Sustaining What?

Karl FitzgeraldCommentary, Progress Magazine, True Cost Economics2 Comments

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Selling the environment in order to save it?

Frank Stilwell

Professor of Political Economy
University of Sydney

As published in our Progress Magazine

The Rudd government’s review of climate change policies, chaired by Professor Ross Garnaut, has issued its interim report and will present its final report later this year. Many environmentalists welcomed the interim report because it stressed the magnitude of the climate change problem. The final report looks likely to be more problematic though. The main recommendation will be for the implementation of an emissions trading system. Creating a market for licences to pollute will be our big step forward. It is pertinent to ask what is being sustained here – our environment or free market capitalism?

The challenge of sustainability is fundamental and multi-dimensional.  Economic sustainability requires the reproduction of productive capacity, including the replacement of depreciating capital, whether natural, human or manufactured.  Social sustainability implies the reproduction of acceptable social structures, social capital and social cohesion. Ecological sustainability is a yet bigger challenge. It requires the maintenance of biodiversity, ensuring ecological integrity, maintaining the stock of natural capital and providing for intergenerational equity. That means that the quality of the physical environment passed on to the next generation should be no worse shape than was inherited by the current generation.

All these requirements are threatened by climate change.  The scientific community, though not unanimous, has generally accepted that the threat is real. The Stern Report in the UK shows that taking remedial action is good economics too. Agreement to remedial policy measures has a strong economic rationale as well as meeting environmental and social needs because the costs of inaction will substantially exceed the costs arising from policies to prevent climate change accelerating. So we have to carefully consider what it means to move to a more sustainable set of economic and social arrangements. Can this transition be made in a way that is consistent with concerns about social justice? Or will market criteria and the exercise of corporate power dominate?

Environmental Economic Policies   

As a professional economist, Ross Garnaut will surely emphasise environmental policies that use economic policy instruments to change market prices. An earlier report that he wrote for the Hawke government on the east Asian ascendancy argued that Australia should specialise in environmentally damaging industries because that is our comparative advantage relative to the nations of Asia. It was not an auspicious beginning for his engagement with environmental issues! One hopes that Professor Garnaut’s thinking has moved on. However, the emissions trading policy that is at the top of his – and the federal government’s – policy agenda at present has similar roots in orthodox neoclassical economic theory.

According to that economic orthodoxy, if a limit is set on the total amount of allowable carbon emissions, and permits to pollute up to that limit are issued and traded in the market, those permits will then be acquired by businesses with the greatest need to pollute and the greatest ability to pay for doing so. The prices of goods and services will then rise to the extent to which the purchase of emissions trading permits adds to their costs of production. Products whose manufacture and supply requires the burning of much fossil fuel would become significantly more expensive. Aluminium products are a case in point, because their manufacture involves the use of enormous amounts of electricity, typically produced by burning coal. Proponents of emission trading argue that, once such products become heavily taxed, consumers will seek to switch to cheaper, less environmentally-degrading products.

The implication of this conventional economic reasoning is that patterns of production and consumption will adjust to changes in market price signals. Technological changes will also create products and processes that use less of the increasingly scarce and non-renewable energy sources and create less pollution. Indeed, the changed market incentives that result from emissions trading could be expected to generate some such responses. However, the overall effectiveness of the policy in practice depends upon how strictly the limit on acceptable pollution is defined, how vigorously it is policed, whether the initial allocation of permits gives preferential treatment to existing polluters, and the conditions under which the market operates. All these practical considerations can result in the application of an idealised neoclassical theory producing a much a muddier outcome in the real world. The experience of emissions trading policies in European nations to date has not been encouraging.

One recurrent problem relates to concerns about equity, understood either as fairness or equality of sacrifice.  Wherever the price of goods rises they become less accessible to the poor.  In the extreme, access to environmental resources – even to the requirements for life itself – becomes a matter of ability to pay. A yet more fundamental concern is that economic policy instruments for ‘environmental fine-tuning’ seek to conserve the environment by putting a price on it.  ‘Selling the environment in order to save it’ is indeed a strange principle.  A narrow market logic does not recognize the more fundamental problems associated with capitalism as an expansionary economic system, and how the extension of markets created the environmental stresses in the first place. 
 
The Australian environmental scientist, Sharon Beder, has written an excellent book, Environmental Principles and Policies, exploring these problems more deeply. She shows that policies based on orthodox economics simply do not measure up against important environmental protection principles – the sustainability principle, the polluter pays principle, and the precautionary principle.  Nor do they rate highly according to three relevant sets of social principles – the equity principle, human rights principles and the public participation principle.  Assessing the proposed economic instruments for pollution control against these six criteria produces strongly negative conclusions. Another prolific Australian author, Ted Trainer, has been arguing a stronger variant of this view for many years, emphasising the environmental limits to growth that require radical changes in our economic structures, going far beyond the ‘fine-tuning’ that leaves the underlying orientation towards relentless profit-driven economic expansion unchanged.

Alternative Policies

A carbon tax would be preferable to an emissions trading system, albeit still subject to some of the same limitations of any market-based policy. Like emissions trading, its effect would be to make products whose manufacture involves intensive use of fossil-based energy resources significantly more expensive. If it replaced the existing flat-rate goods and services tax (GST), other goods and services – those not involving fossil fuels in their making – would become cheaper. Alternatively, if added to the existing GST, then the carbon tax would generate more revenue which could then be used for expenditure by government on promoting renewable energy development, for example.

Why would a carbon tax be better than emissions trading? An orthodox economist would say that both can achieve the same outcome. The former sets the permitted level of output (of carbon emissions) and allows the market price to vary. The latter sets the price and allows the output to vary, in which case the tax rate can be adjusted until the acceptable level of emissions is attained. However, what that orthodox economic reasoning ignores is the power politics. An emissions trading system hands over the market to private interests and thereby creates a powerful political lobby with an economic stake in shaping how the market operates. A few major players – particularly the electricity producers – can be expected to dominate. With a carbon tax, on the other hand, the key relationship is directly between the government and consumers. Adjustments to the tax rate in the light of experience would be politically contentious, no doubt, but less problematic than having a powerful business lobby directly contesting any attempt to reduce their number of tradeable emissions permits.

Public ownership warrants more attention in these circumstances. It cuts against the grain of the privatisation process that has been such a central theme in the neoliberal transformation of the state in Australia, and in many other nations, during the last quarter century. Public enterprises do not necessarily adopt more ecologically sensitive technologies than private enterprises. However, taking the current issue of electricity privatisation in New South Wales as a case in point, it is clear that the prospective shift from public to private ownership would close off policy options.  Privately owned energy providers have a direct stake in increasing the demand for their product.  What is needed is precisely the opposite.  We need electricity to be provided by institutions that will encourage their customers to use energy-efficient appliances and develop strategies to reduce electricity consumption.  From this perspective, public ownership, if not a pre-requisite for the adoption of more ecologically responsible managerial practices, at least keeps open the progressive possibilities.

Government expenditure and subsidies are also a necessary means of promoting the development and implementation of alternative technologies that are less environmentally damaging. Investment in more ecologically sustainable transport technologies is a case in point. It is no good making car use more expensive, for example, through higher taxes on petrol, unless there are readily available public transport alternatives. The provision of better infrastructure and public transport services is therefore a precondition for lower emissions and less per capita fuel consumption.  More comprehensive subsidies for installing solar power, encouraging the use of renewable energy sources and providing the industry policy arrangements necessary for the development of alternative technologies can also contribute directly to more ecologically sustainable outcomes.

Direct regulation is the yet more emphatic role for government. It is implied in ‘cap and trade’ emissions trading, to the extent that the ‘cap’ (on the total amount of permitted carbon emissions) is set by the government regulator. More regulation is anathema to neoclassical economists because they regard restrictions on economic activities as less sensitive than market incentives to change. But  the outright prohibition of particularly environmentally hazardous activities may be increasingly necessary. Having a high energy-efficiency rating could be a condition for permitting particular electrical goods or motor vehicles to be on the market at all. Getting serious about sustainability needs changes to the market rules, rather than allowing the market to rule.

Global Dimensions

It is at the international scale that yet more dramatic challenges arise. Three are particularly important – the challenges arising from uneven development, from neoliberal free trade policies and of making transitions to local production for local consumption. A radical paradigm shift is implied, going well beyond the current agenda of the Garnaut review.

The problems that result from uneven development are fundamental. Glaring international economic inequalities require that the more advanced industrialised nations take a lead in substantially reducing carbon emissions, as a precondition for gaining the cooperation of poorer countries.  The latter are understandably more reluctant to embrace policies that they see as likely to slow their rates of economic growth, unless they see yet more vigorous initiatives from the wealthier nations. A recent report, International Assessment of Agricultural Science and Technology for Development, illustrates the importance of this distributional dimension. It notes that “the unequal distribution of food, and conflict over control of the world’s dwindling natural resources, presents a major political and social challenge to governments, likely to reach crisis status as climate change advances and world population expands from 6.7 billion to 9.2 billion by 2050″. The report further argues that the present system of food production and trade has created a very unequal distribution of benefits and created serious adverse ecological impacts, contributing to climate change.

We must surely be coming to the end of the period of neoliberal globalism in which creating unrestricted growth of international trade has been the dominant drive. The challenge is not just to a dominant economic ideology though.  It is also to the power of the transnational corporations that are so dominant in the capitalist economy today, and to the World Trade Organisation, the International Monetary Fund and other institutions that are deeply wedded to economic practices that prioritise profit-seeking over deeper societal and ecological concerns. The free trade policies promoted by these institutions are prodigiously expensive in terms of energy and other scarce resources. Bilateral trade agreements are equally problematic because they frequently inhibit the autonomy of national governments, including their ability to implement environmental protection policies.  Yet Australia is locked into such agreements, such as the free trade agreement with the USA, and other similarly restrictive agreements are currently being negotiated.

Australia’s capacity to transform itself into an international environmental exemplar is also constrained by its economic dependence on mineral exports. It is the world’s largest coal-exporting nation. This creates a particularly strong tension between the economic gains from environmentally unsustainable production and the moral imperative to embrace radical reform.

It would not be practical to envisage the Australian coal industry being closed down in the next few years,  but the Rudd government needs to introduce a transitional program if it is serious about making the structural changes in the economy that are necessary for ecological sustainability in the longer term. That transitional program would require arrangements for shifting workers to new, sustainable jobs, and regional policies to address the particular needs of coal-mining areas like the Latrobe valley, the Hunter valley and the Illawarra region. The development of those industry policies and regional policies would indicate a government commitment to actively engage with the challenge of climate change, going beyond the easy options. But don’t hold your breath waiting for the Garnaut review to embrace interventionism like this that lies ‘beyond the market’.

Nor is the principle of ‘local production for local consumption’ likely to get a guernsey. This principle is the antithesis of the neoclassical economic orthodoxy that has underpinned the push for free trade and the growth of international trade agreements. It is a heresy deserving particular attention in the current environmental circumstances though. A prodigious use of energy and transport resources is involved in moving products around the world to increase the variety of products available to consumers. The ‘global supermarket’ rests on factory production and agribusiness activities in low-cost nations and complex networks of long-distance sea, rail, road and air cargo movements. These arrangements are not sustainable in the context of increased resource scarcity and the threat of climate change.

There is sometimes an environmental economic rationale for long-distance transport. It is better to import pineapples to Tasmania than to grow them locally, for example, because the latter option would be technically feasible but highly energy-inefficient. However, introducing energy-efficiency and environmental criteria into considerations of trade would generally favour more local production for local consumption. Some consumers are already starting to recognise the advantages – including food freshness – of consuming products that are local in origin. The embrace in government policy of a preference for local rather than global sourcing would indeed signal a significant paradigm shift.

The Politics of Change

We are not on the ‘level playing field’ assumed by orthodox economic theorists. It has been dramatically tilted by the problem of climate change, and furrowed with the problems of resource depletion, uneven development and the unsustainable character of current economic production and transportation. These complex problems cannot be adequately resolved by creating markets for licences to pollute nor by tinkering with the price system. The emissions trading system expected to result from the Garnaut review is a modest starter, at best, and perhaps a false start.

A more comprehensive policy package is necessary, breaking with the neoliberal orthodoxy that prioritises market arrangements and the extension of trade. Charting that radically different direction is the big political economic challenge created by concerns about climate change. It confronts two interrelated constraints – one arising from the vested interests of corporate capital and the other arising from the timidity of government.

The constraint imposed by business interests and organisations is particularly problematic. As Clive Hamilton documented in his book, Scorcher, corporate interests in Australia have played a pernicious role in obstructing the embrace of more ecologically responsible policies. Of course, businesspeople are citizens too, and ultimately just as vulnerable to the problems of climate change and environmental decay. In the short run, however, many of them profit from the very activities that create the environmental problems. That is the sense in which the challenge of sustainability is a class issue.

Business organisations are not monolithic though, and there are promising signs of awareness about the need to change.  Some are embracing principles of corporate social responsibility and a triple bottom-line accounting that monitors environmental and social, as well as financial, outcomes of business activity.  It remains to be seen whether the rhetoric is matched by behavioural change. Meanwhile other business interests remain dug in to reactionary positions. A recent editorial in the Australian magazine Wealth Creator began by saying ‘Kevin Rudd’s decision to sign Australia up to the Kyoto protocol could cost the country billions of dollars and hundreds of thousands of jobs’. This sort of aversion to anything that threatens their short-run profitability is a long-standing feature of capitalist businesses, as is the attempt to represent the threat as one to the nation or to their employees.

The constraint imposed by governmental timidity is equally troublesome. The federal Labor government led by Kevin Rudd is evidently committed to differentiating itself from its environmentally negligent predecessor. That is a good start. So too was its signing of the Kyoto protocol immediately on coming into office. Environment ministers Penny Wong and Peter Garrett also have strong personal commitment to making lasting change, but they operate within evident political constraints. The continuing adherence of Federal Labor to neoliberal economic principles – and Kevin Rudd’s own declared preference for a conservative approach to economic issues – bodes ill for the adoption of a more progressive environmental agenda. If market criteria dominate, then the prospects are correspondingly poor. Indeed, to have a NSW Labour government proceeding with electricity privatisation at a time when we should be emphasising energy-efficiency rather than increased electricity supply is symptomatic of the political problem.

The Rudd government’s response to rising petrol prices in recent months also shows lack of clarity in responding to the changing environmental economic conditions. The government should be telling the public that rising prices are inevitable, irrespective of the influence of monopolistic elements on short-term price fluctuations in the market, because oil is a depleting natural resource. Simultaneously, it should be investing substantially in public transport and renewable energy technologies so that people can adjust to the increasingly economically stressful situation. The rising fuel prices should be treated as an early-warning signal of the growing tension between the environment and material living standards. Maximising economic growth without regard to environmental hazards cannot continue to be the principal policy goal. Therein, of course, lies the direct confrontation with the interests and ideologies that pervade modern capitalism and unlimited consumerism. ‘Waiting for Garnaut’ is not a plausible excuse for facing up to this tough conclusion.

Conclusion

Responding to the challenge of sustainability requires a different mindset and policy stance.  A shift from competitive and individualistic to co-operative and collectivist behaviours is implied. So too is the embrace of a comprehensive policy package – for industry restructuring and regional development, investment in new technologies using renewable resources, sustainable ‘green’ jobs, energy-efficient consumption patterns, and new approaches to international trade and development. Action for sustainability, if it is to embrace social justice, must also challenge the interests and power of the dominant political and economic institutions. Environmental ‘fine-tuning’, driven by economic instruments that work through market processes, will not suffice. Market-based economic incentives, Garnaut-style, are more about sustaining capitalism as an economic system than about sustaining a planet on which we can live in reasonable harmony with nature.

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