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June 26, 2012 | OpinionEvent Highlights

Planetary Economics

Global economic growth and sustainability can -- and should -- go hand in hand, argues Geoffrey Heal, who here offers, in the keynote address prepared for the Rio+20 sustainability summit, four crucial steps to building long-term fiscal and environmental prosperity.

Geoffrey Heal

Last week, representatives from the private sector, governments, and NGOs all over the world met at the Rio+ 20 summit in Brazil to look at progress since 1992’s Earth Summit and to set new goals for building a sustainable future.

Much of our planet is still astoundingly beautiful and is able to sustain us with the food, water, oxygen, and climate that we need to thrive. But we cannot take this for granted: the litany of threats is well-known — climate change, overfishing, deforestation, and pollution of the air and oceans are all irrevocably changing the world around us for the worse, and in ways that will impose huge economic costs.

We have a tendency to throw up our hands in despair at these problems — they seem so all-encompassing and threatening, and so difficult to address. In fact this is wrong. All these problems are manifestations of a few easily remedied shortcomings in our economic system:

Pay full costs, including external costs. Most important is our failure to insist that we pay the full costs of our activities. We generally do pay private costs, which include the cost of labor, buildings, and capital. But we rarely pay and are often oblivious to external costs. Greenhouse gases from burning fossil fuels and fertilizers running off into the oceans and destroying marine life are two of the most global and damaging external costs of quotidian activities like heating and cooling our residences and growing our food. They are real economic costs, just as much as the associated labor and capital costs, and should be in our budgets, in our profit and loss statements. Economists refer to this as internalizing external costs, and it’s one of a small number of prerequisites for solving our environmental problems. The polluter pays principle — the idea that whoever produces pollution should pay for it — speaks to these issues.

Tightly define property rights. Another gap in our economic armory is our failure to define property rights for important environmental goods. Nowhere is this more important than with fisheries. Everyone’s property is no one’s property, the old adage says, and it’s right: fish stocks need to be managed, and to be managed they have to be someone’s responsibility — someone has to act like an owner. When solutions such as catch shares or transferable quotas have been adopted the effects have been dramatic. In some cases these practices have delivered a tenfold increase in fish stocks with a commensurate explosion of yields — more food for us, more income for fishing communities, and a healthier marine environment.

Recognize the economic value of nature. Natural resources are immensely valuable to us. Sometimes this is obvious, as with oil or gas or gold or diamonds. But there are other resources that are in fact more important to us in the long run that the marketplace doesn’t currently value and economists and accountants don’t value either. Snowpacks, watersheds, and aquifers are all an integral part of the system that supplies us with water for drinking and growing our food, so they are hugely valuable assets worth hundreds of billions of dollars. Yet they don’t appear on any balance sheet and are rarely thought of as valuable in public decision making, so we tend to destroy them. We have a nasty habit of destroying whatever doesn’t have a dollar sign in front of it. We need to recognize the value of natural assets beyond those that are easily monetized.

Move beyond GDP as a measure of economic performance. If we pollute and then spend money cleaning up, GDP rises. If we need to build sea walls to protect from rising sea levels, GDP rises. But if we deplete irreplaceable natural assets such as forests, there is no charge against GDP — as there would be under generally accepted accounting principles if a corporation depleted its capital assets. Clearly GDP sends the wrong signals.

These four steps, all of which are easily implemented, will remedy gaps in our economic system and remedy what economics texts call market failures. They would improve the efficiency of our economic system, solve most of our environmental problems, revolutionize the relationship between humanity and the natural world, and give the planet a new lease on life.

Geoffrey Heal is the Donald C. Waite III Professor of Social Enterprise in the Finance and Economics Division and a Bernstein Faculty Leader at the Sanford C. Bernstein & Co. Center for Leadership and Ethics at Columbia Business School.

Professor Heal’s forthcoming book, Whole Earth Economics, expands on the four steps he offers here to remedy the shortcomings of the market economy and ensure long-term economic and environmental prosperity.

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