"It is the most interesting book I have ever read and inspires me to do something immediate to save our civilization." —Hanh Lien, translator for the Vietnamese edition of World on the Edge
Chapter 11. Plan B: Rising to the Challenge: Creating an Honest Market
The key to restructuring the economy is the creation of an honest market, one that tells the ecological truth. The market is an incredible institution—with some remarkable strengths and some glaring weaknesses. It allocates scarce resources with an efficiency that no central planning body can match. It easily balances supply and demand and it sets prices that readily reflect both scarcity and abundance. The market does, however, have three fundamental weaknesses. It does not incorporate the indirect costs of providing goods or services into prices, it does not value nature's services properly, and it does not respect the sustainable-yield thresholds of natural systems such as fisheries, forests, rangelands, and aquifers.
Throughout most of recorded history, the indirect costs of economic activity, the sustainable yields of natural systems, or the value of nature's services were of little concern because the scale of human activity was so small relative to the size of the earth that they were rarely an issue. But with the sevenfold expansion in the world economy over the last half-century, the failure to address these market shortcomings and the irrational economic distortions they create will eventually lead to economic decline.22
As the global economy has expanded and as technology has evolved, the indirect costs of some products have become far larger than the price fixed by the market. The price of a gallon of gasoline, for instance, includes the cost of production but not the expense of treating respiratory illnesses from breathing polluted air or the repair bill from acid rain damage. Nor does it cover the cost of rising global temperature, ice melting, more destructive storms, or the relocation of millions of refugees forced from their homes by sea level rise. As the market is now organized, the motorist burning the gasoline does not bear these costs.
Something is wrong. If we have learned anything over the last few years, it is that accounting systems that do not tell the truth can be costly. Faulty corporate accounting systems that overstate income or leave costs off the books have driven some of the world's largest corporations into bankruptcy, costing millions of people their lifetime savings, retirement incomes, and jobs.
Unfortunately, we also have a faulty economic accounting system at the global level, but with potentially far more serious consequences. Economic prosperity is achieved in part by running up ecological deficits, costs that do not show up on the books, but costs that someone will eventually pay. Some of the record economic prosperity of recent decades has come from consuming the earth's productive assets—its forests, rangelands, fisheries, soils, and aquifers—and from destabilizing its climate.
If we want to determine the full cost of burning gasoline, we need to calculate the indirect costs of doing so. A model for doing this is provided by the U.S. Centers for Disease Control and Prevention (CDC), which in April 2002 released a study on the cost to society of smoking a pack of cigarettes. Calculating the expenses of treating smoking-related illnesses and lost employee productivity due to illness and absenteeism shows that each pack of cigarettes smoked in the United States costs society $7.18. This is in addition to the costs of growing the tobacco, curing it, and manufacturing the cigarettes. The question is not whether the additional $7.18 is paid. It is paid by someone—by the smoker, by the employer, or by the taxpayers who fund Medicare programs.23
For gasoline, calculating the true costs to society means including the medical costs of treating those who are ill from breathing polluted air; the costs of acid rain damage to lakes, forests, crops, and buildings; and, by far the largest, the costs of climate change. Higher temperatures can wither crops and reduce harvests. They can melt ice and raise sea level, inundating coastal cities, low-lying agricultural lands, and low-lying island countries. The interesting question is, What is the cost to society of burning a gallon of gasoline? Is it more or less, for example, than that of smoking a pack of cigarettes?24
No one has attempted to assess fully the worldwide costs of rising temperature and then to allocate them by gallon of gasoline or ton of coal. Some studies were done, however, during the early and mid-1990s on the external cost of automobile use in the United States, including direct subsidies, such as parking subsidies, and many local environmental costs. A summary of eight of these studies by John Holtzclaw of the Sierra Club indicates that if the price were raised enough to make drivers pay some of the indirect costs of automobile use, a gallon of gas would cost anywhere from $3.03 to $8.64, with the variations largely due to how many indirect costs were covered. For example, some studies included the military costs of protecting petroleum supply lines and ensuring access to Middle Eastern oil, while others did not. No studies, unfortunately, incorporated all the costs of using gasoline—including the future inundation of coastal cities, island countries, and rice-growing river floodplains.25
Some of the looming costs associated with continued fossil fuel burning are not only virtually incalculable, but the outcome is unacceptable. What is the cost of inundating half of Bangladesh's riceland by a 1-meter rise in sea level? How much is this land worth in a country that is the size of New York state and has a population half that of the United States? And what would be the cost of relocating the 40 million Bangladeshis who would be displaced by the 1-meter rise in sea level? Would they be moved to another part of the country? Or would they migrate to less densely populated countries, such as the United States, Canada, Australia, and Brazil?26
Another challenge in creating an honest market is to get it to value nature's services. For example, after several weeks of flooding in the Yangtze River basin in 1998—flooding that eventually inflicted $30 billion worth of damage and destruction in the basin—the Chinese government announced that it was banning all tree cutting in the basin. It justified the ban by saying that trees standing are worth three times as much as trees cut. This calculation recognized that the flood control service provided by forests was far more valuable than the timber in them.27
Forests also recycle rainfall inland. Some 20 years ago, two Brazilian scientists, Eneas Salati and Peter Vose, published an article in Science in which they pointed out that when rainfall coming from clouds moving in from the Atlantic fell on healthy Amazon rainforest, one fourth of the water ran off and three fourths evaporated into the atmosphere to be carried further inland and provide more rainfall. When land was cleared for grazing, however, the numbers were reversed—with roughly three fourths running off and one fourth evaporating for recycling inland. Ecologist Philip Fearnside, who has made a career of studying the Amazon, observes that the agriculturally prominent south-central part of Brazil depends on water that is recycled inland via the Amazon rainforest. If the Amazon is converted into a cattle pasture, he notes, there will be less rainfall to support agriculture.28
Once we calculate all the costs of a product or service, we can incorporate them into market prices by restructuring taxes. If we can get the market to tell the truth, then we can avoid being blindsided by faulty accounting systems that lead to bankruptcy. As Øystein Dahle, former Vice President of Exxon for Norway and the North Sea, has pointed out: "Socialism collapsed because it did not allow the market to tell the economic truth. Capitalism may collapse because it does not allow the market to tell the ecological truth."29
22. Expansion in world economy from Erik Assadourian, "Economic Growth Inches Up," in Worldwatch Institute, Vital Signs 2003 (New York: W.W. Norton & Company, 2003), p. 45.
23. Centers for Disease Control and Prevention (CDC), "Annual Smoking-Attributable Mortality, Years of Potential Life Lost, and Economic Costs-United States, 1995-1999," Morbidity and Mortality Weekly Report, 12 April 2002.
24. Effect of higher temperatures on crops from John E. Sheehy, International Rice Research Institute, Philippines, e-mail to Janet Larsen, Earth Policy Institute, 2 October 2002; ice melting and sea level rise from Intergovernmental Panel on Climate Change, Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Report of the Intergovernmental Panel on Climate Change (New York: Cambridge University Press, 2001).
25. John Holtzclaw, "America's Autos on Welfare: A Summary of Subsidies," at www.prservenet.com/ATAutoWelfare.html, October 1996.
26. Bangladesh status from World Bank, World Development Report 1999/2000 (New York: Oxford University Press, 2000), p. 100; population from United Nations, World Population Prospects: The 2002 Revision (New York: February 2003); 40 million displaced is author's estimate based on the distribution of population in Bangladesh.
27. Cost of flooding from Munich Re, Topics Annual Review: Natural Catastrophes 2001 (Munich, Germany: 2002), pp. 16-17; banning of tree cutting from "Forestry Cuts Down on Logging," China Daily, 26 May 1998; Erik Eckholm, "Chinese Leaders Vow to Mend Ecological Ways," New York Times, 30 August 1998; Erik Eckholm, "Stunned by Floods, China Hastens Logging Curbs," New York Times, 27 February 1998.
28. Eneas Salati and Peter B. Vose, "Amazon Basin: A System in Equilibrium," Science, 13 July 1984, pp. 129-38; Philip Fearnside from Barbara J. Fraser, "Putting a Price on the Forest," LatinamericaPress.org, on-line periodical at www.lapress.org, 10 November 2002.
29. Dahle from discussion with author at State of the World Conference, Aspen, CO, 22 July 2001.
Copyright © 2003 Earth Policy Institute