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Green economics.

The Review is pleased to give hospitality to the deliberations of the Clare group but is not necessarily in agreement with the views expressed. Members of the CLARE Group are M.J Artis, A.J. C. Britton, WA. Brown, C.H. Feinstein, C.A.E. Goodhart, D.A. Hay, J.A. Kay, R,C.O. Matthews, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent, MlF-G Scott, ZA. Silberston, J.H.B. Tew, J.S. Vickers, S. Wadhwani.

We all recognise environmental problems-thepollution of air and rivers, the destruction of rain forests, global warming. The article argues that environmental problems are less the result of inappropriate values than of an incorrect calculus, and that economic evaluation and economic instruments have a major role to play in the correction of that calculus.

The green prescription of lower growth as a means of reducing environmental damage is dismissed-if higher output is often the cause of the problem, it is also what enables us to afford to deal with it. Policy should start from an adequate evaluation of the costs and benefits of action and inaction; the article instances nitrate in water, where the costs of rectification seem out of proportion to any likely benefit. Market mechanisms-such as taxes and tradeable licences-are often the best way of tackling environmental problems; but economists are sometimes as naive about their general applicability as non-economists about the effectiveness of prescriptive regulation. 1. Introduction The environment is the problem of the moment. Politicians vie with each other in proclaiming their greenness, and a recent white paper, The Common inheritance, has set out the government's approach. The words of its title indicate two major dimensions of the environmental issue. The first is what has been known for many decades as the problem of the commons: our neglect of assets for which we are responsible collectively rather than individually. When we refer to assets in this paper, we do so in a broad sense which encompasses the air and the landscape as well as those things that are readily tradeable. The second dimension is the problem of inheritance. In this there is a sense that the legacy we offer to future generations may be inadequate, depleted and degraded.

This article seeks to make the important distinction between these two aspects of current environmental concerns. By our neglect of collective assets we impose damage on each other. When we pollute a beach with inadequately treated sewage, most of the unpleasant consequences are immediate. We do it because in discharging sewage we treat the environment as if it were a free good. But for those who use the beach, it is something that they value. Those who use the beach may be the same people as those who bear responsibility for the pollution. In any event, the problem rests in an externality-the absence of a direct connection between the originator of an activity and the costs which that activity imposes. The problem lies in an inconsistency in our calculus, and the solution to it is correcting that calculus-in ensuring that our decisions about how to treat sewage truly reflect our individual and collective preferences for an unpolluted beach. When we do recognise our error and impose restrictions, the damage to the beach can, in most cases, be rectified relatively quickly.

But the word inheritance implies something more, and something different. In emphasising inheritance there is a suggestion that the current generation is cheating its children and grandchildren-that we are behaving selfishly, and using up an environment which we ought to preserve more adequately for future generations. The argument here is not that our calculations are wrong, and that our decisions do not reflect our true preferences. Our calculations of our own best interests are correct, and our selfish decisions reflect our improper preferences. The argument here is one for moral, rather than economic, reform and it leads to the recommendation that we should restrain our current consumption, in both general and specific ways, for the benefit of posterity.

These problems inevitably interact, principally because many environmental problems take time to emerge. The benefits from the use of chlorofluorocarbons CFCS) were obtained yesterday; the hole in the ozone layer is observed today; the consequences arise still later. Yet the distinction between the two aspects of the issue remains. We may have used CFCS as we did because we did not understand what we were doing or because, although we did understand what we were doing, we failed to implement collective mechanisms of restraint. Or we may have done so because we well knew what we were doing and had little regard for the consequences because they were in the future rather than the present. The first is a problem of calculation, the second a problem of ethics.

Most of all, our transactions with the environment have no monitor. In everyday economic exchange, each side ensures that the other deals reliably and fairly. The greater the number of those concerned, the harder is it for such agreements to be reached. When we deal with the environment, we can only monitor ourselves, and if we cheat, we cheat each other. Sometimes we appoint a monitor to keep ourselves honest, and here the problem of enforcement becomes a crucial one. The variety of mechanisms we apply are discussed in Section 5 below.

In this article, it is argued that the principal environmental problems we observe are not, in the main, the result of the product of an inappropriate pursuit of the interests of the current generation-, they derive from a failure to perceive correctly what the interests of the current generation are, or to establish mechanisms that properly reflect them. If this view is correct, it implies that in approaching environmental issues we should concentrate rather less on exhortation to change attitudes and values and rather more on achieving a better understanding and implementation of the consequences of the attitudes and values which we already have. This view also has implications for the identification of those environmental issues which are of serious concern and those which are not. It can be argued, for example, that it is right that we should worry about acid rain but that concern that we are using up non-renewable resources too quickly is largely misplaced. This view also has consequences for the environmental measures which should be adopted-if the fault lies with our calculus, the principal remedy lies in the correction of that calculus, and in tackling the sometimes difficult problem of ensuring that individuals take heed of the consequences of everyone considering only the negligible effect on him of his own actions. In this role, economic evaluation and economic instruments have a major role to play.

Section 2 of the present article describes some of the most important current environmental concerns and identifies the economic problems or market failures which give rise to them. Sections 3 and 4 explore the two issues defined above. In Pigovian terms-and Pigou was the first economist to consider systematically what we would now recognise as environmental problems-Section 3 is concerned with the issue of defective telescopic faculty and Section 4 with problems of externalities.

In Section 5 the variety of economic mechanisms available for dealing with environmental problems is considered, while Section 6 reviews why these have failed in Eastern Europe. in Section 7 two specific, although central, environmental concerns are analysed-water-borne nitrate and air-borne sulphur dioxide-and their evaluation, their effects, and the measures which might deal with them are considered. 2. Some environmental problems(1) The economic problem of the environment is well encapsulated in a famous question posed by Joan Robinson-Why is there litter in the public park, but no litter in my back garden? This formulation of the problem draws our attention immediately to the variety of solutions. One is to parcel out the public park into private gardens. This would, of course, result in the loss of the park but it emphasises the way in which environmental problems frequently result from the absence of well defined individual property rights in collective assets. Another approach is to exhort people not to drop litter in public places. A third is to impose penalties on those who do not obey such exhortations-to make them personally liable for collective consequences-and to appoint enough inspectors to enforce the penalties. Yet another approach is to employ a man to go around and pick up litter after it has been dropped. In keeping our parks clean, or attempting to do so, we need to make use of all these solutions, possibly employing several of them at the same time. The same is true of our dealings with the environment more generally.

Some environmental problems closely resemble the litter in the park. The deposit of untreated sewage in the sea pollutes beaches further down the coast. Sulphur dioxide, created as a by-product of combustion, poisons the local atmosphere and may be deposited, as acid rain, many thousands of miles from where it is produced. Nitrate, used as fertilizer or created as a product of decaying organic matter, is gradually leached into rivers and estuaries. In Section 7 of this paper we consider these latter sources of pollution in some detail.

CFCs are gases which have commonly been employed as aerosol propellants and as coolant in refrigeration processes. They rise when released, and it is believed they react with ozone in the upper layer of the earth's atmospheric gases, reducing the capacity of the atmosphere to filter ultraviolet rays from the sun. Their efforts supplement those of natural processes which lead to ozone destruction. Somewhat more expensive substitutes are available for CFC gases in all their principal uses. The Montreal Protocol of 1987 agreed a programme for the planned reduction of consumption of CFCS.

The production of carbon dioxide is an inevitable consequence of the burning of fuels which contain carbon-principally coal and oil. Plants consume CO[sub.2], so that atmospheric carbon dioxide is transformed into carbohydrate during the growth of vegetable matter. Increases in the rate of energy consumption, combined with deforestation, have increased the net production of carbon dioxide, thus increasing the opacity of the atmosphere of the earth. It is believed that this may lead to an increase in the average global temperature, although the amount and timing of such increases are subject to much speculation and dispute. Car and truck exhausts give rise to emissions of carbon monoxide, nitrogen oxides, smoke and particulates, as well as CO[sub.2]. The introduction of catalytic converters in cars will reduce some of these emissions, but will lead to an increase in emissions of CO[sub.2].

Other environmental concerns relate to the quality of the man-made infrastructure. We see the decay of inner cities creating an ambience which discourages others from living and working there, so exacerbating the initial problem. Growing traffic creates additional urban congestion, and within urban areas we impose noise and pollution on each other.

industrial activities are rarely aesthetically attractive, but they have to be placed somewhere. The interaction between industry and natural environment raises problems. The growth of modern agricultural output has required the destruction of hedgerows and led to the creation of much larger fields. The prevalence of crops like oil seed rape, which lack the visual appeal associated with traditional pastoral scenes or swaying fields of growing corn, has been encouraged by the pricing structures set under the Common Agricultural Policy. Deforestation often reduces visual amenity and causes land degradation, and the kind of reforestation which has been characteristic of the 20th century reduces it also.

Modern societies depend on natural resources, but the ways in which they are exploited have important consequences. There is reiterated concern about the rate of depletion of non-renewable resources, particularly carbon fuels. We need to find regimes for governing, or limiting, the extraction of natural and mineral resources of the oceans and of Antarctica. We see species as varied as whales and elephants endangered by commercial exploitation.

And we are all concerned about the quality of the goods and services which we buy. Most water requires treatment before it is fit to drink, and this would be true even if it were obtained from sources free of man-made pollutants. The standards of what we are willing to drink may change. Some of the demand for organic produce reflects concern for the environment-since plants cannot distinguish one nitrate ion from another, there can be no difference, on this ground alone, in the flavour of artificially or naturally fertilised produce. Others result from concern for the produce-pesticide residues can, and do, affect both the flavour and safety of what is eaten.

It is widely supposed that environmental standards are declining. At least as far as air and water quality, in England and Wales are concerned-which are the items most regularly and objectively monitored-they are not. In 1958, 13 per cent of non-tidal rivers and 27 per cent of tidal rivers in England and Wales had poor or grossly polluted water quality; in 1980 these figures were 7 per cent and 16 per cent respectively. Sulphur dioxide, black smoke and C02 emissions have fallen markedly in the last decade, although CO production (for which motor vehicles are significantly responsible) has increased (Tables 1 and 2). UK government action through, particularly, smoke control legislation and restrictions on discharges into rivers has shown positive results, and improvements in other Western countries have taken place also. Table 3 shows how river quality has generally improved although not everywhere.

Despite the extreme variety of these environmental concerns, the reasons for believing that either our collective or individual choices are inappropriate fall into several categories (Table 4). It may be that the environment is an issue because our individual preferences have changed. Some people believe that we are moving towards a culture which attaches less weight to material goods and more to aspects of the natural environment. Others believe that we should. To the extent that this is true-and the evidence for it as an economic phenomenon rather than a political one remains quite limited-it will have substantial effects on the structure of production. The time dimension of our actions is also important. We may be engaging currently in actions whose adverse consequences will not manifest themselves for many years. Or it may be that we now have better scientific evidence on what the consequences of these actions are. And the collective dimension matters too. We may suffer from institutions, and absence of institutions, which lead us to make choices which are inferior to those which better informed decision-making, with full regard to the collective as well as the individual dimension of our choices, would allow. 3. Damage to future generations Many environmental issues are long-term in nature. Actions we take today may not have a recognisable effect for many years-as with global warming -or even for centuries, as with the seepage of pesticides into ground water. From the point of view of our own generation, we need not worry about many of these long-term effects,. since they will do us no harm. We are nevertheless concerned about them for the sake of future generations. incentives for preventing damage Many environmental concerns arise from a belief that we are likely to take inadequate account of the needs of future generations in today's decisions. In certain respects we, as individuals, may have little choice. National governments, or bodies such as the EC, lay down environmental regulations that have to be adhered to if legal penalties are to be avoided. In this case, the authorities concerned have decided that certain activities should be forbidden, for the sake of present and future generations, just as they preserve public capital for their benefit. In their view the benefits, as they assess them, outweigh the costs, and the costs have therefore necessarily to be borne by the relevant actors in society-probably on the basis that 'the polluter pays' (see below), at least in the first instance.

But it is important to recognise that we do not need to rely on coercion to give us an incentive to pass on benefits to future generations. Many of today's capital assets are sold by their owners to members of later generations. This applies to environmental assets as well as houses. shops, buildings and machinery. Consider a trout stream, a farm with its associated buildings, a beach front hotel, a stock of natural resources. The better the condition these assets are in, the higher the price that will be realised for them. Purely selfish motives, therefore, motivate a policy of preserving and improving assets-so long as property rights in these assets exist. The intergenerational environmental problems which should concern us relate to assets for which no adequate structure of property rights exist-such as the atmosphere, and not to those for which they do-such as natural resources. In addition, the bequest motive is a strong one. Many people are motivated to leave assets to their children and grandchildren. Apart from this, there is a widespread feeling of responsibility for future generations-that we should not make things worse for them, and if possible should make things better. The bequest motive goes beyond ourselves and our own descendants. We are willing to make sacrifices in the present for individuals who will be living in the future in far distant countries, although possibly the sacrifices will be smaller the more remote the individuals concerned in time and space. We are also willing to make sacrifices to prevent damage to amenities, now or in the future, that we may never see or hope to see. The high valuation often given to this option' or 'existence' value is an important constituent of the sum total of the environmental benefits that we seek. (The economic formulation of this idea is due to Henry (1 974).) Sustainable development Our concern for future generations is measured by the capital stock which we choose to pass on to them. A minimal objective would seem to be that of 'maintaining capital intact'-leaving to posterity at least as valuable a collection of assets (including biological potential) as our predecessors left to us. The word collection is important here. There exist assets which we can only run down-like the stock of coal or other non-renewable resources-and to insist we maintain a prescribed physical quality of these would be to put a stop to all economic activity. But we can compensate for this depletion by improving other aspects of our environmental legacy-there are derelict sites that can be improved, polluted rivers that can be cleaned up. More broadly, we can substitute manmade capital for the assets we have used-we can leave bridges and buildings, a better infrastructure, a greater stock of scientific knowledge.

Knowing whether we have reduced or increased the overall capital stock does not depend primarily on our own values. It depends on our assessment of the values which future generations will attach to different kinds of asset. We can be certain only that future generations will appreciate very different aspects of the environment from those we emphasise. The Romantic poets' attachment to the Lake District was quite out of tune with popular tastes of their day, but even for Wordsworth it was of the view from Westminster Bridge that he wrote, 'Earth has not anything to show more fair'. We in turn now see Ribblehead Viaduct, the Forth Bridge and Paddington Station as important parts of our heritage but regard new motorways and airports as environmental affronts. The practical implication of this uncertainty about future tastes is that, when possible, we should eschew actions which are irreversible, thus preserving for future generations as many options as possible (Pearce et al (1989)).

The notion of sustainable development was put into common usage by the 1987 World Commission on Environment and Development (the 'Brundtland' Commission). Here sustainable development was defined as the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs. Put this way, the idea of sustainable development appears to be akin to that of keeping capital intact..

But the inclusion of the word 'development' implies that there should be economic growth also. This is clearly needed in order to raise the very low living standards of many parts of the world. From the narrowly economic point of view, we should aim both to raise living standards and to increase the stock of material wealth. We cannot divorce the idea of sustainability from the costs involved in attaining a desirable environment. Also, when costs are at issue, the question arises of who pays these costs. This raises questions of equity-of desirable income distribution and of the incidence of taxation.

Sustainable development needs to be looked at from an international, as well as a national point of view. Several environmental problems are international in nature--acid rain or global warming, for example-and joint international action may be needed to tackle them. In considering the costs of taking such action, regard must be had to the ability of different countries to pay. It may be necessary to consider some international sharing of costs, both because several countries may be involved in any particular problem, and also as a means of sharing the burden between countries of unequal per capita incomes.

Since costs are involved in environmental protection-often heavy costs-it is necessary to justify these by reference to the benefits received. it may be that certain questions, such as the prevention of global warming, are so extensive in their implications that they are not amenable to the exact measurement of benefits although approximate calculations should be made in all cases. Others, however, are sufficiently limited in nature for a reasonably precise calculation of benefits to be possible. This involves the problem of valuing various aspects of the environment-a problem that will be discussed below.

It follows that while the broad idea of sustainability does not seem difficult to comprehend, its detailed meaning in any particular case is very likely to be impossible to determine. There are two main reasons for this. The first is the breadth and complexity of the factors involved, making the calculation of benefits difficult. The second is the problem of inter-personal comparisons, which cannot be subject to objective evaluation, since some people will gain and some will lose by most environmental changes. That does not mean that the concept of sustainability is too imprecise to be of any value in decision-making. It is a reflection of a widely shared assessment that unless steps are taken to avoid it, much damage to the environment will take place, and future generations (even our own generation in many cases) are likely to suffer as a result. Action should therefore be taken to halt many of the present trends towards greater damage, and to rectify as far as possible damage to the environment that has already taken place.

As regards past damage, the implication is that instances of past industrial and other devastation should be brought up to some acceptable standard; the standard to be reached by discussion among the interested parties, bearing in mind the increasing cost of reaching successively higher standards. As regards potential damage to the environment, the implication is that nothing should be done to damage the environment further, or that damage in one area should be offset by improvement in another. Return on investment Yet, with all these things noted,. preservation of the environment is simply one of the ways in which we invest for the future, and needs to be viewed in the context of all the ways in which we do this. We should look for a return on our environmental investment of no more, and no less, than we achieve in other forms of investment. It is by no means self-evident that investment in environmental sectors would be of greater benefit to posterity, now or in the future, than investment in capital projects of all types giving a market rate of return. Seen in this broad context, there is little to suggest that our concern for the future is inadequate. By all tangible measures, the capital stock and income levels which each generation in the developed world has passed on has been greater than that which it inherited. It is possible-although the present authors do not themselves believe it-that if a full accounting were conducted, which incorporated intangible as well as tangible elements in the calculation, this judgement would be reversed. But whether that is so or not, it follows that the weakness would rest less in the fundamental selfishness of our motives-our lack of concern for future generationsthan in the inadequacy of our calculations and our ability to enforce it. If we damage future generations by inadequate concern for environmental rather than material factors, it is for the same reasons that we damage ourselves, and if we rectify one deficiency it is probable that we rectify the other. It is to this issue that we now turn. 4. Damage to ourselves Those interested in the environment have long been concerned with the costs and benefits of actions which affect it. We have already noted the economic analysis of environmental issues developed by Pigou in 1920. External effects are generated for society which are likely to be detrimental, but for which no compensation is normally paid. Because of this, Pigou held that action was needed by government to bring about equality between marginal) social and private costs. These ideas have become translated into cost-benefit analysis, which typically attempts to measure the social costs and benefits involved in major investment schemes, for example, as well as the private costs and benefits. Such ideas have been introduced into decision-making on important environmental issues for many years-for example, in this country, in discussions regarding the Victoria tube line in London (Beesley and Foster (1968)), the siting of a third London airport (Roskill (1970)), or the building of a nuclear power station at Sizewell (Layfield (1987)). They also find expression in such techniques as Environmental Impact Assessment.

The Royal Commission on Environmental Pollution (a standing commission set up in 1970) has also long been concerned with the need to evaluate social costs and benefits in the context of pollution control. In particular, the twelfth report, 'Best Practicable Environmental Option' (BPEO) (1988), dealt with the subject at some length. It stressed, among other points, some of the difficulties in putting monetary values on certain benefits or detriments to the environment. It also emphasised that different interest groups in society might take different views on what is the best environmental option in particular cases. Social costs and benefits cannot be measured objectively and any assessment must depend on the values attached to the welfare of these divergent groups.

Welfare economics tends to emphasise marginal changes, but many questions relating to the environment are too far-reaching in their possible effects to be regarded as marginal only. One need only mention fears of global warming for this to be obvious. Analysis of these cases, in which very wide general equilibrium considerations are involved, is bound to be more difficult than that of cases with limited local effects. This does not of course mean that such situations cannot be analysed: it simply means that the examination of them needs to be approached with special care.

Externalities are of many kinds. Some arise where production or consumption activities interfere directly with the output or welfare of others. My electricity output is your acid rain. My cheaply disposed of waste is your spoilt holiday. Such externalities are not invariably adverse-my beautiful garden is an amenity for my neighbour-but many environmental externalities are unpleasant. Where such externalities involve relatively small numbers of generators and recipients, it is possible that efficient outcomes can be achieved by direct contracting between the parties, but as numbers on either side increase these solutions are less likely to be available. If contracts between parties can be made without cost (Coase (1960)), the allocation of property rights (do the players have the right to pollute or to be protected from pollution?) will have an effect on the distribution of income, but only a marginal effect on the outcome (the amount of pollution that is produced) and none on the efficiency of that outcome. With large numbers of players, contractual solutions are not feasible and regulation or other intervention is required in order to promote efficient outcomes. A closely related, but distinct, type of externality arises from the possibility of damage to collective assets. The atmosphere, the climate, and the ozone layer are archetypal examples of such collective goods, and the environmental problems associated with them are the result of damage to collective goods which results from individual action. These problems are particularly severe where, as in these examples, no single authority is responsible for the quality of these collective goods. These are very clear cases of environmental problems which follow from the absence of clear property rights in the asset concerned. If anyone owned' the atmosphere, he would take steps to protect it. But-as with the park-we all do, which means no one does.

The environment is also much influenced by the provision of public goods, or bads-goods which if they are available to one agent are available equally to all-and which will therefore be provided only collectively if at all. indeed, one of the current sources of environmental concern is that a period of restraint on public expenditure around the world has led to a tendency for the provision of public goods to grow less rapidly than that of private goods. So we are concerned about our transport system, our cities, and other aspects of our publicly provided infrastructure, most, if not all, of which are regarded as environmentally desirable.

Yet another category is those potentially private goods for which no property rights exist. Endangered species, or common resources-such as the minerals or the fish in the sea, are examples here. One mechanism for handling these problems is to award property rights to private owners and, in the case of resources like minerals, this has mostly proved an effective policy. For other resources, such an approach may be impossible to implement.

All these weaknesses result from deficiencies in the calculus within which environmental issues are evaluated. individual actions impose detriments on others which exceed the benefits to the originator, or else we lack collective decision-making processes which would permit us to take actions which we would recognise to be in our collective interest. It follows that if economic growth correctly measured the value of economic activity, actions which dealt with these environmental concerns would increase rather than reduce measured national income and economic growth. Occasional attempts have been made to create environmentally corrected national accounts (such as Nordhaus and Tobin (1972) and Repe]lo et al (1989)), but these have not been widely adopted, and indeed the subjective nature of the calculations involved means that the calculations are of illustrative rather than practical value.

The problems we have described arise because existing market structures yield inappropriate signals for our decisions. We go on to consider how market signals should best be modified. 5. Dealing with environmental problems Regulation The traditional way of dealing with environmental problems is by the enactment of regulations. One form of regulation is that which requires a firm or individual to adopt specific anti-pollution procedures, as with the management of farm silage and slurry. If these are not satisfactory, prosecution may follow. Another approach, which is becoming increasingly common, is to lay down maximum levels of emission content. This is true of certain chemicals discharged into rivers, for example-. if these limits are exceeded, prosecution may similarly result.

Since the Alkaii Acts of 1863 and 1874, air pollution has been regulated by the first of these methods. Here firms and institutions emitting pollutants to the air have been required to adopt the 'best practicable means' (BPM) for controlling these emissions. More recently the criterion to be adopted has become BATNEEC ('best available technique not entailing excessive cost'). This is in practice much the same as BPM. It demands the latest technology but accepts some limit on expenditure tailored to the financial capacity of firms. This may involve an agreement between firms and inspectors on a delay of some years before the newest technology is installed, but it can also involve the mandatory closure of polluting works.

Emission limits are increasingly widely prescribed, and European Community regulations are tending to replace national limits. They affect such matters as the disposal of industrial wastes and sewage sludge into the sea, emission standards for vehicles (together with the compulsory adoption of catalytic converters), and limits for discharges into rivers. In the case of air, there are at present three statutory air quality standards in Britain, which are also the subject of EC directives. These cover smoke and carbon dioxide, lead in air, and nitrogen dioxide. The World Health Organisation (WHO) also provides guidelines for a substantially larger number of pollutants.

The British government created the National Rivers Authority in 1989, with responsibilities for controlling pollution in inland, estuarial and coastal waters. It issues discharge consents, and has the duty of monitoring water quality and achieving national water quality objectives. It also controls abstraction rates as a means of protecting long-term water resources. EC directives cover, inter alia, the quality of drinking water, the standard of bathing waters, and the maximum permitted levels of discharge of harmful substances to sea and river waters.

The EC directive on dangerous substances established two lists of compounds whose concentration should be controlled in the aquatic environment. Pollution by the compounds included in List I (the 'Black List') is considered to be so objectionable that it should be eliminated, while pollution for List 11 substances (the Grey List') must be reduced. The UK Department of the Environment has chosen 23 'Red List' substances, on the basis of toxicity, persistence and so on, drawn from the EC's List I substances and some newer pesticides. Plans to make agreed reductions in the emissions of these have been drawn up, and some progress has been made. A feature of UK control of water quality is the emphasis on Environmental Quality Standards (EQS), which have regard to the overall quality of rivers etc. rather than to uniform emission standards. This recognises that uniform emissions of harmful substances can have very different effects, depending on the location of plants, the size of rivers and the speed of their flow. The aim is to direct policy towards overall river quality rather than the quantity of emissions at particular points. It is helpful to the UK, in pursuing this policy, that its rivers are entirely within its own borders. No continental European country is so fortunate. Market mechanisms These quantitative restrictions can be contrasted with the use of market mechanisms to control pollution. Here the aim is to give producers and consumers clear signals about the costs of using environmental resources. In the light of these producers and consumers decide how best to alter their practices in order to meet environmental needs. The beneficial consequences of this approach, if well devised, are that those who find it cheapest to reduce emissions make the biggest reductions, that there is an incentive to develop more efficient technology, and a continuing incentive not to damage the environment. A variety of economic instruments have been suggested for these purposes; a recent OECD report, for example, distinguished five types: charges, subsidies, deposit and refund schemes, enforcement incentives, and the creation of markets (by, for example, the issue of tradeable permits).

If full information is available to the regulator. precisely the same outcomes can be achieved by the control of either prices or quantities. As was first emphasised by Weitzman (1974), the quantitative approach may lead to different results from the market based if there is imperfect information. In environmental questions, where wide-ranging and complex factors are involved, information is inevitably imperfect and so too is the probability that there will be a lack of congruity between the two approaches. A market approach seeks to embody in prices, and in the evaluation of benefits, the environmental costs of any activity. Once this has been done, the equation of marginal social benefits and social costs should ensure an optimum solution-one which does not aim to eliminate all pollution, but to balance the costs of further elimination with its marginal benefits. Of course, regulatory and market approaches are not polar alternatives, and some combination of the two may be appropriate.

The implementation of a market approach raises two principal groups of question-who should pay. and how are environmental costs and benefits to be measured. The polluter pays' principle implies that the agent responsible for pollution should bear the costs of clearing it up. This may have a basis in equity, although there may be a sense in which pollution is the fault of the victim as well as the polluter-people who move to locations near Heathrow Airport must be presumed to know what that implies, and may be expected to share some of the consequences. The allocation of rights and responsibilities may also have efficiency consequences. It may well be, for example, that the cost of measures to clean up a river might be lower than the cost of preventing pollution from entering the river in the first place. It would then be more cost effective to clean up than to prevent. in that case the polluter may still be made to pay, but at a level which covers the costs of clearing up, rather than those of preventing the initial pollution. The choice of mechanisms for preventing or cleaning up pollution must, in practice, be very much governed by the costs of enforcement. Where there are many polluters, for example, regulation by inspectors may be ineffectual, and some form of tax or charge may well be more effective. Problems of valuation No environmental benefit can be regarded as 'priceless', in the sense that there is no limit to what should be paid to secure it. There are, however,. certain benefits which can be said to be priceless in another sense, in that they give rise to peculiarly difficult problems of valuation, The value of human life is one such benefit. Valuations made, for example, on the basis of the present value of a prospective future stream of earnings, have their usefulness, as has the size of damages awarded for death or injury in courts of law. But many would not accept that such financial evaluations are a sufficient way of taking account of possible losses to human life, which should not simply be measured as though they were comparable with, say, damage to property caused by river or air pollution.

Nonetheless, most environmental concerns can, at least in principle, be valued, although in certain cases there may be no way of arriving at a valuation which has any sort of precision. This is especially obvious when the various different reasons for valuing the environment are borne in mind. There is a 'use' value-a direct benefit to individuals from an improvement in the environment. Then there is an 'option' value-a benefit that individuals may want to enjoy at some stage in the future, such as visiting a beautiful natural feature. like the Grand Canyon. There is 'existence' value-a value placed on the existence of an environmental benefit which individuals may never expect to enjoy-such as the preservation of a rare species of bird in Latin America. We may think this because we might see that bird-or perhaps we may. even if we never hope to see it. value the bird because it is rare, and we do not welcome the idea of a reduction in the number of species.

Use value is the most likely of these to be amenable to some sort of precise valuation. In some of these cases there may be a market valuation to call upon-as in the different prices placed on similar houses faced with different degrees of aircraft noise. In others, a minimum valuation may derive from what individuals or communities actually prove willing to pay to avoid an environmental detriment or secure an environmental benefit. There is an analogy in industrial situations. where firms may voluntarily install pollution-prevention equipment in order not to be labelled as enemies of the environment.

It is, however, necessary in this context to bear in mind the difference between total and marginal benefit. A consumer may for example be willing to pay a considerable sum for a certain environmental benefit-such as the right of entry to a national park-while a low entry charge may be all that it is necessary to pay. The total benefit, less the charge (the consumer surplus), must be borne in mind in the context of any proposal to take some action detrimental to the existence of the national park. Conversely, the hundredth plane that flies overhead may be less disruptive than the first.

Option or existence value is clearly more difficult to value than use value, since no relevant economic activity may be involved. One obvious way of placing a value on such environmental benefits is to see what contributions are made to relevant charities or organisations, or to ask people what they would be willing to pay for the retention or improvement of the environmental amenities concerned. This last method has the well-known drawback that a declared willingness to pay hypothetical sums of money may exaggerate what people may actually be willing to pay if faced with the relevant situation. Indeed, many of the statements made in favour of environmental improvement seem on the one hand to give an infinite value to the improvement concerned, implying a willingness to pay large sums to secure them, while on the other hand to treat the costs involved as conveniently small, and therefore giving rise to no payment problems at all.

It is the difficulty of devising satisfactory market-based instruments, as well as a general prejudice on the part of governments in favour of the apparently more certain quantitative controls, that has led so far to comparatively little use of market instruments. Now, however, there is much greater interest in these instruments, either used in place of regulation, or in association with it. The use of appropriate marketbased instruments, possibly in conjunction with regulation, might combine the virtues of the polluter pays principle with those of least-cost pollution control. Examples of how market-based instruments might function in the case of nitrate in water and acid rain are discussed below. 6. Pollution in Eastern Europe Following the peaceful revolutions in Eastern Europe in the course of 1989 there have been many revelations about the extent of environmental damage in East European countries, and in the Soviet Union. It is natural to ask whether this damage has been due to a reliance on the organisation of production in terms of planning targets, rather than on the use of market mechanisms. As we have seen, there is no necessary link from market mechanisms to environmental damage, since in many market economies environmental improvements have been taking place. Have planned economies behaved differently?

The extent of environmental damage in Eastern Europe is a matter of some controversy. Some argue that in certain respects the East has lower pollution levels than in Western Europe-for example, from vehicle emissions. This argument looks less impressive than at first sight, bearing in mind the low levels of car ownership in many of these countries. But, in any event, there are many examples of environmental disaster in Eastern Europe on a scale far exceeding that to be found normally in West European countries.

Table 5 gives an overall impression of the state of the environment in Eastern Europe. it suggests that the problems are especially bad in Poland, East Germany, Czechoslovakia and Romania. Particular cases of environmental pollution give, however, a more horrifying picture. In East Germany the mortality rate for men due to bronchitis, asthma and lung diseases is said to be double the European average, and the highest in Europe. In parts of the southern industrial regions, life expectancy is three to eight years below the national average, and some 90-100 per cent of children suffer from respiratory diseases. in Czechoslovakia, there is a serious threat to drinking water from agriculture, and from the heavy use of fertilisers and pesticides. Some 70 per cent of the rivers are polluted by mining wastes, nitrate, liquid manure and oil, and 40 per cent of sewage is untreated. Of the river water, 17 per cent is of Class I quality (4 per cent only in Poland), as compared with the UK, where 90 per cent of river and canal length in England and Wales in 1985 was classed as of good' or fair' quality (Table 1). Pollution in the Danube in Hungary has been increasing (Table 3), although in most Western rivers it has been diminishing. There are numerous other examples of gross pollution. Several reasons for this suggest themselves. One is that the pressure to fill material output plans in these countries led to an emphasis on production at all costs. Ambitious production targets, together with the low priority given to consumer goods, led to a strong emphasis on heavy industry, which is potentially heavily polluting. Local energy and raw material resources were exploited, in spite of declining energy content and quality, because better alternatives could not be exploited, on account of a shortage of hard currency arising from the uncompetitiveness of domestic exports. East Germany and Czechoslovakia have large indigenous deposits of brown coal, which is heavily polluting in terms of high ash and sulphur content, and which also has low calorific value, so that the quantity needed is greater than that in the case of hard coal.

Price signals were often such as to lead to a waste of energy and other resources. Energy prices were generally below both world prices and costs of production. in Poland, for example, it is estimated that industry paid only about 40 per cent of the true costs of coal and electric power. In addition, the terms on which the Soviet Union has in the past supplied oil, gas and electricity to its Warsaw Pact partners were favourable to them, and not conducive to energy conservation. In some of these countries, fines existed for exceeding emission limits, but ministries and industrial concerns often budgeted among themselves for the money necessary to pay the statutory fines appropriate to the expected level of emissions, so that there was no disincentive here. One of the main causes of environmental degradation in these East European countries was the lack of concern on the part of the authorities. There were exceptions: in Poland and, particularly, Czechoslovakia, concern about environmental problems began to be officially expressed by the 1970s and 1980s, although academic and private concern had been evident before that. In general, however, environmental concerns were subjugated to the needs of production, and especially of the output of heavy industry. Public opinion was not effective either. In the first place, environmental education was poor, and concern about the environment much less than in Western Europe, although it rose steeply after Chernobyl. Perhaps more important, it was often dangerous for individuals and groups to express concern about environmental effects, since this was considered to be inimical to state policy. At base, the lack of publicly-expressed concern for the environment was the root cause of environmental degradation. Whatever the faults of the economic system, however biased the market incentives, however great the alternative calls on resources in these relatively low-income societies, it is inconceivable that such environmental damage would have been permitted in the face of widespread openly-expressed environmental concern. It is notable that in Western Europe, the United States (especially California), and elsewhere, the expression of public concern has been one of the main driving forces of the present powerful environmental movement. 7. Two case studies (a) Water-borne nitrate One of the most important, and potentially costly, elements in the European Community's environmental programme is the proposal to limit the nitrate content of water. In 1980 a Directive, accepted by all Member states, set acceptable maxima for 66 different substances that may occur in drinking water supplies. The Directive set the maximum admissible concentration of nitrate at 50mg per litre of water. A further draft Directive is under discussion which would limit the nitrate content of surface and ground water and coastal and marine water to the same level.

Water-borne nitrate has many sources. Rain water contains nitrate. The origins are not entirely clear, but there is some evidence that car exhaust emissions may be contributing to an increase in the level of rainwater nitrate. Decayed vegetable matter, and animal and human excreta are rich in nitrate. All soil contains a pool of nitrate, left over from organic crop residues of previous land use. Rain washes this into water courses and aquifers. Any disturbance to the soil, whether from ploughing or from other sources, will accelerate this process of nitrate leaching.

Nitrate is a key component of fertilisers, whether artificial or organic. Different crops take up different amounts of nitrate during the growing process-the amount available to be leached by subsequent rainfall varies widely. Modern seed varieties are designed to use specific amounts of nitrate, and variations in this amount can have substantial effects on yields. Livestock farming also employs nitrate and lower application rates require lower stock intensities. There is a natural process of denitrification by which, with time and temperature, nitrate in water decomposes into harmles nitrogen and oxygen.

The environmental consequences of nitrate concentrations in water are of two kinds. There is the impact on health of nitrate in drinking water. Two health issues have been associated with nitrate in water. There is a clear association between nitrate in drinking water and 'blue baby syndrome' but this syndrome is very rare. The last fatality from this illness in the UK was in 1950 and the most recent confirmed case in 1972. Excessive concentrations of nitrate have also been shown to produce cancers in some animals. However the evidence linking nitrate to cancer in humans is very weak and often contradictory. The Environment Committee of the House of Lords, reviewing the scientific evidence, concluded that health risks were not material at levels of concentration well above those contained in the existing Directive and called for a reappraisal of the new draft Directive.

Nitrate is also associated with eutrophication, the process of enrichment of water by enhanced nutrient content. The change in the ecological balance which results may have effects on fish and animal life and on the balance between soil and water. In the main, plant growth in inland waters is limited by the availability of phosphorus rather than nitrogen, so that phosphate concentrations are critical but nitrate levels are of small importance. At sea, the relative abundance of these two elements is reversed. There is evidence that nitrate based eutrophication is causing damage to the Norfolk Broads, although phosphate is the greater problem.

Water, and hence nitrate concentrations may take a long time to filter through aquifers. The highest concentrations of nitrate in the UK are to be found in eastern areas of the country where chalk prevails and here it can take 40 to 50 years for water to arrive at an extraction point. The consequence is that changes in nitrate leached from the soil will not emerge as an effect on the nitrate content of drinking water, or of surface water in some areas, for some considerable time.

The nitrate content of water can be reduced in one of two ways-by changing the pattern of agricultural production and land use, or by treatment of drinking water. The wholesale conversion of most arable land in East Anglia for livestock grazing would reduce the average nitrate content of ground and surface water by around 1 0 per cent. This would achieve partial, but not complete, compliance with the drinking water standards in the existing Directive, and the UK would still be in extensive breach of the proposed draft Directive on ground and surface water. The removal of East Anglian land from agricultural production altogether-to unfertilised grassland or woodland-would have somewhat larger effects although still not enough to achieve universal compliance. A 10 per cent reduction in the application of nitrogen fertiliser by, for example, quotas on the use of fertilisers or a tax on the use of nitrogen fertilisers would reduce the average level of ground and surface water nitrate by no more than 1 mg per litre. Similar effects could be achieved by improvement in farming practice-there is evidence of over-application of fertiliser and of excessive soil disturbance accelerating nitrate leaching. Control of farming is in general an expensive, and not very effective, means of reducing waterborne nitrate.

Alternatively, nitrate can be removed from drinking water by treatment. This may be accomplished by extended storage of water to permit natural denitrification, by mixing high and low nitratecontentwaterto bring all water supplies to the critical level or by chemical treatment processes. The cost of treating all UK drinking water to meet EC standards is of the order of 100 million pounds per annum. It is not realistically possible to treat ground and surface water.

We believe there are some grounds for concern about nitrate levels in water. However, the existing and proposed Directives impose an absolute standard for water quality without estimate of either the costs or the benefits associated with this standard, either in aggregate or in particular cases. People would prefer to drink water with a reduced nitrate content, although we are less sure that they would wish to pay 10 per cent more for their drinking water in order to achieve this, especially if properly informed. Given that there is no evidence that nitrate is seriously damaging to health, except in high concentrations, the target level should take account of the costs of achieving that particular target, which vary very considerably in different areas of Europe. Restraint on agricultural production, or changes to more environmentally friendly methods of agricultural production, are virtually useless as remedies for the problem. Even if spectacularly large in scale, they are very much less effective in improving drinking water quality than treatment of polluted water. The new draft Directive on ground and surface water quality imposes standards without apparent consideration of whether there are any feasible mechanisms by which these standards could be met. (b) Sulphur dioxide Sulphur dioxide pollution is mainly caused by burning coal with a high sulphur content. With the decline in the use of smoke producing domestic fuels, most sulphur dioxide is now a product of large combustion plants. Electricity generation is responsible for about three quarters of all sulphur dioxide pollution in the UK. Most SO[sub.2], is deposited, in dry form, relatively close to where it is produced, but some of it is windborne, sometimes for considerable distances. It is often washed down in rain. This is the phenomenon of acid rain, which may occur in countries far away from those in which the pollution is generated. Britain is well placed in this regard; it is at the extreme west of a continent subject to prevailing westerly winds. The result is that our sulphur emissions are deposited in significant amounts in Scandinavia and Central Europe, while very little of their residue is deposited here.

Local deposit of sulphur dioxide products may be seriously damaging to health. Sulphur dioxide was a key element in the fatalities which resulted from the great smogs which were characteristic of London and some other British cities before smoke control legislation became effective. Acid rain does not appear to have comparably adverse medical consequences in man, but it has led to widespread loss of fish life in acid sensitive areas. It may also be seriously damaging to forests and to buildings.

Thus, there can be no doubt that sulphur dioxide pollution is a real environmental problem of some consequence. The extent of SO[sub.2], deposition has been carefully measured through the European Monitoring and Evaluation Programme. Estimates of costs are more speculative; a study by Environmental Resources Limited (1983) of the total costs of acid rain across the European Community, for example, covered a range from $0.6bn-$4.5bn per annum, comprising damage to buildings, forests and agricultural production; however, the damage to buildings and forests is partly aesthetic, and not readily quantifiable.

Reduction of SO[sub.2], production is governed by the European Community's large combustion plant directive, which provides for a staged reduction in SO[sub.2], emissions from large combustion plants across the Community. In the case of the UK, this is a 60 per cent reduction on 1980 levels by 2003, and in the case of (West) Germany 70 per cent. While the near uniformity of this measure may meet political requirements of equity, it is one which takes relatively little account of the cost or benefits of the process. S)[sub.2] production in densely populated central regions of Europe (many outside the EC) is massively more damaging than equivalent volumes of emissions in Scandinavia, where levels are already low and widely dispersed; illustrative calculations by Newbery (1990) suggest that the damage per tonne may be twenty times as great in Belgium as in Scandinavia.

In each country, and particularly in the UK, reduction in S)[sub.2] emission is principally a matter for the electricity industry. There are several ways in which this could be achieved. Forexample, coal-fired electricity output from large plants could be cut by 60 per cent. Since the elasticity of demand for electricity is low, this would require massive increases in the price of electricity or, alternatively, regular power cuts. There is, obviously, no likelihood that these solutions will be adopted; we note them only to observe that, as with nitrate, reducing environmental damage by large reductions in the output of the polluting activity can be both an extremely costly and an unnecessary response.

An alternative approach-and one which was widely favoured before the privatisation of the electricity industry-was the installation of flue gas desulphurisation (FGD) equipment to reduce the sulphur content of emissions from all plants guilty of serious pollution. However, just as requiring all countries to reduce sulphur output by 60 per cent from large plants is not an efficient means of reducing sulphur output in aggregate by 60 per cent, so reducing the sulphur emissions of individual power stations by 60 per cent is not an efficient means of reducing aggregate sulphur emissions by 60 per cent. Coal is available, mainly abroad, with a lower sulphur content than that which has typically been used in British power stations. More fundamentally, electricity is produced from a variety of types of plant-including nuclear, oil fired and gas turbines-as well as from coal-fired stations. The substitution of slightly higher cost stations which do not use coal is capable of achieving significant reductions in sulphur emissions at lower cost.

The achievement of such an outcome depends on quite sensitive adjustment of the structure of electricity production. So long as electricity generation remains concentrated, it may be possible to accomplish this by imposing target reductions for the two principal generators (National Power and Power Gen) and allowing them to optimise within that overall constraint. In a more competitive overall structure, however, an efficient solution is likely to be attainable only through a mechanism that leads each producer to recognise the social, rather than the private, cost of coal-fired production, possibly through a sulphur tax. Another option is the use of tradeable permits, which are issued (or sold) by the authorities up to a maximum total for all emissions, and can then be bought and sold in the market. Sellers are likely to come from firms with relatively low control costs and buyers from those with relatively high costs of control. 8. Conclusions

At the heart of the problem is consumption ... An ever-expanding consumer economy eats up the planet, spewing out the waste as pollution and denying future generations any share in the earth's rich bounty... That's why trees are dying from acid rain, and why our streams and rivers are so dirty. (Green Party (1989))

One of the objects of our case studies is to show how profoundly mistaken that view is. As a means of reducing acid rain or water-borne nitrate, reductions in electricity or agricultural output are both largely ineffective and may involve costs which are wholly out of proportion to the benefits derived. To incur these costs would not only be quite unnecessary; it would reduce our capacity, and willingness, to effect positive improvement in the environment in other ways. We do better to continue to produce electricity and food, but to do so in ways that ensure that the environmental consequences are properly monitored and at least partially neutralised, by reducing the sulphur output of electricity production and by cleaning up our water supplies as well as by making cost-effective reductions in emissions. In so far as higher output is, indeed, the cause of pollution, it is also what enables us to afford to deal with it. It is not an accident that among industrialised countries higher levels of output and standards of living are associated with higher, not lower, environmental standards.

A positive policy for the environment begins not from broad generalisation, but from specific analysis of the environmental costs and benefits of our actions and our policies. We might contrast the case of acid rain-where such analysis has been undertaken, and where it confirms the existence of a problem and points towards solutions to it-with that of waterborne nitrate, where policy has been determined in neither a cost-effective nor a realistic manner. Perhaps the most serious fallacy in green policies, like that described above, is the assertion of general remedies for problems whose solution invariably depends sensitively on the facts of a particular case.

Economists tend to favour the use of market mechanisms where these are feasible but here too no general rule is appropriate. In dealing with sulphur dioxide emissions, it is likely that there are large gains to be made from a market oriented solution which enables the principal polluters to optimise production within a framework which uses economic instruments to take proper account of the environmental consequences of their activities, although for smaller agents, such as domestic households, regulation may be the right answer. Such a solution is both less costly, and more likely to be effective, than a regulatory regime which prescribes similar targets for all. For nitrate, by contrast, market solutions would be largely useless, even if the problem were more serious than actually appears to be the case. The link between output and consequent pollution is too long and too indirect, and the changes in prices necessary to affect behaviour are likely to be very extreme. A better solution in the nitrate case is to regulate for water quality standards and to spend what is needed on treatment to achieve these standards.

This does not mean that emissions of other substances, into rivers for example, should not be directly controlled, possibly in association with charges, as in the Netherlands and Germany. In such cases, the environmental benefits may be substantial and the costs involved in controlling emissions not excessive. What is needed in all instances is a balancing of benefits and costs, while the choice of instruments must depend on the particular environmental problems under consideration.

A careful evaluation of costs and benefits is not enough, however, where costs and benefits accrue to different groups. Firms and industries may resist, for this reason, the imposition of costly environmental controls. Local communities may also resist the siting of disposal facilities in their area (the NIMBY-not in my back yard-phenomenon). National or local governments may refuse to go along with internationally or nationally agreed environmental measures which they consider to be too costly for the benefits that they perceive. Environmental improvements will always entail losses for some as well as gains for others, and unless we are prepared to recognise that fact and, in appropriate cases, to compensate the losers, we may continue to suffer from a calculus which reflects the self interest of individuals rather than the collective interests of ourselves and of our children. NOTES (1) We draw in this section and elsewhere on a number of recent surveys of environmental economics-see, in particular, Pearce, Markandya, and Barbier (1989), Muzando, Miranda and Bovenberg (1990), Helm and Pearce (1990). TABULAR DATA OMITTED REFERENCES Beesley, M. E. and Foster, C. (1968), 'The Victoria Line', Journal of the Royal Statistical Society. Coase, R. H. (1960), 'The problem of social cost', Journal of Law & Economics, October. Dasgupta, P. and Heal, G. (1979), The Control of Resources, Cambridge University Press, Cambridge. Department of the Environment (1989), Digest of Environmental Pollution and Water Statistics, HMSO. Department of the Environment (1990), This Common inheritance, Cm 1200, HMSO. House of Lords Environmental Committee (1989), EC Nitrate in Water, No. 73, Vol 1, HMSO. Environmental Resources Ltd (1983), Acid rain: Report for the Commission of the European Communities, Graham and

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Title Annotation:solution to environmental pollution
Author:Kay, John; Silberston, Aubrey
Publication:National Institute Economic Review
Date:Feb 1, 1991
Words:11263
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