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Greening the Brown Economy

The combined effects of financial crisis, climate change and energy concerns mean that we must overhaul our ideas on governance and harness public opinion, argues Jacqueline McGlade, executive director of the European Environment Agency.

By: EBR - Posted: Monday, December 14, 2009

Greening the Brown Economy
Greening the Brown Economy

The global financial, energy and environmental crises all have their roots in decades of intense natural resources extraction along with poor governance. The result is that a massive but largely hidden ecological debt has steadily built up. It is a toxic debt that will be difficult to repay in the face of climate change and unsustainable growth and consumption patterns, and is also a debt not fully accounted for either in financial rescue packages or in plans for greening our brown economies.

These crises have a number of common features, and if corrected promptly as part of fiscal reforms could synergize the emergence of more sustainable economies. These features include misleading market prices that do not properly cover all the costs and risks, hidden market incentives, opaque transactions, inadequate accounting of assets, a lack of precautionary mechanisms to respond to early warning signals, and a perverse social compass that has allowed massive inter-generational debts to accumulate. Obscured in the shadows there are other very unsettling findings that include an absence of controls to address the destruction of natural capital, a lack of accountability, an unerring belief in models that have little connection to reality, and an excessive hubris in the place of ethics and common sense.

One of the main casualties of these crises has been the loss of public trust. People have witnessed extraordinary amounts of public funds being mobilised to prop up banks and industries that have taken unreasonable risks, enjoyed excessive bonuses and failed to adapt to changes in the business climate. Today’s widespread demands for more information, supervision and accountability are hardly a surprise.

Natural resource accounting can provide part of the solution by presenting quantitative and monetary values for the goods and services that economies rely on, such as food, water, energy, timber and climate regulation. In a deregulated market, or one poorly linked to the physical reality of the underpinning resources, there is a severe risk of boom and bust cycles. The history of resource exploitation is littered with examples of what happens when the basics of accounting are missing.

 In fisheries management, laissez-faire markets, poorly timed interventions, politically driven regulation and a lack of real-time information about fish stock recruitment and abundance, have led to a history of extreme boom and bust cycles and the demise of many of the world’s fish stocks.
 In the rush to develop biofuels, both developed and developing countries lacked the ability to pull together resource accounts to allow them to regulate the growth of the market and fully analyse the impacts and unintended consequences on land use and commodity prices.
If the world is to green the brown economy and embrace a low-carbon future, a global accord on carbon accounting will be needed, including a significant increase in the categorisation of carbon credits for different forms of pollution.

Deforestation is a case in point. The new UN instrument, known as REDD for reducing emissions from deforestation and forest degradation in developing countries, has a primary focus on tackling illegal logging and forest clearance. But it also has another aim, which is to conserve and enhance forest carbon stores. To do this will require international cooperation, not only on the spatial coverage of different types of forest but also a much clearer accounting of the carbon contained within them and the water, biodiversity and soils required for their conservation and restoration.

Just as in managing a bank account, natural resource accounts can provide information about the quantities and qualities of the stocks and flows of natural capital and ecosystem services. The System of National Accounts – the globally recognised accounting framework for generating statistics on GDP, production, investment and consumption – is now being revised to include natural resource accounts. This is being done through the UN System of Economic Environmental Accounts System, the G8+5 project on The Economics of Ecosystems and Biodiversity and the European Environment Agency’s activities on the Consumption of Ecosystem Capital and on the Restoration Cost of Total Ecological Potential. Their inclusion in the system of national accounts will help reveal the degradation and overuse of natural capital, including deforestation, biodiversity loss, land use change, overexploitation of water resources and subsoil depletion and will also provide the basis for establishing the costs of restoration and for an international regime to govern access to genetic resources and the sharing of benefits derived from their use.

Including the full costs of pollution, degradation and destruction of natural capital and its replacement costs in the system of national accounts is the first step. But to be successful, these costs will also need to be internalised into market prices using taxes, tradable permits, regulations, liability regimes and the removal of perverse subsidies.

All this may well make the use of natural capital like water and carbon more expensive, but as many business leaders have recognised these costs must be included in the measures of societal wealth and success if plans for the future are to be realistic. The problem with the main measure used today, GDP, has long been recognised: more than 40 years ago, America’s Bobby Kennedy said that GDP “does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages…..it measures everything, in short, except that which makes life worthwhile”.

National governments and multilateral institutions all need to push their thinking beyond GDP if they are to include measures of net investment or disinvestment in natural capital, and the links between natural assets and the factors of productivity. To help this process there exist land and ecosystem accounts and indicators like the ecological footprint, environmentally weighted material consumption, human appropriation of primary productivity or biomass and net disposable national income, as proposed by the Stiglitz-Sen-Fitoussi Commission set up by France’s President Nicolas Sarkozy. Together, these natural resource accounting methods can reveal the scale and impact of natural resource use on the regenerative capacity of ecosystems, and also that of climate change on our consumption and production patterns.

Some of these indicators are already being used. The bad news is that there is no global, or even EU-level, political agreement on how to include resource indicators in official statistics. So once again the public is left without a transparent way of benchmarking progress on such key political decisions as reducing deforestation, mitigating climate change or even ensuring access to drinking water.

The second major problem in greening the economy is that as governments and institutions rush in with new rules and regulations, sometimes poorly conceived or over-zealous, there is a real danger that they will cause policy conflicts and trigger severe boom and bust cycles that could potentially push the world over critical economic, social and environmental thresholds.

For rules and regulations to be successful, it is important that they abide by the principles of good governance. Even the multi-billion euro European Economic Recovery Plan will fail if new approaches are not adopted that explicitly encourage public participation, create transparent arbiters of equity and fairness, protect the public good and provide explicit evidence of the status of all forms of capital.

In the ideological trench warfare that is being fought out between free marketeers and their opposing advocates of big government, even the free marketeers recognise that there is a need for more supervision of markets. At the same time, those who argue for big government recognise the benefits of the growth, dynamism and opportunities that have flowed from the movement of money, ideas and people across borders. But the general public has almost always been absent from these considerations. If the brown economy is to be greened, a different view of governance is needed that will mobilise public opinion and reinforce the egalitarianism of common-pool resources and even of fettered competition.

Nobel prize-winning economist Joseph Stiglitz has said “Markets work well when private rewards and social returns are well aligned. They have not been well aligned in the financial sector: perverse incentives lead to short-sighted behaviour and excessive risk taking”. A sobering example of this misalignment was the widespread use of improperly conceived collateralised debt obligations for sub-prime mortgages, which turbo-charged the world’s economies with financial weapons of mass destruction.

In his influential 2006 report on the economics of climate change, the former senior UK civil servant Nicholas (now Lord) Stern observed that climate change is history’s largest market failure. One reason for this is the poor representation of the real replacement costs of the environment and of natural resources, and the discounting of these resources in the models that underpin the world’s dominant economies. Developing nations have been extracting their natural resources and exporting them to industrial nations at prices that are often well below replacement costs, and developed nations have grown their economies without the consequences of climate change being taken into account. Directly and indirectly, the market has led to the destruction of many ecosystems and the potential loss of stability of the earth’s climate.

Now these problems are being addressed by a growing number of nations, cities, communities and businesses. In banking, for example, there are the Equator Principles, and in business the Global Reporting Initiative. But today’s crises are more complex, intense and extensive and may well be combining to create a more rapid paradigm-shift than we are prepared for. Coping simultaneously with global recession, climate change and resource security is making it plain to policymakers that we need more public participation, transparency and accountability in the use of the planet’s natural capital. It is greatly to be hoped that these crises will provide the impetus we need for greening our brown economy.

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