2 Policies to enhance sustainable development
If we adopt the Bruntland definition of sustainable development, then policy should focus on the meeting the needs of the present without compromising the ability of future generations to meet their own needs (WCED, 1987:43). Atkinson (2000) lists three key points of sustainable development as follows:
- concern for future generations is the defining feature of sustainable development and to correct for the myopia of earlier policies, contemporary policy should be more forward looking
- increased attention to economy-environment linkages
- requirement to examine trade-offs between sustainable development and other goals
As noted earlier, environmental problems are rooted in market failure and their resolution usually requires government taking action. While correcting for market failures might be seen as a necessary condition for achieving sustainable outcomes it may not be sufficient. Additional challenges arise from the call to address poverty and the welfare of future generations. This section focuses on a range of broad approaches to environmental issues and their contribution to sustainable development. Although each instrument is discussed in isolation, a combination of instruments might best apply to the situation at hand. For example, tradable water rights can easily operate within a minimum flow constraint aimed at protecting conservation interests.
Two broad classes of market failure are relevant to sustainable development policy. Negative (pollution type) externalities attract most attention in the literature (OECD, 2001). As noted in Sharp, (2001) residuals are an inevitable fact of production and consumption. For example, a firm producing paper – a product that is valued in the market – may also produce waste that is discharged into a river adversely affecting other users and non-users of the river environment. A dairy farm relying heavily on fertilizers to lift production might contribute to groundwater pollution and possibly accelerate the eutrophication of a lake. The by-products of household consumption – solid waste, sewerage – also enter the environment. Vehicular transportation, of all kinds, contributes to environmental pollution. Urban development can enhance sedimentation and contribute to the destruction of waterways and wildlife habitat.
The Hartwick (1990) model reminds us that achieving sustainable development involves pricing the natural environment’s services in general. In particular resource pricing should account for contemporaneous and intertemporal externalities. For example, uncontrolled access to fish stocks eventually leads to stock depletion, over-investment in harvesting capacity and inefficient outcomes. Competition for a common pool resource (eg gas field) will result in a lower economic dividend relative to a situation where access is priced so as to maximise net present value (Dasgupta and Heal, 1979). Of course, it is desirable that the optimal price of depleting a stock resource includes the cost of the externalities associated with extraction.
The above externalities are not an economic issue in a world with no scarcity. In a world of scarcity and in the absence of appropriate environmental policies, externalities create opportunity costs that distort the principal mechanism that we rely upon to allocate resources within the economy. The efficiency properties of the competitive market mechanism have been long established and need not be discussed in any detail (Nicholson, 2000).
It is also well known that an efficient outcome, in the presence of externalities, can be achieved by pricing the externality at its marginal (social) damage (Field and Field, 2002). This is the standard Pigouvian result that provides a framework for assessing the relative efficiency of alternative policy instruments.[1]
The call to use market-based instruments (MBIs) to achieve sustainable development is not without critics. Some will argue against valuing adverse environmental impacts. However, the concept of total economic value is recognised as an important part of the environmental economist’s tool kit when it comes to the practical implementation of MBIs (Sharp. 2001). Others will not be prepared to accept environmental degradation of any kind and the very idea of balancing the costs and benefits of pollution abatement is an anathema. The reluctance to accept trade-offs is implicit in the definition of strong sustainability. Critics may also object to the idea of tradable rights to the environment without fully appreciating the fact that property rights are associated with current regulations.
This section provides an overview of economic instruments to achieve sustainable development.[2] The range instruments is generous and includes traditional command and control (CAC), polluter-pays schemes, tradable rights, and mechanisms aimed at tapping into the preferences of individuals and the community. The economic underpinnings of the alternatives are described and discussed in terms of economic efficiency. The economic models provide a basis for the design of specific institutional arrangements as outlined in Section 3.
