ENVIRONMENTAL & SOCIAL ECONOMICS: A PRIMER

ecosystem Getting comfortable with the concepts of environmental and social economics (ESE) requires reading the works of new-generation accountants, economists, tax experts, and policy makers. Not the kind of project that fills most of us with exhilaration. For those not up to that challenge, here’s the Cliff’s Notes version (Coles Notes if you’re a Canadian):

  1. The primary function of ESE is the measurement, regulation and taxation of environmental and social impact, and related policy issues. 
  2. The ultimate metric of ESE is the well-being of the planet, communities and their citizens, whereas the ultimate metric of traditional economics is (financial) wealth. Well-being encompasses health, freedom, peace, security , education, a just society, self-sufficiency, biodiversity, renewability and sustainability, not just financial and material comfort.
  3. ESE views people (and sometimes other creatures) as communities of citizens, whereas traditional economics views people as individual consumers. 
  4. ESE assesses businesses on the good(s) they create (value of products or services produced, employment created, sustainability and efficiency of production processes, ‘clean’ capital produced etc.) net of the bad(s) they create (pollution, waste, natural resource use and depletion etc.) This measurement is an extension of what is called full-cost or true-cost accounting.
  5. The principle of ecological taxation is to tax the above goods (things we want more of) less, and tax the above bads (things we want less of) more. It is tax-neutral, shifting the tax burden without increasing it. So a clean business that creates local employment, and an individual that uses only renewable energy would probably pay no tax at all. The result of ecological taxation is that things that are socially and environmentally good will cost less (since they have no tax to pass on to the ultimate user), those that are socially and environmentally bad (e.g. energy created by burning fossil fuels) will cost more, and the overall after-tax cost of living of the citizens will remain unchanged. The tax burden merely shifts from those to those that buy goods to those that buy bads. Several European countries already have some ecological tax laws in place.
  6. At a macro level, ESE looks separately at three fundamental economic problems:
    • Efficient Resource Allocation – the efficient allocation of scarce resources to producers. Most ESE practitioners acknowledge that the market economy, rather than a planned economy, is the best solution to this problem. However:
    • Distributive Justice – the equitable distribution of economic products. Traditional economics ignores this ethical disparity issue. ESE practitioners believe governments must intervene through the tax and regulatory system to ensure fairness in distribution (so the current situation where 20% of Earth’s people consume 80% of its food, and Africans dying of AIDS cannot afford the treatment, is rectified).
    • Optimal Scale – the total amount of economic products that are produced. Traditional economics leave this up to the advertiser-influenced ‘market’. ESE practitioners believe governments must intervene to set maximum scales of production given the commensurate social and environmental costs of unlimited, extravagant, wasteful manufacturing of products.
  7. The net result of how business and government jointly manage these three problems is reflected in macro measures of well-being. Traditional economics uses Gross Domestic Product (GDP) as the overarching measure. GDP measures only financial wealth production, does not factor in social or environmental costs, and does not consider the distributive justice or optimal scale problems described above (i.e. more is always better at any cost, and it doesn’t matter who has how much, just the grand total). As ludicrous as it sounds, GDP is the basis on which most fiscal and monetary policy is now based. There are many better measures of well-being, but the best measures are unfortunately the least precise, especially with the lack of data currently available. Some of these better measures, in order of ease of calculation, are:
    • Green Net National Product (GNNP):  GDP less the costs of degradation and depletion of natural resources, i.e. less the cost that would have to be incurred to replace the natural resources used, remediate environmental damage, and restore the assets produced to their undepreciated value. This is already being computed, if somewhat roughly, by many countries.
    • Genuine Progress Indicator (GPI): GDP plus the value of ‘unpaid’ work (e.g. volunteerism), less the costs of crime, pollution, disease, family breakdown, and security. This measure is more subjective but brings in social as well as environmental costs and hence is ideally a closer approximation of well-being.
    • Well-Being Index (WBI): Going beyond the GPI, this index also incorporates measures of civil freedom, security, biodiversity, health, justice and self-sufficiency. It also factors in the disparity of well-being (rich/poor gap).
  8. Generally, ESE also considers the impact of population and over-population. In addition to computing the above measures on a per capita basis, ESE also looks at how limiting population growth and family size can have a multiplier effect on programs that enhance well-being, and conversely how over-population and high population growth rates can stymie ESE initiatives.
  9. ESE practitioners generally oppose untrammeled free trade , pointing out that the alternative to ‘free trade’ is not ‘no trade’, but rather regulated trade. Trade regulations that protect local social and environmental programs and standards can contribute to well-being. ESE practitioners tend to promote local self-sufficiency as an inherently efficient means to augment well-being. For example, under traditional economics, importing corn to Mexico from the U.S. makes sense because production efficiencies exceed the cost of transportation. Under ESE, however, after factoring in the dislocation of Mexican labour, loss of local productive capacity, and the additional waste and pollution that are incurred to produce the corn and transport it to Mexico so ‘cheaply’, this trade becomes patently ‘uneconomic’.
  10. So, ESE activism tends to focus on achieving four kinds of change:
    1. Getting governments to stop basing policy decisions, trade treaties and laws on flawed GDP measures, and instead base them on the measures in point 7 above 
    2. Getting governments to introduce revenue-neutral ecological taxation to replace some income and consumption taxation, as described in point 5 above
    3. Getting businesses to more fully and accurately disclose their goods and bads as described in point 4 above
    4. Improving the current data, collection, disclosure processes and measurement precision for well-being indicators, both at the national level (point 7 above) and at the business level (point 4 above)

If you want to read more on this, start with this interview with ESE guru Herman Daly. If you want to read a lot more, start with Daly’s book Beyond Growth , and then work your way through its bibilography.

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