9.0 Introduction

Over a broad range of metrics, over the past 200 years, human well-being has shown dramatic improvements. This is true even as the population has risen from less than 1 billion in 1800 to over 7 billion today. Economist Gale Johnson of the University of Chicago summarized the trends over the past two centuries: “the improvement in human well-being goes far beyond the enormous increase in the value of the world’s output. The improvements are evident in fewer famines, increased caloric intakes, reduced child and infant mortality, increased life expectancy, great reductions in time worked, and greatly increased percentage of the population that is literate” (Johnson 2000). The average person today is much richer, better fed, and lives much longer than his or her ancestors. The gains have been dramatic. In India, life expectancy increased from 23 years in 1990 to over 65 years now. In the United States, life expectancy increased from 48 years in 1900 to 78 years now.

Why have living standards gone up so dramatically despite limited natural resources and increased population? Neoclassical economists point to human ingenuity as the key factor. New products, new methods of producing goods using fewer inputs and discovery of abundant low-cost resources to replace scarce natural resources have meant that resource constraints seem to be less important now than in the past. The key question in this chapter is whether this trend will continue in the future.

We have already explored the theoretical basis for optimism (neoclassical economics) and pessimism (ecological economics) in which a key difference between the two is the view on whether manufactured, human, or social capital can more than offset for losses of natural capital. The neoclassical side believes that ingenuity will continue to prevail. Ecological economists, while acknowledging past accomplishments of growth, argue that the economics of our current “full planet” are fundamentally different than what was possible in an era of low population and low per capita consumption.

Increasingly, as ecological economists argue, growth is being achieved at the expense of future generations. We have fueled the current boom by eating through our natural capital, using up nonrenewable resources such as oil and other fossil fuels, and increasing levels of pollution. Climate change, extinction of species, degradation of ecosystems, depletion of natural resources, increases in toxic waste, and high levels of air and water pollution, all indicate declines in critical natural capital that will harm the well-being of future generations. Herman Daly, a leading ecological economist, summarized the views of many ecological economists about the current economic growth paradigm: “Humankind must make the transition to a sustainable economy—one that takes heed of the inherent biophysical limits of the global ecosystem so that it can continue to operate long into the future. If we do not make that transition, we may be cursed not just with uneconomic growth but with an ecological catastrophe that would sharply lower living standards” (Daly 2005).

The views of neoclassical and ecological economists sketch out a very different view on future prospects. So who is right?

Two prominent academics, an economist and an ecologist, decided to take a very nonacademic approach to proving who was right: they made a bet. In 1980, economist Julian Simon and ecologist Paul Ehrlich bet on whether the prices of five metals (chrome, copper, nickel, tin, and tungsten) would increase or decrease between 1980 and 1990 (Tierney 1990). Simon, representing the views of many neoclassical economists, argued that prices of natural resources would fall over the decade of the 1980s because technological progress and new discoveries would make natural resources less important despite increases in population and economic growth. Ehrlich, representing the views of many ecological economists, argued that prices of natural resources would rise because increased demand from population growth and rising per capita consumption would run smack into the constraints imposed by the limited supply of these resources.

Who won the bet? We’ll answer that question at the end of the chapter. Before then, however, we’ll examine the larger context of debates over sustainability. We will start our discussion of what the future holds by looking back to the past, discussing the historical roots of debates about sustainability. We will then turn to questions of how to assess sustainability. What are the right yardsticks to judge whether the economy and the environment are on a sustainable or unsustainable trajectory? We will also review some of the evidence about whether current trends are sustainable or not. And then we’ll return to the bet.

9.1 Malthus and Ecological Economics

In 1798, Reverend Thomas Malthus wrote a book entitled An Essay on the Principle of Population (Malthus 1798). Malthus laid out a simple proposition with a dire and seemingly inescapable outcome. Assuming (1) that the food supply grows arithmetically (increasing at a constant rate of, say, 10 million tons of grain per year) and (2) that a healthy population grows geometrically (doubling every 30 to 50 years), the prospects for long-run human progress are dim. Eventually, Malthus argued, population growth would outstrip the food supply, leading to increasing human misery, famine, disease, or war. This in turn would provide a “natural” check on further population growth.

This Malthusian population trap is illustrated in Figure 9.1. As population grows geometrically, and the food supply increases only arithmetically, available food per person declines. Eventually, the lack of food limits births and increases deaths, halting or even reversing population growth.

Malthus’s theory should sound familiar. Ecological economists in fact trace their lineage back to Malthus and are sometimes called Neo-Malthusians. Malthus’s theory emphasizes the limits imposed by natural resources. Food production is limited by land availability. It also gives little scope for new knowledge or technological improvements to increase food production.

But surely, wasn’t Malthus wrong? Since the time Malthus wrote his book, human population has indeed grown rapidly. But instead of mass starvation, food production has grown even more rapidly. To date, we have indeed avoided a Malthusian fate because of impressive technological developments in the fields of agriculture, health care, and birth control.

These technological advances have challenged Malthus’s basic assumptions. First, it need not be the case that agricultural output grows only arithmetically. From about 1950 through the 1980s, the Green Revolution in agriculture resulted in greatly increased yields for major crops around the world. The Green Revolution brought new, hybrid forms of wheat, rice, and corn seeds that produced much higher yields per acre than did conventional seeds. The results were dramatic. From 1950 to 1984, world grain output increased by a factor of 2.6. Over the same period, world population roughly doubled.

Since the mid-1980s, as Green Revolution technologies began to show diminishing returns, grain yields have continued to increase, but more slowly. As Figure 9.2 shows, and contrary to Malthus’s prediction, total per capita food production is still rising, meaning that the output is running ahead of population growth.

Malthus’s second assumption, that population always increases geometrically, also has not been born out in reality. Excluding immigration, developed countries have very low population growth rates—often below zero. The availability of effective birth control, not foreseen by Malthus, has meant that families are able to control their “natural” reproductive tendencies. As we shall see in Chapter 20, for a variety of reasons, as countries develop economically, most households in fact opt for small families. The very good news here is that, despite the tremendous momentum behind population growth—we are adding 80 million people a year to the planet—by 2050, many demographers believe that the planet’s population will stabilize at between 9 and 10 billion people.

Still, “only” 3 billion more people is a huge number. It is, for example, three times more people were alive at the time Malthus warned about population pressures outstripping food supply. Will the year 2050 bring with it widespread food shortages? Provided that population does stabilize around 9 to 10 billion, there will likely be enough land to grow the food we need. In fact, there are large gains that remain by applying modern agricultural technology more broadly in many low-income countries where yields remain far below the potential yield. Closing the “yield gap” so that all lands currently growing crops achieved yields equal to that of the best-producing land, given the same climate conditions could increase food production by more than 50 percent (Foley et al. 2011). In addition, advances in biotechnology, genetically modified organisms, and other new technology may boost yields still further.

Ecological economists point out that, beyond simply acres of land, there are other ways in which resource constraints matter. Agriculture requires massive quantities of freshwater, energy, fertilizers, and pesticides. Runoff from modern farming practices is the main source of water pollution through much of the world. For example, the increase in the use of fertilizers to grow corn and other crops in the U.S. Midwest has increased the flow of nutrients from the Mississippi River, resulting in a large increase in the “dead zone” in the Gulf of Mexico. The dead zone is created when algal blooms fed by excess nutrients decay and deplete the water of oxygen required to maintain fish and other marine life. And climate change threatens to disrupt the weather patterns in the world’s main agricultural regions. Drought or excessive heat can damage crops. In the hot dry year of 2012, corn production in the United States fell by over 1.5 million bushels compared to 2011, despite more corn being planted. Ecological economists are quick to point out that just because food production has increased faster than population in the past, there is no guarantee that it will continue to do so in the future.

And it is not just a matter of basic grain production keeping up with population. Rising affluence has resulted in changing diets that increase the demand for food production per person. As people get richer they consume a lot more meat. Over the last 15 years, global meat consumption has more than doubled. And meat production requires a good deal more agricultural output than just directly consuming the grain. Grain-fed beef requires 7 pounds of grain to produce 1 pound of meat. Meat production is responsible for an astounding 15 to 25 percent of global warming emissions worldwide. Meat production also requires large quantities of freshwater. On a per kilogram basis, compared to soy protein, production of meat protein requires 6 to 20 times as much fossil fuel. Increased demand for biofuels can compete with food demand, leading to “food versus fuel” conflicts. Ecological economists worry that the end result is a world of extremes: rising food prices combined with an epidemic of obesity in the developed parts of the world and large increases in the percentages of people facing poverty, malnutrition, and hunger in poor countries and communities.

Malthus was truly the forerunner of ecological economics. He captured the sense in which fundamental limits on natural capital place a bound on supply, which when combined with rising demand from a continually growing population eventually lead to an unsustainable outcome. Although his prediction of decline in available food per capita has not been borne out, at least to date, echoes of his logic continue in modern debates on sustainability.

9.2 Modern Debates: Limits to Growth and Planetary Boundaries

Much of the concern about sustainability has shifted from a more narrow focus on food availability to a much broader set of issues involving the state of the environment and its ability to support an expanded human population in the future. Is natural capital being degraded in ways that threaten future prosperity?

Let’s start with an analogy. Salmon fisheries in the Pacific Northwest have collapsed, and many wild salmon populations are on the verge of extinction. The reasons for this are complex, but clear-cut logging has played an important role. In an old-growth forest, fallen trees create dams, which in turn develop spawning pools. Different types of hardwood trees—maple and alder—provide food for insects upon which young salmon smolts feed. Intact forests prevent erosion that causes sedimentation, which can increase the mortality rate of salmon eggs and smolts. Cutting down trees for timber and replacing them with a much less diverse second-growth forest thus destroys the resilience of the ecosystem. Now, catastrophic events such as mudflows, once a part of stream rejuvenation, scour and destroy the salmon habitat.

Ecological economists essentially claim that we are doing to ourselves what we have done to the wild salmon; in complex and perhaps unknowable ways, we are dismantling the delicate physical and biological structure that underlies the resilience of the ecosystems on which we depend. This in turn dramatically increases our economic vulnerability to any large-scale ecosystem shifts that we may induce.

Modern ecological economics was launched, in part, by an influential 1972 book entitled The Limits to Growth, which in many ways extended Malthusian logic to a broader set of issues about whether the earth could sustain an ever-expanding human population and economic activity (Meadows et al. 1972). The book argues that “If the present growth trends in world population, industrialization, pollution, food production, and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime within the next one hundred years. The most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity.” This group reiterated their warning in a follow-up book Beyond the Limits (Meadows et al. 1993). More recently, a group of natural scientists defined a set of “planetary boundaries,” which, if crossed, could have disastrous consequences for humanity (Rockström et al. 2009). They identified several global boundaries that have already been crossed—climate change, biodiversity loss, and excess nitrogen flows—and others that are in danger of being crossed in the near future. The main point of each of these publications was to make clear the need for major changes in the society to avoid catastrophe and achieve “ecological and economic stability that is sustainable far into the future.”

Neoclassical economists, for reasons you should now be familiar with, have generally been highly critical of Limits to Growth and planetary boundaries. William Nordhaus noted, in a review of Limits to Growth, that the approach assumed “There is no technological progress, no new discovery of resources, no way of inventing substitute materials, no price system to induce the system to substitute plentiful resources for scarce resources” (Nordhaus 1973, p. 1158). Inclusion of any or all of these factors makes the future considerably less bleak. Nordhaus was also critical of the lack of data and specific equations used in the modeling approach. Paul Krugman was much more blunt in his assessment of Limits to Growth, “the study was a classic case of garbage-in-garbage-out” and he claimed that the authors “didn’t know anything about the empirical evidence on economic growth or the history of past modeling efforts…”(Krugman 2008).

The most comprehensive review of the state of the environment was provided by the Millennium Ecosystem Assessment, which involved more than 1,300 scientists including some economists. The Millennium Ecosystem Assessment emphasized the essential role of ecosystem processes and biodiversity in supporting human well-being. A central concept of the Millennium Ecosystem Assessment was ecosystem services, the benefits that people receive from nature. The range of ecosystem services includes provisioning services such as food, energy, and clean water; regulating services such as carbon sequestration, water purification, pollination, and disease and pest control; and cultural services such as recreation and ecotourism. The Millennium Ecosystem Assessment documented a widespread decline in biodiversity and degradation of many ecological processes. The loss of natural capital has led to a reduction in supply of many important ecosystem services. In fact, the Millennium Ecosystem Assessment found that the majority of ecosystem services were in decline, including virtually all of the regulating and cultural services (Millennium Ecosystem Assessment 2005).

But how can the majority of ecosystem services be declining at the same time as there are big gains in human well-being (recall the evidence from economist Gale Johnson quoted near the start of this chapter)? If ecosystem services are declining shouldn’t that translate into a decline in well-being? Not necessarily. First, not all ecosystem services are in decline. It may be that the really important services, such as food production, are increasing and this more than makes up for the declines in other services. Second, technological advances have made well-being less dependent on natural capital. Third, there may be time lags between declines in natural capital and declines in the standards of living. A recent review found some evidence in support of all three of these explanations (Raudsepp-Hearne et al. 2010).

So, what does all this mean: is the global system on a crash course or whether everything is just fine? Economists require empirical evidence to address such questions, and if we can’t measure something, we find it difficult to talk about it. In concrete terms, how do we know if we are achieving sustainability or not? You might have gathered from the fact that there have been persistently held and widely divergent views about sustainability that it is difficult to find conclusive evidence one way or the other. Sustainability, it turns out, is a difficult thing to measure. Most of the existing measures of the state of the economy or the state of the environment capture only a part of what is needed for a complete measure of sustainability.

The next two sections explore the empirical approaches to measuring sustainability and the strengths and weaknesses of these various approaches. One set of approaches builds from the foundation of strong sustainability that requires that we maintain stocks of natural capital. These approaches focus on biophysical measures of natural resources and environmental quality. Ecological economists tend to emphasize these types of measures of sustainability. A second set of approaches builds from the foundation of weak sustainability that requires that we maintain human well-being so that the typical person in the future is no worse off than the typical person living today. These approaches focus on measures of income and wealth (the aggregate value of all capital stocks). Neoclassical economists tend to emphasize these types of measures of sustainability.

9.3 Measuring Strong Sustainability: Impacts and Footprints

Back in 1971, two scientists—Paul Ehrlich and John Holdren—presented an influential method for thinking about environmental problems. Their approach is now called the IPAT equation:

The IPAT relation suggests that we think about three main causal factors underlying environmental problems: population growth, growth in consumption per person (affluence), and the damage per unit of consumption inflicted by the available technology.

The IPAT equation also broadly points toward solutions: addressing both overpopulation and overconsumption and improving technology to reduce the environmental damage per unit of production (“clean technology”). To make the equation more concrete, consider the global emissions of carbon dioxide from cars circa 2013:¹

Now, get set for some depressing mathematics. By 2050, global population is estimated to increase to approximately 9 to 10 billion people, a 40 percent increase from current levels. Affluence (the number of cars per person) is likely to more than quadruple as people in China, India, Brazil, and many other current middle- and low-income countries become wealthier. The IPAT equation tells us that, holding technology constant, ${\text{CO}}_2$ emissions from autos would thus rise by a factor of $1.4*4=5.6$. Alternatively, to maintain ${\text{CO}}_2$ emissions constant, technology would have to advance so that each auto could reduce emissions to roughly one-sixth of the current level. That is quite a tall order. Then recall that to stabilize the concentration of ${\text{CO}}_2$ in the atmosphere, we must actually steeply reduce ${\mathit{CO}}_{\mathit{2}}$ emissions rather than merely keeping them constant.

So are we doomed? Is it possible to reduce emissions while the population and affluence are increasing? Yes, if technology changes fast enough. In the United States, for example, emissions of ${\text{SO}}_2$ and other air pollutants have fallen since 1970, despite increases in population and economic growth. For ${\text{CO}}_2$ emissions and cars, it may also be possible. We could, for example, develop electric cars fueled by solar power, thereby reducing ${\text{CO}}_2$ emissions to very low levels. But the IPAT equation has much broader implications. Consider the environmental impacts of the almost sixfold increase in mining, oil drilling, food production, timber production, and manufacturing needed to support a larger and more affluent population. Even the production of so many electric vehicles and solar power facilities would have environmental impacts. Or consider the impacts on the natural environment if road construction expands along with auto use.

The IPAT equation is useful to get a handle on the environmental impacts and the potential ways to reduce environmental impacts. In particular, it provides us guidance to the scale of substitution from manufactured capital that would be needed to prevent degradation of natural capital. However, it doesn’t necessarily tell us about the relative scarcity of natural capital stocks critical for maintaining human well-being. To measure sustainability, ecological economists therefore favor the use of physical measures of natural resource stocks and ecosystem resilience weighed against population and consumption pressure.

Put another way, ecological economists look at the current value of “I” in the IPAT equation, assess the trends in P, A, and T, and from that, make a judgment about the need for further action to reduce I. Recall from Chapter 8 that from an ecological point of view the only way to ensure that future generations are not penalized by our actions is to hand down a stock of natural capital that largely resembles our own—particularly if the natural capital has uncertain value or its degradation is irreversible. This means, for example, on the global warming and ozone depletion fronts, our current impacts are not sustainable. This follows because everybody agrees that, unchecked, these effects will lead to large-scale, negative changes in the global environment. (Of course, some neoclassical economists argue that we could adapt to climate change and therefore do not necessarily need to stop it.)

Ecological economists have looked to ecological studies to find other signs of “limits to growth.” For example, Vitousek et al. (1997) calculated that humans now appropriate, directly or indirectly, 40 percent of the “net primary production,” which is a measure of the amount of increase in plant biomass fueled by the conversion of sunlight into chemical energy via photosynthesis. Net primary productivity is a good measure of the productivity of ecosystems. In other words, humans consume close to half of the useful output of ecosystems at present. From the ecological point of view there is no substitute for photosynthesis! Projecting trends forward, “If we take this percentage as an index of the human carrying capacity of the earth; and assume that a growing economy could come to appropriate 80% of photosynthetic production before destroying the functional integrity of the ecosphere, the earth will effectively go from half to completely full during the next…35 years.” (Rees and Wackernagel 1994, p. 383). Considering that this statement was written almost 20 years ago it doesn’t leave much time.

Let’s pause for a:

The response from an ecological economics perspective is that history provides little guidance for assessing the impact of continued geometric economic growth. While technology may have been able to accommodate the last 200 years of growth, starting from a relatively empty planet with only 1 billion people, we now have a relatively full planet with over 7 billion people. There are few remaining frontiers and there is no promise that we can continue to have “green revolutions” to boost yields. We are now facing a 35-year doubling of food production from population increase and diet shifts toward meat consumption on an already crowded planet. Yes, technology will improve, but ecological economists argue that constraints on available land and on cheap energy pose a fundamental, relatively short-term problem. Therefore, “forgetting” technology is justified. We will return to this core area of disagreement again at the end of the chapter.

Another example of an ecological accounting of sustainability relates to freshwater use. Humans now use about 54 percent of the surface-water runoff that is geographically accessible. New dam construction could increase accessible runoff by 10 percent over the next 30 years, but the population is expected to increase by 45 percent over the same period. Of course, other technological possibilities exist; chief among them are increases in the efficiency of water use. However, ecological economists would argue that freshwater prices are likely to increase substantially over the next few decades and that adequate substitutes are unlikely to be forthcoming (Postel, Daily, and Ehrlich 1996).

More fundamentally, however, ecological economists following the IPAT logic would have us consider the broader ecological impacts of significant increases in the demand for water. Dam construction and water withdrawals are already driving many aquatic species to the brink of extinction and beyond. Water shortages threaten livelihoods and industries. Some have argued that water wars between nations will soon follow. Beyond the “simple” question of access to cheap water, ecological economists believe that resource scarcity will lead us to fundamentally damage many of the ecosystems on which our economic and cultural lives depend.

In addition to IPAT, ecological economists sometimes rely on a different measure of strong sustainability: the ecological footprint. The ecological footprint summarizes the various constraints of land, water, and environment that we have just discussed in a single number. In particular, the ecological footprint of a community (or nation) calculates how much land and water area is needed to provide the resources for production and for assimilation of wastes for that community. It is relatively easy to calculate the land area needed to grow food or timber. But it is more difficult to calculate the land or water area needed for other types of production or for the assimilation of waste.

For example, how does the ecological footprint compute the land area needed for energy use from fossil fuels? Clearly there is some land use for coal mines, oil drilling platforms, and refineries, but this direct use of land is relatively small. As we have seen, fossil fuel use is a major contributor of ${\text{CO}}_2$ emissions that increase global warming. The ecological footprint asks how much area devoted to growing forests it would take to sequester the same amount of ${\text{CO}}_2$ as is released by burning fossil fuels. This much area for waste assimilation, which keeps the concentration of ${\text{CO}}_2$ in the atmosphere constant, is then added to the area needed for production to attain the total area needed for energy production and consumption.

When the sum total of all areas needed for production and that needed for waste assimilation are added together for the global economy, ecological footprint calculations indicate that we currently need about 1.5 earths to accommodate production and assimilation of waste. Obviously we have only one earth, so any ecological footprint measure over 1 indicates that we are living unsustainably. The ecological footprint provides a quick summary metric of how far the global economy is living beyond what can be supported on a long-term sustainability basis. Of course, as in IPAT, improvements in technology that improve resource efficiency lower the ecological footprint for a given level of population and consumption.

To see the difficulty that the sustainable development challenge poses to global society consider Figure 9.3. This figure plots how various countries fare in terms of their ecological footprint calculated at the national level, considering a widely used measure of human well-being, the human development index (HDI). The HDI includes measures of per capita income, education levels, and life expectancy. The HDI for each country is scored relative to the highest country score so that HDI varies between 0 and 1. Most of the countries with a high HDI are high-income, developed countries such as the United States, Canada, Australia, and many European countries. Countries with low HDI are primarily low-income countries in Africa and Asia that also have relatively poor education systems and low life expectancy.²

The ideal situation is to have a high HDI, indicating a high level of human well-being but a low ecological footprint. To be sustainable, the ecological footprint should lie to the left of the vertical line at 2.1 hectares per person, the level that would yield a global ecological footprint equal to 1 (so that we only need one earth to support all of the demands of the global economy). No country has an HDI greater than 0.9 and an ecological footprint below 2.1. To achieve sustainable development, all countries in the world would achieve this. Even Cuba, which appears to be doing relatively well as shown in Figure 9.3, has an HDI score below 0.8 (0.78), according to the United Nations Development Program’s Human Development Report 2011.

While the ecological footprint has the advantage of being simple to present, its critics think that the approach is overly simplistic and that it does not produce meaningful results. How can one really represent all of the dimensions important for sustainability and convert them into the land or water area needed? For example, absorption of ${\text{CO}}_2$ by forests requires a large land area and greatly contributes to the ecological footprint. If, instead, ${\text{CO}}_2$ were captured and stored underground as is done in carbon capture and storage (CCS) projects, then the land area needed for fossil fuel use would have been greatly reduced. Using CCS might then make it appear that we are more sustainable. But CCS introduces other problems. It is costly and there are fears that the ${\text{CO}}_2$ will not remain trapped underground but will eventually leak back into the atmosphere. As we will see in the next section, the question of whether it is possible to summarize sustainability in a single number is also a central issue for measures of income and wealth favored by neoclassical economists.

In this section, we have seen that in judging whether our use of natural capital is sustainable, ecological economists rely on physical measures of resource stocks and the absorption capacity of environmental sinks. If natural resources have no good substitutes on the horizon, and rapidly growing demand exceeds regenerative capacity of current supply (water, energy supplies, and net primary productivity), then our use is unsustainable. If the absorptive capacity of environmental sinks is exceeded, leading to long-term alterations in the environment from stock pollutants (ozone-depleting CFCs and carbon dioxide), then our use of those sinks is unsustainable. Again, as the focus here is on protecting individual stocks of natural capital—absorptive capacity of the atmosphere, particular forests or fisheries, and regional water supplies—the policy objective is to ensure strong sustainability.

9.4 Measuring Weak Sustainability: Net National Welfare and Inclusive Wealth

Neoclassical economists take a different approach to sustainability. In line with the notions of weak sustainability, they are less interested in the trends of any particular element of natural capital (or human, manufactured, or social capital) and more interested in whether the sum total of capital assets is capable of supporting improved well-being. If different types of capital are, in general, substitutes, then the decline in any particular type of capital can be offset by increases in other types of capital.

In this section, we discuss two neoclassical measures of weak sustainability. The first, Net National Welfare (NNW), attempts to measure, on an annual basis, the “real” well-being of society’s members. If well-being is improving, our economy is, by definition, sustainable—at least to date. The second approach, inclusive wealth (IW), attempts to measure the total value of all forms of capital (human, manufactured, social, and natural). Increases in IW would indicate that the economy is sustainable, while decreases indicate that it is unsustainable. (If you have taken accounting, NNW is something like a national (or global) income statement, while IW is more like a national (or global) balance sheet, focusing on the value of the national capital stock.)

We start this exploration in sustainability accounting with a look at the standard macroeconomic metric of economic performance: gross domestic product or GDP. GDP is a national-level measure of the final value of all goods and services produced and consumed in the market each year; it also equals the income earned and spent by consumers. GDP is a reasonable measure of market activity. But GDP is a bad measure of sustainability—whether the typical person is better off in the long run. GDP has at least four well-known problems in regard to sustainability.

1. GDP fails to include the value of nonmarket goods and services. Housework, child care, and volunteer work are the three biggies. But the main problem with GDP from a sustainability perspective is that it does not include the value of many ecosystem services. Improving air or water quality, seeing wildlife or a beautiful view, improving recreational opportunities, all may generate benefits, but much of the value of these benefits will not be reflected in the economic accounts. Some value may be included, at least indirectly. For example, improved water quality in a lake may result in improved fishing, swimming, and boating, drawing more people to the lake and thereby increasing sales at local businesses and increasing property values of lakefront homes. We have already discussed the ways to measure values of nonmarket benefits in Chapter 5.
2. GDP fails to exclude costs incurred in reducing harmful activities. For example, expenditures to clean up after a storm increase GDP, but this certainly doesn’t represent an improvement in welfare compared to the case with no storm and no clean up expenditures. Costs of externalities should also be deducted, such as costs associated with pollution or congestion. Sometimes these externality costs show up as what are called defensive expenditures—money spent to protect oneself from a deteriorating environment or loss of ecosystem services. Examples include increased number of doctor visits, water purifiers, and cell phones (to make traffic jams tolerable). When defensive expenditures boost the final consumer demand, the GDP measure perversely increases even though people are clearly not better off! The costs of growth also include increased spending on internalized externalities. These include the direct costs to industry and government for pollution control and cleanup (more than $225 billion per year in the United States). Here again, GDP counts on the positive side of the ledger expenditures on pollution abatement and cleanup. Thus, after the giant BP oil spill in the Gulf of Mexico in 2010, the cleanup money spent by the company translated into a big boost to regional consumer spending and thus GDP.
3. GDP fails to account for the depreciation of the capital used up in production. One quick way to boost current income is to spend down capital. For example, unsustainable fishing effort can boost the current harvest and incomes earned from fishing, but it does so at the cost of loss of future income because it has depleted the fish stock. Similarly, not maintaining plant and equipment will lead to increased costs for repairs and replacements in the future. The U.S. government publishes an adjusted GDP measure, called net national product (NNP), which takes the depreciation of manufactured capital into account. However, our main concern here is the lack of similar accounting for the depreciation of natural capital.
4. GDP reflects the experience of the “average” but does not account for distribution or equity concerns. GDP is reported on a per capita basis, showing the mean (average) value for a society. Average income doesn’t tell you much about how the poorest people in society are doing. Average income does not take income distribution or equity into account. For this, a better measure is median income. In the United States, for example, since 1980, GDP per capita has risen substantially, but the median income of the typical family has barely budged. How is this possible? Virtually all of the GDP gains from growth have flowed to the top 20 percent of families and, in recent years, increasingly to the top 1 percent. An increasing fraction of very high income people has raised the average income, but not the income of the typical (median) person. Note that when Bill Gates walks into a room full of people, the “average” person is suddenly a millionaire, even though no one except Bill Gate has that much income! For sustainability, which addresses equity of well-being across generations, equity within the current generation may also be an issue of concern.

To build a measure of sustainability, we need to adjust GDP to account for the four problems mentioned above. One way to do this is to build a measure of NNW. Currently, there is no universally agreed-upon approach to this kind of environmental/economic accounting. However, because such a measure would be quite valuable, economists have focused a lot of attention on calculating NNW.³

In principle, NNW can be defined as the total annual output of both market and nonmarket goods and services minus the total externality and cleanup costs associated with these products, minus the depreciation of capital, both natural and human-made, used up in production. Figure 9.4 shows the calculation of NNW.

The first step in calculating NNW is to augment GDP with nonmarket consumption—the value of leisure time, nonmarket work such as housecleaning and child care, and the value of capital services, such as owner-occupied housing. From augmented GDP, one then subtracts externality, abatement, and cleanup costs. These range from expenditures on pollution-control equipment and operation to the increased congestion costs of commuting to work to increased spending on health care due to environmental damage. Economists have developed a variety of techniques for estimating the costs of both pollution control and environmental damage. We explored these methods in detail in Chapters 5 and 6.

As a last bit of arithmetic, one must subtract depreciation—the amount of money necessary to replace the capital, both natural and created, used up in the production of GDP and to provide for a growing population. Included in this fund would be depreciation of machines, plants, equipment, and physical infrastructure as well as much government investment in human capital, such as spending on education and health care. The depreciation of human-made capital is relatively straightforward, but how does one value the nonrenewable resources used up in production? Calculating the “right” depreciation rates for lost topsoil, species extinctions, or exhausted petroleum reserves is difficult, controversial, and the subject of the next section.

The formula in Figure 9.4 gives the value of NNW on a national basis. But a final adjustment for the changes in income distribution may be required. Rather than considering the average (or per capita) NNW, we may also want to consider what is happening to the distribution of income and, in particular, whether the poorest and most vulnerable in society are seeing their lives improve or not.

Figure 9.4 illustrates what we want, at least in principle—a way to measure sustainability. Our NNW figure incorporates both the (positive) material and (negative) environmental features of economic growth. If, overall, income that accounts for the value of all goods and services and that has been properly adjusted for depreciation is increasing through time, we have achieved economic sustainability, at least to date.

A second approach to measuring sustainability is inclusive wealth or IW. Rather than focusing on outcomes, IW considers the health of the underlying productive capacity of the economy. IW is defined as the value of all capital stocks including human capital, manufactured capital, natural capital, and social capital. The idea behind IW is that if we leave future generations with greater overall wealth, then they will have the means to be better off. However, if we deplete wealth, future generations will be unable to match current standards of living.

In principle, the value of a capital asset is equal to the present value of the flow of net benefits that it creates. For example, how valuable is it to own an apartment building? Suppose that the building has 10 apartments and each apartment rents for $1,000 per month or $12,000 per year. In total, the apartment building generates $120,000 in rental payments per year. If upkeep of the building were $20,000, the owner would earn $100,000 (rental payments minus upkeep expenses: $120,000–$20,000) from owning the building. Suppose that the discount rate is 5 percent and the building is going to last for 20 years. Using the present-value calculations discussed in Chapter 8, we can find that the present value of the apartment building is equal to

We can calculate the value of other assets in a similar manner. What is the value of agricultural land? It is the present value of the profits from growing crops. What is the value of an oil deposit? It is the present value of the profits from the extraction and sale of oil. What is the value of education? It is the present value of the increase in lifetime earnings.

Actually, education may be worth more than simply the change in lifetime earnings. Education may lead people to be more informed and more involved citizens and therefore increase social capital, or it may increase one’s ability to appreciate art or nature and therefore improve well-being quite apart from increased earnings. Education delivers many “positive externalities” that would need to be included in an appropriate measure of IW. In a similar manner, measuring the IW of a farm may need to account for the value of negative externalities, such as the negative impacts on downstream water quality. These points bring us squarely back to one of the problems faced in adjusting GDP to come up with NNW: how to properly account for nonmarket goods and services.

With this background, we can think about how to measure IW. In principle, we need to know two things:

1. The amount of each capital stock. For example, farmland would be measured by the number of acres (or the number of acres of farmland of each quality), and oil would be measured by the barrels of oil reserves.
2. The value of a unit of each type of capital stock. We saw earlier that this value is just the present value of future profits derived from the capital stock, adjusted for externality costs and benefits.

The value of each capital stock is found by multiplying the value of a unit of that type of capital stock by the amount of that capital stock. IW is the sum of the values of all capital stocks. So to calculate IW we would attempt to sum the values of all forms of human capital (education and experience, etc.), manufactured capital (apartment buildings, machinery, industrial facilities, infrastructure, etc.), natural capital (oil and mineral deposits, the state of ecosystems that generate ecosystem services, etc.), social capital (social institutions, organizations, trust, etc.). As with NNW, actually measuring IW is a tall order (we have more to say on this in Section 9.6). But the advantage of this approach is that, for sustainability, we just need to know whether IW is increasing or decreasing. Holding all the values fixed, we would achieve sustainability if for every capital stock that declined by a unit, there was an equally or more valuable capital stock that was increasing by a unit.

This highlights the task of understanding the perception on depreciation (decline) of natural capital: in the United States, we are “using up” 725 million gallons of oil a day. What are we providing future generations in exchange? Once we have explored this issue, we can come back to the main question of what the evidence tells us about whether we are achieving sustainability, which we do in Section 9.6.

9.5 Natural Capital Depreciation

Any human-made capital good has a relatively fixed useful life before it wears out; a pizza delivery truck, for example, may last for 5 years. Each year, then, we say that the truck has “depreciated” in value. Depreciation is a measure of how much of the truck is used up each year in the delivery process, and depreciation must be subtracted from the firm’s income statement, thus lowering the net profits. As a society, how should we also value the loss of natural capital—such as oil, timber, or species diversity—that we use up in production? We need to know this number in order to adjust GDP to arrive at our measure of weak sustainability: NNW. We also need to know it in order to value the changes in the national capital stock, to calculate IW.⁴

Let’s begin answering this question with a:

Billsville’s GDP also rises by $100, the increase in net income. Mr. Bill now has the option of going on a shopping spree at the local Target. But, Mr. Bill cannot increase his consumption out of the oil profits (the resource rent) without penalizing his kids. Thus NNW does not rise at all! And, reflecting the loss in the value of natural capital, IW actually falls by $100. Applying this Mr. Bill logic in the real world to the U.S. oil industry, government analysts have estimated that in the past U.S. GDP has overstated real NNW by between $23 billion and $84 billion.

Note in this example that Mr. Bill is not necessarily punishing his kids by draining the oil today. If he invests the resource rent productively, his kids may well be better off than if he were to leave them the untapped field. Investing resource rents will pay off, especially if, due to technological change, natural resource prices may actually fall in the future. Neoclassical economists, again reflecting an underlying technological optimism, often urge early exploitation of resources for precisely this reason. Ignoring the cost of extraction, if oil prices are rising in percentage terms at less than the current rate of interest (true, on average, over the last 50 years), Bill’s family will clearly be better off if he develops the field today and invests the resource rents. Then IW would recover, and in fact, more than completely replace the lost resource rent.

The oil-rich state of Alaska has actually pursued such an approach, diverting some of its oil tax revenues into the so-called Permanent Fund. Earnings from this giant investment fund (over and above the amount reinvested to keep the fund intact) are paid out annually to all Alaskans. Payouts vary from year to year, depending on oil production and price, with a high of over $2000 per person in 2015 and a low of $331 in 1984. Alaska has also invested in a lot of created capital—roads, telecommunications, and a better educated population. The fund and the greater stock of created capital may not fully compensate future generations of Alaskans for the depletion of the resource. Nevertheless, it does suggest how the current generation can directly substitute created wealth for natural wealth, thus making resource depletion sustainable in economic terms.

The Mr. Bill puzzle provides a depreciation rule for natural capital: depreciation equals the measured value of the resource rent.⁶ The resource rent, not the full market value of the resource, is what future generations will be losing due to our exploitation of natural capital. It is also exactly the amount that needs to be saved and invested (e.g., in a permanent fund or in education, productive infrastructure, or research and development) if resource depletion is to be sustainable—that is, to avoid reduction of IW immediately and NNW in the long run.

Resource rent is earned when people cut down forests; harvest fish, wildlife, or medicinal products; use up groundwater; or develop a mine. Figure 9.5 illustrates how to calculate the resource rent from a supply-and-demand diagram—in this case, for tropical hardwoods. The long-run supply curve (as you surely recall from an introductory course) reflects the full cost of production. As prices rise, higher cost producers are induced to enter the market. The last producer to enter, at Q1, just breaks even. Area $A$, between the supply curve and the price, thus shows the resource rent earned by firms in the hardwood industry. Area $A$ is the value lost to future generations from our decision to harvest today.⁷

In summary, Mr. Bill’s world illustrates how resource rent is the correct measure for depreciation of natural capital. This in turn allows us, in principle, to correctly measure NNW (annual well-being) and Inclusive Wealth (the value of society’s total capital stock). If NNW or IW rise over time, we can confidently say that society would be better off, because increases in material welfare would not be coming at the expense of future generations. In Mr. Bill’s case, draining the oil field leads to no increase in NNW, and would decrease IW, to properly reflect the fact that he has depleted a valuable asset. Yet development led to an increase in GDP by $100.

The year the field is drained, Bill received benefits, but at the cost of potentially leaving his family with less wealth and income for the future. The difference between GDP and NNW or IW is that both NNW and IW account for resource depletion and show what must be “saved” and productively invested in order to ensure sustainability—and this amount is exactly the resource rent. This savings can take the form of investment in created capital (putting the money into a college fund). However, if the current generation is too consumption oriented and refuses to invest (Mr. Bill blows the income on a big night out), the savings gap would have to be made up by setting aside some natural capital for preservation, thus lowering GDP. Mr. Bill’s children should cancel the development order rather than let him head off to town with the proceeds.

This section has addressed an important technical issue: How can we measure progress toward sustainable development? From a neoclassical perspective, both NNW and IW properly account for depletion of natural resources: NNW subtracts resource rents from GDP, and IW measures the change in value of resource stocks by subtracting off the value of resources used up in the current period. In addition, we have seen that it is possible to penalize future generations by consuming, rather than investing, resource rents. Both neoclassical and ecological economists agree that resource-depleting development decisions that finance pure consumption and not investment are unsustainable.

9.6 Are We Achieving Sustainability?

We started this chapter by noting that neoclassical and ecological economists tend to have very different views about the future, with neoclassical economists tending to be the optimists and ecological economists tending to be the pessimists. In thinking about future environmental impact, neoclassical economists emphasize improving technology (T in the IPAT equation) to reduce impacts, while ecological economists emphasize increasing population and affluence (P and A in the IPAT equation) leading to increased impacts. Ecological economists fear that such impacts will lead to erosion of vital natural capital, which will eventually lead to a potentially dramatic decline in future human well-being. What does the evidence suggest? Is the optimism of the neoclassical economists justified? Or are the ecological economists correct in being pessimistic without some major changes in current behavior?

One way to address these questions is to look at the measures of NNW and IW and see whether they are increasing or decreasing. Unfortunately, NNW and IW require making judgment calls about the components of these indexes for which there is often insufficient or missing data. If different experts make different judgments that are each valid, and they arrive at different conclusions, then we cannot sort out in a “scientific way” whether our economy is sustainable. These differing opinions reflect an underlying complexity that makes NNW and IW very difficult to measure.

However, there have been several attempts to measure NNW and IW, and these attempts can tell us something about the prospects for achieving sustainability. One of the main values in calculating NNW or IW is to see whether growth in GDP serves as a good proxy for growth in real social welfare. Two early attempts by neoclassical economists estimated growth rates for NNW of 0.5 to 1 percent. The studies showed no clear correlation between growth in GDP and growth in NNW in the United States (Nordhaus and Tobin 1972; Zolatas 1981). Both studies, in fact, looked at GNP, a measure closely related to GDP. For example, one study found that the rate of growth of NNW dropped by more than 50 percent after 1947; at the same time, growth of GDP accelerated. From this we can conclude that the popular perception of GDP as a measure of economic welfare may well be misguided.

An ambitious attempt to calculate NNW was undertaken by a California think tank called Redefining Progress. Table 9.1 summarizes how their measure, called the Genuine Progress Indicator or GPI, was developed for 2004. It follows, more or less, the formula identified earlier in the chapter:

The GPI subtracts $1.9 trillion from GDP for pollution and cleanup costs, and the largest amount comes from climate change. Costs arising from short-term environmental impacts (air, water, and noise pollution and household abatement expenditures) total to approximately $200 billion. The GPI is also deducted for depreciation of natural capital. From the previous section, you should have an idea of the right way to estimate the value of the natural capital depreciated: the lost wetlands and used up renewable and nonrenewable resources. In principle, researchers at Redefining Progress should use the resource rent yielded through the development of these resources as a measure. For wetlands, one would need to recognize that much of the in situ value (or rent) takes the form of nonmarket services. The researchers estimated that over $2 trillion of natural capital was used up in 2000, including $53 billion in loss of services from wetlands, $50 billion from old-growth forests, and $1,761 billion in nonrenewable resources.

Finally, the GPI also subtracts a category of “Other Social Costs,” including the use of “equity weights” that adjust the social welfare function for increased inequality as well as the costs of underemployment and lost leisure time. In 2000, GPI researchers concluded that, while GDP equaled $6.2 trillion (in 1996 dollars), the GPI was only $2.6 trillion. It is worth stressing that this is only one estimate of an adjusted GDP; many controversial assumptions go into constructing such an index, but the GPI does illustrate in principle how researchers go about trying to calculate NNW.

Beyond just the simple magnitude of the GPI, Figure 9.6 shows how the growth rate in per capita GDP compared with that of the estimated GPI. During the 1950s and 1960s, the two grew at roughly the same rates. During the 1970s, GPI growth slowed down dramatically; it turned negative in the 1980s; and it recovered a bit during the 1990s. The downturn in GPI in the 1970s and 1980s was due primarily to stagnating median family incomes, growing income inequality, nonrenewable resource exhaustion, and long-term environmental damage. The recovery in the 1990s reflected a rise in real wages for the median household, a slowdown in the growth of inequality, and a drop in the rate of loss of natural capital—farmlands, wetlands, old-growth forests, and mineral resources.⁸

Consistent with the earlier findings, Figure 9.6 illustrates that there is no clear correlation between growth in GDP and growth in GPI. GDP growth therefore appears to tell us little about trends in overall welfare. Finally, the average rate of growth of per capita GPI over the entire period was 1.1 percent; since 1970, it has been 0.1 percent. To conclude, from the limited evidence available, the average historical rate of growth of NNW in the United States appears to be 1 percent or less over the long term.

There have been several attempts by neoclassical economists to estimate the changes in IW as an indicator of whether we are achieving sustainability. The World Bank (2006) estimated “genuine savings,” which is a measure of the change in IW. When genuine savings is positive it means that the value of IW in the country is increasing. While they find that genuine savings on average across all countries is positive, there are some notable exceptions. Some countries report gains in GDP but negative genuine savings (Figure 9.7). Countries such as Angola and Nigeria that sell oil and other resources but fail to reinvest show healthy growth in GDP while lowering the wealth of the nation and damaging future prospects.

More recently, a group of researchers attempted an in-depth analysis of changes in the inclusive wealth of five countries, the United States, China, Brazil, India, and Venezuela (Arrow et al. 2012). Following similar techniques as used by the World Bank (2006), the researchers estimated the changes in the value capital stocks including human capital, manufactured capital, and natural capital. With the exception of Venezuela, IW (which they called comprehensive wealth) increased in these countries (Table 9.2). However, in all countries the rate of growth of IW per capita was lower than the rate of growth of GDP, reinforcing the pattern found in other studies that GDP growth tends to overestimate improvement over time because it fails to adjust for depreciation of natural capital.

For most countries, the value of natural capital made up a small portion of the total wealth. In the United States in 2000, for example, the value of natural capital was 6.7 percent of total capital value. The low percentage of the value of natural capital is due in part to the fact that the United States is a developed country with large wealth in terms of human and manufactured capital. Low-income developing countries tend to have a higher proportion of their wealth in terms of natural capital. However, the low calculated value of natural capital also reflects what was included, or more to the point, excluded from the calculations. Natural capital included oil, natural gas, minerals, timber, land, and the value of carbon sequestered in ecosystems. Natural capital did not include other aspects of environmental quality or the status of ecosystems, omissions that many ecological economists would argue could result in skewed numbers.

The evidence to date seems to indicate that NNW and IW are growing in most countries but that each is growing more slowly than growth in GDP. One reason why the growth in the NNW and IW is slower than that in GDP is that NNW and IW properly account for depreciation of natural capital, which is ignored in GDP. Whether this evidence is really proof of achieving sustainability, however, is questionable. The authors of these reports are well aware of the heroic assumptions they had to make in order to generate the estimates and the fact that the analysis is incomplete because it fails to include many aspects of natural capital due to lack of data. Unfortunately, given the state of the science and the data, the evidence compiled to date is unlikely to change the mind of either die-hard optimists or pessimists. We simply cannot yet answer the question of “are we getting better off” persuasively from a scientific perspective.

9.7 Discounting, Sustainability, and Investing for the Future

The rate of growth of NNW—if we knew it with confidence—would help answer the question of the underlying sustainability of the economy. It is also a critical data input into the discounting process. In the previous chapter, we explored the logic of discounting and learned that the Ramsey equation provided guidance as to the right choice of discount rate for maximizing social costs and benefits over time:

One of the key parameters here is $g$, defined as the rate of growth of well-being for the typical individual. This, in fact, is just the rate of growth of NNW, which, as we saw in the previous section, is likely less than 2 percent for the United States, and it may even be below zero. Assuming a low rate for social time preference $\left(\delta \right)$, this evidence suggests that low discount rates (0–2 percent) are appropriate for evaluating long-run costs and benefits as they apply to development decisions that run down the stock of natural capital in developed countries such as the United States. What discount rates are in fact used by the U.S. government? A recent Interagency Working Group charged with assessing the social cost of carbon used a range of discount rates: 2.5, 3, and 5 percent (U.S. Government 2013). The UK government has used a lower rate of 1.4 percent for assessing climate change impacts (Stern 2007).

At the same time, the aforementioned evidence suggests that $g$ is higher for rapidly developing countries such as China. Here, investment in manufactured capital has a higher real rate of return in terms of raising people out of poverty, increasing life expectancy, and expanding opportunities for schooling, and thus, the growth of the human capital stock. To some degree, this justifies less focus on preserving natural capital. And yet, in some areas of China, extremely severe water and air pollution is clearly compromising the ability of manufactured capital investment to improve well-being. Moreover, as consumption of fossil fuels in China increases to meet per capita levels found in the United States, Japan, and Europe, the resulting massive increase in global warming pollution is compromising the potential for long-run global sustainability.

Decision-makers in the private sector often have shorter time horizons than do government agencies. Companies often require profit rates on the order of 15 percent or more to initiate an investment. Few private sector firms invest in projects with paybacks longer than 7 years; most have a time horizon shorter than 5 years. This is a very important point. Along with open access to common property (Chapter 3), high market discount rates explain why many of our decisions today might be unsustainable. Due to high discount rates, we fail to make many long-lived investments that could benefit our descendants.⁹

People sometimes wonder why private energy companies and other investors—knowing that oil is a finite resource—don’t pour resources into R&D for alternative fuels such as biodiesel or hydrogen fuel cells. Won’t these sectors provide high profits? Maybe. But the problem is that the profits will not come for a decade or more. And private investors evaluate projects using high market discount rates, which reflect the private opportunity cost of their capital. The fact that energy companies can make a 20 percent rate of return on conventional investments in oil properties means that they can earn their investment back in 5 years. Access to these high market rates of return gives market actors very short time horizons.

Why are required profit rates so high if society is benefiting at a much lower rate overall from these investments? First, these high required returns reflect only the private benefits of investment and fail to account for the external costs of growth. Second, some of these profits are coming from resource rents and do not reflect any depreciation of natural capital used up in production. And finally, as we saw in Chapter 8, high returns are required to induce people to save and invest their income, rather than consume it today. This is due in part to positive time preference and partly to the risk inherent in investment: investors are not confident that firms will even be around beyond 5 years out and so require short-term paybacks.

And this returns us once again to the neoclassical–ecological debate. In spite of high private sector discount rates, neoclassical economists think that we are still making enough investments in manufactured, human, and social capital to ensure sustainability. They argue that because of rapid technological progress, NNW is nevertheless still rising (though not as fast as possible). As a result, our descendants will still be better off than we are, despite our shortsightedness. Ecological economists, by contrast, argue that these two fundamental economic problems—open access to common property and high market discount rates—have already led to unsustainable exploitation of natural capital. In other words, they maintain, our failure to invest in protecting natural capital has already begun to impoverish our descendants.

9.8 The Ecological–Neoclassical Debate in Context

In many respects, the debate between ecological and neoclassical economists about sustainability reflects the same underlying issues as the differences between the safety and efficiency camps. Both ecological economists and safety proponents view environmental protection as a special commodity that should not be traded off for more of “everything else.” Safety proponents privilege a clean environment on the grounds of individual liberty and the right to be free from assaults on the body; ecological economists argue that, in general, natural capital has no good substitutes for which it can be traded. Both groups reject benefit–cost analysis, arguing that the benefits of protection cannot be adequately captured, and both groups therefore rely on physical, not monetary, measures of their underlying goals: safety and sustainability.

Note that in advocating for strict standards, both safety proponents and ecological economists make utilitarian arguments: Environmental protection is good for people because the society-wide opportunity cost of protection is relatively low. Moreover, we have not, to this point, questioned the underlying assumption that more is better. If increasing material affluence in fact does not lead to greater well-being, a hypothesis we will explore in Chapter 11, then the “low opportunity cost” case for the safety and ecological positions is strengthened.

Efficiency advocates and neoclassical economists respond that the safety and ecological positions are too extreme. They insist there are trade-offs and that we can pay too much for a pristine environment. Resources and person power invested in reducing small cancer risks or preserving salmon streams, for example, are resources and people that then cannot be invested in schools or health care. Benefit–cost analysis is needed to obtain the right balance of investment between environmental protection and other goods and services. Moreover, in the sustainability debate, neoclassical economists argue that history is on their side: Malthusian predictions have been discredited time and time again.

The problem with all of these early predictions, as with Malthus’s original one, was that they dramatically underestimated the impacts of changing technologies. Looking just at the P and the A and essentially ignoring the T (technology) in the IPAT relation has not, in the past, proven to be justified. Neoclassical economists point to these failed predictions to support their basic assumption that natural and created capital are indeed good substitutes—we are not “running out” of natural resources or waste sinks.

Ecological economists respond that history is not a good guide for the future. Two hundred years after the beginning of the Industrial Revolution, accumulating stresses have begun to fundamentally erode the resilience of local and global ecosystems upon which the economy ultimately depends. Indeed, ecological economists have largely shifted their concerns of the 1970s about running out of nonrenewable minerals and oil to other resources: biodiversity, freshwater, environmental waste sinks, and productive agricultural land. While modern ecological economists and earlier pessimists going back to Malthus have indeed done their share of crying wolf, this does not, of course, mean the wolf won’t come.

We can illustrate the debate between ecological and neoclassical economists on the scarcity of one specific form of natural capital: topsoil. David Pimentel is an ecologist and prominent member of the International Society for Ecological Economics. Along with several coauthors, he published an article in the journal Science claiming that topsoil losses cost the United States some $27 billion per year in reduced agricultural productivity (Pimental et al. 1995). This is a big number—about a quarter of total U.S. farm output.

In a stinging response, neoclassical economist Pierre Crosson accused Pimentel et al. of ignoring evidence contrary to their position (Crosson 1995). Crosson himself had earlier published an estimate of agricultural losses due to erosion at closer to $500 million per year—smaller than Pimentel’s by a factor of 50. Two other studies ignored by the article by the Pimentel et al. (1995) backed Crosson’s position.

So, are we running out of topsoil? Not being soil scientists, we are not going to settle this debate for you here. (A great term paper topic!) But one point to take away is this: The I in the IPAT equation—in this case, productivity declines from topsoil loss—arising from a given level of population, a given level of demand (affluence), and a given type of technology can be quite difficult to pin down. A second point: we do know that unless more environmentally friendly agricultural techniques are developed, this impact will quickly grow in the face of a 50 percent increase in P and at least a doubling of A.

And indeed, this point is one that Crosson himself makes explicit. His claim is that productivity declines due to topsoil erosion, while being real, will be dwarfed by the expected three- to fourfold increase in world food demand over the next 50 years (Toman and Crosson 1991). And in the area of world food supply, while there are some optimists that see ever-increasing yields as keeping up with increasing demand, even many neoclassical economists are worried about the ability of the food system to cope, especially in light of potential climate change and trying to end problems of hunger among the nearly 1 billion people who are chronically undernourished.¹⁰ Even if we are not destroying our stock of topsoil as rapidly as Pimentel argues, the logic of IPAT and the ghost of the Reverend Malthus still hang over our shoulders as we consider the world’s food prospects.

9.9 Summary

This chapter began by describing a famous bet between optimistic economist Julian Simon and pessimistic ecologist Paul Ehrlich. Simon and Ehrlich wagered on the price trends of five nonrenewable metals from 1980 to 1990. Simon predicted that metal prices would fall as human ingenuity would find ways to use more available, cheaper materials and essentially make resources more abundant while Ehrlich predicted that prices would rise as demand from increasing population and affluence ran up against limited supply. Who won the bet?

Simon did. Prices of all five metals declined in the 1980s. Metal prices declined because new metal deposits were discovered, more efficient mining and refining methods were introduced, and other cheaper materials replaced metals. For example, telephones up to the 1980s relied on copper wires to transmit signals, but now we use fiber-optic cables and wireless technology, and therefore have little need for copper wires.

So does this mean that the optimists are correct and the pessimists are wrong? Not necessarily. Had they made the bet in 2000, Ehrlich would have been the easy winner. The price of virtually all commodities, including most metals, rapidly increased between 2000 and 2010. For Ehrlich this may have just been a case of bad timing.

But more to the point, the central questions about sustainability are broader questions of whether human actions are undermining ecosystem services and a wider spectrum of natural capital—from freshwater to planetary temperature to biodiversity, more so than just whether metal prices are rising or falling. As long as the population and consumption continue to grow, the logic of relentless pressure on resources and sinks remains and, indeed, accelerates. Asked whether the bet settled anything, Paul Ehrlich responded “Absolutely not…I still think the price of those metals will go up eventually, but that’s a minor point. The resource that worries me the most is the declining capacity of our planet to buffer itself against human impacts. Look at the new problems that have come up: the ozone hole, acid rain, global warming… If we get climate change and let the ecological systems keep running downhill, we could have a gigantic population crash” (Tierney 1990).

So what is to be done? How do we decide if our use of resources and the environment is sustainable or not? Achieving strong sustainability involves an application of IPAT at the resource level: is growing impact (I) causing resource levels to decline? If so, invoke the precautionary principle and take more aggressive policy measures to protect natural capital. Strong sustainability can also be assessed at the community or national level using footprint analysis. This provides some guidance as to the fit between aggregate resource use and sink exhaustion and the level of consumption in a society.

Weak sustainability can be assessed in two ways. The first is via Net National Welfare, arrived at by adjusting GDP to develop a direct assessment of rising or declining welfare. This requires adding nonmarket production to GDP, subtracting out the costs of growth and natural capital depreciation, and adjusting for changes in income distribution. The second method is to measure IW, a monetary valuation of the total capital stock: natural, manufactured, human, and social. If IW is rising, then the society has the capacity to continue to provide its citizens a comparable or rising standard of living.

A key concept to understand here is depreciation of natural capital. We illustrate that when an oil field is developed, a forest cut down, or a fishery harvested, society’s income (NNW) is unchanged: we are trading the resource rent embodied in the resources in or on the ground, or in the ocean, for a comparable pile of cash. At the same time, however, the value of society’s capital stock (IW) declines by exactly the amount of the resource rent. Whether, over time, society’s capital stock will recover and rise, and NNW will ultimately increase, depends on whether the resource rent is productively invested in replacement forms of capital.

Empirical estimates of NNW and IW are quite complex and quite recent and require much professional judgment about which there is still little consensus. Are these measures increasing or decreasing? We do not know with any confidence. The neoclassical/ecological debate about current economic sustainability cannot yet be settled scientifically. However, studies do consistently show that the growth rate of both measures is less than the growth rate of GDP. In the United States, the measured growth of NNW is likely less than 2 percent and may be less than zero.

The growth rate of NNW feeds back into the social discount rate, via the Ramsey equation. Assuming a low rate of time preference, developed countries should therefore use a rate of discount of 0–2 percent for resource-depleting decisions, in order to maximize benefits and costs across time. Higher rates can be justified in rapidly developing countries, where the high productivity of investment in manufactured and human capital is leading to rapid rates of poverty alleviation, access to education, expanding civil liberties, lengthening life spans, and real increases in human well-being.

Private sector discount rates are much higher: typically 15 percent or more. This means that private sector actors have very short time horizons. Typically, investments must pay back in 5 years or less. This helps explain why private businesses and citizens fail to make many long-lived investments that will pay off in the mid-to-distant future: from technology investments in solar to low-input farming methods to household investments in weatherization or efficient appliances. Along with open access to common property, high market discount rates represent the two fundamental economic challenges to economic sustainability.

Let us end this conversation with a road map for a sustainable future. How can we really meet the needs of 9 to 10 billion people in a world of limited resources? Where, ultimately, should policy be taking us? Here, the sustainable business movement, discussed at the end of Chapter 3, can provide some guidance. Paul Hawken, a businessman and author of an influential book called the Ecology of Commerce (Hawken 1995) has offered a vision of a transformed economy in which business practices mimic natural systems. He offers three principles:

• No Energy Crisis: Similarly to nature, businesses need to run on abundant “solar income” (direct sunlight, wind power, and biomass) as opposed to “solar wealth” (fossil fuels) that is both nonrenewable and polluting.
• No Pollution: In nature, “all waste is food.” This means closed-loop production systems, in which wastes from one production process become inputs to another. Ultimately, pollution disappears.
• No Systems Too Big to Fail: Nature promotes and thrives on diversity, creative destruction, and system resilience. Crony capitalism, in which large businesses control government to promote its interests, leads to fragile and unproductive systems.

An interesting example of ecological design is the so-called living machine—a series of pools, supporting a complex artificial wetland, that digests human waste and turns raw sewage into fresh drinking water. The ecological perspective seeks to expand this metaphor of the closed loop—where waste from one sector is food for another—to the macroeconomy at large. When our business systems have learned to mimic natural systems, then we can see our way to a just and prosperous future.

As promised, the previous two chapters have been conceptually challenging, and also, we hope, intellectually exciting. This debate between ecological and neoclassical economists is perhaps the fundamental question of our time: without dramatic changes to our business as usual trajectory, will human progress continue, or are we undermining the foundations of that progress? Is more intelligent and more incentive-based regulation sufficient to ensure sustainability (the neoclassical view)? Or must government play a much more aggressive role in protecting natural capital, promoting clean technology, encouraging less resource-intensive consumption, and helping slow population growth rates (the ecological view)? These different policy suites are the subject of Parts III and IV of the book.

This chapter draws our discussion on different standards for pollution control and resource degradation to a close. Table 9.3 provides a summary of the four different approaches. The first two, efficiency and safety, focus on standards for pollution control. The second two, weak and strong sustainability, are standards for the protection of natural capital. The concepts blend into each other when protecting natural capital (e.g., the ${\text{CO}}_2$ absorptive capacity of the atmosphere) also requires controlling pollution. And if the economy is indeed weakly sustainable, then resource protection decisions can be made using a dynamic efficiency criterion, that is, benefit–cost analysis with discounting using a rate derived from the Ramsey equation.

We now leave our discussion on standards to focus on specific economic tools for natural resource management in the next chapter. We then conclude the first part of the book—How Much Pollution is Too Much?—with one final, critical “big” discussion: does money really buy happiness?

1. 9.0 This chapter focuses on sustainability assessment: how could we tell if we are running out of resources and waste sinks? And are we?
2. 9.1 Ecological economics’ intellectual lineage can be traced back to Malthus and his population trap; ecological economists are sometimes called neo-Malthusians. Malthus was “wrong,” thanks in large measure to the Green Revolution in agriculture. However, gains from the Green Revolution have recently tapered off. Ecological economists share the Malthusian view that population (and consumption) pressures lead to initially steady, and eventually catastrophic, declines in human welfare.
3. 9.2 Modern ecological economics was launched with the publication of Limits to Growth in 1972, and more recent work on planetary boundaries, which claims that we have already exceeded acceptable limits on pollution or depletion of resources in several important dimensions. Ecological economists differ from Malthus in their views that they have broadened the drivers from population to include consumption and the resource constraint from land to a whole suite of ecosystem services.
4. 9.3 Ecological economists use the IPAT equation to identify particular forms of natural capital in need of more aggressive protection, to ensure strong sustainability. They employ physical measures of resource stocks or pollution impacts weighed against population and consumption pressure as their measure of sustainability. If demand for resources without good substitutes is a large portion of the current supply, then our use is unsustainable (e.g., water). If the absorptive capacity of environmental sinks is exceeded, leading to changes in ecosystems from stock pollutants, then our use of those sinks is unsustainable (e.g., ${\text{CO}}_2$ in the atmosphere and oceans). Ecological economists also employ footprint analysis to assess sustainability at the economy-wide level. It is a challenging goal to achieve both a high Human Development Index rating and a low footprint.
5. 9.4 Weak sustainability is measured in two ways: Net National Welfare (NNW), which adjusts GDP to get a better measure of annual well-being; and Inclusive Wealth (IW), which seeks to assess the total value of a society’s capital stock: natural, manufactured, human, and social. If either measure is falling over time, the economy is unsustainable. A key challenge in developing either measure is properly accounting for external costs and benefits and the depreciation of natural capital.
6. 9.5 The depreciation rule for natural capital is that depreciation equals the value of the resource rent generated through resource-depleting activities. When an oil field is developed, for example, GDP rises by the value of the rent, but NNW does not change: society has traded oil in the ground for cash in hand. At the same time, IW falls by the value of the rent. For IW to rise, and for NNW to eventually grow, these resource rents must be productively invested in alternative forms of capital. The Alaska Permanent Fund provides an example.
7. 9.6 So, are things getting better or worse? Unfortunately, the science is not settled. However, NNW and IW growth rates are generally lower than GDP growth rates; in the United States, the number is probably less than 2 percent and could be less than zero. In high-growth developing countries, NNW and IW are both higher, reflecting a higher opportunity cost for protecting natural capital: investment in these countries is yielding high rates of poverty reduction and improvements in education, for example.
8. 9.7 The rate of growth of NNW not only determines whether an economy is weakly sustainable, but also should help determine, through the variable $g$ in the Ramsey equation, the discount rate that maximizes net benefits in a benefit–cost analysis of environmental or resource protection projects. If the social rate of time preference is low, then in developed countries, appropriate discount rates for projects with long-term benefits and costs should thus approximate $g$—lying below 2 percent. The U.S. EPA currently uses a value of 3 percent for climate change damages. Market discount rates are typically much higher, at 15 percent or more. This means that market actors have very short time horizons—typically 5 years or less. High market discount rates are thus a critical factor that could undermine the level of investment in natural capital protection, and in manufactured capital substitutes, needed to ensure sustainability.
9. 9.8 Finally, the safety–efficiency debate on pollution standards is similar in nature to the ecological–neoclassical debate on natural resource exploitation. Both safety proponents and ecological economists argue that human society as a whole is best off protecting environmental quality at a high level regardless of the trade-offs. Ecological economists make this case by arguing that natural and created capital are not good substitutes in production. Neoclassical economists counter that trade-offs are real, because perceived resource limits can be overcome via technology. The topsoil debate illustrates that these issues are not easy to resolve.

REFERENCES

1. Arrow, Kenneth J., Partha Dasgupta, Lawrence H. Goulder, Kevin J. Mumford, and Kirsten Oleson. 2012. Sustainability and the measurement of wealth. Environment and Development Economics 17(3): 317–53.
2. Crosson, Pierre. 1995. Soil erosion and its on-farm, productivity consequences: What do we know? RFF discussion paper 95-29. Washington, DC: Resources for the Future.
3. Daly, Herman E. 2005. Economics in a full world. Scientific American 100–7.
4. Ehrlich, Paul R., and John P. Holdren. 1971. Impact of population growth. Science 171: 1212–7.
5. Foley, Jon, Navin Ramankutty, Kate A. Brauman, Emily Cassidy, James Gerber, Nathan D. Mueller, Christine O’Connell, et al. 2011. Solutions for a cultivated planet. Nature 420: 337–42.
6. Hawken, Paul. 1995. The Ecology of Commerce. New York: Harper.
7. Howarth, Richard B., and Richard B. Norgaard. 1990. Intergenerational resource rights, efficiency and social optimality. Land Economics 66(1): 1–11.
8. Johnson, D. Gale. 2000. Population, food and knowledge. American Economic Review 90(1): 1–15.
9. Krugman, Paul. 2008. Conscience of a Liberal Blog, New York Times, April 22, 2008.
10. Malthus, Thomas. 1798. An Essay on the Principle of Population. London: printed for J. Johnson.
11. Meadows, Donella H., Dennis L. Meadows, Jorgen Randers, and William W. Behrens, III. 1972. The Limits to Growth. New York: Universe Books.
12. Meadows, Donella H., Dennis L. Meadows, and Jorgen Randers. 1992. Beyond the Limits. White River Junction, VT: Chelsea Green Publishing Company.
13. Millennium Ecosystem Assessment. 2005. Ecosystems and Human Well-Being. Washington, DC: Island Press.
14. Nordhaus, William D. 1973. Measurement without data. Economic Journal 83: 1156–83.
15. Nordhaus, William, and James Tobin. 1972. Economic Growth. New York: Columbia University Press.
16. Nordhaus, William, and Edward Kokkenberg, eds. 1999. Nature’s Numbers: Expanding the national Economics Accounts to Include the Environment. Washington, DC: National Academy Press.
17. Perry, David. 1994. Forest Ecosystems. Washington, DC: John Hopkins University Press.
18. Pimental, David, C. Harvery. P. Resosudarmo, K. Sinclair, D. Kurz, M. McNair, S. Crist L. Shpritz, L. Fitton, R. Saffouri, and R. Blair. 1995. Environmental and economic costs of soil erosion and conservation benefits. Science 267: 1117–23.
19. Postel, Sandra L., Gretchen C. Daily, and Paul R. Ehrlich. 1996. Human appropriation of renewable fresh water. Science 271: 785–8.
20. Raudsepp-Hearne, Ciara, Garry D. Peterson, Maria Tengö, Elena M. Bennett, Tim Holland, Karina Benessaiah, Graham K. MacDonald, and Laura Pfeifer. 2010. Untangling the environmentalist’s paradox: Why is human well-being increasing as ecosystem services degrade? BioScience 60(8): 576–89.
21. Rees, William E., and Mathis Wackernagel. 1994. Ecological footprints and appropriated carrying capacity: Measuring the natural capital requirement of the human economy. In Investing in Natural Capital: The Ecological Approach to Sustainability, A. Jansson, M. Hammer, C. Folke, and R. Constanza (eds.), pp. 362–91. Washington, DC: Island Press.
22. Rockström, Johan, Will Steffen, Kevin Noone, Åsa Persson, F. Stuart Chapin, III, Eric F. Lambin, Timothy M. Lenton, et al. 2009. A safe operating space for humanity. Nature 461: 472–5.
23. Solow, Robert. 1992. An almost practical step toward sustainability. Washington, DC: Resources for the Future.
24. Stern, N. H. 2007. The Economics of Climate Change. Cambridge: Cambridge University Press.
25. Talberth, John, Clifford Cobb, and Noah Slattery. 2006. The Genuine Progress Indicator, 2006. San Francisco: Redefining Progress.
26. Tierney, John. 1990. Betting the planet. The New York Times Magazine, December 2, 1990.
27. Tilton, John E. (1992) Mineral Wealth and Economic Development (Resources for the Future: Washington, DC)
28. Toman, Michael, and Pierre Crosson. 1991. Economics and sustainability: Balancing trade-offs and imperatives. Discussion paper ENR-91-05. Washington, DC: Resources for the Future.
29. United Nations Development Program. 2011. United Nation’s Human Development Report 2011. Sustainability and Equity: A Better Future For All. New York: United Nations.
30. US Government, Interagency Working Group on Social Cost of Carbon. 2013. Technical support document: Technical update of the social cost of carbon for regulatory impact analysis under executive order 12866.
31. Vitousek, Peter M., Harold A. Mooney, Jane Lubchenco, and Jerry M. Melillo. 1997. Human domination of earth’s ecosystems. Science 277: 494–9.
32. World Bank. 2005. World Development Indicators 2005. Washington, DC: World Bank.
33. World Bank. 2006. Where is the Wealth of Nations? Measuring Capital for the 21st Century. Washington, DC: World Bank.
34. World Resources Institute. 2009. Earth Trends Data Bank. http://earthtrends.wri.org.
35. Zolatas, Xenophon. 1981. Economic Growth and Declining Social Welfare. New York: New York University Press.