The Environment Goes to Market
Sharon Beder
Citation: Sharon Beder,'The Environment Goes to Market', Democracy and Nature 3(3), 1997, pp. 90-106.
This is a final version submitted for publication. Minor editorial changes may have subsequently been made.
Environmental economists argue that environmental degradation has resulted from the failure of the market system to put any value on the environment and that, because environmental assets are free or underpriced, they tend to be overused and abused, resulting in environmental damage. The solution offered is to put a price on the environment. This approach assumes that environmental problems can be solved through the extension of the market. It is being used by those in power to avoid the need for fundamental change in power relationships and social institutions. It is an approach that reinforces the very social values that are at the root of most environmental problems.
Environmental economics is a recent effort to extend the marketisation process, defined by Takis Fotopoulis[1] as the "historical process that transformed the socially controlled economies of the past into the market economy of the present... a process that tends to reduce all citizens to mere buyers and sellers and to transform all goods and services, including human labour and land, into commodities which are exchanged through the market." Environmental economists seek to do the same to the environment.
Environmental economists argue that environmental degradation has resulted from the failure of the market system to put any value on the environment, even though the environment serves economic functions and provides economic and other benefits. It is argued that, because environmental assets are free or underpriced, they tend to be overused and abused, resulting in environmental damage. Because they are not owned and do not have price tags then there is no incentive to protect them.
The solution offered is to put a price on the environment so that it can be incorporated into the economic system and taken seriously by those who make decisions. Environmental values will then be integrated into economic decisions, market failures will be repaired and sustainable development assured. Cost-benefit analysis or CBA is one of the key ways in which environmental values are incorporated into economic activities. Another way that environmental values are incorporated into economic decisions is through economic instruments. Economic instruments include taxes and charges on polluters that aim to internalise environmental costs into the decisions of companies and individuals and therefore provide an incentive to curtail environmentally damaging behaviour.
This article examines the assumptions and premises inherent in the environmental economics emerging from neoclassical economics and the hidden agenda behind the recently renewed push for environmental economics
How is environmental valuation done?
The measurement of environmental gains and losses is done in money terms. Direct costs and benefits are the easiest to estimate. These might include estimating the value of production foregone because of environmental damage, the value of earnings lost through health problems associated with air and water pollution, health care costs because of pollution, and the value of decreased growth and quality of crops because of soil degradation.
These direct monetary costs tend to underestimate the full costs and benefits provided by the environment. For example improved health resulting from a cleaner and safer environment is worth more than just the medical bills saved. Similarly, a clean beach is worth more than the just the value of having healthier beach goers. Economists attempt to measure these additional dimensions by considering the preferences of individuals for things like cleaner air and water, less noise and protection of wildlife. This is done in various ways:
(i) Willingness to Pay (Contingent Valuation)
Market demand may be derived from surveys to find out how much people are willing to pay to preserve or improve the environment, how much they are willing to pay to visit a particular environment, or how much monetary compensation a person is willing to accept for loss of environmental amenity ("willingness to sell"). Both methods, "willingness to pay" and "willingness to sell" have problems associated with them because they are based on surveys which are likely to be inaccurate because people may inflate or deflate the amounts they are willing to pay or accept.
The concept of willingness to pay assumes that the environment does not already belong to the community, but that they must buy it. Willingness to sell, on the other hand, assumes the environment belongs to the community and they must be compensated for any losses. However, economists tend to prefer willingness to pay because willingness to sell surveys "tend to generate very high dollar values, to the point where many people find them implausible".[2]
A way economists try to get around the tendency for people to give `unrealistic' answers is to ask more indirect questions and then infer what people are willing to pay from indirect evidence concerning their behaviour. For example, by asking people in a park how far they travell to get to the park and how often they go there each year, economists hope to find out what the park is worth to these people. This method assumes that people travel to the park as long as the cost of getting there is less than the benefits they get from being there. It also assumes that the value of the park is solely as a recreational area and that the cost of travel reflects how willing people are to pay for the park. However, the park may be valuable for other reasons and people may be restrained from going there more often, not because of the cost of getting there but because of other commitments. Moreover, they may be willing to spend more getting there but don't need to, so it is a minimum measure.
Opportunity costs are sometimes used to put a value on an area of the environment which is to be preserved from development. To work out the opportunity cost for such an area, economists list all the possible alternative activities that could take place in that area if it was not preserved and calculate what the maximum net benefit of going ahead with one of them would be. This method can be used to enable decision-makers or the public to decide whether they believe the area is indeed worth what has been worked out as the opportunity cost.
Opportunity cost can only be a partial measure of environmental value. The value of the area for housing may have no relationship whatsoever to the actual value of a wetland that provides a breeding ground for fish and other aquatic organisms and performs a cleansing function, filtering out pollutants that flow through the area.
(iii) Using Proxies (Hedonic Pricing)
This method assumes that the value of parts of the environment can be found by considering the prices of market substitutes. For example a lake that is used for fishing, boating and swimming might be valued by what people spend on private fishing, boating and swimming facilities. Another market substitute commonly used is property values. The idea is that houses in a polluted area will be worth less than houses in a non-polluted area and part of the difference in house prices will reflect the value the market puts on clean air. Differences in property values will also arise for other reasons such as quality of accommodation and accessibility to the central business district or public transport routes. The analyst has to work out what part of the difference is due to the environmental differences and infer from that how much people are willing to pay for improved environmental quality.
Other proxies might include differences in water rates, where higher rates are levied to cover better waste-water treatment of effluent going into a river. The extra cost to ratepayers is a proxy for the value of a cleaner river. The value of time environmentalists spend fighting to protect an area can also be used as a proxy for what they think its worth. Working out what their time is worth is also tricky. If someone earns more money in their job, does that mean their spare time is worth more?
Should the Environment be Given a Price?
Oscar Wilde described a cynic as "one who knows the price of everything and the value of nothing." E.F.Schumacher, who wrote the well known book "Small is Beautiful", said a similar thing about cost-benefit analysis:
To press non-economic values into the framework of the economic calculus, economists use the method of cost/benefit analysis. This is generally thought to be an enlightened and progressive development, as it is at least an attempt to take account of costs and benefits which might otherwise be disregarded altogether. In fact, however, it is a procedure by which the higher is reduced to the level of the lower and the priceless is given a price. It can therefore never serve to clarify the situation and lead to an enlightened decision. All it can do is lead to self-deception or the deception of others; for to undertake to measure the immeasurable is absurd and constitutes but an elaborate method of moving from preconceived notions to forgone conclusions...what is worse, and destructive of civilisation, is the pretence that everything has a price or, in other words, that money is the highest of all values.[3]
Most economists argue that unless the environment is valued in monetary terms, it will be undervalued because people (voters, politicians, bureaucrats) are used to dealing with monetary values and can more easily relate to them. Because other things are valued in money terms then the environmental benefits can be compared to the benefits of other ways of spending money. For example the benefits from preserving a wetland can be compared with the benefits of filling it in and building a housing estate.
However there are various critics of this type of reasoning. Their reasons are outlined below:
(i) It Can't and Shouldn't Be Done
None of the methods of valuation discussed earlier is altogether satisfactory and each only measures some aspects of the environment. Some people oppose putting a price on the environment because it can never be accurate. With respect to the use of willingness to pay to value areas of the environment, the British Association of Nature Conservationists says:
The problem of valuing environmental resources does not lie primarily in the lack of markets but in the difficulties of determining the value of any particular species or example of habitat type to the system as a whole. Decisions rarely involve stark choices between survival and extinction for particular species or eco-systems. Rather they involve questions of more, or less. Opting for less increases the risk of extinction, but by how much? And if extinction does follow how does one value this? The world's stock of genetic material is depleted, but what is the probability that a particular species or eco-system will contain the key to future survival or welfare? And if we knew that how should we appraise it? How risk averse should we be? The scientific community has no answers to these questions; what can one hope to obtain by asking the public? What one gets from the contingent valuation is a willingness to pay, but is that the relevant measure in a context of extreme uncertainty about the significance of the decision? [4]
Economist David Pearce and his colleagues admit that economists need to be careful that "the use of social objectives such as gains in welfare does not dictate or support policies which are inconsistent with the ecological preconditions for existence or, at least, some minimal quality of life" [5]
In terms of sustainable development, a major problem with valuing the environment according to individual preferences is that the preferences of future generations are not taken into account. For this reason a value that reflects current willingness to pay might not be consistent with long term welfare or survival. Individuals might prefer, in times of recession, to continue adding to the greenhouse emissions rather than cutback on energy use but taken to its extreme this could threaten future generations in a severe way.
Individual preferences are shaped to a large extent by the information available to them about the consequences of their choices and that information is usually partial, often distorted and mostly shaped by the media. What is more, their willingness to pay will depend on their financial security and income level whereas their desire to protect the environment may go far beyond this. Any survey, therefore, is likely to be distorted towards the values of those with the highest incomes.
Another argument against these methods of valuing the environment are that they are completely human centred and take no account of the preferences of other living creatures. This, economists believe, is as it should be. For them value is defined in terms of exchange between humans. For many environmentalists, however, especially deep ecologists, this is unacceptable and completely arrogant. It denies other living creatures any intrinsic value outside of their value to humans.
For many people, not just environmentalists, putting a price on nature is as abhorrent as putting a price on family, friendship or freedom. It represents the further creep of the market and economics into areas of life that have traditionally been considered above material concerns. Like the packaging and marketing of religion, sex and body organs, it is somehow unsavoury and definitely unwelcome. The usefulness of economic theory can be pushed too far. Biology professor, David Ehrenfield says,
It does not occur to us that by assigning value to diversity we merely legitimize the process that is wiping it out, the process that says, "The first thing that matters in any important decision is the tangible magnitude of the dollar costs and benefits." People are afraid that if they do not express their fears and concerns in this language they will be laughed at, they will not be listened to. This may be true...But true or not, it is certain that if we persist in this crusade to determine value where value ought to be evident, we will be left with nothing but our greed when the dust finally settles.[6]
Herman Daly and John Cobb (1989) note that resource economists have found a certain reluctance of the public to co-operate with contingent valuation surveys. They quote a researcher who argues that "respondents believe that environmental policy - for example, the degree of pollution permitted in national parks - involves ethical, cultural, and aesthetic questions over which society must deliberate on the merits, and that this has nothing to do with pricing the satisfaction of preferences at the margin." [7]
(ii) Assumptions Made by Economists are Inappropriate
Environmental economists put great emphasis on individualism and equate value to the total of what each individual is willing to pay. A separate notion of public interest is alien to them. For example the text, Economics of the Environment states:
The welfare of the society has meaning only as the summation of the welfare of its individual members. The criterion for evaluating collective action must accordingly be its implications for their welfare as individuals, and hence in the aggregate.[8]
Daly & Cobb (1989) point out that the reduction of human values to individualism and the world to one in which "individuals all seek their own good and are indifferent to the success of failure of other individuals" is fundamental to economics but far from reality. They argue that human values come into being socially and it is our relationships with other people that determine how we think and feel, our desires, fears and aspirations. "The social character of human existence is primary. The classical homo economicus is a radical abstraction from social reality".[9]
One of the problems with assigning a monetary value to something, say Daly and Cobb, is that there is a tendency for economists and others to treat it as if it behaves like money. "Thus, if money flows in an isolated circle, then so do some commodities; if money balances can grow forever at compound interest, then so can real GNP, and so can pigs and cars and haircuts".[10] A good example of this is discounting which is an essential component of cost-benefit analysis.
Whilst discounting future monetary income may make sense, discounting future environmental benefits seems to be an example of economists 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. People would rather have money now than later, so they can invest it or to be sure of having it. It is for this reason that economists reduce or discount future benefits and costs. They argue that income in the future is not worth as much as income now.
But this does not mean that enviornmental benefits will be worth less in 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:
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.... The prize for nonsensical discounting must go to those who discount future fatalities to their "equivalent" present value... one is left with the suspicion that the motivation underlying the whole ludicrous calculation is simply to convert a "very large number" into a very small number under the cover of numerological darkness.[11]
The take over of the environmental debate by economic language may also bring with it subtle changes to the way people think about the environment. It is difficult to habitually use terms like natural capital, stock, resources and assets without beginning to see the environment as a set of inputs and outputs of the economic system that are interchangeable with other types of capital and resources.
(iii) Decisions are Better Made in the Political Arena
Environmental questions have been traditionally determined by the political process and governments levy taxes to provide public goods and protect the environment. This means that everyone shares in these costs of this according to their income. Many economists don't like this system, however, because they argue that voting is a poor mechanism for revealing individual preferences about how resources should be allocated. These economists argue that it is only when a person puts a money value on environmental quality that they can get a measure of the strength of feeling and the degree of concern individuals have for an environmental asset.
Peter Self (1990) claims that this conclusion, that markets are more efficient at giving people what they want than governments, is based on the fallacious assumption that there is no such thing as the common good outside of individual wants and preferences. He argues, however, that when people vote they often consider wider interests than their own self-interest. They see themselves as part of a group, be it an occupational group, an ethnic group, a class, a nation or whatever.
Economic markets follow an instrumental logic whereby, under the right conditions, rational egoistic behaviour is socially legitimated and acceptable.... In politics, by contrast, it is or was a general social belief that individuals should have some regard to the `good of society' and not just their own private wants.[12]
This is why people support things like public education although they may not have children and environmental protection into the future, beyond their own lifetimes.
Similarly, just because the benefits of an action outweigh the costs, it does not mean that the decision is morally correct or politically acceptable. 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. But cost-benefit analysis can be used to avoid considering the moral dimensions of a decision. New Zealand politician Marilyn Waring (1988) says that the moral value of averting injury, saving life and ensuring healthy working conditions are ignored in a cost-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". [13].
Pricing mechanisms and markets tend to ignore distributional issues as well as moral issues. Cost-benefit analysis deals with total costs and benefits not with who gets the benefits and who bears 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.
There is an exacerbating tendency in our society for poor people to be the ones that suffer the costs of hazardous, dirty or unwelcome developments. Siting a dirty industry in an already dirty area will be less costly than siting it in a low-pollution area 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 and so the poor are disadvantaged. 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.
Proponents of cost-benefit analysis argue that value judgements are made explicit in a cost benefit analysis because everything is given a numerical value that is set out on paper. In reality, however, the value judgements are hidden beneath a mass of figures that give the impression that the analysis is rational, neutral and objective. Ian Barbour (1980) argues;
Value conflicts that should be resolved politically are concluded in what look like rational, neutral, objective calculation. 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.[14]
Public debate over the options is therefore inhibited and public participation is replaced by a technocratic process.
Cost-benefit analysis, far from being an objective input into the decision-making process, can be used to justify projects. Barbour argues that environmental effects and other indirect costs tend to be neglected, whilst indirect benefits are searched for. He claims 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".[15]
Increasingly economic instruments, such as pollution charges and tradeable emission rights, are also being seen as a way of depoliticising environmental debates. Gary Sturgess, whilst Director General of the NSW Cabinet Office, argued that such policies have the potential to lift politics out of policy-making and to prevent it from distorting decisions. Similarly Jeff Bennet, writing for the Institute of Public Affairs, has argued that the political process of allocation of scarce environmental resources is "highly divisive, confrontationist and largely inefficient" because resources are misallocated and a great deal of time and money spent on "the largely unproductive activities of lobbying and protesting". If, instead, the market could be used to allocate environmental resources, on the basis of supply and demand, just as other choices are made (eg between growing wool or wheat on a farm), then they could be removed from the political arena.
Such decisions belong in the political arena and should not be made by those most able to pay. Whilst many economists argue the market is democratic because each consumer can vote by choosing how they spend their money, the move towards a market allocation of natural resources is a move away from democracy. The rationale for economic instruments threatens to drastically reduce the scope for public participation in such decisions. Currently communities can influence governments to protect the environment through legislation and intervention by campaigning and demonstrating as well as by voting. In a system where the optimum level of environmental protection is decided automatically by a market responding to prices which are supposed to have incorporated environmental costs, community influence is far more difficult. The power of the consumer is not evenly distributed (the wealthy, businesses and bureaucracies have far greater consumer clout) and alternatives are often not available. Moreover, power through consumption is not seen as such a benefit to the environment by those who believe consumption itself is inherently bad for the environment.
In reality, the more that economists are successful in persuading people that environmental problems should be solved using economic solutions, the more the economists themselves will control the decision-making processes, for it is they who will do the cost-benefit analyses, put the prices on environmental `assets', set the level of charges and taxes for economic instruments. It is because people put different values on the environment that conflict arises in the first place. That conflict is normally resolved politically. These economists are seeking to avoid that political process and to take over the role of attaching values.
(iv) Putting a Price on the Environment Will Not Save it
Environmentalists disagree over the issue of whether the environment should be given a price. Those who favour the idea generally do so because they believe this will lead to environmental protection. They think that policy-makers will not protect the environment unless they can see how much it is worth. They hope that by incorporating environmental costs into cost-benefit analyses and economic instruments, more notice will be taken of the environment. The prominent British environmentalist, Jonathon Porritt, argues; "when you are talking to the people who are really in the business of destroying the environment, you have to use concepts that will allow them to begin to understand what we're saying".[16]
However such concessions will not change the power structure and it will not be environmentalists who put monetary values on the environment but economists employed by industry and government. The British Association of Nature Conservationists says the agencies promoting schemes "have a monopoly of information which enables them to manipulate CBA to achieve their objectives. This power will not be broken by requiring some disputable monetization of environmental effects".[17]
Larry Lohmann (1991), in an editorial in The Ecologist, responds to Porritt by pointing out that more environmental battles are won through local people chanting and demonstrating in their own language and forcing leaders to listen to them than those won by people "who allow their views to be phrased in consultants' cost-benefit terms". Lohmann displays some scepticism about environmental economics and the purported new union between nations and nature:
Since it is presumably not Nature Herself who will be attending the G-7 economic summits and whispering in the ears of presidents, however, it is hard to fight down the suspicion that this mystical union will in the end be mediated by the usual fallible individuals in three-piece suits.[18]
Whilst some environmentalists hope that pricing the environment will help to shift priorities back towards environmental concerns, others argue that pricing the environment is merely a way of incorporating environmental issues into economic concerns and that the priority remains with the economic bottom line. Economists have woken up to the importance of environmental "resources" and "assets" as inputs to the economic system and they have therefore sought to price and commodify the environment as they do labour and capital. This is a very different view of the environment to that of the environmentalist. Yet in accepting the economists way of incorporating the environment into the economic system, environmentalists may be unwittingly accepting the economist's deformed and truncated view of the environment.
The renewed push for the use of economic and market instruments in Australia has been due in part to the influence of the ideology of economic rationalism in all areas of government. Economic instruments are an increasingly attractive alternative to industry as public pressure mounts to tighten up and increase regulation. They would prefer to retain the ability to discharge wastes into the environment, even if they have to pay for the privilege.
Rob White (1992), of Edith Cowan University, argues:
Within this framework of general acceptance of the `market', the issues of `capitalist development' and `ecological sustainability' have tended to congeal around the theme of environmental costs and how best to reduce these. The social relations of the market itself are not brought into question; the solution is not seen as involving a major social transformation or radical economic restructuring.[19]
White argues that the market, far from being free, or operating efficiently to allocate resources in the interests of society, is dominated by a small group of large multinational corporations who aim to maximise their private profit by exploiting nature and people. He argues that focussing on policy measures that leave the existing market unchanged, will mean that environmental issues will continue to play second fiddle to economic interests and the logic of the system, which is based on unlimited growth, will be left unchallenged.
Environmental economics is seen by some as a deliberate ploy by those in power to counteract the possibility of social and political change arising from environmental concerns. Sara Diamond (1991) says "Some farsighted corporations are finding that the best `bulwark' against `anti-corporate' environmentalism is the creation and promotion of an alternative model called `free market environmentalism'".[20]
Conclusion
Fotopoulos describes an economic democracy as "an economic structure and a process which, through direct citizen participation in the economic decision-taking and decision-implementing process, secures an equal distribution of economic power among citizens." [21] It is clear that environmental economics cannot lay the foundations for such a democracy since it seeks to perpetuate and reinforce a market system in which economic decisions are decided by those with the most purchasing power.
Environmental economics consists of minor reforms of basic economic systems, such as national accounts, pricing mechanisms and cost-benefit analysis rather than any fundamental change in thinking or power relationships. It is a way of keeping things going as they have been by reducing the threat of environmental break down. This is an unsatisfactory approach because the primary cause of environmental degradation has always been that the environment is an adjunct to production, a second priority to concerns about profit and competitiveness, and that those in power care little for environmental preservation. Environmental economics does not really change this, rather it represents some fiddling at the edges; adjustiment of cranks and levers of the old machine, by economists working on behalf of business leaders. This will only subvert any real hope for change.
Endnotes
1 Takis Fotopoulos, "The Nation-State and the Market", Society and Nature, Vol. 2, No.2, (1994), p. 37.
2 Mark Streeting & Clive Hamilton , An Economic Analysis of the Forests of South-Eastern Australia, (Canberra: Resources Assessment Commission, 1991), p. 76.
3 Quoted in D.W.Pearce, Cost-Benefit Analysis, 2nd Ed., (MacMillan, 1983) , pp.1-2.
4 John Bowers, Economics of the Environment: The Conservationists' Response to the Pearce Report, (British Association of Nature Conservationists, 1990), p. 17
5 David Pearce, Anil Markandya and Edward Barbier, Blueprint for a Green Economy, (London: Earthscan Publications Ltd, 1989), p. 52.
6 David Ehrenfeld, "Why Put a Value on Biodiversity?" in E.O. Wilson, ed, Biodiversity, Washington DC: National Academy Press, 1988), p. 213.
7 Herman E. Daly and John B. Cobb, Jr, For the Common Good: Redirecting the Economy toward Community, the Environment, and a Sustainable Future, (Boston, Beacon Press, 1989), p. 91.
8 John Lenihan, and William Fletcher, Economics of the Environment, (Glasgow and London: Blackie, 1979), p. 4
9 Herman & Daly, For the Common Good, p. 159.
10 Herman & Daly, For the Common Good, p. 37.
11 Herman & Daly, For the Common Good, pp. 153-4.
12 Peter Self, "Market Ideology and Good Government", Current Affairs Bulletin, September (1990), p. 9.
13 Marilyn Waring, Counting for Nothing: What Men Value and What Women are Worth, New Zealand: Allen & Unwin, 1988), p. 20.
14 Ian Barbour, Technology, Environment and Human Values, (Praegar 1980), p. 170.
15 Ian Barbour, Technology, Environment and Human Values, p. 170.
16 Quoted in Larrry Lohmann, "Dismal Green Science", The Ecologist, Vol. 21, No. 5, (1991), p. 194.
17 John Bowers, Economics of the Environment: p. 17.
18 Larrry Lohmann, "Dismal Green Science", p. 194.
19 Rob White, "Towards a Green Political Economy: The Market", in Ronnie Harding, ed, Ecopolitics V Proceedings, (CLGS, UNSW, 1992), p. 150.
20 Sara Diamond, "Free Market Environmentalism", Z Magazine, December (1991), p.54.
21 Takis Fotopoulos, "The Economic Foundations of an Ecological Society", Society and Nature, Vol. 1, No. 3, (1993), p. 5.