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Sustainability: an economic perspective Steven R. Elliott ∗ Department of Economics and Center for Sustainable Systems Studies, Miami University, Oxford, OH, USA Accepted 18 January 2005 Available online 17 March 2005

Abstract The economic perspective of sustainability focuses on the trade off of current consumption for future consumption. This was the question that faced the economists of the late 19th century such as Malthus who noticed growth in the population outpaced that of food. Yet, Malthusian prediction of famine and disaster did not come to pass due to technological innovation. There was a substitution of created capital (machines) for natural capital (labor and land). Thus, whether created- and natural capital are substitute or complementary goods is key to sustainability. Many economists believe we can maintain current consumption and that technological innovation will take care of the needs of future generations. However other economists believe that created capital and natural capital are complementary goods; as we consume more created capital, we will also have to consume more natural capital. The relationship between natural and created capital has an impact on what policies and incentives we consider for the preservation of opportunities for future generations. If they are substitutes, current efforts need to focus on development of new technologies which will allow us to do more with less. If they are complements we need to consider efforts of preservation and conservation. We understand that we cannot have our cake and eat it too. The debate is whether we emphasize finding a new way to bake more cake, or carefully consume the cake we have. © 2005 Elsevier B.V. All rights reserved. Keywords: Sustainability; Current consumption; Future consumption

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0921-3449/$ – see front matter © 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.resconrec.2005.01.004

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1. Introduction This paper is meant to be an introduction for a non-economist to how that particular social science approaches the issue of “sustainability”.1 Thus, it is a non-technical discussion aimed at a reader who may or may not have had an introductory course in economics in college. The purpose is to create part of a foundation upon which a cross-disciplinary discussion of sustainability can be built. In his paper in this PRES’03 Special Issue, Michael Gorman (2005) discusses the need for interdisciplinary approach to the challenges presented by sustainability. He also noted that it would take a common vocabulary and understanding of the motivations and concerns of all those stakeholders who come to the table to face these issues. This paper represents such an attempt to bring the economists’ view of sustainability to the table of diverse interests and backgrounds. This paper will begin with an introduction to some of the important concepts of economics and how economists view the world. In particular it will focus on what is economics, what are markets and why do economists like them so much, and finally how do economist measure economic well-being. This will include a short discussion of the weaknesses of these concepts and tools for facing an issue such as sustainability. Section 3 will continue on as background discussing briefly the historic perspectives that economists have had as to sustainability. In Section 4, I will finally talk about a working definition of sustainability as it applies to economics. This may seem to come late in the paper – it is always good to defines terms early on – but it is hoped that the historic perspective given in Section 3 shows that economists have dealt with sustainability for centuries without a formal definition. The focus on Section 4 is the current focus of economists on sustainability. The next section will include a discussion of perspectives on the relationship between natural capital (natural resources) and created capital (machines). The following section will explore a number of rules that have been suggested for dealing with this relationship. Section 7 will be a discussion of how current economists suggest that we might deal with building the concerns and uncertainties of the future and future generations into today’s decisions. The final section draws some conclusions about how important it is engage in a multidisciplinary dialogue on this issue, and possible ways of framing such a dialogue.

2. Economics, markets, and economic growth 2.1. Economics The definition of economics is: the study of the allocation of limited resources across unlimited wants (McEachern, 2000). That is, we would love to “have it all,” but there is not enough land, labor or capital (traditional economic resources) to do so. Even if there were, we are constrained by a limited amount of time; we can only live so long, and we can only

1 This paper draws heavily on a number of more technical sources including, but not limited to Hanley et al. (2001), and Goodstein (2002). The reader with a more technical foundation in economic theory is directed to these sources for a more in-depth and focused discussion of these topics.

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consume so many goods at a particular time. Thus, we must decide what resources are best used to produce what goods, and when all this should happen. The economist usually measures the success of any such allocation by an efficiency criterion: resources going to their highest valued use. That is, are land, labor, capital, and time being put towards the goods and outcome that we most highly value. If so, it is argued that the economy is working well. If not, we must consider a redistribution of those resources and time to the creation of different, more highly valued goods and outcomes. It is this efficiency criterion that motivates many economists’ interest in markets, and market based outcomes. 2.2. Markets Markets are very complicated institutions but in general can be thought of as a way to bring those that want a good together with those that are willing to provide it. This exchange, be it land, labor capital, or some finished good, sets the value for the resource or good. It is assumed that buyers have a declining value for additional units of a good and thus downward sloping demand curves. Sellers on the other hand are willing to bring more and more of the good to market as the price they can get for each additional unit increases, and thus upward sloping supply curves. When the value of the last unit that a buyer is willing buy is exactly equal to the value of the seller for that unit, we establish the equilibrium price and quantity. The intersection of the demand and supply curves therefore indicates the optimal market allocation of the particular good. Further, in the absences of any sort of market failures (e.g., a small number of buyers or sellers, imperfect information, etc.) this optimal allocation can be show to be efficient. Thus, through markets people can determine and communicate their value for goods and resources to others. As the reader is likely aware however, there are many concerns about the allocation of markets. Leaving for later the discussion of particular market failures, it should be noted this discussion of value is more restrictive than might at first be apparent. When an economist considers demand for a good (and therefore its value), that takes into account both a willingness to pay for the good, and an ability to pay for it. For example, I may highly prize a vacation home on a sunny beach in the tropics, but if I cannot afford it, my value of the house will likely not affect the finally allocation of the good. My dream home may be bought up by a land developer who can afford it and turned into a strip mall. In this way, if we think of markets as a way to vote for goods that we think are “valuable,” we have one vote for each dollar. The more dollars, the more influence one has on market outcomes, and the more influence one has on the efficient allocation of goods. Thus, an objective of efficiency need not be related to an objective of equity. Markets create efficient allocation not necessarily equitable ones, and this often creates tension between an economic perspective and those of others. The analytical tools of economics are not focused on what is fair. Another weakness is related. In most markets, not only do you have to have dollars for your preferences to be noted, but you must also be present. Not that one need be on the floor of an exchange to purchase a good or resource, as long as one’s preferences are adequately represented by an agent. Yet, future generations have no representation in most markets, and when it might exist it is imperfect. Efficient market allocations represent the preferences

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of the current generation, with almost no concern, certainly directly, for those of future generations. Any concern shown is from the current participants in the market who may be forward thinking.2 Therefore, economists must realize that when they point to market outcomes, that they ignore almost completely issues of inter-and intragenerational equity which is an important factor in the broader discussion of sustainability. 2.3. Economic growth and the standard of living Often, a measure of the health of an economy, such as that of the United States, is how much it can grow across in a particular amount of time. Economic growth is measured in the change in the gross domestic product (GDP) expressed in percentage terms. Thus, if we say that the US Economy has grown by 2.1% in the first quarter of the year we are saying that GDP has increased by 2.1% in that time. Gross domestic product is the value of all goods and services produced in an economy over in a particular time; it is a measure of the flow of resources and goods, or the flow of the money that is used to pay for them (the same in theory) (Bannock et al., 1998). It is a measure of how much stuff we make and consume. Thus, from a sustainability perspective, GDP and economic growth have particular weaknesses. There is no distinction within GDP of the importance of what is made and consumed. A dollar spent on education for “at risk” children counts just as much as a dollar spent on pet rocks. Economic growth can come from an increase in human capital such as education or from cleaning up a toxic waste spill and there is no difference in the final outcome. Many, both economists and non-economists would argue that a measure of national economic well being should be concerned not only with the level of spending, but on what that spending is for. Another weakness comes from not what is counted, but what isn’t. There is no way in GDP to include the changes in our stocks of resources. That is, we do not account for depreciation; the value of the capital used up in production, in economic growth. In the national income accounts we do account for some depreciation (that of what is traditionally thought of by economists as capital) in the calculation of net national product (NNP), but we ignore the depreciation of many other stocks. In particularly of the stock of renewable and non-renewable resources that are used to make the goods that do count. Our use of petroleum reserves today represents petroleum that will not be available in the future. Again, our current economic measures are not adequate for understanding effects on future generations. Some might suggest that instead of a focus on growth as our measure of well being we should use a different measure such as the standard of living. Yet standard of living is simply GDP per capita. It measures how much of the flow did each person today theoretically receive. It is not a measure of the quality of life at all. This is why many small oil-rich nations can have such a high standard of living. The numerator of the equation is very large while the denominator is very small. One would not suggest that the typical person in many countries with high standards of living actually has a “high” quality of life.

2 For example, Nature Conservancy can be considered to act in current real estate markets to protect land for future generations.

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It might therefore appear that the tools of economics are inadequate to the task of understanding sustainability, and in some sense many are. However, as noted above, sustainability has been a focus of economists for centuries. It is important to understand this history to understand some of the reason that many of these weakness might exist, and to frame the current debate about sustainability within the discipline.

3. Sustainability and the dismal science Sustainability, in one form or another, has been a concern for economists for well over 200 years. As Adam Smith was writing “The Wealth of Nations” expounding how markets and the “invisible hand” moved people to a better life, Thomas Malthus was looking at the same world and seeing gloom and doom. As many know, Malthus looked at a world where population was increasing at an exponential rate, but food production was increasing only linearly. Malthus saw that at some point in the not too distant future the population growth would be greater than the ability of the land to feed them. This would cause famine and severe economic down turns. Malthus predicted that the best we could do was cycle around a subsistence wage as each time we had economic growth we would have population growth and the subsequent crash when population becomes too large. Arguably this was where economics became the dismal science: Malthus was forecasting a very bleak world. Yet this is not the world that came to pass for this was also the dawn of the industrial revolution. Technological advances in manufacture and agriculture allowed increased production of goods, and increased production in food. We were able to produce more with less. This then, in effect, lifted the constraint that Malthus had predicted would keep prolonged economic growth from occurring as long as technological progress made any constraint non-binding. Now economists could turn from concerns of the sustainability of economic systems to understanding more clearly how those systems worked. This then was the direction of economics thought and concern until after World War II. It was at this time that Kenneth Boulding (1966) wrote his paper “The Economics of the Coming Spaceship Earth” where he suggested that maybe Malthusian ideas were not so irrelevant to the modern world. Boulding noted that in the past economists had viewed the world like cowboys of the Old West might have viewed their world; an open expanse full of resources and opportunities for the taking; a world with no binding constraint on growth. He pointed out however, that while this might have been the case, it was becoming abundantly clear that the world was a closed system and that the economy was more like a spaceship. This spaceship economy is self-contained and relatively small. There are only limited resources, and the wastes from production could no longer just be tossed aside and forgotten. Economists of the past had been concerned with the flow of resources, goods and services in the economy. Boulding suggested that while this was important it was also important to understand that there are stocks also; stocks of resources, some of which were finite, and stocks of waste some of which might be quite dangerous and long lasting. The cowboy economy was concerned only about flows, but the spaceship economy needed to be concerned also, if not primarily, with the stocks. Boulding’s idea, the reawakening of a Mathusian concern, is the foundation for the economic view of sustainability.

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4. Sustainability defined It may be worth noting that at least from an economic perspective, the definition of sustainability is something of a moving target. Early in the first Clinton Administration I worked at Oak Ridge National Laboratory. We had heard that there was increasing concern in Washington, D.C. over the idea of sustainability, and that this would translate into research dollars. Many of us sat around a conference table, knowing that there was serious concern about this topic, but having no idea what it really was. We must have spent our first few meetings just trying to come up with an operational definition that we could use to focus our efforts. A good working definition is the one provided by the Brunland Commission (see Hanley et al., 2001) which defines sustainable development as: Development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. Another that is also good is that provided by Ger Asheim (again see Hanley et al., 2001) which defines sustainability as a requirement to our generation to manage the resource base such that the average quality of life we ensure ourselves can potentially be shared by all future generations. This implies that we, the current generation, must be aware that we do not live in isolation, but as a continuing stream of people who have and who will exist. Further, it is important to realize that our current actions have an effect on those to come after. It is the idea of the Spaceship economy – a closed system with binding constraints if not on us, on the future, and we must be aware of all the constraints. At the heart of both definitions, is the idea of fairness and equity. They suggest that we need to be concerned about fairness in resource allocation across time. It is not fair for those of us here now to use up all the fish in the ocean without regard to future generations. This intergenerational equity is usually at the heart of any definition of sustainability. Yet there is also a subtle push for intragenerational equity. That is, a fair distribution of resources across people with the current generation. Asheim’s definition implies this type of concern when it introduces the term “. . . average quality of life we ensure ourselves . . .”. When we think of passing on a quality of life, do most people consider a life like the average person in the US, or the average person in Sub-Saharan Africa? Unfortunately, as discussed above, economics as a discipline, is primarily concerned with efficiency not equity. Further, as will be discussed below, our ability to address issues of efficiency even into the not-so-distant future are severely limited. Yet economics has some important input into the discussion of sustainability much of which could be insights of Malthus.

5. Sustainability and capital A primary concern of the economic view of sustainability is the nature of capital. As an economic resources capital is any input that goes into the production process to help create a final good. Thus, capital is stuff that makes stuff. Classic examples of capital are machines,

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roads, cars and trucks.3 In the discussion of sustainability, the definition of capital needs to be expanded and refined. When considering sustainability we break capital down into three broad categories. We consider natural capital (Kn ). These are inputs into production that come from nature such as water, air, plants, or energy.4 Human capital (Kh ) is also considered. This is knowledge that people possess that operates and improves a production process. As people go to school, they are said to be increasing their stock of human capital. The final category of capital is created capital (Kc ). This is the traditional classification of capital as goods that are created by people to aid in the production of final goods and services. Created capital can be thought of as the machines. It is how these various forms of capital are related that is at the heart of the economic perspective of sustainability. Consider that it is capital that in large part represents the ability to make goods, and therefore create a way or quality of life. The size and quality of the capital stock that is passed on to future generations represents their ability to create produce goods. It may be an oversimplification to say that if we pass on a capital stock that is at least as large as the one that we inherit than we have passed on the ability of the next generation to have a quality of life at least equal to ours. Yet, this is essentially the argument. With this understanding it is possible to consider that all three forms of capital are substitutes. In this weak form of sustainability we consider the total stock of capital to be the sum of all the various components. Thus, K = Kn + Kh + Kc The implication for sustainability is that as long as K stays the same size the current generation could use a large amount of Kn (e.g., crude oil) as long as this depletion is made up for by increases in Kc (e.g., more efficient machines) or Kh (e.g., a increased understanding of how to make synthetic fuels). In what is often considered to be a neo-classical view, increases in technology can make up for our current use and abuse of natural capital. This is the solution that Malthus had not foreseen. The Green Revolution is a prime example. Through the increase use of machine, and chemical fertilizers and pesticides, we have been able to expand food production while actually reducing the amount of land in production and the amount of labor in the sector. It is this view that suggests we need not worry about using oil too fast as by the time we use the last drops, we will have developed alternative energy sources that will probably be better. Another group of economists, often identified as ecological economists, are uncomfortable with this view. They expound a strong sustainability that views the various forms of capital not as substitutes but complements. That is, we need some of each to a have complete stock of capital. They suggest that there should be no declines in natural capital, or at least in critical types of natural capital. The argument is that future generations will need some amount of critical natural capital regardless of the amount of created capital and human capital they might possess.

3 Money is considered “non-productive” capital as by itself it does not create anything. It is considered capital to the extent that it represents a firm’s ability to purchase productive capital to employ in the productive process. 4 In a traditional economic framework much of what is considered to be natural capital is considered to be land.

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Thus, the basic foundation of an economic view of sustainability is the same. The key is the role of the stock of capital, and how it is preserved and developed into the future. Yet, the contrasting relationship of the two different groups – the substitutability of various types within the weak or neoclassical view, or their complementarily as taken in by the ecological economists and the strong view – suggests different paths by which we move towards sustainability. They have different rules that are meant to assure that future generations are at least as well of as the present.

6. Economic rules of sustainability The following four rules are by no means the only prescriptions for reaching a goal of sustainability. They are however the most often cited. As will be detailed below, the first is representative of the neoclassical approach where natural and other forms of capital are substitutes. The other three are taken from the ecological economic approach, and depend much more heavily on preserving the current stock of natural capital and using it carefully. 6.1. Correctly priced environmental goods and services Proponents of this first rule tend to be the neoclassicists who believe in the fundamental soundness of markets and the interactions of agents in them to obtain the optimal outcome.5 When market outcomes are not optimal (inefficient) it is due to some sort of market failure. That is, there is some sort of break down that produces prices that do promote the efficient allocations. Thus, for example, a market failure exists when the price of water in the US is very low, and so some people have no concern about irrigating lawns in the dessert while at the same time there are people in sub-Saharan Africa that are on the brink of dying of dehydration. If markets worked perfectly, the price of water in the US would reflect both the scarcity of it here and also in Africa. If we understood and accounted for all the costs of water it might turn out to be unprofitable to water lawns in the Southwest US because it was more profitable to ship the water to Africa. Of course this assume many thing, including but not limited to: our understanding of the full cost of commodities (a sort of full cost or life cycle accounting); knowing the value of all goods, even ones that might not be important today; and being able to determine the price of all goods including ones not traded in markets (how much is clean air worth?) to name a few. Again this approach begs questions of equity versus efficiency. As noted, markets outcomes assume that buyers are both willing and able to pay for a good. If you are unable to afford the water where you are, then you need to, as one comedian once said, “Move to where the water is!” The other issue, also discussed above is that future generations are not in today’s market and therefore have no direct representation. It is possible to consider futures markets for such things as water, or other natural resources, but these have their own challenges, and have never been considered for contracts generations into the future. 5 Readers interested in more details on this approach and how it is being applied to current environmental and social issues should see materials at the Rocky Mountain Institute (www.rmi.org).

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6.2. The Hartwick rule Another rule that is based on a weak rule of sustainability is the Hartwick Rule that suggests ways that we can insure the continuity of the total capital stock. As natural capital is used, the resource rents that are generated must be invested in either increased human or created capital. Resource rents are the difference between the marginal cost of extraction of the natural capital and the price that the resource demands in the market.6 Thus, any of what might be considered “excess profits” need to be channeled into creation of new created capital, education, or research and development that would insure that future generations will have the same productive capacity. Thus, as an oil company pumps petroleum out of the ground, the resource rents that those create are not distributed to shareholder to buy TVs or cars, but are rolled back into research into alternative energy sources, for example. In this way the total value of the capital stock is maintained as the proceeds from the use of one type of capital are invested in the creation of other types. 6.3. Daly’s “operations principles” Herman Daly was one of the original ecological economists. In general the Daly rule states: never reduce the stock of natural capital below a level that generates a sustained yield unless good substitutes are currently available for services generated.7 As Goodstein (2002) notes, this is like a commandment where we are told to protect natural capital without current substitutes regardless of the cost. For renewable resources this means that harvest rates must be less than or equal to the growth rate. That is, we cannot cut down trees any faster than they are growing. This assures of a constant if not growing stock of the good. The case of non-renewable resources is a bit more complex. Similar to the Hartwick Rule Daly’s principle calls for that sufficient income from the extraction of non-renewable resources be invested in a renewable substitute. By “sufficient” Daly means that there is enough investment in the renewable substitute to insure that it is available when the non-renewable resource is exhausted. Only after such a substitute has been made available can the residual income from the non-renewable resource be used for current consumption. That is, all profit from the extraction of petroleum must go into insuring that some alternative such as hydrogen, wind or solar power is available before the company can declare a dividend and pay its shareholder. Daly’s principles also address the issue of pollutants. In this case a much simpler rule is given, and described as an operational principle (Hanley et al., 2001). For pollutants the operational principle states that emission must not exceed the assimilative capacity of the environment. That is, we cannot put more of a pollutant such as Ozone into the air than the natural atmospheric cycle is able to break down and assimilate. While this simple enough, 6 Resource rents are considered to be the producer surplus generated by a given market price and covers both the owners’ opportunity cost of time and the opportunity cost of capital. 7 This rule is a generalization by Goodstein (2002) of Daly’s principles of renewable and non-renewable resources.

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one must recognize that global warming is a result of putting more CO2 into the air than can be accommodated by the natural respiratory cycle of the earth. 6.4. Rules set in terms of natural capital itself This final set of rules, as explained by Hanley et al. (2001) has many of the ideas of the others, but not as much detail. In particular, it suggests that we have no change in the stock of natural capital. Instead exact replacement and offsets need to be created as we use, in particular, non-renewable resources. Thus, if we pump one barrel of crude oil out of the ground we must assure that one barrel worth of an alternative energy is already available, preferably in the form of a renewable source. Thus the stock of natural capital is not allowed to fall at all, but cannot be replaced by created or human capital. These rules also demand a safe minimum standard in terms of pollutants. Contrary to the proper price rule above which would suggest that efficiency be the standard for the level of pollution (marginal costs of clean up equal the marginal benefits of clean up), this calls for a safe level of pollution; one that assures the continued health of both the people and the environment. This is large part is how we regulate certain pollutants and toxic and hazardous substances in the US. It is an example of equity concerns having greater impact than efficiency. These rules, and these views all provide a significant starting point. However, we must ask: how are issues of sustainability addressed in the current economic decision-making climate, and how are they might to be into the not-so-distant future.

7. Approaches to an uncertain future and future growth When considering how sustainability is addressed now, we can look in two different directions. The first approach is the traditional method that examines how we consider impacts of today’s decisions on future generations. Another is an emerging concept that suggest that pollution levels, and their impacts can be mitigated by increasing levels of income. Finally, we will turn to a move to broaden our National Income Accounting (GDP) to include issues that embrace sustainability. 7.1. Discounting Discounting is the method of determining the present value of a project or good that will accrue in the future. It is based on the idea that: (1) we value things more today than we do in the future (e.g., stuff today is better than stuff a year from now); and (2) since this is true, we must be compensated to put off having stuff today, and instead receive them, and their benefit, in the future. In its simplest form discounting is nothing more that applying the concept of compound interest to situations other than one’s savings account. Consider the simple example that many people face. You are considering the future of your new child. You can already tell that the child is above average in all areas, and will of course be going to a prestigious and quite expensive college. Good estimates are that your child’s 4 years in school are going to cost $150,000. Of course, through the magic of

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compounded interest, you don’t need all $150,000 right now, you only need a small amount, and as your small child grows so will the college fund. Assuming that you have a newborn child who will go to school in 18 years (she is above average, but not that far above the mean), you can use the following equation to determine how much you have to put away now. FV = PV(1 + r)t where FV is the future value of the account, PV is the present value of the account (today’s value), r is the interest rate, and t is the amount of time that you leave the money in the account. So, of the college example, FV is the $150,000 you will need to for your child education, t is the 18 years that you have to wait for the your child be graduate from high school, r is some interest rate, and PV is the amount that you have put in the account now.8 Thus using the equation, and assuming an interest rate of 7% (a bit below a long run equity market return), we can see: $150,000 = PV(1.07)18 or PV = $150,000(1.07)−18 = $44,380. Thus, you only (only) need have $44,380 today to pay for your child’s education in 18 years. The same exercise can be used to explore consequences of projects that have an impact on sustainability. Consider another simple example: Global warming is theorized to raise ocean levels which will have dramatic impacts on costal cities; in particular ones such as New Orleans which is already below sea level. Assume that we can take steps to reduce our emissions of greenhouse gasses that would insure New Orleans would not be affected by sea level rise at a cost of $10 billion, or we could do nothing now and in 100 years New Orleans will have to build higher sea walls and take other protective measures at a cost $100 billion. On its face it would seem more efficient to spend $10 billion now than $100 billion in 100 years, but consider discounting: How much do we need to put away today to insure that New Orleans has $100 billion in the future. Using the above formula, and assuming a discount rate, r, of 3% (a typical discount rate for this type of engineering project in the United States), we can see that to have $100 billion in 100 years costs the current generation only $5.2 billion. This is well below the cost of reducing greenhouse gas emissions today. Thus it can be argued that the current generation can live as it does as long as it sets aside $5.2 billion to pay future generations for the damage, and that this is an efficient solution. The weakness with this method may be intuitively obvious, but worth mention. First, the choice of the discount rate is both important and difficult. The discount rate needs to reflect a number of considerations within the nation where it is being applied. It must encompass the stability of the economy, and the government. That is, it needs to reflect how stable a nation’s real and nominal (inflation adjusted) interest rate both now and into the future. Thus, as used above, a low discount rate in the US of 3% is not out of line. US interest rates are reasonably consistent in the long run, and inflation is not a tremendous problem. 8 It should be noted that this assumes annual compounding of interest. The interested reader may want to see many of these same calculations where interest is compounded continuously such that FV = PVe−rt .

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Yet, if we consider a country such as Peru where the economy and government suffers wild swings across relatively short time spans, a discount rate between 15 and 25% is not unreasonable.9 As the discount rate rises, the present value falls. Thus, adopting costly harvesting practices in the Amazon rainforest now to promote sustainable harvests into the future are very difficult to justify; the wood is worth more today than it ever will tomorrow, so we can argue that we are justified by using clear cutting now.10 Thus, in nations with a great deal of political and economic instability, we would expect that using discounting will justify current exploitation of resources. Another weakness is that discounting can easily trivialize problems that are in the distant future. Assume that the example in New Orleans is not 100 years in the future, but 200 years out. Now we need only save $271 million. This is exacerbated if we use a higher discount rate (but still not outrageous for the US and for such an extended time period) of say 5%. This implies we need only spend $5 million. Finally, move the consequences out 500 years (not a long time when considering sustainability), and a 5% discount rate and the present value becomes $2.54. Any issue sufficiently out in the future is simply not a problem for us today; let the future deal with it (even if we create it). Thus, while discounting is an appropriate tool for doing cost benefit analysis of environmental impacts in the near term (say less than 100 years), it may be inappropriate for evaluating those same impacts across longer spans of time. Unfortunately there is no good tool which is well accepted that is able to do this long term evaluation. 7.2. Environmental Kuznets curves Wilfred Beckerman (1994) suggested that the only way to attain a decent environment in most countries is to become rich. That is, as nations and their people become wealthier, they may reduce the amount of pollution they create or clean up more. This is often referred to an environmental Kuzents curve after Simon Kuznets who hypothesized a U-shaped relationship between the equality of income distribution and the level of income. As applied to the environment this inverted U-shape (see Fig. 1) suggests that at low levels of income (per capita) environmental damage from pollution increase. However, at some sufficiently high level of income (Y* ), there is no increase in pollution damage and additions to income above Y* actually lead to less damages. Thus, the solution to pollution problems can be addressed not by reducing economic activity (GDP) and thereby income, but by increasing it especially in the poor nations of the world. Arguably this will increase pollution in the short run, but could in the long run reduce overall damages. This may have been part of the reason that major developing nations such as China and India were not part of the Kyoto agreement on Greenhouse Gas reduction. They’re respective economies needed to develop (and be allowed to pollute more) in order to increase their income. This idea may have broad appeal. We need do nothing but increase global income and pollution issues will take care of themselves. There is no need for environmental regulation. 9

See Rondon (2004). This may not be as striking if we include all the costs of clear cutting including loss of ecological services, biodiversity and so on. 10

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Fig. 1. Environmental Kuznets curve.

Yet heretofore there is little actual empirical support for environmental Kuzents curves. Grossman (1995) has shown a turning point for only one major pollutant, that being Carbon Monoxide and only for a small number nations which have sufficiently high income for this to occur (the US, is amongst them). Given the sizable difference between US per capital income, and that of the overwhelming majority of rest of the world, and the fact that this turning point has been seen in only one pollutant suggests that the power of the environmental Kuzents curve may be severely limited. Further, even if this idea does have power, and enough nations can attain a level of income to meet this turning point, we must more carefully understand economic growth. 7.3. Expanding national income accounts As noted above, there are a number of weaknesses in the current method for understanding economic growth. Currently the National Income Accounts are measures of flows of economic goods (or money). Even if we subtract the value of the created capital used up to produce this flow (depreciation), giving us net national product (NNP), we are not accounting for changes in our stock of natural capital.This concept, which was introduced by Martin Weitzman in 1976 can be expressed mathematically as: Green NNP = NNP − (ρ1 − mc1 )NR − (ρ2 − mc2 )R − v(S) In this equation ρ1 and ρ2 are the prices of non- and renewable resources respectively while mc1 and mc2 are the marginal cost for the same. As discussed above, price less marginal cost is the resource rent created by the amount of the non-renewable (NR) or renewable (R) used in the production – the excess value of the change in the stock of natural capital. In the last term we subtract the cost, v, of pollution reduction times the change in the pollution stock, S. Thus, Green NNP is NNP less the net value of the change in the non-renewable and renewable resources stocks used to produce it, and the cost of the change in the pollution stock in the same time. This number then includes both the flow of goods, and the reduction in the stock of created and natural capital, along with cost of pollution clean up.

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Yet, there is no real movement towards implementing this concept. Nor is there any real discussion of considering a way to replace or revise current discounting methods to make them more relevant to issues of long run sustainability. As a field in isolation, economics is able to do little advance sustainability as a central theme of decision making.

8. Looking forward Arguably what is needed is a more integrated systematic approach to sustainability; one that represents both the interests of those in social/business sciences and those in the natural sciences; one that equity concerns are given the consideration they demand. By itself no discipline can have the impact necessary to affect real, systemic change. Yet by integrating across disciplines, with economists talking to ecologists, and geographers talking to zoologists, and finance and management experts talking to botanists we can begin to speak with one voice that can be meaningful to decision makers, and stakeholders who will be affected by the decisions. Such systems approaches have been developed (see Loucks et al., 1999) and are becoming more popular in university curricula.11 Sustainability has come a long way since the early 1990s when I sat around a table trying to figure out what it was and how we could address it. Many major companies and business associations are very concerned and see it as an important aspect of their current and future planning (see Kirchhof, 2005). Yet it is important we keep looking forward, past how we can maintain sustainability for 40 or 50 years, but instead for 400 or 500 years. As Boulding pointed out, we are on a spaceship now and we must figure out how to make the best use of the resources we have. It is not an issue of how we will live; it is an issue of what we leave to our children, and their children, and their children and . . ..

References Bannock G, Baxter RE, Davis E. The Penguin dictionary of economics. 6th ed. London: Penguin Books; 1998. Beckerman W. Sustainable development: is it a useful concept. Environ Values 1994;3:191–209. Boulding KE. The economics of the coming spaceship earth. In: Jarrett, editor. Environmental quality in a growing economy. Baltimore: Johns Hopkins Press; 1966 Essays from the Sixth RFF Forum. Elliott SR, Gorman RF, Krehbiel TC, Loucks OL, Springer AM. Approaching sustainability through a businessscience synthesis. In: Galea, editor. Teaching business sustainability. Sheffield: Greenleaf Publishing Limited; 2004. Goodstein ES. Economics and the environment. 3rd ed. New York: Wiley; 2002. Gorman, M. Earth systems engineering management: human behavior, technology, and sustainability. Resour Conserv Recycl 2005; doi:10.1016/j.resconrec.2005.01.002. Grossman G. Pollution and growth: what do we know?. In: Goldin, Winters, editors. The economics of sustainable development. Cambridge: Cambridge University Press; 1995. Nick H, Shogren JF, White B. Introduction to environmental economics. Oxford: Oxford University Press; 2001. Kirchhof M. Promoting sustainability through green chemistry. Resour Conserv Recycl 2005; doi:10.1016/j. resconrec.2005.01.003.

11 See, for example, Elliott et al. (2004), which presents various integrated, and system based approaches to created and teaching courses dealing with sustainability issues.

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Loucks OL, Erekson OH, Bol JW, Gorman RF, Johnson PC, Krehbiel TC. Sustainability perspectives for resources and business. London: Lewis Press; 1999. Rondon X. Assessing the sustainability of strip-clear cutting in the Peruvian Amazon. Ph.D. dissertation proposal; 2004. William AM. Macroeconomics: a contemporary introduction. Cincinnati: South-Western College Press; 2000.