Economic Functions of the Environment

The environment can be said to have three basic

‘economic functions’:
• Providing raw materials (e.g. coal, copper and natural gas)
• Assimilating waste (e.g. household rubbish, waste gases)
• Providing aesthetic services (e.g. national parks)
Key points:
• What comes out of the environment must eventually return
• There are important trade-offs between these three
functions
Economic Functions of the Environment
Recycle

Goods and Services

Production Consumption

Recycle

Waste
Assimilation
a b

Resource Supply c Services Supply

 Sustainability

Question: How do we continue to ensure that the

environment can perform these economic and other
functions ?
Answer: Move towards Sustainable Development
Problem: Sustainable Development is hard to define:
• Almost everyone agrees with it
• Most think their view of the world is compatible with it
• Pinning it down in practice is much more difficult
 Sustainability: A Definition

Development which meets the needs

of the present without compromising
the ability of future generations to
meet their own needs
World Commission on Environment and Development Our
Common Future (1987)
 Trade-offs
There are possible conflicts and complementarities
between economic growth and environmental protection
• At one extreme, every increase in economic growth leads to a more
degraded environment (doom and gloom scenario ?)
• At the other, economic growth and environmental protection progress
happily together (complacent position ?)
Whilst neither is an exact description of our society today,
we are probably nearer the first extreme:
• If our economy is built on polluting industries, more production (to attain
higher growth) equals more pollution
• Is the solution is to cut back growth ??
Sustainable development
Sustainable development is development that meets the needs of
the present without compromising the ability of future
generations to meet their own needs. It contains within it two key
concepts:
the concept of 'needs', in particular the essential needs of the
world's poor, to which overriding priority should be given; and
the idea of limitations imposed by the state of technology and
social organization on the environment's ability to meet present
and future needs.
2. Thus the goals of economic and social development must be
defined in terms of sustainability in all countries - developed or
developing, market-oriented or centrally planned. Interpretations
will vary, but must share certain general features and must flow
from a consensus on the basic concept of sustainable
development and on a broad strategic framework for achieving it.
• Development involves a progressive transformation
of economy and society. A development path that is
sustainable in a physical sense could theoretically
be pursued even in a rigid social and political
setting.
• But physical sustainability cannot be secured unless
development policies pay attention to such
considerations as changes in access to resources and
in the distribution of costs and benefits.
• Even the narrow notion of physical sustainability
implies a concern for social equity between
generations, a concern that must logically be
extended to equity within each generation.
 The satisfaction of human needs and aspirations in the major
objective of development. The essential needs of vast numbers of
people in developing countries for food, clothing, shelter, jobs -
are not being met, and beyond their basic needs these people
have legitimate aspirations for an improved quality of life. A world
in which poverty and inequity are endemic will always be prone to
ecological and other crises. Sustainable development requires
meeting the basic needs of all and extending to all the opportunity
to satisfy their aspirations for a better life.
• Living standards that go beyond the basic minimum are
sustainable only if consumption standards everywhere have
regard for long-term sustainability. Yet many of us live beyond the
world's ecological means, for instance in our patterns of energy
use. Perceived needs are socially and culturally determined, and
sustainable development requires the promotion of values that
encourage consumption standards that are within the bounds of
the ecological possible and to which all can reasonably aspire.
 Sustainability and Sustainable Development

1987 report of the World Commission on Environment and

Development (WCED).

Sustainable development is development that meets the needs of the

present without compromising the ability of future generations to meet
their own needs.

Far from requiring the cessation of economic growth, sustainable

development recognises that the problems of poverty and
underdevelopment cannot be solved unless we have a new era of
growth in which developing countries play a large role and reap large
benefits.
 Moreover

Growth must be revived in developing countries because that is

where the links between economic growth, the alleviation of
poverty, and environmental conditions operate most directly. Yet
developing countries are part of an interdependent world
economy; their prospects also depend on the levels and patterns
of growth in industrialised nations. The medium term prospects
for industrial countries are for growth of 3-4 per cent, the
minimum that international financial institutions consider
necessary if these countries are going to play a part in expanding
the world economy. Such growth rates could be environmentally
sustainable if industrialised nations can continue the recent shifts
in the content of their growth towards less material- and
energy-intensive activities and the improvement of their
efficiency in using materials and energy. [WCED, 1987].
And the most well-known phrase from this
report:

“Sustainable development is development that meets the

needs of the present without compromising the ability of
future generations to meet their own needs.”
 Environment - Economy Interactions

We are interested in:

•Reproducibility of each system over time

(sustainability)
•Interactions between the two systems
•Predictability or uncertainty in the operations of these
sub-systems
 The material basis of sustainability

•We have seen that economic activity has a material

basis.
•It draws resources from the environment, and provides
flows back into the environment.
•There are interactions between the economic and
environmental sub-systems.
•Key question: How can the stocks and flows in these
systems be reproduced over time, at non-diminishing
levels and rates?
 Environmental and economic sustainability

Two systems to be sustained:

•Economic system (stocks and flows): Utility
•Ecological system (stocks and flows):

And possibly others?

Steve Hackett (1998) “People in a sustainable society enjoy
non-diminishing flows of ecological, economic, sociopolitical
and cultural benefits.”
 Ecological sustainability

The ability of the environmental system to perform these

functions depends on its “state of well-being”.
Of relevance here are two central concepts:
•Ecosystem stability
•Ecosystem resilience

A safe minimum standard of conservation as a matter of

resources and economic policy. To be achieved by avoiding the
"critical zone-that is, the physical conditions, brought about by
human action, which would make it uneconomical to halt and
reverse depletion.
A “deep ecology” concept of sustainability

“Every generation should leave water, air and soil

resources as pure and unpolluted as when it came on
earth. Each generation should leave undiminished all the
species of animal found on earth.”
Economic sustainability
Some “economic” concepts of sustainability:

Sustainability is defined as... non-declining utility of a

representative member of society for millennia into the future.

A sustainable state is one in which utility (or consumption) is

non-declining through time.

The alternative approach [to sustainable development] is to

focus on natural capital assets and suggest that they should not
decline through time.
Some “interdisciplinary” concepts of sustainability:

Preserving opportunities for future generations as a common

sense minimal notion of intergenerational justice

Sustainable activity is...that level of economic activity which

leaves the environmental quality level intact, with the policy
objective corresponding to this notion being the maximisation of
net benefits of economic development, subject to maintaining
the services and quality of natural resources over time.
 CRITICAL ISSUES

Critical to sustainability, however defined, seem to be:

∙ the degree of resource substitutability

∙ the rate of technical progress
∙ the degree of eco-system stability and resilience
∙ irreversibility of “investment” decisions
 The degree of resource substitutability
The assets available to society, now and in the future, comprise:
• Natural capital ( Natural capital can be defined as the world's stocks of
natural assets which include geology, soil, air, water and all living things. It is
from this natural capital that humans derive a wide range of services, often
called ecosystem services, which make human life possible).
• Physical capital (In economics, physical capital refers to a factor of
production (or input into the process of production), such as machinery,
buildings, or computers. In economic theory, physical capital is one of the three
primary factors of production, also known as inputs production function.
∙ Human capital (labour and embodied skills)
∙ Intellectual capital (disembodied skills & knowledge

•Some of these can be accumulated over time. Others cannot be –

they are either finite, or there are limits to their accumulation.
So, as we move through time, to what extent can those resources
which can be accumulated substitute for those which cannot (or
which are depleted)?
How great is resource substitutability?

• Economists have typically argued that substitutability is high.

• Ecologists tend to be less sanguine (+ive). Many argue that natural

capital cannot be easily substituted by other forms of asset,
particularly in regard to some of its system life support functions.

•One extreme view is that substitution over this boundary is zero. So

natural capital must be conserved (at all costs). But is this even
possible? And how could we measure the stocks to know whether
they are being depleted?

“weak” and “strong” sustainability.

 The rate of technical progress

Important because technical progress implies we can get

more output from given quantities of inputs. So limited
resources can be stretched further.

Technical progress may also impact on the extent of

resource substitutability.

And possibly also on the degree of eco-system stability

and resilience.
 Eco-system stability and resilience
∙ Stability
The stability of a population refers to the
strength of the tendency to return to an
original equilibrium level after being subject to
some disturbance.

∙ Resilience
Resilience is the propensity of a system to
retain its organisational structure and function
in essentially the same way following a
significant disturbance.
 The degree of eco-system stability and resilience

Sets fundamental limits to all economic activity.

Of recent interest in the research literature in this regard are:

∙ biodiversity decline and evolutionary capacity

∙ interference with natural ecosystems

Various indicators may signal future stability/resilience.

But can never know ex ante whether a system is stable and resilient.

Changes are non linear, and path dependent (so dependent on initial
conditions).
 FEASIBILITY OF SUSTAINABILITY

Is sustainability feasible?

Is it possible for the economy to attain a state in which production

and consumption track along non-declining paths (or grow at positive
rates) over indefinite periods of time, in the presence of finite stocks
of exhaustible resources and constraints imposed by natural
environmental processes?
Irreversibility
Suppose that an asset is developed (or used) in some way.
New information arrives and we change our mind about
the desirability of that development.
Is it possible to reverse the process so that we are back in
the original position?
Often this is NOT possible. In those cases, the decision is
irreversible. This gives us much less room for making
mistakes.
Important in resource valuation.
 MODELS OF THE FEASIBILITY OF SUSTAINABILITY
Much of this based on a neo-classical growth model with
finite environmental resources – examines the possibility
of constant consumption over unlimited time horizons.
Not surprisingly, results depend on assumptions made
about
• Resource substitutability
• Technical progress
• Population growth

It is easy to get specific results for specific sets of

assumptions.
But these are of dubious validity as a guide to actual
policy.
 CONCLUDING COMMENTS

What do we mean by sustainability? Is it a moral, an

economic, or an ecological concept?

Critical to sustainability seem to be:

∙ rate of technical progress
∙ degree of resource substitutability
∙ degree of eco-system stability and resilience
 POLICY IMPLICATIONS
It seems sensible to adopt some form of precautionary principle.
But how much premium are we willing to pay to avoid risks of
catastrophic failures ?

If sustainability is feasible, can it be achieved through the use of

market-based incentives and instruments alone?

Some “sensible” interim goals:

• Encourage recycling
• Pay attention to safe disposal of wastes
• Information flows should be improved
• Ensure property rights are clearly established.
• Create incentive compatible instruments.
 Indicators for Sustainable Development
An important issue of the sustainable development agenda is
the use of indicators for measuring progress.
• Sustainable development indictors are quite important for
gaining insights into the complex and intertwined social,
economic and environmental systems, and to generate new
knowledge and information on their linkages and interactions.

• Moreover, the indicators are needed to address critical

questions relating to environmental integrity, public
participation and inter- and intra- generational equity.

•Decision makers and planners need indicators to identify and

prioritize policy interventions, assess impacts, harmonize
policies and actions, and design long-term development
strategies.
The 1992 United Nations Conference on
Environment and Development (UNCED) at Rio
recognized the important role that indicators can
play in helping countries to make informed
decisions concerning sustainable development.
Chapter 40 of Agenda 21 calls on countries,
governmental and non-governmental
organizations to develop and identify indicators of
sustainable development that can provide a solid
basis for decision-making at all levels. Moreover,
Agenda 21 specifically calls for the harmonization
of efforts at developing sustainable development
indicators at the national, regional and global
levels.1
 Indicators for Sustainable Development
• Economic indicators have been used for many years at
national, regional and international levels.
• Social indicators have also been developed over the past years
and are widely used all over the world.
• It is feasible to select among the economic and social indicators
those which capture the specific issues most relevant to
sustainable development. Institutional indicators related to
Agenda 21 or sustainable development are largely undeveloped
and are at this stage limited to so-called yes/no indicators.
• Environmental indicators have been developed more recently.
For some of the environmental aspects, data will not be easily
available. Recent initiatives include the environment statistics
programme of the United Nations Statistical Commission,
environmental indicators being developed by UNEP, the UN
system-wide Earthwatch, the OECD, various relevant international
legal instruments, and so forth.
A core set of indicators, as contained in Table 1 (see Indicator
Template on main menu) is proposed for monitoring progress
at a national level towards sustainable development through
the implementation of Agenda 21.

• It is fully recognised that there is need for flexibility as the

conditions, activities and priorities for sustainable
development differ from country to country.

• At same time, the need for international comparability calls

for the development of standardised concepts, definitions and
classifications of indicators.
 The indicators in the core set are presented in a Driving Force - State -
Response (DSR) framework.
• The DSR framework is adopted from the widely agreed framework for
environmental indicators, the Pressure - State - Response framework.

• The concept of "pressure" has been replaced by that of "Driving Forces", in

order to accommodate more accurately the addition of economic, social and
institutional indicators.

•"Driving force" indicators indicate human activities, processes and patterns that
impact on sustainable development,

•“State" indicators indicate the "state" of sustainable development and

• “Response" indicators indicate policy options and other responses to the

changes in the "state" of sustainable development.
•In the core set, the indicators are grouped in categories covering the economic,
social, institutional and environmental aspects of sustainable development. The
indicators are related to chapters of Agenda 21. The coverage of the four
aspects of sustainable development and of all the chapters of Agenda 21
ensures that the most significant aspects of sustainable development are
monitored by the indicators.
The indicators in the proposed framework have been developed in accordance
with the following criteria:
(a) primarily national in scale or scope (countries may also wish to use
indicators at state and provincial levels);
(b) relevant to the main objective of assessing progress towards sustainable
development;
(c) understandable in that they are clear, simple, and unambiguous;
(d) realizable within the capacities of national governments, given their
logistic, time, technical and other constraints;
(e) conceptually well founded;
(f) limited in number, remaining open-ended and adaptable to future
developments;
(g) broad in coverage of Agenda 21 and all aspects of sustainable development;
(h) representative of an international consensus, to the extent possible; and
(i) dependent on data which are readily available or available at reasonable
cost/benefit ratio, adequately documented, of known quality and updated at
regular intervals.
Instead of focusing on the different phases of a project, the PSR framework
distinguishes between three different angles of environmental issues:
• The pressure variable describes human activities or aspects that exert pressures
on the environment, that is the underlying causes of a problem. The cause can be
an already existing one or a new activity or investment. Examples of potential
pressures include income growth, trade patterns and activities, energy use, and
population growth.

• The state variable usually describes some physical measurable characteristic of

the environment that results from the pressure.
Examples include indicators that monitor aspects such as water quality, water
availability, deforestation, soil erosion, and existence and quality of habitats.

• The response variables measure to what degree society is responding to

environmental changes and concerns, for example those policies, actions or
investments that are introduced to solve the problem. As responses to
environmental problems they can affect the state either directly or indirectly. In
the latter case they aim to influence the pressures at work.
Examples include water-pricing methods, the establishment of resource rents,
the use of alternative crops, and reforestation programs.
• Drivingforces, such as industry and
transport produce…
• Pressures on the environment, such as
polluting emissions, which then degrade
the…
• State of the environment, which have an…
• Impact on human health and eco-systems,
causing society to…
• Respond with various policy measures, such
as regulations, information and taxes, which
can be directed at any other part of the
system.