Sustainability: Marco vs Micro
by Dr. Hans W. Gottinger
Professor of Economics
University of Maastricht (RL)
International Institute for Environmental Economics and Management
Sustainability has many facets as a prescriptive principle how to conduct environmental policies on an economy-wide and global economic level. Little thought has been given, however , to what such a principle entails for corporate environmental management (CEM). Corporate environmental reports (CERs) abound with references to sustainability and use as proxies their performances with regard to eco-efficiency and/or life-cycle analysis.
We will argue in this paper, however, that such performances won't add up to satisfy sustainability as a macro principle.
Sustainable Management (SM) would request to fully internalize sustainable behaviour (as prescribed through the macro principle) into managerial decision-making. We discuss ways to operationalize SM.
The paper attempts to analyse sustainability concepts, such as sustainable growth, sustainable development and sustainable resource use, in terms of conventional neoclassical economic theory, emphasising sustainability on a macro vs. micro scale. It then tries to analyse why free market forces may not achieve sustainability, and how policy intervention may help or hinder sustainability.
We set out a general model depicting stocks and flows of economic and environmental variables such as capital, labour and natural resources (hereafter abbreviated to just „resources"). Each variable consists of many different categories, and weights such as prices or natural resource accounting values are needed to calculate aggregate stocks and flows of variables. General interdependencies are pointed out, such as the effect of resource and pollution stocks on output („environmental productivity") and on welfare (environmental amenity) , Gottinger (1998)
Dozens of different verbal definitions of sustainability concepts are discussed in the literature (Chichilnisky, 1996).The general economy/environment model is used to suggest quantified, sometimes conflicting interpretations of these definitions. Key points which emerge are:
(1) The geographical and temporal context for sustainability concepts must always be made clear :
(2) „Growth" generally ignores the direct effect that the environment may have on social welfare, whereas „development" takes it into account.
(3) The most common, although subjective, definition of „sustainability", is that the wel- fare for future generations should not be less than the welfare of the current generation, i.e. utility should be non-declining.
(4) „Sustainable resource use" focuses on maintaining a stock of renewable resources. Looking objectively at the resource base may be more relevant than notions of inter- generational welfare, when studying poor developing country economies.
(5) Many definitions of „sustainable development" explicitly require attention to the needs of the current poor as well as to the needs of the future.
Many different definitions of sustainability can be interpreted in terms of maintaining the economy’s capital stock. However, capital stock can also be defined in several different ways, so a choice of definition is still necessary. The relevant choice requires a judgement of how significant, essential or substitutable are the various natural and man-made resource inputs into the economy.
The uses and shortcomings of abstract optimal growth models for analysing sustainable development are discussed. Optimal growth models can never achieve much realism, but may be useful for clarifying concepts and for making general suggestions for policy in what is a very diverse and complex field (Gottinger,1997). Sustainability may be viewed as a constraint on the conventional optimality criterion of maximising discounted utility, rather than as a replacement for it. Providing an ethical foundation for a sustainability constraint requires that people are seen as having separate preferences for private and social choices. In practice governments may be no more concerned about sustainability than individuals.
Comparative static analysis is used to analyse rational tradeoffs between consumption and environmental quality at different stages of economic growth. Resource inputs are ignored, and a given output is assumed to be divided between consumption and pollution control expenditure. It is possible to view a commonly observed pattern, that environmental quality first declines and then recovers as industrialisation proceeds, as an optimal allocation of resources. One can then perhaps conclude that continued environmental improvement is generally compatible with economic growth in the mature stages of development. However, it is also possible that environmental policy is inevitably weak during early industrialisation, and that truly optimal consumption-environment tradeoffs actually lead to continually declining environmental quality as growth proceeds (World Bank, 1992)
Optimal control theory is applied to radical simplifications of the general economy/ environmental model, in order to examine sustainability in the context of non-renewable and renewable resources (Beltratti,1996;Gottinger,1998) A first model is of „cake-eating", with exogeneous technical progress in the transformation of a single non-renewable resource into a consumption good. The optimal path shows steady growth of consumption (i.e. sustainability) only if the rate of technical progress exceeds the rate at which future utility is discounted; so people’s concern for the future does affect sustainability.
A second model is also of cake-eating, but here an individual’s utility depends not only on the rate at which he depletes his own resource stock, but also on the total resource stock owned by all individuals. This total resource effect is either direct (environmental amenity) or via the production function (environmental productivity). In either case, non-cooperative (privately optimal) resource depletion results in a „tragedy of the commons": private rates of resource depletion are greater than is socially optimal, and the economy is less sustainable.
Government intervention in the form of resource conservation subsidies or depletion taxes is shown both to correct the tragedy of the commons and to improve sustainability. Conversely, government subsidies for resource depletion, as often occur in reality, have the opposite effect. However, slowing down resource depletion also means lower initial levels of consumption and utility. The suggested (not proved) implications for policy are that conventional environmental policy may also improve sustainability, making a separate sustainability criterion redundant in practice; and that politically difficult short-term sacrifices may be needed to reach optimal and sustainable growth paths. „Conventional environmental policy" need not always mean making the polluter pay for externalities; more important is that property rights over the environment are first defined and enforced.
A third model looks at steady states of an economy which also uses accumulated capital as well as resource flows to produce output (via a Cobb-Douglas production function). Environmental amenity or environmental productivity, combined with privately optimal resource depletion, again results in socially excessive resource depletion rates and lowered sustainability. A government conservation incentive again slows resource depletion. It also raises the rate of return on capital (the interest rate), because the resource price is driven up and capital investment results in resource savings. Possible limits, imposed by the laws of thermodynamics, on capital substitution for resources (limits which the Cobb-Douglas formula does not recognise) and on technological progress must be observed.
A fourth simple model is based on a single renewable resource („corn"), where there is exogeneous population growth, no technical progress in corn growing and harvesting, no environmental externalities, and a minimum consumption level needed for survival. This is clearly more relevant to developing countries whose economies depend largely on renewable resources. The optimal solution can be one of sustained growth of consumption and welfare, but only if two conditions both hold. The first is that the resource growth rate exceeds the sum of the utility discount and population growth rates; if not, grinding along forever at subsistence consumption is optimal. The second condition is that the initial resource growth is large enough to feed the initial population; if not, people are forced to eat resource capital (seedcorn) simply to survive, and total depletion and catastrophe are the inevitable result. This model provides a rationale for common development policies such as agricultural improvement, population control and the need for outside assistance. Possible extensions to include capital accumulation, non-renewable resources and environmental externalities are suggested.
We then discuss the roles of a more equal income distribution, and /or of meeting basic needs, in sustainable development. To some extent these may be separate issues, requiring separate redistribution policies. However, the corn-eating model showed how poverty and environmental degradation can be linked. Also, the allocation of environmental property rights to the poor may both alleviate poverty and improve the environment if there are both rich and poor classes in society. This is true whether the poor are the polluters (by being so poor that they degrade their own land and cause floods, siltation, etc. elsewhere), or the pollutees (by suffering air and water pollution in cities).
Finally, we look at how a sustainability criterion (if it is accepted as a social goal) may be made operational. First of all one must be clear about what system level (species, ecosystem, nation or planet) the sustainability criterion is to be applied to. Then one must ask whether a separate sustainability criterion is necessary in practice: it will be very difficult to apply, and in any case improving conventional environmental policies will generally improve sustainability as an automatic side-effect.
If it is decided that improved environmental policy alone is not enough, any separate sustainability policy is necessary, one must ask how it can be applied at both the system and project level. At the same level it is fairly clear, in theory if not in practice. Aggregate constraints (either economic or regulatory) must be imposed to slow down or halt the depletion whatever resources have been shown to be important for sustainability. Such constraints will effectively drive up the price of such resources, to what level is necessary to induce the required conservation efforts throughout the system. These conservation efforts will be equivalent to providing intergenerational compensation in various ways. Moves toward this process already clear with international agreements on CFCs.
Making sustainability operational at the project or corporate level is much harder, even conceptually. Linking sustainability to „proxies" such as eco-efficiency, lifecycle analysis and full-cost accounting as suggested by the BCSD(1994) would not be enough and might be in conflict with the macro principle. System sustainability cannot be disaggregated into project rules in the simple way that system optimality can be disaggregated into cost-benefit analysis of projects. Many writers suggest that „intergenerational compensation" projects should be required for any group projects that has a harmful overall effect on environmental resources. This is an attractive and fairly operational concept, but questions are raised to how groups of projects are to be defined, how compensation should be paid and who should pay it, particularly in the case of private investments.
Beltratti, Andrea(1996), Models of Economic Growth with Environmental Assets, Kluwer Academic Publishers: Boston
Business Council for Sustainable Development (1994), Internalizing Environmental Costs to Promote Eco-Efficiency, Geneva
Chichilnisky, Graciela (1996) 'What is Sustainable Development?', Columbia University, mimeo
Gottinger, Hans W.(1997) , Polluted and Sustainable Growth Paths, Keiei to Keizai (Japan Review of Economics) 77 (2), pp.47-74
Gottinger, Hans W.(1998), Global Environmental Economics, Kluwer Academic Publishers,Boston
World Bank(1992), World Development Report: Development and the Environment, Oxford Univ. Press: Oxford
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