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1 The Economic Costs of Ecological Deficits …
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Created: Fri Aug 30 12:26:56 2002
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1
The Economic Costs of
Ecological Deficits
(part 3 of 3)
FACING THE CLIMATE CHALLENGE
Lester R. Brown
The earth is getting warmer. The 15 warmest years since
global recordkeeping began in 1867 have all come since
1980. Hardly a week goes by without new reports of ice
melting, record temperature highs, or more destructive
storms.1
The temperature series maintained by the Goddard
Institute for Space Studies of the National Aeronautics
and Space Administration (NASA) shows that the 10
months preceding June 2002 (August 2001 through May
2002) were uncommonly warm, setting several records.
Temperatures for September and November were the
highest ever recorded for those months in the last 134
years. Those for August, December, January, March,
April, and May were the second highest on record for
those months. If these record or near-record tempera-
tures continue, then 2002 will likely set a new annual
record, moving above 1998, the previous high.2
With emissions of carbon dioxide (CO2), the principal
greenhouse gas, continuing to rise, further increases in
temperature are almost inevitable. The latest report by
the Intergovernmental Panel on Climate Change (IPCC)
projects that global average temperature will rise by
1.45.8 degrees Celsius (2.510.4 degrees Fahrenheit) by
60 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 61
the end of this century. This will undoubtedly alter every The Rising Costs of Climate Change
ecosystem on the earth and every facet of human activity.3 The benefits of burning fossil fuels are well known, but
Perhaps the most pervasive evidence of warming to there are also enormous costs, many of which will be
date is seen in ice melting. In Alaska, where wintertime levied on future generations. Among these are changes in
temperatures now average up to 7 degrees Fahrenheit temperature that result in more destructive storms, rising
above the norm, glaciers are retreating at an accelerating seas, and crop-withering heat waves. More destructive
rate. A similar situation exists in the Andes. And recent storms are the product of the higher water surface tem-
data on the Himalayas indicates that glaciers there too peratures, particularly in the tropical and subtropical
are melting at an alarming pace.4 regions, where hurricanes (typhoons in the Pacific) origi-
One of the concerns of scientists is that climate nate. These higher temperatures mean more energy is
change will not always be a linear process. For example, released into the atmosphere to drive storm systems. Ris-
if the ice in the Arctic Sea continues to melt, leaving the ing global temperatures also mean rising seas from both
sea ice-free during the summers, as projected for some- thermal expansion and ice melting. Crop-withering heat
time within the next several decades, the heat balance of waves are often accompanied by drought, with the two
the region could change dramatically. With the Arctic Sea reinforcing each other.
largely covered with ice and snow, roughly 80 percent of At the end of 2001, Munich Re, the world's largest
the incoming sunlight is bounced back into space, while reinsurer (a company that helps spread risk among the
20 percent is absorbed as heat. But an ice-free Arctic Sea various insurance companies), compiled a list of all nat-
during the summer would mean that 20 percent of the ural catastrophes on record with insured losses of $1 bil-
incoming sunlight will bounce back into space and 80 lion or more. (See Table 17.) The first such disaster
percent will be absorbed as heat. While the melting of the came in 1983, when Hurricane Alicia racked up $1.3 bil-
Arctic Sea ice does not affect sea level, a dramatic warm- lion worth of insured damages in the United States. By
ing of the Arctic could lead to rapid melting of the the end of 2001, the list of catastrophes with insured
Greenland ice sheet.5 damages of $1 billion or more had reached 34. Of these,
An article in Science reports that if the Greenland ice 32 were storms, floods, and other atmospherically relat-
sheet were to melt entirely, and this could only happen ed events. The other two were earthquakes.
over a long period of time, it would raise sea level by 23 Insured damage from storms is rising for four reasons.
feet. At some point, feedback loops, such as the one just One, more property is covered by insurance today than in
described for the Arctic, could begin to reinforce existing the past. Two, the value of the property (as measured in
trends. Once certain thresholds are crossed, change can dollars) has increased. Three, there is more building in
come rapidly and unpredictably--leaving a bewildered coastal regions, on river floodplains, and in other high-
and perhaps frightened world in its wake. At issue is risk areas. And four, storms are both more frequent and
whether our political institutions, which could not pre- more powerful.
vent these mega-scale changes, will be able to deal with In the last 15 years, Europe has experienced a greater
them when they occur.6 frequency of highly destructive winter storms. From 1987
62 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 63
Table 17. Atmospherically Related Catastrophes with Table 17 continued
Over $1 Billion in Insured Losses, through 2001
1998 Hurricane Caribbean 4.0 10.0
Insured Economic Georges United States
Year Event Location Losses Losses 1999 Hail storm Australia 1.1 1.5
(billion dollars) 1999 Tornadoes United States 1.5 2.0
1999 Hurricane Floyd United States 2.2 4.5
1983 Hurricane United States 1.3 3.0
1999 Typhoon Bart Japan 3.5 5.0
Alicia
1999 Winter Storm Europe 2.4 2.9
1987 Winter storm Western Europe 3.1 3.7
Anatol
1989 Hurricane Caribbean, 4.5 9.0
1999 Winter Storm Europe 5.9 11.5
Hugo United States
Lothar
1990 Winter Storm Europe 5.1 6.8
1999 Winter Storm Europe 2.5 4.0
Daria
Martin
1990 Winter Storm Europe 1.3 2.0
2000 Typhoon Saomai Japan 1.0 1.5
Herta
2000 Floods United Kingdom 1.1 1.5
1990 Winter Storm Europe 2.1 3.2
Vivian 2001 Hail, severe United States 1.9 2.5
1990 Winter Storm Europe 1.3 2.3 storm
Wiebke 2001 Tropical Storm United States 3.5 6.0
1991 Typhoon Japan 5.4 10.0 Allison
Mireille Source: Munich Re, Topics Annual Review: Natural Catastrophe 2001
1991 Oakland United States 1.8 2.0 (Munich, Germany: 2002), pp. 1617.
forest fire
1992 Hurricane United States 17.0 30.0
Andrew to 2001 the continent was battered by eight storms with
1992 Hurricane Iniki Hawaii 1.6 3.0 insured damage of $1 billion or more. The first, in 1987,
1993 Snow storm United States 1.8 5.0 led to $3.1 billion in insured losses. In 1990 there was a
1993 Flood United States 1.0 16.0 clustering of four storms with damages ranging from
1995 Hail United States 1.1 2.0 $1.3 billion to $5.1 billion. Lothar, one of three storms to
1995 Hurricane Luis Caribbean 1.5 2.5 hit Europe in the winter of 1999, had insured losses of
1995 Hurricane Opal United States 2.1 3.0
$5.9 billion and total losses of $11.5 billion, making it the
1996 Hurricane Fran United States 1.6 5.2
1998 Ice storm Canada, 1.2 2.5
most costly storm on record in Europe. Until recently,
United States such destructive storms had been largely confined to the
1998 Floods China 1.0 30.0 hurricane belt.7
1998 Hail, severe United States 1.4 1.8 The most destructive storm on record, Hurricane
storm Andrew, struck Florida in 1992, racking up $17 billion in
insured losses and an estimated $30 billion in total loss-
64 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 65
es. Damage from this storm sent seven local insurance frequent, more powerful storms is also raising sea level.
companies into bankruptcy. Climate analyst Jeremy Higher temperatures lead to ocean thermal expansion
Leggett points out that if Hurricane Andrew had struck and ice melting. These two trends, both contributing to
land 20 miles further north, hitting Miami, total losses rising sea level, are creating a new set of challenges that
could have reached $75 billion. In second place among will not be limited to coastal communities. Attempting to
tropical storms in damages is Typhoon Mireille, which cope with rising sea level will place serious financial bur-
hit Japan in 1991. It caused $5.4 billion in insured dam- dens on coastal countries. Inland communities will be
age and left Japan with a total bill of $10 billion.8 crowded with refugees from areas that are no longer hab-
One of the most destructive floods on record hit itable. Food production will be affected. The loss of out-
China's Yangtze River basin during the summer of 1998. put as rice-growing river deltas and floodplains are
Although insured damage was barely $1 billion, total inundated and as local populations expand could lead to
damage was calculated at $30 billion, and this did not a worldwide shortage of rice.
include the indirect costs associated with the resultant Few countries have researched extensively the effect of
economic disruption. This extensive flood, which lasted rising seas on their economies and population distribu-
for several weeks and directly affected 120 million of the tion. A World Bank report concludes that a 1-meter sea
400 million people living in the Yangtze River basin, level rise would inundate half of Bangladesh's riceland.
came close to destabilizing the Chinese economy as river- For a country with 133 million people projected to reach
side factories were forced to close until the floodwaters 209 million by 2050, the prospect of losing half of its rice
receded.9 harvest is not a pleasant one.11
The insurance industry is concerned about the effect Other Asian countries where rice is grown on low-
of global warming on storm intensity. As early as 1990, lying river floodplains include China, India, Indonesia,
Munich Re observed, "If water temperatures increase by Myanmar, the Philippines, South Korea, Thailand, and
0.5 to 1 degrees Celsius in the course of the next few Viet Nam. For Asia, which produces 90 percent of the
decades, we can expect an extension of the hurricane sea- world's rice and is home to over half its people, rising
son by several weeks and a considerable increase in the seas could mean rising rice prices.12
frequency and intensity of hurricanes. . . . A warmer Three countries--Thailand, Viet Nam, and the Unit-
atmosphere and warmer seas result in greater exchange of ed States--account for two thirds of world rice exports
energy and add momentum to the vertical exchange pro- that meet the needs of the 36 rice-importing countries. In
cesses so crucial to the development of tropical cyclones, these three, only U.S. rice production is relatively immune
tornadoes, thunderstorms, and hailstorms." Trends over to the adverse effects of rising seas. The inundation of
the last decade have borne out their concerns. In May deltas and river floodplains in Thailand and Viet Nam
1991 the strongest cyclone on record for the twentieth could easily eliminate their exportable surpluses. Rising
century wrought death and destruction in Bangladesh, sea level has many agricultural consequences, but its
leaving 139,000 dead.10 potential effect on the world's rice harvest is generating
The same increase in temperature that leads to more concern about climate change in Asia.13
66 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 67
For the United States, which has a coastline of 20,000 Europe or to the less densely populated countries like the
kilometers (12,000 miles), a 1-meter rise in sea level--the United States, Canada, Australia, Russia, and Brazil?
upper end of the possible projected rise for this century-- What will happen to the major coastal cities that could
would inundate 35,000 square kilometers (13,000 square be partly inundated by a 1-meter rise in sea level, such as
miles). The regions most affected would be the East Shanghai? Again, will the central government finance the
Coast, from Massachusetts south to Florida, and the construction of fortifications to protect Shanghai from
Gulf Coast, from Florida to Texas. Except for a few rising seas and storm surges, or must Shanghai fend for
areas, such as the San Francisco Bay area, the West Coast itself? These are questions with no easy answers. Will this
has much steeper, coastal topographic profiles, which generation's legacy to future generations be millions of
limits the damage and disruption from rising seas.14 rising-sea refugees and mega-scale public works projects
A study from several years ago indicates that even a as coastal communities try to protect themselves from the
half-meter rise in sea level would lead to damage and loss rising sea level set in motion today?
of U.S. coastal property totaling $20150 billion. This Intense heat waves can exact a heavy toll in human
figure is rising as the population in coastal counties, now suffering and even death. A heat wave with temperatures
53 percent of the national total, increases. Unfortunately, reaching 45 degrees Celsius (113 degrees Fahrenheit) in
growth is most rapid in coastal communities in the south, eastern India in May 2002 took 1,030 lives in the state of
the region most vulnerable to rising seas and storm Andhra Pradesh alone. Many more died in West Bengal
surges.15 and other neighboring states. To the northwest, in Islam-
Among the low-lying cities that need to invest heavily abad, Pakistan, the temperature on June 14 reached a
in flood defenses in the event of a 1-meter rise in sea level searing 48 degrees Celsius (118 degrees Fahrenheit).16
are New Orleans, Miami, Washington, D.C., and New Heat waves can also devastate crops. In the summer of
York. Who will bear the cost of building the fortifica- 1988, the United States experienced drought and crop-
tions against the sea: the cities or the federal government? withering heat simultaneously in its midwestern agricul-
Should cities begin accumulating funds in advance of tural heartland. Together they reduced the U.S. grain
potential inundation to ensure that they have the finan- harvest below domestic consumption for the first time in
cial wherewithal to build the dams to hold out the sea? If history 17
.
coastal communities are abandoned, are the property Fortunately for the more than 100 countries depend-
owners responsible for dismantling the buildings in the ent on U.S. grain, the United States was able to satisfy
areas that are being inundated? Or can they just leave domestic demand by drawing down its vast grain
them as ghost towns that will gradually break up over reserves. If such a shortfall were to occur in 2002, the
time as they are battered by the rising sea? world would be in trouble because the United States no
A 1-meter rise in sea level would create millions of longer has such extensive grain reserves. A similar harvest
refugees. In Bangladesh alone, tens of millions of people reduction would translate into reduced exports and in all
would be displaced. Would they move into the already likelihood a dramatic climb in world grain prices.
overpopulated interior? Or would they try to migrate to Climate change is now a global food security issue.
68 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 69
Higher temperatures mean more extreme climate events. cleanest and least climate-disruptive of the three fossil
Whether they be droughts, heat waves, storms, or floods, fuels, grew by less than 3 percent a year.18
all have the potential of disrupting production and desta- The burning of coal, the dirtiest and most carbon-
bilizing grain markets. intensive fossil fuel, peaked in 1996 and has dropped by 6
One of the difficulties in doing a cost-benefit analysis percent since then. This historical peaking, marking the
on the burning of fossil fuels is that those benefiting and first decline in the use of a fossil fuel, may be followed by
those bearing the costs may live on opposite sides of the a similar peaking in oil use within the next 515 years.19
planet. The United States is the principal source of atmo- In contrast, renewables, starting from a small base,
spheric carbon emissions from fossil fuel burning. are growing at an extraordinary pace. Worldwide, wind
Bangladesh, a low-lying country, may be one of the prin- electric generation grew by 32 percent a year from 1995
cipal victims. to 2001. (See Table 18.) In 2001 alone it grew by a robust
The costs and benefits of burning fossil fuels are also 36 percent. And in the United States, wind electric gener-
separated by time. The benefits from burning fossil fuels ating capacity jumped by a phenomenal 66 percent in
are immediate, but the more destructive storms or rising 2001.20
sea level caused by their use may lag by decades, genera- Solar cell sales, growing by 21 percent a year from
tions, or even centuries. Fortunately, we can now gain the 1995 to 2001, are likely to grow even faster in the years
same benefits from more benign energy sources. ahead. Once economically competitive only when used in
satellites and pocket calculators, solar cells are now
Restructuring the Energy Economy becoming competitive for residential lighting in Third
The key to restoring climate stability is shifting from a World villages not yet connected to the grid. In many
fossil-fuel-based energy economy to one based on renew- countries, if getting electricity to villages means building
able sources of energy and hydrogen. Advancing tech- both a centralized power plant and a grid to deliver the
nologies in the design of wind turbines that have power, it is now often cheaper for families simply to
dramatically lowered the cost of wind-generated electric- install solar cells. In Andean villages, for example, the
ity to the point where it can be used to produce hydrogen monthly installment cost (with a 30-month payment peri-
from water, along with the evolution of fuel-cell engines, od) on an array of solar cells to provide lighting is com-
have set the stage for a dramatic restructuring of the parable to the cost of candles. A similar price
world energy economy. The good news is that this shift is relationship exists for the more remote villages in India
under way. The bad news is that it is not happening near- that depend on kerosene lamps for light.21
ly fast enough to avoid a climate-disrupting buildup in Another renewable source, one with a largely over-
atmospheric CO2 levels. looked potential, is geothermal energy, which is growing
The burning of each of the three fossil fuels is now at 4 percent a year. This is a vast resource and one that is
either growing slowly or declining. From 1995 to 2001, likely to figure prominently in the energy economies of
the use of oil, the world's leading source of energy, the Pacific Rim, particularly where widespread volcanic
expanded by just over 1 percent a year. Natural gas, the activity indicates that geothermal energy is close to the
70 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 71
Table 18. Trends in Energy Use, by Source, 19952001 One of the difficulties in restructuring the energy
economy is that doing so typically depends on small,
Energy Source Annual Rate of Growth fledgling industries challenging large, well-established,
(percent) often heavily subsidized industries. One way to accelerate
the restructuring needed to stabilize climate is to adopt
Wind power +32.0 full-cost pricing, requiring that those using energy pay
Solar photovoltaics +21.0 the full cost of doing so. This approach is discussed fur-
Geothermal power1 + 4.0 ther at the end of this section.
Hydroelectric power + 0.7 Fortuitously, the fastest-growing fossil fuel is natural
Oil + 1.4 gas, which is the obvious transition fuel from a carbon-
Natural Gas + 2.6 based energy economy to a hydrogen-based one. The nat-
Nuclear Power + 0.3 ural gas infrastructure, including distribution networks
Coal 0.3 and storage facilities, can easily be adapted for hydrogen
as gas reserves are depleted.
1Data available through 1999. As the effects of climate change become clearer, the
Source: See endnote 20. public's desire to avoid extreme climate events will inten-
sify. As this happens, pressure to raise carbon taxes and
earth's surface. The western coasts of South America, reduce income taxes may well rise, providing a strong
Central America, and North America have an abundance economic incentive for energy restructuring.
of geothermal energy. Perhaps the geothermally richest The new century is bringing new directions in the
region is the western Pacific, including Indonesia, the world energy economy. The last century was character-
Philippines, Japan, and the eastern and southern coasts ized by the globalization of energy as oil emerged as the
of China. Another rich region is the Great Rift Valley, leading energy source. Indeed, the entire world became
which stretches through East Africa up into the Middle heavily dependent on one region, the Middle East, for a
East. In fact, the entire eastern Mediterranean is geother- disproportionately large share of its energy. Now as the
mally well endowed. Some countries have enough world turns to wind, solar, and geothermal as the pri-
geothermal energy to meet all their electricity needs.22 mary energy sources and to hydrogen as an end-use fuel,
Hydroelectricity, which supplies over one fifth of the the energy economy is localizing, reversing the trend of
world's electricity, has expanded by 2 percent a year since the last hundred years.
1990. In contrast to the other renewable sources of ener-
gy, the growth in hydropower is losing momentum as Building the Wind-Hydrogen Economy
suitable sites for new dams are scarce and as public oppo- For many years it appeared that wind would be a corner-
sition mounts to large-scale inundation of land, the asso- stone of the new energy economy, but it now appears that
ciated displacement of people, and the disruption of it could become the centerpiece. Between 1995 and 2001,
ecosystems.23 world wind electric generation multiplied nearly fivefold.
72 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 73
(See Figure 15.) The generating capacity of 24,000 Megawatts
25000
megawatts at the end of 2001 was sufficient to meet the Source: AWEA, Flavin,
residential needs of 24 million people at industrial-coun- Windpower Monthly
20000
try consumption levels, a number equal to the combined
populations of Denmark, Finland, Norway, and Sweden.24
Wind is abundant, cheap, inexhaustible, and clean-- 15000
four attributes that make it unique. By any yardstick, it is
an abundant resource. In the United States, for example, 10000
a national wind resource inventory by the Department of
Energy reports that the United States is richly endowed 5000
with wind energy. The Great Plains, sometimes referred
to as the Saudi Arabia of wind energy, could easily sup- 0
ply twice as much electricity as the United States now 1980 1985 1990 1995 2000 2005 2010
uses. The United States is not the only country with a
wealth of wind. China could double its current electrici-
Figure 15. World Wind Energy Generating Capacity,
ty generation from wind alone. Europe has enough read-
19802001
ily accessible offshore wind energy to satisfy its demand
for electricity.25
Over the last 15 years, the cost of generating electric- of the world energy economy. In the United States, for
ity from wind has fallen dramatically, dropping from 38¢ example, farmers and ranchers, who own most of the
a kilowatt-hour to 4¢ or less at prime wind sites today. wind rights, could one day not only meet most of the
Indeed, some recent long-term wind electricity supply country's electricity needs but also supply much of the
contracts have been signed at 3¢ per kilowatt-hour. Wind- fuel used in automobiles.
generated electricity is now competitive with that gener- The hydrogen era is beginning to unfold. Both Honda
ated from other sources, even without including the costs and DaimlerChrysler plan to be on the market with fuel-
of climate disruption associated with producing electric- cell automobiles powered by hydrogen in 2003. Ford
ity from fossil fuels.26 expects to be in the market in 2004 with fuel-cell vehicles
Once cheap electricity from wind is available, it can be that run on compressed hydrogen. It will initially con-
used to electrolyze water, producing hydrogen. Hydrogen centrate its marketing on fleets of cars that can easily be
is a way of both storing and efficiently transporting wind fueled from a central fueling station.27
energy. Hydrogen is the fuel of choice for the new fuel- The Icelandic government is working with a consor-
cell vehicles that every major automobile manufacturer is tium of companies led by Shell and DaimlerChrysler to
working on. Parallel technological advances over the last become the world's first hydrogen-powered economy. The
decade in the design of wind turbines and the evolution first phase of this program begins in 2003 with the con-
of fuel-cell engines have set the stage for a restructuring version of 3 of Reykjavik's 80 buses from internal com-
74 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 75
bustion to fuel-cell engines. Shell will open its first hydro- pollutants nor do they make any noise. Quiet cities with
gen station in Iceland to supply the buses with fuel.28 clean air will replace noisy, polluted cities.
Singapore, anticipating the arrival of fuel-cell- Among the countries setting ambitious wind develop-
powered automobiles in 2003, has signed a letter of ment goals are Germany, Spain, the United Kingdom,
intent with BP to build several hydrogen stations. Air pol- France, Argentina, India, China, Brazil, and the United
lution concerns apparently are driving this shift to the States. A 3,000-megawatt wind farm in the early planning
non-polluting fuel-cell engine.29 stages in South Dakota is one of the largest energy proj-
Farmers and ranchers are beginning to mobilize in sup- ects being contemplated anywhere. Some wind-rich
port of developing wind energy. Local political leaders are countries could become hydrogen exporters in the new
starting to understand the economic benefits for rural energy economy: Canada, which is richly endowed with
communities of developing their wind resources. In con- wind but sparsely populated, and Argentina, with world-
trast to fossil-fuel power plants, the income from wind- class wind resources in Patagonia, could become leading
generated electricity tends to stay in the community. hydrogen exporters. Both countries could generate vast
Among the countries moving rapidly to develop their quantities of hydrogen, supplying it in perpetuity, to
wind resources are Germany, Denmark, Spain, and the more densely populated countries with less favorable
United States. Denmark now gets more than 15 percent wind/population ratios.31
of its electricity from wind. In Schleswig-Holstein, the In the northwestern United States, where hydropower
northernmost state in Germany, the figure is 28 percent; is already well established, cities such as Salem, Oregon,
in the state of Meckenburg-Vorponnen, it is 21 percent. are now moving to get the rest of their electricity from
In Navarra, a northern industrial province in Spain, 22 wind, making them entirely independent of fossil fuels
percent of the electricity comes from wind. Wind-gener- for electricity. The shift from a fossil-fuel-based economy
ated electricity in California is sufficient to meet the res- to a renewable-energy-based one is under way. The chal-
idential needs of San Francisco.30 lenge now is to accelerate that transition before climate
Once a country's wind-generating capacity reaches change spirals out of control.32
100 megawatts, wind resource development tends to
accelerate, acquiring a momentum of its own. At this Fixing the Market
point, countries appear to have the engineering experi- The market is a remarkable institution. It allocates scarce
ence, the financial structures, and the professional resources with an efficiency that no central planning
expertise in place to develop this vast but largely body can match. It easily balances supply and demand
untapped resource. Some 16 countries, home to half the and it sets prices. As noted earlier, however, it does have
world's people, are now in this group. three fundamental weaknesses, namely its failure to
In the wind-hydrogen economy, wind turbines will incorporate the indirect costs of providing goods or serv-
replace smokestacks. Hydrogen generators will replace ices into prices, its inability to value nature's services
oil refineries. Fuel cells will replace internal combustion properly, and its lack of respect for the sustainable-yield
engines. Fuel cells run on hydrogen do not produce any thresholds of natural systems such as fisheries, forests,
76 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 77
rangelands, and aquifers. the smoker, the smoker's employer, or taxpayers. The full
Throughout most of recorded history, there was little cost of each pack of cigarettes smoked is thus $9.98.34
reason to be concerned about the sustainable yields of If the indirect costs of burning a gallon of gasoline
natural systems, the value of nature's services, or the were incorporated into its price, would the $1.60 that
indirect costs of economic activity because they were Americans typically pay be $4, $6, or maybe $10 per gal-
rarely an issue. But with the 19-fold expansion in the lon? Would the cost to society of burning a gallon of
world economy over the last century, the failure to gasoline be more or less than the $7.18 from smoking a
address these market shortcomings will be costly.33 pack of cigarettes? Intelligent investment and purchasing
As the global economy has expanded and as technol- decisions for society, whether by government policymak-
ogy has evolved, the indirect costs of some goods and ers, corporate planners, or individual consumers, depend
services have become far larger than the price fixed by the on estimating these costs and incorporating them into the
market. As noted earlier, the price of a gallon of gasoline price of the gasoline. If the unlevied cost of using a
includes the cost of production but not the expense of product, such as cigarettes or gasoline, leads to extreme
treating respiratory illnesses from breathing polluted air market distortions, it could eventually lead to economic
or the repair bill from acid rain damage. Nor does it bankruptcy.
cover the cost of rising global temperature, of more Another market shortcoming is its failure to price
destructive storms, and of relocating future millions of properly the many services that nature provides, which
rising-sea refugees. As the market is now organized, the are often taken for granted. Nature converts salt water
motorist burning the gasoline does not bear the cost of from the oceans into fresh water through evaporation. It
rising sea level and the potential losses of ocean-front pollinates crops, recycles nutrients, and purifies water.
property, the evacuation of coastal cities, or the loss of The destruction of natural systems deprives society of
the rice harvest from the inundation of low-lying river these services--services with a value that society is only
deltas and floodplains. beginning to recognize.
A recent study from the Centers for Disease Control New York City, with its population of nearly 17 mil-
and Prevention, a U.S. government agency, on the indirect lion, recently discovered just how valuable nature's water
costs of smoking cigarettes illustrates the kind of analy- purification service is. Faced with the residential and
sis needed for burning fossil fuels. The study reports that industrial development of the Catskill forest region and
the market price of a pack of cigarettes, which includes the associated pollution of water in the watershed that is
the cost of growing the tobacco and processing it into the source of New York's water, the city was told it need-
cigarettes, is $2.80 in the United States. But the cost to ed a water purification plant that would cost $8 billion to
society of smoking a pack of cigarettes, including both build and $300 million a year to operate. The bill for this
the medical costs of treating smoking-related illnesses would reach $11 billion over 10 years. City officials real-
and the cost of lost worker productivity as a result of ized that they could restore the watershed to its natural
absenteeism, is $7.18. The issue is not whether the addi- condition for only $2 billion, and let nature purify the
tional $7.18 is paid--clearly it is paid by someone, either water, thus avoiding the need for the purification plant
78 THE EARTH POLICY READER The Economic Costs of Ecological Deficits 79
and saving taxpayers $9 billion.35 the governments of New York City and China made
The Chinese have learned the hard way the value of major policy changes once they recognized the value of
the flood control services provided by forests. During the nature's services, values that were not reflected in the
summer of 1998, several weeks of some of the worst market. Will the world one day reach a similar judgment
flooding on record in the Yangtze River basin wreaked on the costs of climate change?
enormous havoc. Direct damage caused by the flood Another area in which the market is inept is in recog-
totaled some $30 billion, according to Munich Re. Some nizing the sustainable-yield thresholds of natural sys-
120 million people were directly affected by the flooding. tems. If an oceanic fishery's catch increases over time in
Up until mid-August the Chinese government had been response to demand until it exceeds the fishery's sustain-
describing the catastrophe as an act of nature. But they able yield and stocks begin to decline, then fish prices will
finally recognized that deforestation, specifically the loss begin to rise. The market's response to higher prices is to
of 85 percent of the original forest cover in the Yangtze invest more in fishing trawlers, a response that ensures
River basin, was a major contributor to the flooding. collapse of the fishery. Further exacerbating this problem
Once they understood this, they banned tree cutting in are the subsidies that governments pay the fishing indus-
the basin. They justified the ban by noting that trees tries, which distort the market.
standing are worth three times as much as trees cut. Chi- What some governments are realizing is that protect-
nese leaders were acknowledging that the flood control ing an economy's natural resource base depends on intro-
value of the forests in the Yangtze River basin was worth ducing the concept of sustainable yield into the market
three times as much as the lumber in the trees. The mar- place. Australia, concerned in 1986 about the overfishing
ket values lumber in the trees, but not the flood control of its lobster fishery, estimated the sustainable yield of
service provided by the forests. In addition to the ban on the fishery and then issued fishing permits totaling that
tree cutting, the government launched a tree planting pro- amount. Fishers could then bid for the permits. In effect,
gram to restore the flood control service.36 the government decided how many lobsters could be
The $30 billion worth of damage from the Yangtze taken each year on a sustainable basis and then let the
flood, plus the disruption it caused in the heavily indus- market decide how much the permits were worth. Once
trialized Yangtze river basin, nearly derailed the Chinese the permit trading system was adopted, the fishery stabi-
economy. To put the loss in perspective, China is the lized and has operated on a sustainable basis ever since.38
world's leading producer of both wheat and rice, but the A similar situation exists with aquifers. As the
$30 billion of flood damage exceeds the value of the demand for water increases, the pumping eventually
annual wheat and rice harvests combined. It was the exceeds the sustainable yield of the aquifer and the water
recognition in Beijing of the scale of the damage and dis- table starts to fall. The market simply says, "drill deep-
ruption from the flooding that led to the abrupt shift in er." But all this does is allow the use of water to contin-
policy from tree cutting to tree planting.37 ue to increase while the aquifer is being depleted. Once
The market's lack of appreciation of the value of that happens, the rate of pumping is necessarily reduced
nature's services is pervasive. In the two cases just cited, to the rate of recharge. But if the level of use at this point
80 THE EARTH POLICY READER
is double the rate of recharge, which can easily be the
case, then water use is abruptly cut in half. Needless to
say, the adjustments to aquifer depletion can be abrupt
and destabilizing.
Enlightened government policy could intervene by
establishing the sustainable yield of the aquifer and auc-
tioning off the rights to pump that amount of water. This
lets the market allocate the water to the more high-valued
uses, while stabilizing the water table.
There are two dimensions of overpumping that are of
concern. One, once the rising level of water use exceeds
the sustainable yield of the aquifer, the gap between that
use and the sustainable yield widens each year until the
aquifer is dry. This means that if countries delay until
depletion occurs, they will face wrenching reductions in
the use of water. Two, the overpumping of aquifers is
proceeding simultaneously in literally scores of coun-
tries, which means that at some point in the not-too-dis-
tant future the world will face simultaneous "water
shocks" as aquifer depletion forces abrupt and, in many
cases, substantial reductions in water use.
Unless governments are prepared to intervene in the
market to get prices to tell the ecological truth, to value
nature's services, and to respect the sustainable yields of
natural systems, then the economy will eventually
destroy its natural support systems. Thus far the ecolog-
ical and economic consequences of market distortions in
our modern civilization have been mostly local and man-
ageable. But if they continue to increase, they will even-
tually become worldwide, setting the stage for global
economic decline.