Environment or Growth? Both

Conventional wisdom says the environment and economy are fundamentally at odds, that whatever we give to the economy--a barrel of oil, a ton of ore, a tree--we take from the environment. Because of this, it is impossible to have both a bountiful environment and a growing economy. We must sacrifice one for the other. But which to choose?

It’s a dismal choice. But that’s how most environmental groups and businesses think about our dilemma--as a trade-off. Choose a healthy, growing economy today, and you doom the environment tomorrow. Choose a healthy environment tomorrow, and give up affluence today.

To make the best of an impossible choice, most thinking people choose a middle road: Use up enough of the environment to be comfortable today, but leave enough for our children to use up tomorrow.

There is a better way. Not only can economic growth occur without harming the environment--it must occur in order to save the environment. An economy that does not grow will inevitably deplete and destroy the ecosystem that surrounds it. The reason we perceive growth as being in conflict with the environment is because we confuse growth with depletion. The best analogy may be to a bank account: To the extent we add to the account, our wealth grows; to the extent we make withdrawals, we grow poorer, until finally everything we had is gone. The only sensible path is to invest the money we withdraw in income-producing activities that will increase our wealth.

Similarly, when we withdraw resources from the crust of the Earth, we deplete our global wealth. To compensate for that depletion, we need to add to the Earth’s resource base--for example, by using resources synergistically to produce wealth, such as by turning silica into a microchip or developing recycling systems that turn garbage into reusable resources.

Faced with this simple reality, why don’t we simply stop wasting our global resources and start investing them?

The answer is simple: Our global economy is founded on faulty accounting systems. We value our natural resources according to their cost of extraction, rather than their cost of replacement. That’s like valuing our life savings according to the cost of driving to the bank to withdraw them.

No bank in its right mind would make a sizable loan, then accept cab fare back as full payment. Yet that is precisely the way the globe’s bankers loan out its assets. As a result, part of what we have called “growth” in the past is merely the depletion of global assets. We extract oil from the ground, burn it and count the work that gets done as income. But while we figure the costs of drilling in the expense category, we forget the biggest expenditure--the loss of the oil itself.

That leads to the overconsumption of capital assets--fossil fuels, non-renewable resources--and the overpricing of renewable energy, efficiency, durability and recycling.

The result is ultimately catastrophic: life-threatening levels of carbon dioxide in the atmosphere; poisonous chlorofluorocarbons devouring the ozone shield; plows and bulldozers tearing down rain forests because their importance to the biosphere is given no value by the economy.

Nearly all our global environmental challenges, then, stem from an accounting problem: We are depleting the environment because we vastly undervalue its resources.

Seen in this light, the solution seems relatively straightforward. People deplete the Earth because we let them keep the profits from depletion, but we don’t charge them for the resources they deplete. If they had to pay for the resoures they borrow--if, for example, oil companies had to return to the Earth the same British-thermal-unit value of energy that they borrow--they would soon find that developing renewable energies would be their best investment. That, in turn, would reduce fossil fuel consumption. Carbon dioxide buildup would be reduced and the greenhouse threat would be reduced and ultimately eliminated.

But how can we know the true cost of an increment of depletion or pollution? And who do we charge?

The good news is that the job may not be as complex as we have imagined. By using simple incentive mechanisms, and adhering to basic environmental accounting principles, we can harness the natural forces of the economy to produce growth that nurtures the environment, rather than illusory “growth” that ravages it.

Only two overriding principles need be followed to solve most of our environmental problems. Once these are fully adopted in policy, all the technical, political and economic changes we need will follow automatically.

First, we must price natural resources at their true costs, by eliminating all the subsidies that keep prices artificially low, and valuing them according to their replacement cost.

Second, we must hold all businesses and individuals strictly liable for the restoration costs of any environmental disruptions they cause, legal or illegal. Economists call this the “polluter pays” principle.

As sensible as those steps may sound, many environmentalists and business people bristle when they hear them. To some environmentalists, charging corporations to pollute is a cop-out--pollution should be banned, not turned into a commodity. Some business people have the opposite concern: Pollution is a social problem, and manufacturers shouldn’t pay the costs alone. If manufacturers have to foot the bill, some factories may become uneconomic or obsolete and be forced to shut down. But by charging the costs of cleanup to everyone, we’ll still have products to manufacture and we’ll all share equally in the costs of cleanup. That’s the theory.

Instead of adopting true costing and polluter-pay principles, most environmental and business organizations unknowingly favor policies that slow economic growth and erode the environment. They do so by explicitly favoring certain technological solutions to environmental problems: They may advocate mass transit, or alternative energy development or recycling technologies.

But if no one uses the transit because urban sprawl is artificially cheap, if no one switches to alternative energy because fossil fuels are still on close-out sale and if no one reduces waste because it is more profitable to let taxpayers pay for disposal, then environmentally sound energy and resources systems will be discredited as too expensive.

To ensure that efficient transit, affordable energy, waste reduction and recycling happen, their true value must be recognized by the economy. The only way to do that is to include the full true costs of non-renewable resources in their price.

But how?

Progress is being made in the true costing of natural resources. Under California law, for example, beverage-container manufacturers are required to buy back their containers at the actual cost of collecting them for recycling. That, in essence, internalizes the replacement cost of aluminum, glass and plastic in its selling price.

The result has been a major increase in costs for plastic containers, a minor one for glass and none at all for aluminum, which is highly recyclable. To avoid these higher costs, glass and plastic manufacturers are investing millions of dollars in recycling systems to capture the value that they used to throw away.

But much more must be done. At the local level, taxpayer-financed garbage fees should be eliminated, and the cost of garbage service transferred entirely to produce manufacturers, as an incentive to reduce waste. At the state level, the full costs of roads and highways should be paid through gasoline taxes, automated tolls and other user fees. Globally, natural resources should be capitalized at their true replacement cost, so that we have an accurate accounting as to whether the economy is truly growing, or merely being auctioned off to the lowest bidder.

Some might say these changes will cost too much money. The truth is, they will save money. We already pay for our highways, our dumps and for the ill effects of pollution. The problem is, we pay as taxpayers, so we don’t connect the expense with the pollution and waste that caused it.

Others might say that true costing and “polluter pays” policies violate free-market principles. Just the opposite. Polluter subsidies, socialized garbage fees and tax-financed roads and highways violate the free market. Polluter-pays principles support the market, by bringing it into alignment with the ecosystem after which it is modeled.

The community, state or nation that recognizes the essential unity of the environment and economy, and that pioneers the fees and incentives that make polluters pay, will, in the words of the Economist, “enjoy a boom as the purveyor of greenness to a dirty word.”