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The economic case for sustainable development.

Starting with Our Common Future, the report of the United Nations Commission on Environment and Development, and culminating in the United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro, the concept of "sustainable development" has gained widespread acceptance throughout the world. Although disagreement exists on the sustainability of particular practices, consensus exists on the central goal: economic development that leaves future generations with a stock of environmental amenities (i.e., topsoil, clean air, potable water, forests, species) no less, and preferably more, abundant than those enjoyed by their predecessors. To achieve this goal, all countries, rich and poor, must shift from the resource-depleting, environmentally destructive development patterns of the past.

The conventional wisdom, particularly in developing countries, in that in traditional accounting terms the new, more environmentally sustainable patterns of development will be more costly than conventional practices. This perception threatens to undermine the movement toward the new patterns because it means that sustainable development will be implemented in the developing world only if the industralized countries agree to pay the incremental cost of doing the right thing or if the developing countries are willing to give higher priority to long-term environmental goals than to their desperate and immediate economic needs.

The assumption that there will be incremental costs is reflected in the structure of the major international programs to promote sustainable development. For example, the Global Environmental Facility (GEF) was established in 1991 under the joint management of the World Bank, the United Nations Development Program and the United Nations Environment Program to provide funding to meet the "agreed full incremental costs" of redesigning "baseline" development projects so that they protect the ozone layer, reduce greenhouse gas emissions, preserve biodiversity, and protect international waters. Similarly, the Framework Convention on Climate Change, which was signed by more than 150 countries at UNCED, requires developed countries to provide developing countries with "such financial resources, including for the transfer of technology, needed by the developing country Parties to meet the agreed full incremental costs of implementing measures" to reduce greenhouse gas emissions or adapt to climate change. In each case it is assumed that doing the right thing costs more.

Counterproductive myth

Although many environmentalists fought hard to win these financial commitments from the industrialized countries, the concept on which they are based is likely to be detrimental to sustainable development. Most developing countries, particularly in Asia and Latin America, are determined to do what they can to achieve rapid economic growth over the next few decades. They are aware that such growth may cause increased air and water pollution, loss of forests, soil erosion, and other consequences harmful to human health and the environment, but they are not ready to make significant economic sacrifices to avoid those consequences. If forced to make a choice, most developing countries will choose more rapid economic development over protection of the environment. As they become more prosperous, they are likely to give greater priority to minimizing local environmental problems such as urban smog or groundwater contamination, but in the meantime, they could cause irreversible harm to the global environment through practices such as increased greenhouse gas emissions or ocean discharges.

This pattern is already evident in Asia. All Asian governments increasingly recognize that their historical growth patterns are environmentally unsustainable, yet only the most wealthy appear ready to follow Japan in making serious changes. The Korean and Taiwanese governments are finally beginning to take serious steps to reduce pollution. Less wealthy Asian countries such as Thailand, however, are continuing to pursue rapid growth even at the cost of increasing urban smog, industrial pollution, and loss of forests. The situation is particularly acute in China, where recent economic growth coupled with enormous population creates the possibility for significant local and global environmental damage.

In the energy sector, for example, China is already burning 1.2 billion tons of coal a year--approximately one-fourth of the world total--and plans to increase that amount by approximately 50 percent between now and the end of the century. The resulting sulfur and nitrogen emissions are responsible not only for a worsening acid rain problem in China but also for 50 percent of the acid rain falling on Japan. China still has relatively few automobiles, but it can be expected to experience the same type of transportation-related pollution already plaguing the great cities of India and Latin America as the number of private vehicles multiplies in response to rising incomes. In addition to aggravating local environmental problems, China's rapidly increasing use of energy will contribute to global climate change through increased emissions of carbon dioxide and other greenhouse gases.

Looking ahead at the expected environmental consequences of current development trends has convinced many observers that developing as well as developed countries must change their practices. But those changes are unlikely to take place if decision-makers in these countries believe that they will be economically costly. And developing country policymakers know only too well that assistance from the developed countries will never be enough to meet their needs. Developing country leaders need to be convinced that environmentally sustainable technologies and practices will enhance their economic development. Harping on incremental costs will squeeze a little cash out of aid agencies but will persuade developing country business and political leaders, who will provide the direction and most of the funds for development, that "sustainable" is synonymous with "too expensive."

If, on the other hand, these leaders perceive that environmentally sound technologies and practices will actually reduce their costs of production and increase their productivity, they will seek to provide the policy reforms, investment incentives, worker training, and other conditions necessary to implement those technologies. Limited financial assistance from national and multinational development agencies may be required to help them create those conditions, but local leaders will make the necessary changes with enthusiasm if they understand that they are pursuing their own self-interest. Once the conditions are right, private capital from domestic and foreign sources will flow toward investment in more efficient and less polluting technologies, as is already happening in the industrialized countries.

The price is right

Fortunately, we have increasing evidence that these technologies are indeed more cost-effective. Electric utilities in Europe, Japan, and the United States are choosing investments in energy-conservation programs instead of new power plant construction because they have found that the environmentally benign course also makes good economic sense. The companies participating in the Business Council for Sustainable Development, an international coalition of major corporations, have demonstrated how enlightened management has found ways to save money, improve competitiveness, and increase market share through efficient use of resources and pollution prevention. The Council's report, Changing Course, is replete with examples of companies in North America, Europe, Japan, and the developing world that have saved money and protected the environment through greater "eco-efficiency." The 3M Co. alone reports savings of more than $500 million through its Pollution Prevention Pays program.

In assessing these examples, it is important to distinguish between incremental investment and incremental costs. Deployment of less wasteful technologies often requires some additional front-end investment as compared with the more wasteful technologies they are replacing. Compact flourescent lamps, for example, currently have a higher first cost than incandescent lamps, but they use only about 20 percent as much electricity and quickly pay back their extra cost. The economical rationale for making such incremental investments is clear, and we should be careful to avoid referring to them as "more costly." When the appropriate discount rate is applied, these investments can prove to be very cost effective over time.

Although the industralized countries of the West have been the leaders in making these "eco-investments," the opportunities for cost-effective, environmentally sound investments are even greater in the former Soviet Union, Eastern Europe, and the developing countries, where energy efficiency is so low and industrial processes so wasteful. At this stage, relatively small investments can yield large payoffs. Exploiting these opportunities will require difficult policy and institutional changes, including the phasing out of remaining energy subsidies. In addition, the industrialized countries will have to provide assistance in institution building, training, and technology cooperation. But from the start there will be incremental savings, not incremental costs.

In fact, developing countries and countries "with economies in transition" have no choice but to pursue these savings. The World Bank estimates that to continue their current growth trajectory with current energy-use patterns, the developing countries will need $100 billion per year for new energy-supply infrastructure in the 1990s alone. Since sums of this magnitude are unlikely to be forthcoming, these countries will have to turn to the more cost-effective policy of enhancing efficiency. The benefits of such a policy shift are nowhere more apparent than in Russia, where an enlightened energy policy may be the foundation for economic recovery. By using its domestic resources efficiently, Russia will be able to sell its surplus oil and gas production and thereby earn capital for modernization. No other source of cash can be as easily tapped.

Assistance that helps

The proper role of development assistance from public sector institutions is therefore not to pay the supposed incremental costs of deploying environmentally friendly technologies, but to stimulate cost-effective investments in eco-efficiency by private firms and public authorities. The barrier is not lack of funds but inadequate information, training, and incentives to exploit the available options.

Similar potential for simultaneously saving money and the environment exists in agriculture and forestry. Farmers in many countries are learning to reduce their costs and extend the productivity of their land through techniques such as multi-cropping, integrated pest management and drip irrigation. In some cases these techniques may produce lower yields, but profits can still increase as long as input costs are lowered sufficiently. Likewise, modern timber harvesting techniques combined with state-of-the-art mills can increase the overall value of the wood products produced from a given forest. Lack of information, not money, is the principal barrier to this kind of innovation.

Protection of biodiversity is the one area where more environmentally sensitive practices do seemingly involve increased costs. To protect or rehabilitate an endangered forest ecosystem or coral reef means that certain profitable activities such as timber extraction, mining, or commercial fishing may have to be limited or foregone. We need look no further than our own Pacific Northwest with its bitter spotted owl controversy to understand how high political passions can run on both sides of the jobs-versus-environment issue. Yet, if we take a slightly longer-term view, we can perceive the tremendous economic waste involved when biodiversity is sacrified in the pursuit of relatively low-value-added resource exploitation. The tropical flora and fauna that are destroyed for slash and burn agriculture contain a potential cornucopia of new drugs and crops; the mountain forests that are clear-cut protect watersheds and fertile valleys; the coral reefs that are blasted or poisoned are the basis for a thriving tourist industry. The problem is that many of those profiting from exploitation will not directly benefit from conservation. Public policies are needed to ensure that a few aren't forced to make large sacrifices for the benefit of the many. Environmental progress is more likely when economic self-interest is in sync with desirable practices.

The assumption that there are incremental costs undermines the market incentives and political will to exploit the "win-win" sustainable development opportunities available. GEF and other assistance should therefore be directed at building the infrastructure and creating the other conditions for exploiting those opportunities, rather than focusing on add-ons to baseline projects that themselves often need to be fundamentally reworked. If aid programs are focused on priming the pump and informing economic decisions, a significant portion of worldwide private investment could be redirected through market forces to deployment of truly sustainable technologies.

Fortunately, leaders at the GEF and other development assistance organizations are already beginning to recognize the wisdom of this strategy. But real progress will come only when business and political leaders in the developing countries are convinced that on strictly economic terms sustainable development is the path to prosperity.
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Title Annotation:ecological balance
Author:Nitze, William A.
Publication:Issues in Science and Technology
Date:Jun 22, 1993
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