The Natural Wealth of Nations, Harnessing the Market for the Environment
by B. Sohngen
ISBN 0-393-31852-4.
This book introduces an important and exciting new development in the fields of environmentalism and economics. In it, the author tries to prove that government subsidy programs often cause more environmental problems than they fix. Whether or not he is correct, he further argues that by changing economic policy to include market-based incentives for businesses to use the environment less destructively, both investors and the environment benefit. One of the largest myths associated with market-based incentives is that they deflate productivity and reduce revenue, but the reality is that by changing economic policy to include market-based incentives for the environment, more jobs and wealth are created. It was industrialization that first automated the manufacturing process and, ultimately, removed the human-being from the equation; now, it is time to remove the subsidies and place human ingenuity back into the manufacturing process. After abusive subsidies are removed from the fiscal landscape, the playing field then can become fertile for technologies that cause less environmental damage. It is easy for environmentalists to get up on their high horses while they wait and preach morality in an effort to aid their cause, but according to Sohngen, this is unnecessary. With the correct fiscal policy, the market will correct itself and put a proper value on the resources that human beings need for survival. As long as subsidies continue to be abused aiding less efficient industries in their effort to compete in the economy, the skies will be grey with smog, the rivers clogged with filth, and the oceans will continue to acidify. If the global society chooses to make the bold choice of putting a price on our most valuable resources—the forests, oceans, air, rivers, and land—then there is no limit to the level of innovation that will spring forth from the human population in an effort to create an economy around the principles of stewardship.
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While the mix of environmental principles and economic analysis is just beginning, the initial synthesis is already showing signs that environmental economics may one day soon replace the system set up by the founding fathers of American capitalism. Sometime in the near future, the crossover from a single financial bottom-line to one that includes social and environmental factors as well will happen simply from the fact that environmental economics is better for the human species overall in the long-run.
Traditionally, capitalism has always based itself upon the mental construct of a world with limitless resources; in fact, for the founding fathers of American capitalism, the continent still had yet to be explored. Timber, minerals, water, agriculture, and opportunity all seemed in abundance, and whose limit could not be imagined, so it was not contemplated. The abundance of resources here has carried America through the Civil War, World War I and II, and on into the Digital Age. Seemingly, the expansive vision put forth by America's founding economists has reached maturity here in the twenty-first century, and forces are pushing on capitalism to change some of its fundamental assumptions around the ideas of limits. Should capitalism have risks?
In the past, businesses had one responsibility to the shareholders. Today, in addition to financial obligations to shareholders, businesses are being asked to maintain professional responsibilities to the social communities and in the environments where they do business. The fact that this is occurring is a sign that human populations have consciously realized that they have reached their limits in terms of the amount of resources that the planet can supply.
Some business are fighting back against the triple-bottom line, though, claiming that environmental economics is a fancy way to keep the impoverished regions of the world in a perpetual state of desperation. They claim that environmental economics stifles economic growth and the ensuing prosperity that comes with it. They throw words like eco-imperialists and socialism at the environmentalists, but really, many of these types of economists simply need a friend.
The impoverished of the world continue to suffer because of the current economic policies; they don’t suffer more from caring for the environment. To think that the impoverished people of the world would be better off if only their governments would burn more fossil fuels, deforest more of their land, allow them to eat more genetically modified food, and generally deplete and destroy their little section of the global real estate is a crazy idea. They might be better off in the short term, but we are currently realizing what happens when China, India, the Middle East, South America, and parts of Indonesia all go through a significant growth period simultaneously; we begin to see the finite limit of the resources on planet earth. This is an astounding achievement, and it offers us a perspective never even dreamed about by capitalism's founders.
The impoverished people of the world would benefit from free energy like solar or wind; why wouldn’t they? Beside the high initial costs of installation, solar and wind generate electricity for next to nothing. Therefore, the fossil fuel industry has to actively lobby and campaign against renewable energy because limitless, cheap energy is a threat to their established respective monopolies. In their micro-cosmos, solar, wind, fuel cells, geothermal, and ethanol signal the end of their reign on top of global energy and financial markets.
The renewable energy industry is just beginning to put together lobby groups in Washington D.C. to actively try and push their agenda through the channels of congress. Clean coal, although not really a renewable energy, is number one with nearly $2 million spent on ‘educating’ congress. In all, the top renewable energy industries spent less than $10 million on lobbying and campaign contributions. In contrast, the oil industry spent $110 million on lobbying and $22 million in direct campaign contributions. It is obvious who has the power of congress’ ear. To blame ethanol for higher commodity prices across the board is foolish, and to blame environmental economics for poverty is ridiculous. Pollution and corruption breed poverty. Environmental stewardship combined with economics creates wealth socially, environmentally, and financially.
The major example of a market-based solution to an environmental problem is the carbon market. The environmental problem here is that the atmosphere and the oceans have too much CO2, and this is bad for ecosystems across the planet. A carbon tax, in this case, is good for the environment because it would limit pollution, but it is not necessarily initially good for business. It adds an additional cost of operation to those industries that have been the slowest to upgrade their lines of production and are still polluting the environment. For businesses that have adapted to the many cleantech innovations that have made their way into the market over the last several years, they will be positioned to benefit from a carbon market.
The carbon market essentially adds a cost where there formerly was not a cost. Currently, it is virtually free for businesses to dump as much CO2 into the environment as part of their manufacturing process as they like. With a carbon market, these types of firms would have to buy up carbon credits to keep up with their polluting practices, if they could afford it. It is an important milestone when a society decides to put an economic value on the environment so that using it has a cost, i.e. a carbon tax, cap and trade, whatever you call it. Without it, certain ecosystems of the world will continue to fall into a state of complete collapse. Are we willing to play such a game of global roulette with the odds stacked against us?
What constitutes excessive carbon pollution, though? Which industries are the worst polluters? Is it worse for the environment to make tires or cement? What are the marginal costs of disposable diapers? Why do people with children get tax breaks? These are all fine questions, but it is easy to see how the issue can get complicated quickly by calling some of America’s longest held beliefs into question. The idea that subsidies help bring the cost of manufactured goods down may not be accurate. In their purest form, carbon markets are better than subsidies because they allow investors to make money while the market makes the environment cleaner.
There is no question that solar is part of the renewable, cleantech solution. Solar power is approaching grid parity, and so, is becoming an attractive solution to businesses looking to retrofit or upgrade or are just coming online now. Solar power requires a large investment upfront, though, but then develops lower and lower operating costs the longer the system is in use. The high cost of initial installation acts as a barrier to entry, but the market came up with a streamlined solution.
Third party power purchase agreements, or PPAs, help solar projects get started by providing the financing. Many businesses do not want to hassle with the technicalities of operating a renewable energy system onsite, so they hire a third party to finance, manage, and operate the renewable energy components. This way, they can not only buy electricity at a set cost for fifteen years, but also position themselves in case CO2 becomes regulated sometime in the future. The sad fact of the matter is that many solar projects would not go ahead without an incentive plan of some sort, but are subsidies for innovation better than subsidies for pollution?
Any discussion of subsidies and renewable energy these days must include the topic of ethanol, even though the conversation around it can become highly volatile. The reason for the volatility is not necessarily clear, but it seems that people have begun to see the entire ethanol industry as being propped up on subsidies. Critics argue that the ethanol industry can not stand on its own, and that it is actually contributing more CO2 to the system than it takes out.
No one wants to see people go hungry, but what is the alternative…more respiratory disease? The problem for environmentalists is not that we are running out of oil; their problem is that there still is more oil to be found. Are climate change and global warming really a better alternative to higher food prices in the short-term? So, we pay a little more upfront for a more environmentally integrated society; this seems like a rational investment.
The whole food vs. fuel debate seems ultimately like another distraction from the main issue, that is, that fossil fuels are in the process of being replaced. It is way past time that certain market-based solutions were implemented in order to try to regulate some of industry’s most egreggious behavior regarding the environment. The ethanol distraction, as it is coming to be known, is part of a broader campaign that is being used by the oil industry to confuse and conquer their enemy, in this case, renewable energy in general.
It makes no difference to the oil industry that ethanol made from grain is being replaced by ethanol made from wastes of all types; no food is necessary at all anymore. In fact, algae shows the most promising potential in terms of energy produced and in taking CO2 out of the atmosphere, but none of this matters to the oil industry except that ethanol is set to begin eating into Big Oil's profits.
Some economists argue that Europe’s carbon market has not allowed them to meet most of their Kyoto obligations, but images from the Olympics this year in Beijing show what unregulated climate policy does in terms of the amount of pollution.
There are two emerging carbon markets closer to home here in North America. The Western Climate Initiative, WCI, and the Regional Greenhouse Gas Initiative, RGGI. Potentially, these carbon markets could ultimately save taxpayers money by making the corporations who are responsible for the polluting, pay. The funds from the carbon markets are then transferred to spur more innovation in low carbon technologies.
Economics can become the environment’s best friend, and it is an exciting time to be a part of the transition. Financial markets are the most powerful force in the world, even more powerful than elected governments. To have the people in those markets operating under environmental principles is a major benefit to all living things and humanity’s quality of life in general, not to mention will provide a robust economy ensuring healthy returns for years to come.
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United States Society for Ecological Economics
www.ussee.org
The United States Society for Ecological Economics provides a place for economists, scientists, politicians, and people who care for the well-being of this planet and its inhabitants, so they might learn from each other on a regular basis and develop solutions to our most pressing economic, social, and environmental problems. “Ecological economics is a trans-disciplinary field of inquiry that facilitates understanding between economists, ecologists, and many others interested in real solutions to environmental problems and the integration of new ideas to create a sustainable world.”
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