Can economics protect the environment?

When the last tree is cut down, the last fish eaten, and the last stream poisoned, you will realize that you cannot eat money,” Native American saying

“Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs,” Brundtland Report

It is undeniable that our current way of life is unsustainable; If every country consumed resources and created waste at the same per person rate as the United States, we would need three to five planets to survive. Part of the problem lies in the fact that economics—the major discipline advising global and national policy—has failed to include the environment in its calculations. To rectify this problem, different methods have been proposed, so as to make predictions and come up with better ways of managing the planet’s resources without compromising the future.

There are two broad perspectives on how to measure environmental problems and how to better (quantifiably) understand the relations between economies and the environment. The first one is what Peter Bartelums—professor of economics at the University of Wuppertal (Germany) and Columbia University in the City of New York—calls environmental economics. Partly due to the implicit philosophical belief that human societies ought to become more advanced and modernized over time, this perspective maintains that we have to avoid decline in future production, income, and consumption to ensure economies and people survive. According to this perspective, the problem has been that the market, which is the mechanism that distributes resources across society, has so far considered nature to be “free” for the taking, so that the costs to nature and to society that arise from economic activities are not taken into account by those who generate them. For example, the cost of logging one tree is not directly dependent on how quickly the same type of tree can re-grow if replanted. Thus, the cost of depriving society of the future availability of that tree is not accounted for in the extraction. Also, emissions like pollution have costs for the general health of the population, even though companies and consumers pollute “for free”. Finally, nature and biodiversity provide many ecosystem services that nourish people and the planet, such as providing clean air, water and cultural and economic sustenance to communities who rely on them for their ways of life. These extra services are not usually taken into account when decisions like chopping down forests for the market value of timber are made by policy makers. For example, a forest’s ability to clean the air could then be calculated by how much it would cost for society to clean that air by other means. Therefore, the recommendation of environmental economics is to create markets for environmental goods and services so that there will be a monetary price for overusing resources or emitting waste and pollution. As a consequence of this more “complete” price, supply and demand will work in a way that unsustainable practices and products will become more expensive and thus will be significantly reduced, while sustainability will be incentivized. For instance, if a gas guzzling 4×4 costs a million dollars and a more sustainable electric smart car costs a more affordable $5,000, many more people would buy the latter, thus helping to curb pollution.

Ecological economics, on the other hand, believes that the current environmental situation is too critical for us to rely on market mechanisms to solve it, because markets and economies have simply “appropriated” nature. Thus, what is needed is a deeper sustainability that involves actually reducing the size of economies and relying on a much smaller quantity of materials to function, thus taking less from nature and emitting less waste into it. Ecological economics is not against economic growth or managing financial incentives, but it attempts to calculate how much growth we can actually attain while being sustainable.

Here arises the conflict with environmental economics, since those calculations may lead to policies that support negative economic growth. The way ecological economics measures these economic limits is not by attaching prices to the environment, but through physical measures of extraction and emissions, such as calculating how many metric tons of CO2 we can emit without reaching a catastrophic tipping point that causes irreversible climate change or how much timber we can extract without crossing the line after which forests cannot recover. Therefore, their strategy is more radical than that of environmental economics: Depending on the analysis, certain activities will have to be banned rather that just “disincentivized”. If for some reason economies still manage to sell a lot of guzzling 4x4s that cost a million dollars each—sales that would be great for the economy—pollution will still be a problem, thus such vehicles would simply be banned.

Both approaches create new indicators for sustainability. Environmental economics makes use of what is known as “integrated environmental and economic accounts” to adjust economic indicators with environmental values, creating for example a “green Gross Domestic Product (GDP). The logic is that if we deplete our natural wealth, the green GDP won’t perform well, and economies will change their practices towards stronger sustainability.

How to account for that wealth, however, is also a subject of debate. One way of doing that, mentioned above, is to calculate the value of services done by nature that are otherwise ignored, a practice within the concept of “green accounting”. Nevertheless, in environmental economics, the economy always comes first, and economic growth cannot be sacrificed. Ecological economics, on the other hand, keeps the sustainability indicators separate from economic ones. For instance, one indicator they use is the Total Material Requirement (TMR), which measures all physical requirements that support an economy, including the ones that are often not seen, such as unused extracted resources (e.g. gangue). TMR also traces back imported raw materials to their delivering countries, and accounts for the impacts done during extraction there. The logic here is that regardless of how the economy performs, TMR has to decrease.

This reassessment of priorities is reasonable and urgent. For example, a natural reaction by a son or daughter when their mother becomes ill and needs life-saving surgery would be to say yes to the surgery, and figure out later how to pay for it, even if that means acquiring a harmful debt, or asking for other people’s help. Therefore, if we agree that the current environmental situation is an emergency, the logic of environmental economics falls down. If deep sustainability requires less economic growth, that is a sacrifice worth taking. In addition, environmental economics fails to consider that markets are governed by power, subject to speculation and corruption, and are vulnerable to big crises like the recent one, which make them poor tools for longer-term environmental sustainability. Conversely, ecological economics, seems to offer a better starting point for a strategy, even if that strategy can end up hurting economies. But after all, it’s humanity that we’re trying to save, not economies.

Throughout the November month of Environmental Economics and Sustainability, Development Roast will present and discuss how the world’s nations have gone about quantifying the relationship between the economy and the environment and offer insights around tools like ecocommerce and symbiotic demand that are currently under development to improve sustainability.

How should governments and organizations quantifiably account for the environment and its relation to economies? Leave a reply below.

Allan Spessoto is a Research & Communications intern at the Institute for Advanced Development Studies (INESAD)

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For your reference:

Bartelmus, P., 2008. Quantitative Eco-nomics: How sustainable are our economies? Dordrecht; London: Springer.

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  1. Hey Allan

    A good article. Very clearly distinguishes between the two school of thoughts in economics pertaining to Environment/nature. The initial part of your article did highlight the differences mostly unbiased. The last paragraph though spoils the mostly ambivalent nature of the essay.
    A conclusion trying to give a very micro level example to justify a macro level issue was unnecessary. On a macro scale one cannot just prescribe the medicine as the doctor says. Another sibling might just not like the doctor and may seek for a second opinion and some other (who is infact very poor) might seek for other options. The example is not analogues.

    My only point of contention with your conclusion is, you should have left it to the reader to decide. This would have been a much better alternative.. The example kind off misappropriates the entire writing you did right above it.

    Student of Economics,
    Indian Institute of Technology Kharagpur

  2. Mark A. Bartholomew

    Converting currency capital into environmental capital, then converting it back into currency capital, while retaining the environmental principle is difficult due to the devaluation during currency exchange.

    You will be competing against the very physical laws which govern and allow the powers of unnatural medium of exchange.

    Indexing anything natural with a medium of exchange other than a natural commodity of similar natural qualities
    is an error for those who wish to retain true value on exchange. Unnatural Mediums of exchange are so easily monopolized by the powers which govern them it will never favor the natural resource production cycles of the earth.

    A tree has X energy put into it by nature during its life cycle before it falls or dies.
    How do you correctly value the Input and the time spent associated with the growth of that tree?
    Would you be willing to exchange that amount to chop it down and use it for a porch?
    Would you put that much work into another tree so you could harvest that one? No?

    So then.. The only way you could afford to chop it down would be by stealing it from nature then exchanging it for a lesser valued medium of exchange.

    A fundamental understanding of what holds true value helps investors and business owners make better long term more stable management decisions to increase their ROI and hedge against things which do not hold value, even though the financial statement may not reflect those values.

    Unfortunately small efforts to hedge or leverage against the consumption and depletion of natural resources is being overturned by the opposition which are making profits hand over fist by destroying the resources and raising prices on remaining high demand resources.

    To balance this humans can lower their standards of living to a more natural/primal and environmentally friendly state. (I.E. Like the Indian culture lived) but.. that will resolve in the same manner for which it did before.

    And if human consumption was voluntarily withdrawn and the standard of living was voluntarily withdrawn the organizations which desire more control and more consumption would enforce laws which maximize consumption
    through its trade agreements, mediums of exchange, and wars.

    Mark A. Bartholomew
    Managing Director
    Newport River Company

    • Allan J. Spessoto

      Thank you for your comment Mark. Indeed, markets are already unnatural and artificial in their nature and have always faced problems with their utilitarian principle of cost/benefit analysis. There are some things that we never can quantify well enough with monetary values – we can always miss something. If we try to value the health costs of pollution by figuring out how much it would cost to treat people’s diseases caused by it, we would miss the larger consequences to society (unhealthy people cannot work, can create despair in their families thus also affecting their work, etc.). It seems like it always gets to a point where we can’t calculate anymore.
      I don’t think changing our lifestyles to less materialized ones would necessarily compromise wellbeing or standard of living though. Actually, I think people would be in fact happier if they all carpooled to work for example (less consumer based/materialized and more towards values of sharing).
      We shouldn’t dismiss these financial efforts by businesses, but I don’t think they’re enough.


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