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presence on Earth in perspective and reveal that Humanity has
created an unprecedented disturbance in Nature in a brief period of
a century or so.

On the other hand, it has been argued that just as earlier
generations in Becky™s world invested in science and technology,
education, and machines and equipment so as to bequeath to her
parents™ generation the ability to achieve high income levels, they
are now in turn making investments that will assure still higher
living standards in the future. It has been argued as well that the
historical trend in the prices of marketed natural resources, such as
minerals and ores, has been so ¬‚at that there isn™t any reason for
alarm. Economic growth has allowed more people to have access to
potable water and enjoy better protection against water- and air-

borne diseases. The physical environment inside the home has
improved beyond measure with economic growth: cooking in the
Indian subcontinent continues to be a major cause of respiratory
illnesses among women. Moreover, natural resources can be so
shifted round today, that dwindling resources in one place can be
met by imports from another. Intellectuals and commentators use
the term ˜globalization™ to imply that location per se doesn™t matter.
This optimistic view emphasizes the potential of capital
accumulation and technological improvements to compensate for
environmental degradation. It says that economic growth, even in
the form and shape it has taken so far, is compatible with
sustainable development. Which may explain why contemporary
societies are obsessed with cultural survival and on the whole
dismissive of any suggestion that we need to ¬nd ways to survive

Broadly speaking, environmental scientists and activists hold the
former view, while economists and economic commentators
maintain the latter. It is no doubt banal to say that our economies

are built in and on Nature, but I wonder if you noticed that the list
of productive assets I drew earlier (Chapter 1) didn™t include
natural capital. Nature didn™t feature in our account of
macroeconomic history because it doesn™t appear in of¬cial
publications of the vital statistics of nations. The extraction of
minerals and fossil fuels is included in modern national accounts
(though not depreciated), but with the exception of agricultural
land, natural capital makes very little appearance. If Nature™s
services have appeared in this book so far only in passing, it is
because that is how matters are in the literature on the theory and
empirics of economic growth and the economics of poverty.

Natural capital: classi¬cation

Sustainable economic development
Natural capital is of direct use in consumption (¬sheries); of
indirect use as inputs in production (oil and natural gas); or of use
in both (air and water). The value of a resource is often derived from
its usefulness (as a source of food, or as an essential actor in
ecosystems “ such as a keystone species); but there are resources
whose value is aesthetic (places of scenic beauty), or intrinsic
(primates, blue whales, sacred groves), or a combination of all three
(biodiversity). The worth of a natural resource could be based on
what is extracted from it (timber), or on its presence as a stock
(forest cover), or on both (watersheds).

The ecologists and environmental scientists Paul Ehrlich, John
Holdren, Peter Raven, and more recently Gretchen Daily, Jane
Lubchenco, Pamela Matson, Harold Mooney, and others have
taught us the economic signi¬cance of ecosystems. Interpreting
natural capital in an inclusive way, as I am doing here, allows us to
add ecosystems to our list of capital assets. The services they
produce include maintaining a genetic library, preserving and
regenerating soil, ¬xing nitrogen and carbon, recycling nutrients,
controlling ¬‚oods, ¬ltering pollutants, assimilating waste,
pollinating crops, operating the hydrological cycle, and maintaining
the gaseous composition of the atmosphere. A number of them have

a global reach (the atmosphere), but many are localized

Pollutants are the reverse of resources. Roughly speaking,
˜resources™ are ˜goods™ (in many situations they are the sinks into
which pollutants are discharged), while ˜pollutants™ (the degrader of
resources) are ˜bads™. If over a period of time the discharge of
pollutants into a sink exceeds the latter™s assimilative capacity, the
sink collapses. Pollution is thus the reverse of conservation. In what
follows, we will use the terms natural resources and environment

Two simple exercises in environmental economics
In order to demonstrate that economics is capable of joining the
environmental sciences in a seamless way, it will prove useful to
begin with a discussion of two issues that are much in the news

today. The ¬rst is the subject of an acrimonious debate between
those who favour free trade and those who are opposed to it on
grounds that it often hurts the poorest in Desta™s world. The second
is the belief that because the economic effects of carbon dioxide
emissions into the atmosphere are likely to be felt by a generation or
two further down from us, we needn™t do anything about climate
change now.

Trade expansion and the environment
There should be little doubt today that, other things being equal,
freeing trade enables economies to grow faster. A large body of
empirical work testi¬es to that. There is some evidence too that the
poor, as a group, also enjoy the fruits of faster growth. However, as
the environmental consequences of economic growth are rarely
assessed, the case for freeing trade remains unclear. If those
consequences hurt many of the poorest in society, there is room for
discussion about the merits of freeing trade without at the same
time taking precautionary measures. Here is an example of how
trade expansion can hurt.

An easy way for governments in poor countries that are richly
covered in forests to earn revenue is to issue timber concessions to
private logging ¬rms. Imagine that logging concessions are
awarded for the upland forest of a watershed. Deforestation
contributes to an increase in siltation and the risk of ¬‚oods
downstream. If the law recognizes the rights of those who are
harmed, the logging ¬rm would have to compensate downstream
farmers and coastal ¬shermen. But there is a gulf between the law
and the enforcement of the law. When the cause of damage is miles
away, when the timber concession has been awarded by the state,
and when the victims are a scattered group of poor farmers and
coastal ¬shermen, the issue of a negotiated outcome usually
doesn™t arise. It can even be that those who are harmed do not
know the underlying cause of their deteriorating circumstances. If

Sustainable economic development
the logging ¬rm isn™t required to compensate those suffering
damage, the private cost of logging is less than the true cost of
logging, the latter being the sum of the costs borne by the logging
¬rm and all who are adversely affected. From the country™s point of
view, timber exports are underpriced, which is another way of
saying that there is excessive deforestation upstream. It is also a
way of saying that there is an implicit subsidy on the export, paid
for by people who are evicted from the forest and by people
downstream. The subsidy is hidden from public scrutiny; but it
amounts to a transfer of wealth from the exporting country to
those that import the timber. Some of the poorest people in a poor
country would be subsidizing the incomes of the average importer
in a rich country.

Unfortunately, I can give you no idea of the magnitude of those
subsidies, because they haven™t been estimated. International
organizations have the resources to undertake such studies; but, to
the best of my knowledge, they haven™t done so. The example
shouldn™t be used to argue against free trade, but it can be used to
caution anyone who advocates free trade while ignoring its
environmental impacts.

Discounting climate change

My second example concerns the emission of greenhouse gases and
the global climate change it is inducing, the subject of continuing
study by the International Panel on Climate Change (IPCC).

The global concentration of carbon dioxide in the atmosphere stood
at approximately 260 parts per million (ppm) for 11,000 years until
the early 18th century, but is now 380 ppm. (We will ignore the
concentration of methane, which is another greenhouse gas.) The
most reliable evidence on climate change over geological time
comes from ice cores in Antarctica, which reveals that until the
early 18th century, the maximum concentration of carbon dioxide
during the previous 420,000 years was 300 ppm. That long interval
of time witnessed four glacial-interglacial cycles, each of about
100,000 years™ duration. Those cycles are driven by rhythmic
changes in the amount of solar radiation reaching Earth, the effects

of which are ampli¬ed by the feedbacks and forces they in turn
generate within Earth™s environment.

We are living in an interglacial period, which means that Earth is
experiencing a warm phase. If current trends in carbon emissions
continue, carbon concentration is expected to reach 500 ppm
(which is nearly twice the pre-industrial level) by the middle of this
century, and could reach as high a ¬gure as 750 ppm (which is
nearly three times the pre-industrial level) by the year 2100. A
doubling of present-day carbon concentration is expected to give
rise to an increase in the mean global atmospheric temperature by 3
to 7 degrees Celsius. With a trebling of concentration, it could rise
by 6 to 11 degrees. The temperature that would result even if the rise
were limited to 3 degrees is beyond anything that has been
experienced on Earth in the past 420,000 years. The speed of that
change is of particular signi¬cance, because it would mean that a
good portion of our capital assets will become less than useful long
before their planned obsolescence. Some of our infrastructure will
even disappear under the rising seas. In order to restructure our

assets, humanity will need to make additional investments,
diverting resources from consumption. If we add the impact of
rapid climate change on ecosystems (changes in the disease
environment to which human populations are not immune;
degradation in the composition, geographic distribution, and
productivity of ecosystems), the potential costs begin to look huge.
Nevertheless, when in 2004 eight eminent economists were invited
to Copenhagen to offer advice on how the world community could
most usefully spend $50 billion over a ¬ve-year period, they placed
climate change at the bottom of their list of ten alternatives.

Why did the economists do that? They did it because their
reasoning was based on discounting future costs and bene¬ts at a
positive rate. Reducing global carbon emissions or investing in

Sustainable economic development
technologies for carbon sequestration would involve huge costs
now, but the bene¬ts from averting economic disruptions would be
enjoyed only 50 to 100 years from now. Long-term interest rates on
government bonds in the US have been 3“5% a year. When
economists there evaluate public projects, they typically use such a
¬gure to discount future bene¬ts and costs, regarding it as the
˜opportunity cost of capital™, the term being applied to the rate of
interest that could be earned by investing in government bonds
rather than in the project whose bene¬ts and costs are being
evaluated. At discount rates of 3“5%, though, consumption bene¬ts
in the distant future look minute today. If you discount at 4% a year,
a dollar™s worth of additional consumption bene¬ts 100 years from
now would be worth less than 3 cents today; which is another way
of saying that as a price for giving up $1 worth of consumption
today, you would demand that more than $30 worth of
consumption bene¬ts be made available 100 years from now. A
number of economic models of climate change have shown that if
you use an annual discount rate of, say, 4%, the costs (which are
negative bene¬ts) are greater than the sum of the discounted
bene¬ts from curbing net carbon emissions. Doing something
about climate change now, the calculations imply, would be to
throw money away on a comparatively bad project.

Should the global community discount future consumption bene¬ts
at a positive rate? As with households at the private level (Chapter
6), so it is with households at the collective level: there are two
reasons why it may be reasonable for the global community to
discount future bene¬ts at a positive rate. First, a future bene¬t
would be of less value than that same bene¬t today if the global
community is impatient to enjoy the bene¬t now. Impatience is a
reason for discounting future costs and bene¬ts at a positive rate.
Second, considerations of justice and equality demand that
consumption per capita should be smoothed across the generations.
So, if future generations are likely to be richer than us, there is a
case for valuing an extra dollar™s worth of their consumption less
than an extra dollar™s worth of our consumption, other things being
equal. Rising consumption per capita provides a second
justi¬cation for discounting future costs and bene¬ts at a positive

Philosophers have argued that societal impatience is ethically
indefensible, because it favours policies that discriminate against
future generations merely on the grounds that they are not present
today. Once we accept their argument, we are left with only the
second reason for discounting future costs and bene¬ts. But if rising
per capita consumption provides the global community with a
reason for discounting future consumption bene¬ts at a positive
rate, declining per capita consumption would provide it with a
reason for discounting future consumption bene¬ts at a negative
rate. We noted the latter possibility at the household level in
connection with the dilemma Desta™s parents face when deciding
how to spread the consumption of maize between harvests
(Chapter 6).

Economists use positive discount rates in their models of climate
change because the models assume that global consumption per
head will continue to grow over the next 150 years and more even if
net emissions of greenhouse gases follow current trends; which is to
assume that climate change poses no serious threat to the future.

But an increase in the mean global temperature by 3“5 degrees
Celsius would take the biosphere into a climatic zone that has not
been visited in millions of years on Earth. The possible
consequences of such changes to our productive base are so huge,
that it isn™t to be an alarmist to question forecasts of continual
economic growth even after Earth enters that zone. Suppose you
fear that if nothing substantial is done today to discover ways to
sequester carbon and to ¬nd alternatives to fossil fuels as sources of
energy, there is a sizeable chance that global consumption per head,
suitably weighted across regions and income groups, will decline “
owing, say, to a big increase in the frequency of extreme weather
events, more severe droughts in the tropics, the emergence of new
pathogens, and degradation of vital ecosystems. You should then
use a negative rate to discount future consumption bene¬ts. Notice

Sustainable economic development
though that applying a negative rate ampli¬es bene¬ts in the
distant future when viewed from the present, it doesn™t attenuate

Let us perform a quick calculation to get a feel for orders of
magnitude. Empirical evidence from societal and personal choices
suggests that the rate a society ought to use to discount future
consumption bene¬ts is about three times the percentage rate of
change of consumption per capita. Imagine that carbon emissions
follow their current trends (which is often called ˜business as usual™).
Consider a scenario in which global consumption per capita
increases at an annual rate of 0.5% for the next 50 years and
declines at 1% a year for the following 100 years. Under that
scenario, the global community ought to discount future
consumption bene¬ts at 1.5% a year for the next 50 years (3 times
0.5) and at minus 3% for the subsequent 100 years (3 times minus
1). A simple calculation now shows that a dollar™s worth of
additional consumption 150 years from now is worth $9 of
additional consumption today. To put it another way, the global
community should be willing to forgo $9 worth of additional
consumption today for an extra dollar™s worth of consumption
bene¬ts 150 years in the future. The calculation reverses the

message that has been conveyed by economic models of climate

There should be little doubt that private investors would be using a
positive rate to discount their personal earnings even under the
above scenario. They would be doing so because the interest rate
offered by commercial banks on deposits would most likely remain
positive. But there is no contradiction here. Under ˜business as
usual™, the atmosphere is an open access resource. So long as people
are free to emit carbon dioxide, there will be a wedge between
private rates of return on investment and the rates the world
community ought to use to discount collective costs and bene¬ts.
The former could be positive even while the latter is negative. That
wedge is a reason for controlling carbon emissions into the
atmosphere and bringing the two rates closer to each other; it isn™t a
reason for claiming that the problem of global climate change
should be shelved for the future.

GDP and the productive base
What we have just conducted are but a pair of ¬nger exercises.
Nevertheless, they have shown us how natural capital can be
introduced in microeconomic reasoning. Let us see if it can be
included in macroeconomic reasoning.

A famous 1987 report by an international commission (widely
known as the Brundtland Commission Report) de¬ned sustainable
development as ˜ . . . development that meets the needs of the
present without compromising the ability of future generations to
meet their own needs™. In this reckoning, sustainable development
requires that relative to their populations each generation should
bequeath to its successor at least as large a productive base as it had
itself inherited. Notice that the requirement is derived from a
relatively weak notion of intergenerational justice. Sustainable
development demands that future generations have no less of the
means to meet their needs than we do ourselves; it demands

nothing more. But how is a generation to judge whether it is leaving
behind an adequate productive base for its successor?

It is easy to see why focusing on GDP won™t do. An economy™s
productive base is its stock of capital assets and institutions
(Chapter 1). By capital assets, we now mean not only manufactured
capital, human capital, and knowledge “ which is what we limited
ourselves to in Chapter 1 “ but also natural capital. We will
presently discover what to look for in order to check whether an
economy™s productive base is expanding or contracting. It is
evident, though, that an economy™s productive base will shrink if its
stock of capital assets depreciates and its institutions aren™t able to
improve suf¬ciently to compensate for that depreciation. GDP is an
acronym for gross domestic product. The word ˜gross™ means that

Sustainable economic development

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