Sustainable Development as an Economic Model

The following has been contributed by Dr John Peet, Department of Chemical and Process Engineering, University of Canterbury.

General Principles

Every economy is connected to its environment. Physical raw materials (fuels, minerals, crops etc.) flow in, and physical wastes (heat, pollution, sewage etc.) flow out. The outflow is at all times a direct and unavoidable consequence of the inflow. Both flows are influenced by decisions made by humans in the economy. Sustainable development means (at the very least) protecting the environment's ability to supply ecosystem services to the economy. This means that uses of physical resources and emissions of pollution must not exceed the absorptive capacity of the environment.

Historically, New Zealand has followed economic policies of increasing inflows (one outcome being that our ratio of energy to economic activity is second to highest among OECD nations). In addition, we and most other nations have largely ignored outflows by relegating them to the category of "externalities". They are, in fact, inescapable consequences of all types of economic activity.

When faced by issues such as accelerated global climate change and damage to the ozone layer, a biophysical viewpoint tells us that it is the throughput of matter-energy across the environment-economy boundary that is the prime issue to be addressed. This in no way implies that the value of economic activity needs to be so restricted, but the quantity of fuels and materials used in that activity must not rise above a threshold level, and should preferably be reduced.

The principle that underlies everything - The Primary Policy Principle - is acknowledgement of the imperative of ecological sustainability. Following this principle we have to achieve substantial reductions in pollution and waste emissions. That, in turn, means that resources flow, especially the use of fossil fuels, must be reduced.

We then have to determine by how much. This is the Second Policy Principle of sustainable resource use and waste management. The optimum quantity of throughput must be determined by ecological and ethical considerations, including sustainability and inter-generational justice.

Once these two (related) questions are resolved, we can address the Third Policy Principle, which involves choosing the legal, economic and other policy instruments with which we can move towards a sustainable society.

It is never enough to bolt clean-up facilities onto current dirty processes. "End-of-pipe" technological improvements, while often useful in the short term, are inadequate when the need is to ensure that total resource throughput is substantially reduced. It is more sensible to redesign processes, to cut down on "beginning of pipe" inputs.

Government Policies

Each independent policy goal needs an independent policy instrument. There are actually three independent policy goals facing governments today: allocation, distribution and scale. The three goals (the ends) must be clearly distinguished from each other, and from the policy instruments (the means) available for each of them.

Allocation is the process of linking the supply of goods and services to the demand for them. It may be achieved by several means, including sharing or rationing. Where appropriate and where properly harnessed, however, competitive markets can often be both simple and economically efficient means to this end.

Distribution is an ethically-driven end, in that it reflects a society's attitude to social - including intergenerational - justice. Social welfare, education and health are areas in New Zealand where income transfers are used to provide services to citizens.

The third issue, that of scale, has been largely absent from government policy in the past. It reflects the fact that all activities of society involve the use of resources and production of wastes. To avoid damage to the web of life, the volume of wastes must be kept within the absorptive capacity of the natural environment into which they are dumped. Since real Gross Domestic Product (GDP) is quite a good indicator of the volume of resources used, unthinking growth in GDP must be replaced by more sensitive indicators of economic activity.

The most appropriate policy response to the issue of scale is the relatively simple one of reducing flows of raw materials used by an economy, thereby reducing outflows of waste and pollution from it. The most direct means is to concentrate on the use of fuels such as coal, oil and gas, since they are directly polluting and intimately related to other pollution from industries. This requires a drastic improvement in resource productivity, so that much more economically-useful output is obtained from a given quantity of resource input.

In order to get to the stage of examining possible means to the ends of social justice and scale, it is obvious that the ends have to be determined first. We must not look to markets (allocative tools) until we have first clarified such questions as the desirable extent of income transfers, and by how much to reduce energy and resource flows. These are ethical questions to be answered by the people, with economists, ecologists and engineers involved in a community-wide consultative process.

One response has been the call for an "environmental Plimsoll line", analogous to that which defines an absolute limit to the load which a ship can carry. The ship's load can be well or badly balanced, even when the water line is well below the Plimsoll line. But if the water line is above the mark, rearranging the load in an optimally-efficient manner will be of little help. Arguably, those who are obsessed with allocation to the exclusion of scale deserve the environmentalists' criticism that they are busy rearranging the deck chairs on the Titanic.

The environmental economist Daly has suggested two rules to govern the relationship of an economy or a project to its environment:

The Output Rule is that "wastes from a project should be kept within the assimilative ('sink') capacity of the local environment.

The Input Rule for renewables is that "harvest rates of renewable resource inputs shall not exceed the regenerative capacity of the natural system that generates them."

for non-renewables is that "their depletion rates shall equal the rate at which renewable substitutes are developed by human invention and investment."

Clearly, while following these rules is highly desirable, in many situations it will require a phase-in period. That period should not be too long, since it is urgent that all projects reflect the rules to the maximum extent, as soon as possible.

Since the rules reflect physical criteria, it is also clear that the physical and natural sciences, together with engineering, are the central professions involved.

Economics and the Environment

In the context of economics and the environment, a former Minister of Conservation made the statement: "... to give the environment a fair hearing, and represent it across the entire alignment with development, you have to communicate in economic terms."

First, it is worth mentioning that this statement reflects, more than anything, the dominant place of economics in the political power structure. In order to apply it, it is also as well to remember that in order to be included in a conventional economic analysis, the characteristics of the environment (and its resources, and the people in it) have to be transformed into, and enumerated in, a form (commonly the dollar) generally used in society to measure the exchange value of goods or services. Many economists assert that the market - or some form of surrogate - is the appropriate place for "valuation" to be carried out.

The approach has a number of flaws. For example, there is no way in which even an approximation of what might be seen as a monetary value of the damage due to CFC or CO2 emissions to the atmosphere can be determined: there are no markets where they may be "valued". One response is to attempt to determine societal costs, by estimating the costs of damage, control, mitigation or prevention. Another is to use shadow prices, which may be obtained from measurements of transactions associated with the events. As a generalisation, at the present state of knowledge these methods fall well short of representing anything like a full meaning of the term "value", and are often seriously incomplete. In most situations, therefore, economic methods cannot give scientifically- meaningful dollar values to many resources.

Despite these problems, the use of even incomplete methods of economic assessment of environmental factors may assist the user to incorporate more realistic values into economic calculations, and thereby improve economic decision-making relative to situations in which no account is taken of them. The caveats given above, however, mean that little confidence should be placed in the numerical values produced by such analyses, while accepting the broad potential usefulness of the analyses themselves.

Natural Resource Accounting

Given the central importance of limiting the flows of material resources across the ecosystem-economy boundary, it is usually important to evaluate these flows, in any engineering context. Often, a process analysis (in which energy and material inputs and outputs are identified and quantified) will provide the main information required.

For larger systems, including national economies, process analysis has been developed into natural resource accounting, with national flows evaluated in physical units such as litres of oil used, tonnes of fish caught, tonnes of topsoil lost, and so on. This method has been used in several countries with success, but when used in national accounts it suffers from the disadvantage of a high level of complexity, in that separate accounts in different units must be maintained. The question then arises, is it possible to express the diversity of results in simpler units?

Primary energy requirements (direct plus indirect) provide a very important means of describing and characterising the resource demands (in the form of energy "costs") of physical activities within an economy. While only containing part of the information needed for indicators of sustainability, energy-based tools are further developed than other non-monetary techniques, and can contribute useful information. Given the requirement for sustainability, namely that attention be focussed on physical flows across ecosystem-economy boundaries, tools of energy analysis have been central to the attempt to incorporate a physical dimension into economic decision-making.

Engineering and the IPAT Rule

The ecologist Paul Ehrlich has proposed the following simple equation, as a useful general guide:

or I = P*A*T, where Population is measured in numbers, Affluence in dollars spent on consumption, and Technology Impact by some function of the resources used (perhaps primary energy consumption).

If today's values are indexed to unity, the Impact equation simplifies to the reference situation: I = 1*1*1 = 1

To illustrate the use of this equation, assume that we in New Zealand proceed along conventional lines of development, with 4% annual increase in GDP (as proposed by the main political parties) compounded over the next 25 years. Assuming no increase in population and no improvements in technology, the Social Impact 25 years hence will therefore be around (1 + 0.04)25 = 2.7 times the current level. Put another way, if we want to keep the total Social Impact constant at today's relative level under those conditions, then Technology Impact will have to improve (ie reduce in size) at the same 4% annual rate as Affluence is increasing, ending at a value of 1/2.7 = 37% of today's level.

The engineer's task is clearly to address issues of Technology Impact. A suggestion is to concentrate attention on:

1. Lowering materials requirements of production
2. Lowering primary energy use in production of materials
3. Lowering environmental impact through use of less polluting processes.

This process could be analysed by making the following substitutions in the T (Technological Impact) term in the IPAT equation.

In the context of an engineering project, these items can usually be identified and enumerated, at least in general terms, often from a process analysis. What is important is less the absolute values in themselves than the extent to which the project under examination contributes to trends (desirable or undesirable) in Technology Impact on the local environmental/ecological system. In this context, linking with the Environmental Assessment process is obviously essential.