Economics for a Sustainable Planet

From the Foundation's 1996 Annual Report

The key unanswered question in all countries, in every region on Earth, is how to accommodate economic development without jeopardizing both the local and global environments and undermining the human prospect.

No region on Earth exemplifies this tension better than China. Its struggle to supply energy for its growing economy will have tremendous consequences for the health of all Chinese people and for the global environment. China intends to build more than one hundred new power plants over the next decade. Most of these plants will be coal-fired, and it is far from clear what type of environmental controls—if any—will be exercised. One estimate foretells that China will burn over three billion tons of coal annually by the year 2050. Even that scenario is based on slower than expected economic growth and considerable, almost heroic, policy intervention to reduce the use of coal.

Finding ways for economic forces to support rather than undermine environmental protection is essential. Elegant and attractive in concept, this approach faces significant but not insurmountable obstacles. Foremost among these is the economic reality that markets do not fully incorporate social and environmental damages in the costs of goods and services. Sometimes the costs are difficult, if not impossible, to relate to economic measurements, such as determining the "cost" of watershed degradation. Other times, the costs are difficult to establish precisely—for example, decreases in agricultural productivity resulting from ozone and acid rain produced as a consequence of burning fossil fuels, or loss in reading skills and increased tendencies to engage in violence among American children as a result of exposure to lead in gasoline, paint and other sources. Even when the costs can be estimated, the separation between the users and producers versus those bearing the costs renders simple market mechanisms inadequate. The most dramatic example here is the impact of decades of fossil fuel use by developed countries, especially the United States and Europe, on the small island nations of the world, whose very territories stand at risk from sea level rise caused by global warming.

One partial but important remedy is the "polluter pays principle," by which producers of pollution would be charged taxes or fees for polluting. This additional "cost of production" would then be included in the price charged for their products. Not only could the fee or tax then be allocated toward remedying the damage caused; more importantly, the impact would be to level the economic playing field for alternative products that did not pollute or cause as much damage. This approach encourages efficient abatement, yielding more pollution control at the lowest possible cost. By ensuring that energy consumers pay for their pollution, governments can achieve a "least-cost" environmental policy that reflects appropriate amounts of pollution control.

The foundation is also supporting efforts to correct these market imperfections through tax shifting—focusing taxes on pollution rather than employment. Economists support this approach because it simultaneously discourages pollution and encourages employment. Advancing solutions to environmental degradation such as tax shifting and a "polluter pays principle" are essential to creating a sound system of environmental economics.
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