would need to be at least partially top down.
Tom,
I know that I am trying to raise another issue from theirs, and that’s my point. I agree that it’s not a binary either-top-down-or-bottom-up thing. But to the extent that influential people like Gore and Blood fail to incorporate the effects (good and bad) of taking the institutional, bottom-up approach and incentives, they will create bad policy.
Tom,
I know that I am trying to raise another issue from theirs, and that’s my point. I agree that it’s not a binary either-top-down-or-bottom-up thing. But to the extent that influential people like Gore and Blood fail to incorporate the effects (good and bad) of taking the institutional, bottom-up approach and incentives, they will create bad policy.
BTW, I forgot to point out that Mark Thoma substantially excerpted their column Environmental Economics.