| Problems with Putting a Price on the Environment |
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Identifying all the consequences of a particular project or policy option is difficult because it involves predicting the future and dealing with the uncertain interactions between human activities and the ecosystems in which they take place. Moreover, there will be unintended and unexpected indirect effects arising from any large project. While this is a problem whether one is doing a cost&endash;benefit analysis or not, it can be crucial for the outcome of a cost&endash;benefit analysis and could make the difference between a project being considered to be justifiable or not. The problem of placing a value on these consequences, once they have been identified, was discussed in the previous section. Some things are difficult to quantify because they are not generally bought or sold or even paid for. These include environmental values such as the value of clean air and water, unspoilt wilderness areas, ecological balance and diversity. They also include social values such as community feeling and a sense of security. In transport, and particularly road projects, savings of time for motorists or commuters are often the major benefit of the project. This creates two areas of contention. One is predicting what the time savings would be; the other is estimating what those times savings are worth to the community. Another aspect of cost-benefit analyses that is often not considered is that the decision to preserve an area is reversible, whereas the decision to develop an area may be irreversible. No allowance is made in standard cost-benefit analysis for the importance of keeping options open for the future. The Commonwealth Government (1990) recognises that different people will put different valuations on resources and on different ecosystems, and that these valuations can include economic, ecological, aesthetic and ethical components. 'It is because different individuals and groups give different weightings to these components that conflicts of opinion arise as to how resources should be used' (p. 4). Some people argue that cost&endash;benefit analysis, far from being an objective source of information, is usually used to justify projects. In his book Technology, Environment and Human Values, Ian Barbour argues that; In practice, CBA is almost always a means by which an agency justifies and promotes its own programs. The formulation of problems and the preselection of alternatives, which are frequently the most important decisions, occur before the analysis is made. In the analysis itself, an agency typically overstates benefits and understates costs. (1980, p. 170) He argues that environmental effects and other indirect costs tend to be neglected, whilst indirect benefits are searched for. He goes on to say that: While the assignment of monetary values appears to be a technical question, it often reflects the biases of analysts or their judgements of what the public wants. Differing weights would be assigned by various social groups to the incommensurable benefits of such projects. (p. 170) Moreover, as Frank Stilwell (1986), economist at the University of Sydney, points out, the exercise of cost&endash;benefit analysis embodies ethical judgements about what is good for the community. Such judgements include assumptions about whether consumer preference reveals true environmental values. Another assumption reinforced by cost&endash;benefit analysis is that technology is neutral but has unintended consequences. Because cost&endash;benefit analysis is, for reasons of practicality, only applied to total projects rather than the design process, the idea promoted is that the consequences of the project are inevitable &emdash;and we either accept them with the project or reject the project. The idea of modifying the project to prevent consequences is not encouraged by cost&endash;benefit analysis. Proponents of cost&endash;benefit analysis argue that, by placing explicit values on proposed actions, the process is more open to scrutiny by others. However, what tends to happen is that the analysis is highly technical, and neither available nor accessible to the public. The value judgements are hidden beneath a mass of figures that give the impression that the analysis is rational, neutral and objective. Barbour argues: Value conflicts that should be resolved politically are concluded in what look like rational, neutral, objective calculations. This may appeal to administrators, but it hinders public debate of the policy issues and lessens the accountability of bureaucratic officials. Numbers carry an unwarranted authority when used to legitimate decisions that are basically political in character (1989, p. 170). Public debate over the options is therefore inhibited, and public participation is replaced by a technocratic process. Again, cost&endash;benefit analysis may hide distributional consequences and appear neutral when in fact a certain section of the community is benefiting. Rational Decisions Are Not Necessarily Moral Ones Just because the benefits of an action outweigh the costs, it does not mean that the decision is morally correct. An individual may not gain personally from giving money to charity but may believe it is the right thing to do. Pearce points out that, in the same way, 'the summation of a whole set of choices by many individuals may give a result which the "state" or government thinks is not right' (1983, p. 3). For example, child labour or slavery would be considered immoral even if the economic advantages to the whole society outweighed the costs to some individuals. Pearce argues, that for this reason, cost&endash;benefit analysis should be seen as an input to decision-making but should not 'supplant political judgement'. Governments will want to know what the preferences of individuals are but may overrule these. In response, Stilwell (1986) points out that: If the CBA is not decisive, then it is necessary to determine what considerations could or should over-rule it; otherwise its claimed advantages in terms of making the decision-making processes more systematic and consistent tend to evaporate. (p. 25) Others argue that cost&endash;benefit analysis tends to be used to avoid considering the moral dimensions of a decision. Waring says that the moral value of averting injury, saving life and ensuring healthy working conditions are ignored in a cost&endash;benefit analysis. 'The value of safety is its costs and benefits relative to lost or gained production, possible legal suits, different groups of workers, and the allocation of scarce resources.' (1988, p. 20) Cost&endash;benefit analysis is about total costs and benefits, and does not deal with who gets the benefits and who suffers the costs. As long as the sum of the benefits outweigh the sum of the costs, even if a small group of people get the benefits and a whole community suffers the costs, the society as a whole is assumed to be better off. For example, the building of a third runway in Sydney will benefit interstate and overseas travellers, particularly business people who currently suffer from delays at the airport and who want to arrive at particular times of the day in order to attend meetings. Some residents also gain if they are under current flight paths that will have less traffic as a result of the new runway. But thousands of residents under the new flight paths will suffer the noise of the extra aircraft traffic. However, if the benefits in monetary terms outweigh the costs in monetary terms, then it is assumed that the society will be better off. It is sometimes argued by economists that, if the total benefits outweigh the total costs, the winners could compensate the losers and still be better off; but this is only theoretical reasoning and seldom happens. It is also sometimes argued that, although the distribution of benefits and costs may be unfair in particular instances, it will all balance out in the end. However, the tendency in our society is more often for winners to win and losers to continually lose&emdash;so that poor people are the ones who tend to suffer the costs of hazardous, dirty or unwelcome developments. Another distributional issue, mentioned earlier, is that values based on consumer preferences and the market tend to reflect and therefore maintain the prevailing distribution of income. Also, siting a dirty industry in an already dirty area will be less costly than siting it in a low-pollution area&emdash;because the costs of pollution, if measured in terms of decline in property values, will be lower. Similarly, siting the polluting industry in an area that has depressed property values for other reasons but is nevertheless unpolluted will also be less costly by this method than siting it in an affluent area; again, the poor are disadvantaged. Biased against future generations Normally, future costs and benefits are discounted (reduced) because it is assumed that they are not worth as much to people today. The reasoning behind discounting is as follows: if a person has the choice of receiving a sum of money now or waiting to get it later, most economists assume that, even if he or she ignores inflation, the person would prefer to get the money now. He or she will only be interested in getting it later if the sum has become larger by then. Pearce, Markandya and Barbier (1991) put forward the following reasons for this:
For the economist, $1 this year is worth $1+r (the discount rate) next year. Therefore, $1 next year is worth less than $1 this year; it has to be discounted (reduced) if we are to consider it in today's values. The procedure for reducing future costs and benefits to today's values is known as discounting, and the rate at which costs and benefits are discounted is known as the discount rate. The ratio of benefits to costs (the benefit: cost ratio) is worked out by dividing the net present values of benefits by the net present value of costs. A project generally should not proceed if costs exceed benefits; that is, where the benefit: cost ratio is less than one. Whether a project goes ahead or not will often depend on what discount rate is used. For example, since economic returns usually come later than construction costs, the use of a low discount rate will generally raise the ratio of benefits to direct costs, and make a project seem more attractive. Small differences in discount rates can make big differences in the final ratio of benefits to costs if long-term costs or benefits are being considered. For example, consider the following: The net present value of an income or cost of $200 million in 50 year's time would be Choosing an appropriate discount rate therefore makes a big difference to the outcomes&emdash;but the choice can be very much influenced by value judgements, including the judgement about entitlements of future generations. In terms of environmental costs, the higher the discount rate that is used, the greater is the bias towards the present and against the future. The further the costs are into the future, the less they will be worth in today's values; yet future generations will still have to put up with them. An extreme example is that of the storage of radioactive waste, which can last hundreds of thousands of years into the future. A large cost arising from this waste hundreds of years hence would be worth almost nothing in today's values. A more commonplace example is the case of reafforestation. 'Except at very low discount rates, a tree that takes 40 years to grow would have a very low value today to show against its costs.' (ESD Working Group Chairs 1992, p. 14) Discounting therefore discriminates against future generations by saying that future costs are worth less than present costs. Because costs that are more than thirty years away become almost valueless using discounting at normal rates, long-term environmental costs such as resource depletion may be effectively ignored. Yet the chairs of the ecologically sustainable development working groups have pointed out that there are practical difficulties for governments in using discount rates that are lower than market rates of interest, because it would seem that the government was getting less return on its money than it could get elsewhere and that the cost of raising the funds was more than the returns (1992, p. 16). Nevertheless, as they also pointed out, the community does accept low rates of return on socially important investments such as schools and public services (p. 12). Economist David Pearce says: There are those who argue that we cannot take account of costs to generations yet unborn, for to do so is to widen the concept of 'democratic voting' in an unacceptable way. Those who are alive at the time of the decision constitute the 'proper' electorate. Others draw attention to the fact that the kind of 'inter-generational discrimination' implicit in discounting is an increasing feature of our society. Examples might be the potential for heating up the atmosphere through continued burning of fossil fuels ('the greenhouse effect'), nuclear power waste problems, continued and expanding use of toxic metals and chemicals which do not degrade in the environment, the use of chlorofluorocarbons (CFCs) which punch 'holes' in the stratosphere and increase the amount of ultra-violet rays in certain areas, perhaps inducing skin cancers, and so on. However, while discounting money may make sense, discounting environmental values seems to be an example of what Daly and Cobb (1989, chapter 7) call 'misplaced concreteness': in other words, getting mixed up between the measure (in this case, money) and the real world (the environment), and assuming that the real world behaves as the measure does. Just because people would rather have money now than later, so they can invest it or to be sure of having it, this does not mean that they will value the maintenance of an area of environmental significance less each year into the future. In reality, an area of environmental significance is likely to increase in value as areas like it become scarce and our knowledge about ecosystems increases. Such areas are also likely to become more valuable as populations increase and, especially, if leisure time increases. The idea that someone would like to consume now rather than in the future is also not applicable to public goods which can be enjoyed now and in the future; only consumption that uses up the environment, such as logging or pollution, fits this model. Society gets the benefits of environmental preservation, and therefore the risk of one person dying before he or she gets the benefits is meaningless. The operational basis of discounting is that there exists a concrete process of depositing money in the bank where it grows at a given rate of interest and this process is viewed as an alternative to investing one's money in any particular project. In their models economists seem to consider all good things as equivalent to a sum of money in the bank, and therefore to expect that good thing, whatever it is, to grow like money in the bank. But when in their models economists discount future utility or happiness, then we are already getting into misplaced concreteness, because there is no real world operation by which satisfaction today can be stored in a fund and even if there were, there is no reason to expect such a fund to grow to give greater satisfaction tomorrow... Public goods, particularly environmental 'goods', are not like other types of goods. It is for this reason that they do not normally have prices attached to them in the first place. There is no reason to treat them like other goods when it comes to discounting.
Source: Sharon Beder, The Nature of Sustainable Development, 2nd edition, Scribe, Newham, Vic.,1996. |
© 2001 Sharon Beder