Making Markets Work for Sustainability

It is perplexing that our economic success is leading to environmental catastrophe. We need practical ways to correct this situation.

The "Ecology of Commerce" and "For the Common Good" provide abundant suggestions. The ideas presented here introduce the much broader spectrum of material contained in these two excellent books. This paper aims to stimulate thought about mechanisms for harnessing the power and ingenuity of the modern world to create a durable civilization. The opportunities identified by these authors are inspiring. I highly recommend reading their books.

Quotations are used extensively in this paper, the initials (PH) for Paul Hawken or (D&C) for Daly and Cobb will appear at the end of each quote along with the number of the page from which the quote was taken.

Markets and Ecology

One big lesson we have learned from recent history is about the vigor and resilience of the open market system of economics. Daly and Cobb note: "The most important insight that economists have to convey about the market is how independent, decentralized decisions give rise, not to chaos, but to a spontaneous order."
(D&C 44)

The other big lesson has been how humans are ecologically connected with all life on Earth. "What ecology offers is a way to examine all present economic and resource activities form a biological rather than a monetary point of view, including the impact our present lifestyle will have on generations henceforth." (PH 205) In the natural world there is no waste and resources can only be temporarily diminished. Everything produced is food for something else and the materials which make life possible cycle around and around as long as the sun shines.

In the market process, millions of people collect information about materials, techniques of production, labour costs, what people want and how much they are willing to pay. Working with the common goal of personal enrichment, the activities so informed provide a vast array of goods and services. Paul Hawken notes, however: "If the market is so efficient, why, as it affects the environment, is the overall economy so inefficient? The answer is simple: Markets are superb at setting prices, but incapable of recognizing costs."
(PH 75)

Prices are what we must pay to receive a good or service from a supplier. To the extent that prices reflect the money cost of other goods and services used in supplying the product, the price is accurate, but as soon as the activity draws from the natural world or impacts upon it, there are no mechanisms for accounting. No account is made of the depletion caused by drawing 55 million barrels of petroleum from the ground each day nor do we account for the costs incurred by burning it.

With the enormity of the modern economy, the loss of natural capital and the damage being done around the globe is potentially fatal. We are challenged to adapt the market system in such a way that economic success is also successful for environmental systems. "we must create systems of feedback and accountability that support and strengthen restorative behavior."
(PH 209)

The costs to which prices have yet to be attached, resource supplies, waste, health effects and the like, are called externalities. Full cost accounting is a process which takes externalities into account along with all the customary factors.

Daly and Cobb use the example of requiring that the price of coal reflect the full cost of treating black lung disease among miners. "To the naive citizen who asks, 'But can society afford to pay those costs?'" the authors reply "It is not a question of choosing whether to pay or not pay external costs. The costs are there and will be paid by someone: either the miner, the general public through socialized medical care or the producers and users of coal who pay a sufficiently high price for coal to cover these costs."
(D&C 56)

On the other hand: "Solar energy does not pollute, does not cause asthma and emphysema, does not destroy forests with acid rain, does not seep into ground water, pollute rivers, or create superfund [toxic waste clean up] sites. These and other costs are what is missing from market prices when you pump your gas, turn on your heater, even buy your food."
(PH 181)

"Products that cause distinct, identifiable, and long-lasting damage should at least pay their way."
(PH 188)

"The principle of internalization is not only equitable (who ever causes the cost should pay for it) but also socially efficient (the one who pays the cost is also the one who is in a position to reduce the activity that causes the cost and will benefit from doing so)."
(D&C 56)

"The resulting changes in the marketplace [that internalization of costs] would cause would be dramatic. Every purchase would become more constructive and less destructive. Equally important, the innate instinct to save money would reward both the consumer and the environment."
(PH 171)

If we don't take decisive action to adapt, diminishing resources, accumulation of toxic substances and the disintegration of communities will reach a point where local and global systems will change and markets will respond in their reliable way. However, as Daly and Cobb point out, "if humanity waits until it is physically compelled to change, its options will be few indeed."
(D&C 21)

It is governments' role to oblige full cost accounting. Without full compliance, firms accepting the responsibility on their own would often find their products uncompetitive. The changes have to take place across the board, to avoid favouring those who do not care. By gradually requiring that externalities be factored into economic equations, markets can be tuned so that money is saved by treating the environment well and a high price extracted for doing it damage.

The changes involved would actually produce markets which reflect the real world more accurately. In Canada we often talk of our great wealth of natural resources. The trees, water and mineral resources are the natural capital on which our economy is founded. We do not account for the draw down of this capital. Present market based economics assumes that "any extraction of resources can be regarded as the equivalent of current income despite the fact that every business person knows that on a corporate level [operating from capital] is the sure path to bankruptcy."
(PH 79)

In addition to accounting for the resources we use, we have also to account for pollution and other waste.

"Industrial processes that harm and waste are, by definition, less economic and therefore more costly in the long run. tailoring by-products of manufacturing so that they become the raw materials of subsequent processes not only prevents material from entering the waste stream, it garners sales and therefore income for what was once an expense."
(PH 61)

What follows are a variety of policy measures that governments can take to align markets with our planetary reality.

Programs and Policies

Paul Hawken gives a number of examples of how government actions in Germany and Japan have obliged responses from industry which now puts these countries far ahead of North America in energy efficiency and waste control.

"The German and Japanese experiences prove the obvious:
Only when the incentives to continue the manufacture of waste are removed, and only when the risks and costs far outweigh the gains and profits, will designers, engineers, chemists, and investors turn their attention to safer alternatives. We use wasteful methods today because they are the "cheapest" solution. In a restorative economy, the least expensive means of manufacturing a product should also be the most environmentally benign and constructive means. Until this is so, there is an inherent design flaw in business: being "economic" and being sustainable remain in conflict and at odds."
(PH p73-74)

One system proposed by the Environmental Protection Encouragement Agency from Germany. " divides products into three categories: consumables, products of service, and unsaleables."

"Consumables are products which are used and consumed, usually only once, and then become waste of one sort or another." To qualify however, the waste must be wholly biodegradable, "In essence, it would have to be capable of turning back into dirt, with no harmful intermediary process inherent in its decomposition." (PH 67)

"Products of service are primarily what we call durables, although they also include non-durables like packaging. What we want from these products is not ownership per se, but the service the product provides: transportation from our car, cold beer from the refrigerator, news or entertainment from the television," (PH 68) In this system we would lease such items from the manufacturers. When they break down, it would be the responsibility of the manufacturer to reclaim the product and repair, recycle or otherwise deal with the remains. "This calls for entirely novel principles of design that mimic what nature tells us: waste equals food. Instead of thinking of the value of the product only as it goes out the door, the manufacturer has to consider its value when it comes back in the door." (PH 68)

"By designing products so that they can be disassembled and re-manufactured, we will require more labor, a cost that will ultimately be paid for by using less waste and energy. Productivity can go down, employment up, and profits increase." (PH 69)

"unsaleable products: toxic chemicals, radiation, PCB's, heavy metals and the like." (PH 69) Unsaleables must be phased out and replaced. In the mean time they would be the responsibility of those who manufacture them. This system proposes "parking lots" where manufacturers can rent space to carefully store these products. The cost of storage would add to product costs and add to the incentive to redesign more benign products. The cost of secure storage would be borne by the producer "in perpetuity or until the industry or some other agency devised a safe method of detoxification." (PH 70)

In Sweden Dr. Karl-Henrick Robert has instituted a process called the Natural Step. Principles for decision making are clarified by asking systemic questions. "For example, in the case of dioxin or any persistent toxic, Robert believes there are six questions to be asked. Is dioxin natural? No. Is dioxin stable? Yes. Does it degrade into harmless substances? No. Does it accumulate in bodily tissues? Yes. Is it possible to predict the acceptable tolerance? No. Can we continue to place dioxin into the environment? No, not if we want to survive." (PH 53)

The reasoning above supports the goal of 'zero' discharge. While monetary thinkers try to calculate how much poison it is acceptable to release for how much financial gain, the biological perspective recognizes the discharge of persistent toxics as suicidal.

Green Dot

Faced with mountains of disposable packaging, Germany passed a law requiring 80% recycling of all packaging. "producers must pay a fee, ranging from 1¢ to $2 depending on the type and size of the package, and they must then guarantee they will recycle or reuse their packaging." Producers paying these fees print a green dot on their packages. The fees pay for collecting the materials and returning them to producers. Companies wishing not to comply have the option of paying a 30-cent surtax on all packages. There is further incentive to participate in the form of "strict laws limiting the amount of packaging that can be thrown away. Companies not meeting those standards would face stiff fines per package." (PH 72)

"Producers have passed on the fees to the consumers in the form of higher prices." Consumers now "have a way to measure the real cost of their purchasing decisions as they see "convenient" throwaway containers going up in price. German producers now have incentives to design packaging that is reusable as opposed to merely recyclable, giving a cost advantage to durability and non-wasteful cyclical processes." (PH 73)

Daly and Cobb clearly outline a variety of waste issues which could be addressed by targeted taxation. The natural world can purify a certain amount of waste. "The use of this scarce renewable resource should be paid for in the form of a tax. The tax should be set at a level that would encourage [enterprises] to keep wastes within the capacity" of natural purification. "Of course the tax will be passed on as far as possible to the consumer, as it should be." Another "instrument should be taxation of goods to cover costs of their disposal." In addition, "as an instrument of fine tuning, we feel a pollution tax is needed." (D&C 261)

Moving from concerns about waste to those of resource supplies, both books propose shifting the tax burden from income to resources. "The purpose of green taxes is to give people and companies positive incentives to avoid them." (PH 171) What sense is there in taxing employable labour of which we have a surplus and not taxing resources which are diminishing in supply. By reversing this pattern, we can encourage increased employment and more efficient use of resources.

"Unlike the income tax, severance tax [tax on resource extraction] is very hard to avoid. since all commodities require some resources, all commodity prices will embody the tax. The only point at which the tax could be avoided is at the point at which it is levied, namely at the well-head or mine-mouth for non-renewable resources. Renewable resources from forests and farms would not be as easy to monitor, but the difficulty would still be less than with a general sales tax. The tax would be levied to raise revenue and keep the physical scale of the economy within ecological carrying capacity." (D&C 325)

Taxes on the carbon content of fuels are being considered and to various extents implemented. They have the effects of both conserving the resource and discouraging the release of carbon dioxide which causes climate change. Hawken cites a study of the economies of Japan, the US, the USSR and the European Community. "The more costly the price of resources, as in the case of Japan, the greater the technological innovations and economic growth. higher prices goad and urge companies and individuals toward better design and more efficient technologies and systems. " (PH 180)

Another approach to resource management is the 2% solution suggested by Daly and Cobb. A number of resources are being depleted at problematic rates. To cushion their eventual exhaustion, a 2% maximum extraction could be instituted. For a resource in abundant supply this would have no effect. "In some other cases, such as oil and copper, this limit would be below present extraction rates and would drive up the price of the right to extract. This would add to market price and encourage frugal use, the development of substitutes, and in the case of copper, recycling. When no technical advances are made and no new resources found, the amount of allowable extraction will decline slightly. The 2% will be figured on just 98% of the previous year's base." Through this process, "crises occasioned by relatively abrupt exhaustion can be avoided." (D&C 260)

Daly and Cobb also mention the Public Utilities Regulatory Policies Act of 1978 as one that has encouraged more efficient use of energy resources. The Act " led to rapid development of co-generation technologies [small scale electrical generation where the waste heat, which is normally lost, is used in near-by facilities] as well as solar ones, by requiring utilities to purchase electricity produced by independents at the cost that the utility saves by not increasing its own production." (D&C 263)

Particular attention is due to Agriculture, both because we all consume its products every day and because of its present dependence on unsustainable practices.

"Sometime during the next 40 years the cost of oil will necessarily rise to the point where the present agricultural system will collapse. The transition to an older, much less energy-intensive style of farming can occur less disruptively if the real costs to the future are charged to the current users of fossil fuels. The more labour-intensive methods of traditional family farming will then prove most cost effective. (D&C 273)

"The main advantage of agribusiness is almost always the efficiencies gained by substituting industrial practices for traditional stewardship of the land."
(PH 185)

Daly and Cobb caution against capital intensive farming. Quoting Wendal Berry, the point is made that "once [the farmers] investment in land and machines is large enough, he must forsake the values of husbandry and assume those of finance and technology." (Berry 1977, 45-46)

"The most truly efficient farm is the one that most effectively internalizes all of its costs. the secret to healthy plants is healthy soil, not deadly chemicals. Thus, not only should energy use be taxed more heavily, but so, too, should all agricultural chemicals, from artificial fertilizers to toxic pesticides." (PH 185)

To subsidize agricultural chemicals and energy intensive equipment by not taxing them to cover the costs of use, is to use our taxes, "not for restoration but to subsidize environmental damage." (PH 186)

We are facing a tragedy of the commons on a global scale. In the classic example, everyone in a community had access to a common grazing area for their animals. An individual could graze an extra animal for personal advantage, but when everyone did so the resource was damaged to the point that it was of less service to everyone. One solution to this problem would be a commons utility to oversee the process, make sure no one drew more than their share and take other steps necessary to maintain and enhance the resource.

In return for public control of a utility commission, a certain level of profit is guaranteed allowing for long-term planning and access to cheap capital. (PH 191) Such public utilities could manage forests, petroleum reserves, fish stocks, and the like as well as agricultural lands.

A start can be made adapting economies provincially or nationally, but clear signals must be sent to the rest of the world as well. The problem will not be solved as long as companies externalize costs elsewhere. We might consider establishing trade preferences for nations that follow sustainable practices. "Under the Most Sustainable Nation tariff system, countries following environmentally and culturally sensitive practices would be the ones to prosper." (PH 198)

Daly and Cobb place emphasis on the value of communities as the place where people flourish and the level at which environmental sensitivity is most acute. Many of the economic practices which currently degrade the ecological environment are also damaging to community. The authors propose a number of measures which would strengthen communities and bring destructive inequities within acceptable bounds. These measures are extensive and constitute the topic for another review. Nevertheless, their basic position on equity is worth noting.

"The goal for an economics of community is not equality, but limited inequality. Complete equality is a collectivist's denial of true differences in community. Unlimited inequity is the individualist's denial of the interdependence and true solidarity in community." (D&C 331)

The policies and programs covered in this paper could be implemented by present governments. However, care should be taken to respect the independent, decentralized decision making process of the market. "Taxes should not distort economic decisions unless there is a clear public decision that supports the distortion in question. For example, there might be a decision to discourage the smoking of tobacco by taxing cigarettes." (D&C 318)

It follows that there should be a public debate about what the purpose of the economy is. A clear mandate is needed to adapt markets to reflect environmental reality. The topic is ripe. Public debate is the goal of the Sustainability Project. If you would like to see this issue raised in the democratic forum, please get in touch.