Ecocentrism and Environmental Economics Discounting the Discount Rate: Ecocentrism and Environmental Economics • J

J.Discounting Samuel Barkin the Discount Rate: Ecocentrism and Environmental Economics Discounting the Discount Rate: Ecocentrism and Environmental Economics • J. Samuel Barkin

Analyses of environmental politics generally come from one of two philosophical starting points: an anthropocentric perspective, which includes environmental economics, or an ecocentric perspective. With respect to any given environmental policy question, the anthropocentric perspective asks how the policy will affect the well-being of people in the future, and the ecocentric perspective asks how the policy will affect the natural environment in the future. Each perspective has generated an extensive literature, including critiques of the other. Little work has been done on the relationship between the two, however, beyond these mutual critiques; proponents of each perspective tend to present their philosophical starting points as the bases of self-contained approaches to the study of environmental politics. But neither form of analysis in the end works as a self-contained approach. Some limits of the ecocentric approach will be noted below, but the focus of this paper is on the limits of the anthropocentric approach, and in particular of approaches to environmental politics informed by environmental economics. The key argument of this paper is that, as a tool for making decisions about long-term environmental policy, the anthropocentric perspective underlying environmental economics does not work on its own terms. In particular, fundamental decisions about the relationship between economic activity and the natural environment need to be informed by ecocentric norms. Environ- mental economics works well as a tool for analyzing environmental policy given clear, exogenously deªned costs and beneªts. For this reason, this tool works best in a static world. In a dynamic world, in which both economic patterns and perceptions of costs and beneªts change over time, the analytic edge of economic analysis of environmental issues dulls. In other words, environmental economics works much better as a tool for analyzing policy in the short term than in the long term. But many of the most salient issues in international environmental politics are salient speciªcally because they have a fundamental long-term component. Perhaps the best example

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of such an issue is climate change. Any change in behavior in the short term to limit greenhouse gas emissions will only yield beneªts over a generational time scale. It is precisely this sort of temporal disjuncture between costs and beneªts that environmental economics cannot address adequately. This is the case because economic tools, for reasons to be discussed below, have trouble pricing environmental goods, and the further the cost element of cost/beneªt analysis is projected into the future, the less reliable estimates are likely to be. At a certain point, the compounding of this decreasing reliability makes the cost estimates analytically counterproductive. This paper will ªrst discuss the differences between the anthropocentric and ecocentric approaches to the study of environmental politics. It will then elaborate on four reasons that the environmental economics approach fails as a basis for deciding issues of environmental regulation in the long term. The ªrst of these reasons is that it requires us to assign values in a way that is often problematic for environmental goods. The second is that it conºates utility calculations and national accounting in misleading ways. The third is that it cannot cope with the endogeneity of policy to preferences in the long term. And the fourth is that projecting future economic conditions from current trends is problematic. None of these critiques of environmental economics is in itself new. Combined, however, they create a powerful argument against the use of environmental economics, in its own terms, for long-term forecasting. The paper will conclude by arguing that the use of economic forecasting in discussing the regulation of environmental issues such as climate change that have long- term, and particularly intergenerational, implications is misplaced. The case for regulation of these issues must draw upon ecocentric as well as anthropocentric norms.

1. Ecocentrism and Environmental Economics An anthropocentric approach to environmental politics is any approach that begins from the perspective of people as individuals. There are a variety of speciªc starting points for anthropocentric analysis of this kind, including utility-based approaches and rights-based approaches. The former look at issues from the perspective of maximizing the usefulness of the environment to people, the latter from the perspective of the rights of individuals to environmental goods. In practice, the literature generated by these two variants of the anthropocentric approach tend to come from quite different political directions: the rights-based literature tends to focus on the environmental conditions of marginalized people (such as the poor, minorities, or indigenous peoples), whereas the utility- based literature tends to focus on the aggregated social costs and beneªts of environmental regulation. In principle, however, the philosophic starting point of these two variants of the anthropocentric approach is the same—the environment is of value only insofar as it is necessary for or useful to individual people.

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Of these two variants, the utility-based approach is the more common both in the political science literature and in policy debates. It is the focus of this paper’s critique. An ecocentric approach to environmental politics is one that begins from the perspective of the natural environment, either as an ecological whole or as a set of individual species or entities. Beginning from the perspective of the environment as an ecological whole encompasses religious approaches to eco- politics, in which we must protect the natural environment because it is the work of the divine.1 It also encompasses understandings of ecology as so com- plex that we cannot reasonably disaggregate it into component parts, and must interact with it as a whole.2 Beginning from the perspective of individual species encompasses a range of approaches that focus on the rights of individual entities, be they animals or trees.3 Standard critiques of environmental economics from an ecocentric perspective include that it fails to take into account the rights and/or well-being of anything other than humans, and that its focus on the efªciency of environmental policy means that it is inherently focused only on economic growth and does not allow scope for policy to take into account other normative concerns. All of these critiques can be found in an approach called ecological economics (as opposed to environmental economics), which takes as its starting point the effect of economic activity on the environment rather than environmental impacts on human utility.4 The environmental economists’ response to these criticisms would likely be threefold. The philosophical response might be that liberal political theory, which underlies our core political institutions and practices, is anthropocentric. Having an environmental policy informed by a utility-based approach makes sense in a world in which most other policy is similarly informed.5 Creating a non-anthropocentric philosophical basis for environmental policy creates real problems in a world constructed on liberal lines, and generates questions concerning the anthropocentric basis of other policy areas. Environmental economics, in other words, is argued to be a reasonable approach to making environmental policy in democratic polities.6 At a more concrete level, proponents of the environmental economics approach can reasonably argue that the goal of the economistic approach to policy-making, efªciency in the maximization of social utility, is a goal to which

1. From a Christian perspective see, for example, Martin-Schramm and Stivers 2003. From a broader analytical perspective, see Scott 2003. 2. See, for example, Volk 1998. The Gaia and religious approaches can also be combined, e.g. Ruether 1992. 3. See, for example, Wapner 2002; Singer 1975; and Stone 1974. 4. Martinez-Alier 1987. 5. One can make analogous arguments (that we make other policy this way, and therefore should make environmental policy this way) for rights-based, as well as utility-based, anthropocentric approaches. See, for example, Eckersly 2004. 6. But see Princen 2005 for a counterargument.

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proponents of ecocentric approaches should pay more attention.7 The alternative to efªciency, from this perspective, is waste, and waste, of either environmental goods or economic potential, is precisely what we are trying to avoid through the creation of environmental policy. An example from the climate change debate serves well to illustrate this point. At various points in the Kyoto process there has been discussion of the extent to which market mechanisms should be used, permitting countries to pay others to decrease emissions rather than having to decrease emissions themselves. There were some arguments (both from ecocentric and democratic perspectives) that all countries should have to physically decrease emissions a certain amount—that all countries, to a certain extent, should have to share the pain, as it were.8 The response from the economistic perspective was that this would be inefªcient. It would force more expensive emissions reductions rather than cheaper ones. For any given level of expenditure, the argument goes, greater emissions reductions could be achieved through greater use of market mechanisms. In other words, not using market mechanisms would mean either that less environmental good was being generated for a certain ªxed cost, or that people were being made poorer than they needed to be to generate a certain ªxed amount of environmental good. The third response from proponents of an environmental economics approach to ecocentric criticisms might be that much of the ecocentric approach can be subsumed within the economistic approach, and can be translated into policy in a much clearer and more precise way once this has been done. This in- volves taking the preferences that are expressed by various ecocentric approaches, translating them into prices, and incorporating those prices into economistic analysis.9 When a market for an environmental good does not exist, assigning a price to it is a prerequisite for an environmental economics analysis. The price reºects the social value placed on the good, and is exogenous to the cost/beneªt analysis that is at the heart of the environmental economics approach to environmental policy-making. This value, in turn, can be arrived at in a number of different ways. With pollution issues a social price can be approximated by estimating the actual market cost of the damage done by the pollution, in terms of the cost of cleanup, health effects, and other impacts. With some resource issues a social price can be approximated by estimating the potential beneªt of different approaches to environmental stewardship. For example, the long-term ªnancial returns of sustainable forest stewardship can be used to set a price for a sustainably managed forest. This price can be compared with the short-term returns of clearcutting. A third way of setting prices is to try to determine directly what price people put on an environmental resource, by asking them how much

7. See, for example, Goodstein 1995, Chapter 4, “The Efªciency Standard.” 8. See, for example, “Europe and US Wrangle as Great Ice Sheet Melts,” The Times of London, Over- seas News, 22 July 2000. 9. For a thorough review of this approach, see Hanley and Spash 1993.

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they would be willing to pay for it and aggregating those answers (a process known as contingent valuation). Finally, prices can simply be assigned to environmental goods based on any number of assumptions about their values, including assumptions drawn from ecocentric analysis.10 A complicating factor with pricing environmental goods in this way is that often the beneªts of environmental policy will be realized in the future, while the costs are incurred in the present. This time lag can vary from the fairly short (ªshing less this year to ensure a viable ªsh stock for next year) to the generational (climate change). This time lag is, at ªrst glance, similar to the lag between investment and return that is at the core of the ªnancial industry. Invest- ment, in this sense, is a decision to forego consumption today in exchange for the ability to consume even more in the future. Economists deal with this lag using an analytic tool called the discount rate, which quantiªes the extra beneªt needed in the future in order to forego consumption today. Translated to environmental economics, an individual’s discount rate would be used to compare the cost of environmental stewardship today with the value assigned to the environmental good being protected, discounted to reºect how far in the future the environmental beneªt is likely to be. The idea of discounting has been applied to the creation of social policy by assigning a social discount rate. The logic of a social discount rate is not as clear as that of an individual discount rate—there is, for example, no social policy indicator equivalent to an individual’s cost of capital. As such, social discount rates must be assumed, and the assumed value can vary greatly.11 For example, if a social discount rate of 6 percent is assumed, then if a policy yields a beneªt one year in the future, its current value is would be 6 percent less than its expected value in a year’s time. If the beneªt is expected in two years, the current value is 6 percent less than it would be if the beneªt were expected next year. This kind of discounting is based on the assumption that the utility of everything can be compared if accurate prices are assigned. According to this logic, if the discounted value of an environmental good achieved (or an environmental loss prevented) is less than the present-value cost of a policy, then it makes sense to forego the policy. The return from investment directed elsewhere should then allow for future consumption of something else that will more than make up for the environmental loss.

2. Environmental Economics and Climate Change A prime example of this sort of discounting logic applied to discussion of long- term environmental policy can be found in the literature on climate change. The most comprehensive review of the scientiªc literature on climate change is

10. All of these approaches are reviewed in Hanley and Spash 1993. 11. Hanley and Spash (1993, 23), for example, assume a rate of 6 percent. Teitenberg (2000, 51) notes that the US Ofªce of Management and Budget as of 1992 required government agencies to use a discount rate of 7 percent.

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to be found in the reports of the Intergovernmental Panel on Climate Change (IPCC), an international body of scientists operating under the auspices of the United Nations Environment Programme and the World Meteorological Orga- nization and tasked with reviewing the literature on the subject and reporting on it every ªve years. The most recent report was published in 2001.12 In the sec- tion of the report dealing with mitigation strategies, the IPCC made extensive use of the tools of environmental economics and relied on several scenarios that projected economic behavior into the future. The report noted that a key to using this analytic tool successfully was ªnding the appropriate discount rate. It noted as well that there was no consensus on what this rate should be, making consensus on appropriate climate change policy, even within the environmental economics approach, impossible. The report notes that long-term social discount rates should be lower (i.e., take the future into account to a greater extent) than the “rates that private agents generally use in market transactions.”13 It also notes “the literature shows increasing attention to rates that decline over time and hence give more weight to beneªts that occur in the long term.”14 This attention points to a problem in the use of this sort of approach for long-term policy analysis, whether of environmental or other issues: the future almost invariably gets discounted away to nothing. At a social discount rate of 6 percent, for example, a gain of one dollar in a generation’s time (30 years in the future) is worth an expenditure of less than sixteen cents now. A gain of a dollar in two generations’ time is worth less than 2.5 cents now. In three generations’ time, it is worth barely more than one- third of a penny. The problem of planning for the long term from the perspective of environmental economics is highlighted by a recent study called the Copenhagen Consensus Project, co-sponsored by the Danish Environmental Assessment In- stitute and the British newsweekly The Economist.15 The purpose of this study was to determine the most effective uses of development assistance. It looked at various tasks upon which aid money to poor countries could be focused, rang- ing from primary education to combating malaria to basic sanitation to con- fronting climate change. It applied a common set of analytical assumptions to all of these policies based on the idea of cost-beneªt analysis. It concluded that spending aid money on climate change policy was the single least effective use of that money, partly because of the compounding effects of the discount rate over generational time spans.16 Environmental economists have tried to get

12. In three volumes. For a synthesis of the ªndings, see IPCC 2001a. The next report is due in 2007. It will be interesting to see how the authors respond to criticisms of the scenarios used in the 2001 report. 13. IPCC 2001b, 9. 14. Ibid. 15. The papers that formed the core of this project can be found in Lomborg 2004. 16. The position paper that the project commissioned, written by William Cline, did suggest that an active climate change policy would yield substantial beneªts. His calculations were based on a discount rate of 1.5 percent per annum, which was in turn derived from a “social rate of time

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around this problem by creating a separate discount rate for environmental issues,17 or by creating discount rates that decline over time, as noted above. But these are often ad hoc tools designed to yield the desired results, rather than modiªcations to the environmental economics approach that are defensible from within the intellectual construct of environmental economics. In any case, they have yet to gain widespread acceptance. Ultimately, the analytic tool of the social discount rate fails in this context because it is the wrong tool. A tool designed to analyze ªnancial investment is being applied to environmental protection. But there are meaningful differences between ªnancial investment and environmental protection that make the tool inappropriate, particularly in long-term policy analysis. The idea of discounting in ªnancial analysis is based on the idea that a dollar tomorrow is worth less than a dollar today because if we invested the dollar today we would have more than a dollar tomorrow. Thus, investing a dollar today to protect the environment in the future, either by spending it or by allowing a policy that de- creases current economic activity by a dollar, makes policy sense only if it yields at least as much economic activity in that future as would have been produced by investing that dollar elsewhere in the economy. Otherwise, the investment strategy would be preferable, because the extra money could then be used to increase well-being in the future more than it would be increased by the environmental policy. Applied to climate change policy, this logic implies that a healthy environment in a generation’s time should be as important to us as a healthy environment now. The argument underlying the Copenhagen Consensus’ results is that if we invest the money that would otherwise have gone into climate change policy in some other form of development policy, we will have the money in the future to offset the disutility of climate change and still have some left over. But this assumes several things: that mitigation is the same as prevention, that we can predict what the next generation will want, and that what seems like an economic cost in the short term will seem like an economic cost in the long term. These assumptions for the most part relate to the price mechanism discussed above, in that economic policy analysis requires that the value of all goods in question be expressed in terms of a purely fungible measure of utility. Translated into the terminology of the measurement of utility, the problems are fourfold. The ªrst two problems relate to the difªculty of assigning prices to environmental goods, even in the short term—environmental value is not necessarily as easily translated into monetary terms as other economic goods. This difªculty creates problems assigning prices both because environmental goods

preference” rather than from the standard investment logic. See Cline 2004, 16. The “panel of distinguished economists” called upon to rank the various proposals, however, “simply refused to buy it.” See “Putting the World to Rights,” The Economist, 3 June 2004. 17. For example, Goodstein (1995, 62–72) uses an environmental accounting measure, the net national welfare, to establish discount rates, rather than the idea of investment returns. This yields discount rates in the range of 1 percent per annum.

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are not necessarily as fungible as ªnancial goods, and because there is a greater potential for difªculty in translating environmental prices from the individual to the social scale than is the case with other goods. The third problem has to do with the assigning of prices in the long term, and with the recursiveness of preferences over time—what we do today can affect preference formation in the future. The fourth problem occurs in the interaction of short-term and long-term economic analysis.

3. Four Problems with the Price Mechanism

Comparing Apples and Oranges The ªrst problem is that environmental goods are not necessarily as fungible as money. To an economist, there is no problem comparing apples and oranges. Each has a market price, allowing a consumer to decide whether to purchase one, the other, or some combination of the two. The problem with pricing environmental goods in an analogous manner is not that they cannot be valued in monetary terms individually. It is that those prices will not necessarily accurately reºect the aggregate effects of the presence or absence of environmental policy. Two examples serve to illustrate this problem: public goods and extinction. A public good is a good that, if it is to be available to anyone, must be available to everyone. Examples of public goods include national defense and clean air. Absent an authority able to enforce contributions to the provision of public goods (i.e., government) these goods tend to be underprovided, because individuals who fail to contribute will still be able to beneªt almost as much from what others have provided.18 As such, most economists, and even libertar- ian ones, accept that a role of government is to provide public goods.19 But public goods can be difªcult to price, because there is no functional market for them. We can survey people and ask them how much they are willing to pay for a particular public good, but unless we back up the surveys with collection agents we have no way of gauging the accuracy of the responses. As a result, governments often decide on the level of public goods provision without attempt- ing to set an individual price for the good. For example, governments tend not to determine national defense budgets by calculating that a good national defense has a market price of $1,500 per person. And if the US government went around asking people for checks to pay for national defense, it would be un- likely to get $1,500 per person. Similarly, while most Bostonians like having their new harbor tunnel, and many of them if asked will say that it was worth the money, few of them would have been willing to pay $3,000 for it.

18. Olson 1965. 19. Up to a point—for a minimalist discussion of the role of governments as public goods provid- ers, in which individual rights place limits on collective utility, see Nozick 1974.

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Environmental economics, however, tries to price public goods based on ideas of individual utility, in a way used by neither defense economics nor trans- portation economics.20 This has two effects. The ªrst is that using this way of calculating prices for environmental public goods is likely to yield results that, in the terms of reference of environmental economics, are incorrect. The second effect is that pricing environmental public goods in a different manner than other public goods traditionally provided by government puts the environmental goods at a comparative disadvantage in terms of access to policy. If, for example, we require that the value of an intact forest be arrived at in this way, but allow that the value of a road not be calculated in this way, the road will usually win, because the building of the road will be subject to fewer checks than the saving of the forest. This observation would be moot if similar pricing mechanisms were applied to all public goods provided by the government, but that is un- likely to happen. Even when they are not public goods, some environmental goods present a pricing problem not faced when pricing most other goods, the problem of irreplaceability. This problem is faced when assigning a price to anything that can be deemed part of the common heritage of humankind.21 If one uses up a normal consumer good, a similar replacement can usually be created. For example, if one eats a sandwich, one can be reasonably assured that if someone in future generations wants a sandwich, another one can be made. But with goods that cannot be remade, there is no such assurance. If a Da Vinci painting is de- stroyed, it cannot be replaced at any cost. Similarly, a species driven to extinction by development cannot be restored.22 The use of discount rates in ªnancial analysis is based on the presumption that money invested now will increase our ability to buy things in the future. Social discount rates as applied to environmental policy analysis are similarly based on the presumption of a trade-off between environmental goods and economic growth. An implicit assumption is that the environmental quality that we can buy in the future with our extra wealth is equivalent to the environmental quality that we lose by foregoing environmental policy in the present. But this equivalence is a tricky assumption to support, given environmental effects such as extinction. Discount rates are not based on the idea that we care less about the future; they are based on the idea that investing elsewhere may be more efªcient and may therefore increase our long-term welfare. According to this logic, the utility lost because of the absence a generation hence of a species that we drive to extinction now should not be discounted in the same way as re- versible utility losses, because investment gains in the future are offset by a re- duced set of utility options in the future.

20. For an argument that publicly provided goods should in all cases be priced differently from private goods, see Kelman 1992. 21. On the idea of common heritage and its status as a concept in international law, see UNESCO 1972. 22. On some of the limitations of imputing prices, see Ackerman and Heinzerling 2004.

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Accounting for the Environment The discussion of pricing thus far assumes that social prices for environmental goods can be aggregated from collective individual prices for those goods. In other words, it assumes that if the existence of a piece of wilderness is worth, on average, one dollar to each citizen, then it is worth roughly three hundred mil- lion dollars, for example, to the United States. As a proxy measure for aggregated social utility, analyses of national- and international-scale environmental policy often use national accounts statistics as their metric; they look at the effects of a policy on future gross domestic product, gross national product, global product, or some similar measure. In other words, they compare the estimate of GDP at a particular point in the future if ameliorative action is taken on an environmental problem now to the estimate of GDP at that point if no ameliorative action is taken, and people in the future must pay for the resulting damage. Both the IPCC and the Copenhagen Consensus models work this way. At ªrst glance, national accounts measures seem an appropriate measure against which to judge environmental policy—they measure the degree of economic activity, and maximizing economic activity seems a reasonable proxy for maximizing aggregated utility. But on closer examination there is a disjuncture between individual pricing and national accounts that has a direct and fundamental bearing on environmental policy, particularly natural resource policy. At the level of individual exchange, the price of a good reºects its expected lifetime utility as well as its ability to contribute to current economic activity. Other things being equal, a car expected to last ten years before rusting through should be priced higher than a car expected to last ªve. To use a natural resource example, the price of a piece of land containing an oil well will depend in part on the current production of that well, but also in considerable part on how much oil is thought to remain. A well capable of a certain ºow of production will be worth quite a bit more if it has ten years’ reserves at that ºow than if it has one. In the case of a car, the difference in price should be reºected in the national accounts, because cars are bought and sold all the time; buying and sell- ing cars is a current economic activity, and current economic activity is what national accounts are designed to capture. But this logic only works for goods that are bought and sold in private market transactions on a routine basis. For many environmental goods this is not the case. In the example of the oil well, the depreciation of the value of the land on which the well is located caused by extraction of the oil will be reºected in national accounts if the land is privately held and if similar lands in that country are bought and sold on a regular basis.23 But a large majority of the world’s oil lies under land (or water) owned by governments. For offshore oil located in exclusive economic zones (EEZs), governments have authority over extraction, but the territory itself is unowned and therefore unsellable. Other re-

23. National accounts reºect actual economic activity, and thus will better capture activity that generates regularized transactions.

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sources that may be degraded over time, such as parks or biodiversity, are even less likely to be sold in market transactions, and will therefore never appear in national accounts statistics. As a result, many, perhaps most, of the costs of resource use and environmental degradation are not accounted for in environmental economic analyses that use aggregate (national or international) accounts of economic activity as their estimator of utility. As such, these analyses will be biased against environmental regulation because they will systematically underprice environmental losses. Environmental economists have recognized this problem and suggested ways of dealing with it. In particular, some have suggested forms of “green” national accounting that incorporate the costs of resource depletion—for example, by assigning a cost to a lost forest as well as accounting for the increased economic activity generated by logging.24 But until governments actually start using such methods in determining their national accounts, those accounts will woe- fully under-represent environmental costs. Moreover, even if it is put to use, green national accounting is problematic for the reasons that all environmental accounting is problematic, including those issues discussed in the previous sec- tion and those discussed in the next. It is problematic more broadly because even if it is made greener, national accounting is designed to measure economic activity, not aggregate utility, and the former can be at best only a very rough proxy for the latter.

Advertising the Environment Both of the two problem areas discussed above relate to assigning to environmental goods prices that accurately reºect the exogenously given preferences of economic actors. But the problem of pricing environmental goods, or in fact any goods, over the long term is further complicated by the fact that preferences change over time in ways that cannot be predicted, and in ways that are not in fact entirely exogenous to prior policy choices. In other words, policy and preferences are recursive: the environmental policy that we choose now can affect how people deªne their preferences in the future. Certain basic preferences, such as food, shelter, clean water and breathable air, are likely to be constant. Even with these basic goods, however, it can be difªcult to predict preferences. For example, a century ago in the United States wealthier people were likelier to eat white bread and poorer people were likelier to eat whole-grain breads. Today, that situation is exactly reversed. Since this consumption pattern probably reºected the relative prices of breads, and since economists see price as a sign of social utility, this pattern suggests that a century ago white bread was more highly valued, but now whole-grain breads are more highly valued. There are several good explanations for this change, but the point is that few would have predicted the change a century ago. Part of the change

24. See, for example, Davidson 2000.

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has likely resulted speciªcally from government policy to convince people that whole grain breads are healthier than white breads. And the change in turn makes it easier for the government to make policy that promotes the consumption of whole grain over white breads. The recursiveness of policy and preferences creates a real dilemma for environmental economic analysis. Utilitarian analysis—the basis of most cost- beneªt analyses used by economists, including environmental economists— holds preferences to be exogenous by deªnition. Preferences are where the costs and beneªts come from. If preferences are endogenous to policy, then the whole analytic process becomes tautological, and thereby ceases to be a viable mechanism for distinguishing among policies. For example, educational policies designed to convince students that democracy is a good thing will (if they work) affect students’ preferences by making them want more democracy. Edu- cational policies designed to convince students that discrimination is acceptable will (if they work) affect students’ preferences by making them want to re- inforce discrimination. The success of each policy can be judged in its own terms, by comparing preferences before and after. But the policies cannot really be compared on utility-maximizing terms, because they are designed to create their own utility. They can only be compared on normative grounds. In this sense, social policy is somewhat akin to advertising. It aims not only to be efªcient in maximizing social utility, but also (and often self- consciously and explicitly) to change deªnitions of social utility. This means that environmental policy is not only about determining what the natural environment will look like in a generation’s time. It is also about how the next generation will think of, and want to interact with, the natural environment. In other words, choosing environmental policies is inherently a normative activity, rather than just an exercise in utility maximization. Once a normative choice has been made about what the natural environment should look like in the future, environmental economics can provide useful analytic tools to get there as efªciently as possible. But without this normative choice, environmental economics cannot deªne for us what policies are most likely to get us there, because what counts as there itself depends on the policy choice.

Modeling the Future We lack knowledge not only of future preferences but also of future economic structures. And yet environmental-economic analyses of the long-term effects of environmental policies rely on estimates of what future economies will be like. These estimates derive from projections of current patterns into the future. The assumptions underlying these projections are, as most environmental economists would agree, guesswork. For example, projections of the effects of economic growth on climate change depend on how much carbon is emitted per unit of output. Over time this number has tended to fall, but not necessarily at an even rate. For the projection, do we use the current rate of decline of the car-

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bon-intensiveness of economic output, the rate over the past decade, or the rate for the past century? In the long term, the rate of decline of carbon intensiveness will be affected substantially by technological developments that we cannot foresee. And those technological developments will in turn be affected both by policy decisions and by new information on the magnitude and effects of climate change. Interestingly, this kind of forecasting has been criticized both by those who favor more stringent environmental policy and by those who favor less stringency. Both sides argue that we have no idea what the economy of the distant future will be like, making it pointless to base policies on the assumption that we can guess. The use of such projections is based on the sort of ªnancial logic discussed above—the idea that if we invest money now instead of spending it on environmental policy we will be richer in the future and therefore better able to deal with the effects of environmental degradation. To a certain extent this is no doubt true, particularly with respect to poorer countries. But it is also misleading, for three reasons. First, it assumes that investment is fungible. Second, it does not fully take environmental externalities into account. Third, it assumes that we can look at environmental policy by itself, holding other things equal. The overall effect of these issues is to overstate the costs of environmental regulation in the long term and to understate its potential economic beneªts. The logic of modeling the long-term effects of environmental policy is ex- trapolated from the logic of individual investment, the idea that investment is fungible. The assumption is that there is a market for investments; if at some future date you decide to invest in something else, you can sell one investment and buy another. But this is not necessarily the case when aggregated to a national scale. Environmental policy can affect choices about the form of national infrastructure, whether investment in that infrastructure is public or private. And infrastructure is often a sunk cost—if you want to replace it you often cannot sell it, in which case it represents an economic loss. If a form of infrastructure is likely to be made obsolete in the foreseeable future, then it often makes sense to invest in an alternative infrastructure now and be on the leading edge of an economic change, rather than invest in an old infrastructure that may be cheaper in the short term but will become obsolete in the medium term. In this sense, some environmental policy that is cast by environmental economics as a cost might be better understood as an economic opportunity—an investment in the economy of the future rather than a drag on investment in the economy of the present. Long-term economic modeling also cannot take environmental externalities fully into account. Environmental externalities are those environmental costs of economic activity that are not born by those who proªt from the activity. For example, air pollution generated from a factory is an environmental externality unless the price of the factory’s goods reºects all of the negative effects of the pollution. Oddly enough, to the extent that the pollution from the factory causes those affected by it to buy amelioration (such as home air ªlters,

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more frequent painting, and medical attention) it generates extra economic activity and can have a positive impact on national accounts. Natural disasters have the same effect—by destroying things that must be replaced, they generate economic activity.25 This phenomenon is related to the disjuncture noted above between aggregate utility and national accounts. To the extent that long-term projections capture the extra economic activity generated by the environmental externality, but not the damage that it causes, the projection will underestimate the beneªt of environmental regulation and overestimate its cost. Furthermore, this effect may well increase in magnitude the longer into the future the model projects, because the model assumes that the increased economic activity has a cumulative effect but does not allow for any cumulative effect of the damage. Finally, long-term modeling of the effects of environmental policy generally assumes that the effects of individual policies on general economic behavior can be isolated. Thus, for example, it is assumed that we can compare the effects in two generations’ time of adopting policy A versus not adopting policy A, or the effects of policy A versus policy B, other things being equal. It seems un- likely, however, that speciªc technical policy choices determine long-term economic success. There is an increasing body of evidence to suggest that compe- tence and honesty in government, rather than speciªc policy choices, underlie long-term economic success. To the extent that thinking through and putting into effect workable environmental policy contributes to good government, it might actually promote rather than hinder long-term economic success despite any short-term economic costs.

4. The Price Mechanism and Climate Change These four sets of problems in applying the traditional price mechanisms of economic analysis to environmental problems can affect particular issues inde- pendently, but they can interact with one another as well. Take as an example a policy designed to favor the use of smaller hybrid engines in cars rather than larger, purely internal combustion engines.26 Economic analysis would see such a policy as a cost in the short term, because it interferes with the market and therefore makes the market less efªcient. Such a calculation, however, does not take into account the beneªts of lower fuel usage not captured by the price mechanism—for example, lower costs to future generations of non-fungible environmental damage or the fact that there is more oil left in the ground. Nor does it take into account the effects of regulation on the development of new engine technologies, which may result in greater economic activity combined with lower emissions in the future. Finally, it cannot account for the effects of the availability of viable hybrid technologies on consumer preferences—for ex-

25. The same is true of war. See, for example, Morgan 1943. 26. For the purposes of this example, the type of policy does not matter, and could be either a com- mand-type regulation (such as a fuel economy standard) or a market intervention (such as a higher gasoline tax or a carbon tax).

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ample, the possibility that increased concern for climate change will make hy- brids not only available, but also fashionable. This example provides a good entry into a discussion of environmental economic analysis of climate change policies more generally. Long-term analysis of the efªcacy of preventative action now versus ameliorative action later runs into all four sets of problems discussed in this article. It faces issues of non- fungibility in pricing, because the atmosphere and global weather system as a whole is in a way the ultimate public good: changes in the weather affect all people globally regardless of their degree of input into the problem, and because there is no real substitute for the atmosphere. As such, a stable atmosphere/climate system is likely to be undervalued in economic analysis. And among the effects of climate change will be irreplaceable losses such as species extinction and the disappearance of local ecosystems. Economic analysis of policies designed to ameliorate climate change also suffers from translation problems from the individual to the social scale. Na- tional accounting, for example, does not take into account the cost to future generations of resources used up in the present. Nor can economic analysis account for change in preferences that may be generated through an increase in social concern for climate change. In a world in which governments are clearly committed to ameliorating climate change, people may well come to value cli- matological stability for its own sake more than would otherwise be the case; in a world in which governments are clearly committed to the status quo, a generation of children are likely to be taught that a more variable climate is acceptable, and that preserving nature as we ªnd it is not that important. Finally, long-term models of the economic impacts of climate change assume a relationship between today’s economy and future economies that we cannot predict. They assume that we are better off investing heavily in a petro- leum-based economy, while hoping that this economy is short-lived, than we are investing in carbon substitutes that may be more expensive in the short term but which also may be around for much longer. They assume that money spent cleaning up an environmental mess in the future is better than money saved by avoiding the mess in the ªrst place. And they assume that if we spare developing countries the costs of controlling greenhouse gas emissions now, they will use those resources to develop in a way that will signiªcantly increase their ability to ameliorate the effects of climate change in the future. But what if they fail to do this? Then whole generations of people in some unlucky countries will suffer hugely because of the failings of the politicians of their parent’s era—because some economic model was taken to mean that climate change policy was the difference between poverty and wealth. In short, then, the long-term modeling of the costs and beneªts of climate change policies used by environmental economists, aside from being a far less accurate tool than its technical precision makes it seem, is systematically biased against policies that are designed to take preventative action now rather than ameliorative action later. Furthermore, this bias is not something projected onto

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the analyses from an ecocentric perspective—the analyses fail on their own terms, by not sufªciently connecting underlying principles (utility maximization) with analytical tools. While this modeling can be done in a way that mini- mizes these problems, some of the problems are inherent to the tools being used. In other words, even within the framework of the environmental economics approach (and hence within the worldview of neoclassical economics more generally), the tools of environmental economics are not sufªcient to determine the appropriate level of costs that we should bear today to temper climate change in the future. And while this argument holds perhaps most strongly for the issue of climate change, it applies across a range of other environmental issues as well, wherever some of the problems with the price mechanism discussed above inhere. None of the individual criticisms of environmental economics discussed here are particularly novel. Collectively, however, they add up not just to a set of operationalization problems for environmental economics, and not just to a critique of environmental economics from a different perspective, but to an argument that environmental economics on its own terms does not provide analytic tools sufªcient for making major policy decisions involving long-term economic costs and environmental beneªts. This should not be read as an argument that environmental economics provides no useful analytical tools. Other things being equal, efªcient environmental policy is better than inefªcient environmental policy, because it results in fewer wasted resources. But while these tools are useful in deciding among the mechanics of different policy approaches given speciªed policy goals, they are less useful in deciding among different policy goals. This is particularly true of long-term analysis, when, on its own terms of reference, environmental economics is at its weakest. In deciding among different policy goals or among different levels of normative commitment to environmental issues, we need to begin with ecocentric analysis rather than environmental economics. Because we do not have a reli- ably fungible measure of utility for long-term projections of environmental costs and beneªts, the tools of environmental economics simply do not work effectively for such projections. We do not have the tools to effectively compare economic and environmental utility in the generational future, and therefore must address questions of environmental utility as distinct from those of economic utility. In other words, we need to begin by asking what the natural environment should be like in the future, as a separate question from that of what we want the economy to be like in the future.27 In short, the environmental economics approach is useful, but it is not a self-contained analytic tool. It is insufªcient as a source of long-term environmental policy unless it is aug- mented by an ecocentric philosophy, a concept of what we want our natural environment to look like.

27. For an example of one way in which to do this, see Princen 2005.

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