Achieving Sustainability

Education, cooperative agreements, taxes, and tradeable permits are among the available incentives that can help pave the way to a sustainable economy.

BY KENNETH G. RUFFING

There are no shortcuts to sustainability. Achieving the economic, social, and environmental objectives of sustainable development in an integrated way is an enormous challenge. If we are to achieve an environmentally sustainable economy ourselves — and the alternative is to wait until it is forced upon us by a collapsing environment — we'll have to learn how to solve the enormous environmental problems caused by pollution, wastes, and poor planning that go hand in hand with an industrial economy in the late 20th century. Fortunately, a variety of policymaking incentives are available to make the problems more solvable and the transition smoother.

Environmental Costs

Many, if not most, of the environmental problems associated with a growing economy result from a tendency to undervalue the air and water, the Earth's soil and minerals, and the ecological processes that tie these systems together.

 

Environmental systems are undervalued for countless reasons, but mainly because of institutional shortcomings. These failures are caused either by the behavior of entrepreneurs in the market place or the decisions of government officials in legislative halls and executive offices.

 

Market failures, for instance, take place when environmental costs are externalized and are not reflected in the cost of a product or service. Pollution in all its forms — whether as air laden with excessive carbon dioxide or water laced with dangerous toxins — offers the best example of this shortcoming.

 

While the price of a product reflects the materials and labor that go into its manufacture, those prices rarely take into account the adverse environmental impacts generated by a product’s creation or use.

 

Policy failure, which is also widespread, results when governments intervene in markets in ways that actually discourage sustainable practices. Agricultural subsidies, which pose a particularly good example of this phenomenon, tend to encourage farmers and consumers alike to abuse resources.

 

In Brazil before 1970, for instance, cattle ranching — which was encouraged by subsidized credit and tax allowances — accounted for deforestation of 16 percent of the state of Mato Grosso and 20 percent in the state of Para.

 

Both market and policy failure can be addressed by measures that internalize environmental costs, remove unnecessary subsidies, create institutional mechanisms to manage shared global resources, help the poor secure sustainable livelihoods, and raise environmental consciousness.

 

Informed Decision Making

Without a better grasp of the links between socioeconomic issues and environmental problems, environmental policymaking is likely to remain ineffective.

 

Economic globalization and changing consumption patterns, particularly in the developing world, seem to have generated a growing demand for information on consumer spending patterns and lifestyle habits.

 

Beyond gathering information, researchers who study environmental issues must provide information to consumers on how their behavior influences environmental quality. Given existing lifestyles, however, the weaving together of sustainable consumption and production patterns likely will take decades to achieve.

 

Furthermore, we must acknowledge that the information we glean on nonsustainable consumption and production patterns in developed countries may be of only limited use in reversing the most damaging unsustainable patterns in those developing countries where poverty is the root cause of environmental degradation.

 

While many developed countries have supported efforts to reduce waste and dampen environmental impacts associated with consumption and production, developing countries are lagging far behind. Those living in developing countries are simply too worried about day-to-day survival to turn their attention to long-term ecological issues.

 

Moreover, environmental problems in developing nations often vary widely. For instance, in Bangladesh, India, and China, the most critical environmental and public-health problems are caused by polluted drinking water, lack of sanitation, and indoor burning of biomass for cooking and heating. In Sudan, Mali, and Niger, on the other hand, the most dire environmental problems are soil erosion, salinization, and desertification as a result of poor agricultural and other land-use practices.

 

Policy Instruments

A number of policy instruments are available to bring about changes in production and consumption patterns. For example, zoning ordinances limit open wood burning to certain times or areas, deposit-refund systems shift responsibility for controlling and monitoring pollution to individual producers and consumers, and ecolabeling schemes help consumers make better-informed purchases.

 

While these measures by themselves can effect positive change, they are much more powerful when used together.

 

In the past, command-and-control measures — such as the imposition of ambient air-quality standards for such pollutants as sulfur dioxide, or prohibitions on use of certain pesticides—have been the mainstay of environmental regulation. While these measures succeeded in forcing polluters to meet environmental standards, they offered industry little flexibility in terms of how it achieved compliance.

 

Because these regulatory schemes are costly to enforce and often not the most effective way to achieve results and motivate people and institutions, many policymakers — including those involved with the United Nations Commission on Sustainable Development — have been shifting their attention to social and economic instruments.

 

These instruments include public-information campaigns and voluntary agreements among governments, industry, and other major stakeholders on how to meet specific environmental targets.

 

Norway and the Netherlands have been particularly successful at orchestrating these voluntary agreements. Take, for example, a covenant signed in 1996 in the Netherlands. Under this agreement, the Netherlands’ cold-storage warehouses pledged that by 2000 they would achieve a 28-percent improvement in their energy efficiency over 1989 levels.

 

To reach this goal, the several dozen companies covered by the agreement have drawn up their own internal energy plans. Dutch equipment suppliers are providing advice on energy-efficient technology.

 

Education Leads Way

Environmental policymakers have learned that education — both formal and informal — plays a powerful role in changing consumer attitudes and behavior. Indeed, introducing formal environmental curricula into national education systems can go a long way towards enhancing environmental literacy.

 

In Vietnam in 1980, for example, the general education curriculum for all primary and secondary schools was reorganized, with various environmental subjects being introduced at all levels. In 1993, a survey of 500 students sought to gauge their level of environmental awareness. The survey showed that 84 percent of interviewed students had an understanding of deforestation, 81 percent of biodiversity, 77 percent of toxic wastes, and 73 percent of soil erosion. Additionally, it was found that 30 percent of the students’ information came from school courses, 30 percent from reading materials, and 40 percent from radio and television.

 

Environmental education and awareness campaigns should go beyond targeting the public, however. In many cases, these campaigns should also offer environmental education and training programs for corporate managers, engineers, designers, and other workers whose on-the-job decisions pose significant environmental impacts. Many large corporations in the United States — including DuPont, Johnson & Johnson, and AT&T — have implemented such programs.

 

Pocketbook Persuasion

Basically, economic instruments aimed at environmental protection have focused on:

 

n fees or taxes on water, air, or waste emissions,

 

n fees or taxes on products that generate a great deal of waste,

 

n deposit-refund systems that curb the waste stream,

 

n and tradeable emissions permits.

 

The power of economic instruments lies in their ability to encourage behavioral changes on the part of manufacturers and consumers. For instance, charges on air and water emissions create powerful incentives to reduce environmental degradation because, by reducing pollutants, companies reduce their emissions fees. It’s a simple matter — if you pollute less, you pay less.

 

This cost factor stimulates manufacturers to search for cleaner technologies, which contribute to significant changes in production processes over the long term. For instance, a recent study in Sweden indicates that the sulfur content of fuel oil decreased by about 40 percent between 1990 and 1992, at least in part as a result of a national sulfur tax.

 

As for consumers, deposit-refund systems achieve parallel reductions in pollution by encouraging people to change their consumption habits. A refundable charge on such goods as bottles and cans that litter roadsides and clog waterways rewards consumers for handling a product or its container in an environmentally sensitive way.

 

Deposit refunds have achieved remarkable environmental results, with return rates in some countries — including Norway, Sweden, Finland, and the Netherlands — reaching nearly 100 percent.

 

Because deposit-refund systems generally operate at point of sale through retail stores, they are simple to implement and manage. And thanks to the low administrative costs, some countries have begun using them on products other than beverage bottles.

 

In Korea, for instance, a deposit-refund system for products containing toxic materials or those associated with mass discharge of wastes went into effect in 1992. Currently, the law applies to 11 items, including batteries, tires, beverage cans, TV sets, and air conditioners. This system was combined with a volume-based fee system for collection of wastes, which was introduced in 1995. Under this system, the amount of fees that a person pays for discharging wastes depends on the volume of wastes discharged. A trial implementation of the new scheme in 1994 indicated a 40-percent reduction in the amount of waste generated and a 100-percent increase in the amount of waste recycled.

 

Product charges can be levied either on products and their containers or on the product’s characteristics, such as carbon or sulfur content. A typical example is tax on leaded gasoline, which in most developed countries gradually came to exceed the tax on unleaded gasoline. Most countries that adopted this tax — including the United States, Canada, France, Germany, New Zealand, Norway, the United Kingdom, and Denmark — significantly boosted their market share of unleaded gasoline.

 

In the United States, for instance, total annual emissions of lead nationwide declined from more than 200 million tons in 1970 to 8 million tons in 1987, mainly because of the gradual phasing out of leaded gasoline.

 

In Thailand, a tax on leaded gasoline was introduced in 1991 to finance a subsidy for unleaded gasoline. Unleaded gasoline was introduced at a discount of 0.30 baht (US$0.012) per liter relative to leaded gasoline. This price differential created a thriving market in refitting lead-burning engines so they could burn unleaded gasoline. This measure was reinforced by a 1993 regulation requiring that all new cars be equipped with catalytic converters, which boosted demand for unleaded gasoline even further.

 

Tradeable permits also represent a promising market-driven technique for reducing the environmental impacts of larger-scale polluters. Under an emission-trading scheme, firms earn credits for reducing their emissions below target levels. Those firms that earn credits may sell or lease their credits to other firms. Empirical studies of tradeable permits are limited to a few countries, but data from the United States, which has been introducing tradeable permit systems since 1976, show that such permits help curb air and water pollution. Some of these schemes have been used in the United States to combat air and water pollution and preserve wetlands. Other U.S. emissions-trading programs have targeted ozone- depleting chemicals.

 

Technology Cuts Cost

Added to the effectiveness of permit trading is its cost advantage. In economic terms, permit trading, unlike regulatory controls, provide an incentive for a company to reduce its pollution levels in the most efficient way. Indeed, most studies have found that the implementation costs associated with command-and-control regulatory systems are significantly higher than those associated with permit-trading schemes.

 

The U.S. Congressional Budget Office has estimated that the per-ton cost advantage of achieving a 10-million-ton reduction of sulfur oxides would be reduced from $360 per ton under the traditional command-and-control approach to $327 per ton using transferable credits.

 

Moreover, beyond offering companies incentives for voluntarily complying with environmental standards, emissions trading also encourages development of advanced pollution-control technologies. These technologies, once in place, can help a company reduce emissions below regulatory limits and then trade its earned credits on the open market. In the process, an entire nation — and, in many instances, the global community — benefits from technological advances.

 

Technological progress has been most pronounced in areas where emission-reduction standards are most stringent. Such stringency leads to a scarcity of available pollution-emission credits, largely because companies have been able to meet their mandated emission levels through investments in technology. The most prominent example of technological change driven by rigorous emissions standards was the substitution of water-based solvents for solvents containing volatile organic compounds.

 

Enhancing Success

Whether an economic instrument — such as the imposition of a tax on a specific pollutant in a production process — will help bolster environmental protection depends on several factors. Research suggests that such instruments are most effective when they meet four criteria.

 

First, a less harmful substitute for the taxed pollutant must be readily available. An example is the refrigerator industry’s relatively rapid switch to the production of chlorofluorocarbon-free refrigerators thanks to the immediate availability of a propane-butane coolant, an environmentally friendly alternative.

 

Second, the substitute must be available at a reasonable cost. This may require the government’s help in establishing the infrastructure necessary to support development of the substitute. For instance, zero-emission cars will not become economical or practical if the government doesn’t help subsidize the cost of electric cars, at least until production levels increase enough to reduce unit costs to affordable levels. Moreover, the government will have to ensure that recharging stations are available to owners of electric cars.

 

Third, demand for the final product must be sensitive to increases in the product’s price. That is, sales of a product that damages the environment — or a product whose manufacture damages the environment — should decline markedly if its price increases. Price sensitivity tends to ensure that taxes on a product’s hazardous components cannot easily be shifted to the consumer. It follows that if goods whose production harms the environment are heavily taxed and become more expensive, sales will decline. As sales decline, the environmental impacts associated with the product will decline, even if the manufacturer fails to implement cleaner production methods. It’s a simple matter of arithmetic; fewer environmentally harmful products made and sold means fewer environmental impacts.

 

And fourth, the taxed pollutant must represent a relatively large portion of the total cost of the product. Consider, for instance, that if a taxed pollutant represents only a small proportion of a product’s total cost, a manufacturer could easily absorb the increased cost of the pollutant in the overall costs of production. If, on the other hand, the tax on the pollutant represents a substantial percentage of the overall cost of the product, the price of the product will increase noticeably unless producers reduce emissions of the pollutant in question.

 

Tech Transfer

Over time, as the developed world creates new, environmentally sustainable technologies, these technologies will need to be transferred to developing countries.

 

Such transfer is important not only because it is equitable, but because of the transboundary nature of such environmental problems as air and water pollution, global warming, and ozone depletion. Indeed, such problems have no respect for national boundaries, and solving them will require international cooperation and collaboration.

 

But there are other, longer-term reasons to support the transfer of these technologies. To do otherwise will only widen the technology gap between developed and developing countries.

 

As industrialized countries enact new environmental laws and establish new standards, developing countries face the increasingly difficult task of keeping pace if they hope to retain access to the global market. Transnational corporations based in developed countries have a unique role to play in this area.

 

In China, for example, nearly 500,000 expatriate managers working for multinational corporations are actively involved in the transfer of developed country knowledge and business methods. To some extent, environmental awareness is transferred as well. Consider, for instance, that such computer companies as Digital, Compaq, and IBM have pushed for higher environmental standards abroad.

 

Meanwhile, such oil companies as British Petroleum and Arco guarantee they will act as environmental watchdogs, in addition to building schools and airports, in return for permission to drill for oil in places like Siberia and Alaska.

 

Generally, multinational companies tend to apply international standards wherever they go because it is easier for these companies to operate by one set of rules everywhere around the world.

 

Furthermore, if we hope to accelerate change toward more sustainable consumption and production patterns, we must do our utmost to support and institutionalize the sharing of practical experiences among countries from both developed and developing worlds.

 

Once such an exchange network is in place, developing countries can capitalize on the technologies cultivated by their developed neighbors. A global network will not only ensure that all nations have access to the newest environmental technologies, it will also ensure that mistakes, once made, are relegated to the past, never to be repeated.n

Kenneth G. Ruffing is chief of the Socio-Economic Policies, Finance, and Technology Branch of the Division for Sustainable Development, United Nations Department of Economic and Social Affairs, in New York City.