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SPEAKER 1: This is a production of Cornell University.
DAVID LEE: So thanks for the opportunity to talk with you all today. The organizers of THE session have asked us to provide a range of disciplinary perspectives on sustainability and sustainable development. And so it's my task to, as the resident economist on the panel, to bring a perspective from the dismal science of economics, as Thomas Carlyle famously called it. Although after seeing Tom O'Rourke's slides about Japan, economics looks positively cheery at this point, so.
Being in the same room with some engineers reminds me of the joke about the engineer, the priest, and the economist who are going for a hike together, and they all fall into a well. They need to get out, so the engineer says, let's get all our gear together, and see if we can rig up some contraption to get out of here. The priest says, well, that'll never work. We have no choice but to put our faith in God, kneel down and pray that someone will discover us, so we can get out. The economist says, you're both wrong. It's no problem, just assume we have a ladder.
So let me state, up front, from my perspective, I hope is not that of an economist in the well, or the economist in the well, but that of an applied economist who has worked on economic development and environment issues for the past 30 years, primarily in agricultural and rural areas, both in this country and in the developing world. I work on practical and applied problems, issues like how and why farmers and households adopt innovative technologies, how they manage their natural resources, how they adapt to climate change, how environmental services support both household livelihoods and economic growth.
Poverty and environment are important issues. It's often said that most of the world's poor are rural, and most of the rural poor around the world are involved in one way or another in agriculture and natural resources. $2.6 billion people globally are estimated to be at least partially or fully dependent on agriculture for their livelihoods, 1.6 billion on forests, and 250 million on fisheries.
And, of course, the livelihood challenges faced by the rural poor are intimately tied to many of the environmental concerns that we face around the world. These folks are on the front lines, as it were, in addressing issues of tropical deforestation, the wetlands conversion, decertification, climate adaptation, and so forth.
So what does economics bring to the table in terms of sustainability thinking? Perhaps the most obvious contribution of economics to sustainability is to introduce cost-benefit analysis or at least a cost-benefit way of thinking to sustainability questions. That may seem to be pretty self-evident, right? It's only logical to use economic tools to assess economic sustainability of specific technologies, systems, and innovations. But it hasn't always been this way, as I'll mention in a couple of minutes.
One of my favorite examples of this most basic contribution of economics to sustainability has to do with a unique cropping system in the Andean highlands where I often work in South America, the [? Sukaquois ?] in Aymara, or the [INAUDIBLE] in Quechua. I first became familiar with this system while working with a PhD student here in soil physics back 15 years or more ago. This example illustrates the hazards of engaging in sustainability debates without economic analysis.
Very briefly-- if this thing works-- which it doesn't-- here we go-- actually, we just skipped one-- here we go-- so very briefly, the [? Sukaquois ?] are an innovative raised-bed agricultural system in the highlands of Bolivia in southern Peru at altitudes of about 3,800 to 4,000 meters, very, very high, obviously. It gets very cold, and frost is a perennial problem for growing crops.
So beginning sometime after around 1000 BC, the pre-Incan Tiwanaku Empire of the Andean highlands developed these raised-beds systems that are really a remarkable technology. They consist of rows of raised beds that are interlaced with small canals which circulate water to irrigate the crops, which are in that part of Latin America are primarily potatoes.
Importantly though, the water in the canals-- I can skip ahead here-- the water in the canals, and its thermal radiation, keeps the micro-climate a bit warmer, often just about one degree Centigrade, in the surrounding area, but just enough to keep from avoiding-- keep farmers from avoiding frost problems.
Crop yields can be very high, up to four to nine times typical yields for potatoes. The system uses water very efficiently. And by intensifying agriculture, you take pressure off the neighboring-- the neighboring areas which are, in many cases, marginal lands. Estimates are that as many as 80,000 to 120,000 hectares of raised beds were constructed in pre-Incan and Incan times.
There's only one problem. Who can tell me what it is? It's a sustainable system or you could claim it's just a sustainable system. What's the problem? Labor. It takes about 200 to 900 man-days to construct one hectare of raised beds. They only last for about three years, after which they have to be renovated. So it takes a lot of time, time, a lot of time and a lot of money.
One estimate made about 15 years ago is that if you figured in the full cost of construction and maintenance, amortized it across the years of use, and importantly included the opportunity cost of the farmer's time, it would cost about $19 to produce a pound of potatoes.
So is the [? Sukaquois ?] system sustainable? Well, there's a lot of literature out there that argues that it is, agronomically, environmentally, and socially. There is arguments on behalf of all those. But how about economically? The [? Sukaquois ?] were initially constructed under a feudal corvee system which existed in pre-Incan South America, much as it did in the Middle Ages in Europe. And that system, the market value of the product, or the cost of labor, was irrelevant. What was important was the compulsory labor service that the peasant farmer was obliged to spend in lieu of taxes to the local authority.
But in a modern economy, market prices and opportunity cost, whether for end products or labor inputs or other resources, those are, of course, central to economic feasibility and thus sustainability. Given that the price of potatoes is now about $0.80 a pound, it's clear that any-- that a cost that's even remotely close to $19 a pound isn't sustainable. And yet, in the 1980s and 1990s, donors, including USAID and many NGOs, became enamored of this technology, and were sinking a lot of money into promoting costly renovations of these pre-Inca systems for current use in Bolivia and southern Peru.
So this may seem like an unusual example, but I mention it just to make the broader point that there are many, many other examples where a little economics goes a long way, at least in terms of getting a rough approximation to the economic viability of so-called sustainable technologies or investments. Very often, though, these most basic analyzes get overlooked in development circles, which so often becomes captivated by the latest alluring technology or system, often with groundless claims about sustainability.
Don't get me wrong. I'm-- technology is great, and I've spent much of my professional life evaluating technologies, assessing technologies, and so forth. But, ultimately, technologies have to be used or not used by people. And so it's the incentives and disincentives that people face along with the constraints under which they operate that ultimately determine adoption.
Beyond this most basic contribution, what else can economics contribute to sustainability thinking? Actually, quite a bit. You've seen the-- go back here-- you've seen the Brundtland Commission definition of sustainability what three or four times maybe already this afternoon? So I'll add it again. Until the 1980s, economists and environmentalists not only weren't often on the same page, but frequently had two diametrically opposed views of the problematic facing poor countries.
Economists viewed the problem as primarily one of generating economic growth and addressing poverty. Environmentalists frequently viewed the key problem as conserving and protecting natural resources, to which agriculture naturally was often, and remains often, a threat. The World Commission on Environment and Development, or the Brundtland Commission in 1987, just exactly a quarter century ago now, had the major accomplishment of bringing together economic and environmental perspectives on sustainability with a particular focus on developing countries. And that's, I think, the reason why it's still the most widely cited definition of sustainability, as we've seen, in fact, today.
The appeal of this approach appear to sustainability is that it doesn't get wrapped up in countless technical details of having to define what exactly you mean by sustainability with 40 or 50 or 60 sustainability indicators and so forth the downside is that operationalized-- and I think Jeff Tester made this point earlier this afternoon-- the downside is that operationalizing an approach to sustainability like this can be a challenge.
I think economics has contributed, in many ways, in operationalizing this approach to sustainable development. I just wanted to briefly mention three ways. First, economics emphasizes that human behavior is a dynamic phenomenon. The Brundtland Commission's concept of sustainable development means comparing and contrasting the needs of present and future generations. While we often do this implicitly, economics does this explicitly.
Recent high profile reports and white papers, such as the Millennium Ecosystem, Ecosystem Assessment 2005, and the report of the IPCC in 2007, they prompt us to think ahead to the end of the century-- 2100 is now the time frame where you see a lot of future projections and forecasts. That's less than 100 years from now, obviously.
In making these projections and forecasts, it's common to extrapolate or forecast future needs for energy, for food, for oil, and so forth, based on current use and demand trends, whether through economic modeling, global resource assessments, Millennium Ecosystem Assessment, the IPCC reports, or many other mechanisms.
Yet human needs, tastes, and preferences change their dynamic. You may have seen, for example, the-- if I can get this to go here-- you may have seen the reports on the recent Bureau of Labor Statistics report on expenditure, or changing expenditure patterns, between 1900 and the year 2000. This was featured in the Atlantic magazine just last month.
If you consider this country just 100 years ago, only a quarter of households in the US had running water. Fewer than that own the home that they lived in. Still fewer than that had flush toilets. Only 1/12 of US households had gas or electric lights. 120th of us had telephones. One in 90 owned a car. And nobody, of course, had a television, much less an iPad, or anything like that.
Perhaps, most importantly, though, 80% of household income 100 years ago was spent on food, housing, and clothing. As you can see up here, the breakdown. In 2003, that figure was only 50%. So essentially, what's happened over a century is that we've freed up a third of our wealth or our household wealth or household income to spend on other stuff. Now some of that other stuff are important things like health care, but we also have far more discretionary spending than we did 100 years ago. And that's the hallmark of a rich economy. And you can see that in the orange slice of the pie here.
So the point-- the point is that human behavior is not static, not mechanistic, and I think one thing that economics has contributed to sustainability thinking is better understanding human behavior, recognizing that it's changing its dynamic, it responds to incentives and disincentives typically as expressed through prices. We have many frameworks and approaches that provide the empirical basis for understanding changing behaviors. In fact, this comprises much of what we teach in our classes here at Cornell.
We also spend a lot of time thinking about how to encourage the so-called incentive compatible behavior that not only expresses self-interests, but that seeks to address group objectives, including environmental and social externalities. This prompts us also then to devote a lot of attention to about how to alter incentive structures to help address societal problems. This is the impetus, for example, behind the idea of a carbon tax, to address greenhouse gas emissions that is the policy that is favored by the great majority of economists, even though politically it hasn't gone anywhere, obviously.
Some of you may have seen James Hansen's Op-ed just, I think it was last week or the week before, in the New York Times, where he renews this call for a carbon tax, and takes the Obama administration to task for insufficient attention to energy policy. Much of this focus on incentives and behavior may seem obvious, but these aspects are often not highlighted in technocratic or mechanistic approaches to sustainability.
A second way that economics contributes to Brundtland Commission-type thinking on sustainability is responding to an equally basic question. And that is how do we compare current and future needs to begin with? One way is to put them in a common metric, so we can actually assess the trade-offs between current and future periods. And, again, Jeff Tester mentioned that word as well earlier this afternoon, the notion of trade-offs.
This brings us to valuation. This isn't the place to get into the vast methodological issues involved in alternative approaches to valuation. And I admit that this is an area that's fraught with difficulty. But suffice it to say, there are all sorts of values that we recognize in economics that can be used to make many useful types of decisions. I've just put up some of these values here.
For example, decisions regarding making discreet investments, choosing among alternative investments, estimating the net benefits of a policy intervention of various types, ranking social investments that make the best use of limited public resources, and many, many other examples. In the case of assessing sustainability, the challenges to valuation are immeasurably greater. And this has provided much of the motivation to develop specific valuation techniques, such as these, and others. I just put up some of the more common examples here.
Some of the techniques to try to address some of the very difficult conceptual problems and challenges and empirical problems involved in making intertemporal and intergenerational trade-off evaluations. So it's really tough analytically to do this stuff. The third way in which we address Brundtland-type sustainability is making intertemporal comparisons through discounting.
Again, this is another area fraught with methodological difficulties that I won't go into here obviously, but the basic issue is just simply as follows. If I offer you $100 now, or if I offer you $100 in five years, even aside from issues of inflation as such and decrease purchasing power, typically you'll take or most of you would take the $100 now. This is what we call the social rate of time preference, which is positive.
This enables us not only to allocate resources and make efficiency decisions in the present, but it also enables us to compare, albeit imperfectly, current values and future values and to try to make intertemporal comparisons between the two. Discounting problems arise in many contexts. One is in evaluating the behavior of the poor. It's often claimed that poor households have high discount rates, because they really cannot afford alternatives that provide long-term benefits. If you're really poor, you're mostly concerned, logically enough, with the here and now.
Another context where the discount rate poses a challenge to sustainability thinking is in the classical example, first mentioned by Lesser and Zerby, are the toxic waste dump. Imagine you have a technology that successfully stores toxic waste for 5,000 years. But you know that the waste itself remains toxic for 10,000 years. Thus the waste will inevitably escape and pose a danger to society some time between 5,000 and 10,000 years from now.
Say we generously estimate the damage at 50% of GDP, or around $6 trillion. If you discount those environmental costs at a 3% annual rate of time preference, which is typical, you end up with a net present value today of less than $0.01. This is for a loss that is totally predictable, and might be catastrophic to future generations. And yet, of course, in the Brundtland Commission view of sustainability, we highlight this focus on future generations.
So this illustrates the general problem that even in rich countries, not just poor countries, we typically end up very heavily discounting the future, which flies in the face of the Brundtland Commission's definition of sustainable development. So I could go on at length about other contributions from economics to sustainability assessment, of the focus on economic livelihoods and household livelihoods, the role of natural capital in economic growth, which in the last few years has gotten a lot of attention, and so forth. I won't do that. We have limited time.
Economics helps us, I think, in many ways to think through these issues formally and analytically, and help assess the trade-offs that we need inevitably must make. So what are some of the limitations of economic analysis in the context of sustainability thinking? This is where the last two words of my original title enter the picture. There's no question that externalities, in general, and environmental externalities, in particular, pose especially vexing problems when thinking about sustainability. These problems are familiar ones, and they have long been recognized in research and in the literature, but that doesn't make them any easier to address.
The essence of the problems is that markets and prices simply don't exist for many environmental resources that we would wish to value. Thus we tend to overuse them and misuse them constantly. I mentioned the 2005 report of the Millennium Ecosystem Assessment in which over 1,000 scientists labored for years under the auspices of the United Nations to come up with a document that was extremely wide ranging and very well documented.
This figure here-- if I can get it-- this figure here is one of the most widely-cited from the Millennium Assessment. It's basically just a schematic illustrating the many types of environmental services on the left and their roles in supporting human livelihoods. There are a lot of confusing arrows there. I certainly agree. But the point is that they gave a lot of thought to trying to identify the various types of ecosystem services and try to establish these links and in some cases value them.
There are a lot of valuable conclusions in this report. One is that 60% of the earth's ecosystems are undergoing various states of environmental degradation, and are not being used sustainably. Another is that agriculture is the primary human activity perhaps most responsible for much of that degradation. So for those of us that work in agricultural and economic development, this isn't fun stuff to hear.
The lack of markets and prices for environmental services is exacerbated by a variety of other factors. The sheer number in dispersed locations of farmers and rural peoples around the world that makes it very difficult to increase its transaction costs and makes it very difficult to incorporate them both in markets and in national institutions. The fact that many environmental services are public goods, and the sheer complexity of ecosystem and agroecosystem functioning. So these all mitigate against a clear understanding of the process.
As economists, we've developed many methodologies to try to specifically incorporate the values of ecosystem services in private decision making, but this remains a challenge, too, just as it does on the public side. There's been a great amount of attention to these methods that I'm listing up here and others in recent years, and some headway has been made. But in the end, all our approaches suffer from the same two problems.
First, it's difficult to accurately measure, quantify, and monitor the bio-geochemical and natural resource flows that underlie agriculture natural resource management. It's just plain difficult to do. Second, at the end of the day, it's still necessary to try to value non-marketed environmental services. These approaches try to do that in different ways. But at the end of the day, you still have to do it.
Consequently, we run into many situations where we must make estimates, approximations, or, frankly, judgment calls. Compounding that problem is one of what I would call false precision, the sense that if we only crunched the numbers better, we could find the answer, which, basically, misses the point. As an example of these difficulties, I should mention the concept of sustainable agriculture, at least briefly. There's been a great deal of attention by researchers and increasingly the popular media to agricultural sustainability in recent years, not only in developing country context, but also in terms of local agriculture and food systems.
There's no country on Earth in which sustainable agriculture has been analyzed more in depth and more rigorously than in the UK. Five major studies in the past decade or so have all tried to incorporate environmental externalities, measure them and value them, in various ways to answer the question, is agriculture in the UK sustainable? In fact, one of the key papers has exactly that title.
But the estimates are all over the map. In a review of these studies done several years ago by a colleague in the UK concludes after huge expenditures of time and analytical resources that we just don't know. That's a pretty anti-climactic conclusion, and illustrates the fact that we have a lot of work to do. A
Second major limitation of economics is respect-- is with respect to the last word in the title of my presentation, and that is equity. In the context of sustainability, the type of equity we're generally concerned with is over time, or what we call intergenerational equity. This directly responds to the Brundtland conception of sustainability. However, our attention in economics, including seminal contributions by people like Solow, Hartwick, Stieglitz and Tobin, our conception is somewhat different than the Brundtland focus on future needs.
We tend to focus-- that's more of a demand side view-- we tend to focus on investment rules, or supply side or production side rules. For example, how you invest the profits from the extraction of exhaustible resources. Investment rules that will assure that those future needs, however you define them, are met, rather than just focusing on the needs per se. So this is an important distinction because it puts much of the focus on the role of capital formation today, and sowing the seeds for future consumption tomorrow. So the two are very much complimentary.
That, in turn, once you focus on the production side, or the capital formation side, that then leads to all sorts of debates, including the strong sustainability versus a weak sustainability debate. And all of these debates are far from resolved. So in thinking through these issues and in summing up, economics, I think, can only take us so far. I believe economic perspectives on sustainability are important. And, in fact, economists have been grappling with sustainability-related problems long before sustainability itself became a buzzword.
Economics can shed light on sustainability issues in many ways, in providing tools for private and public decisions, in assessing intergenerational trade-offs, and in evaluating the payoffs and risks that characterize different policies and options. And these, and other ways, economics can help provide insights into the consequences of different social values and choices. But economics and economic tools, like cost-benefit analysis, cannot determine what is right, just, or most equitable.
The long term values of environmental services that are key to sustainability ultimately depend on assumptions about the intergenerational distribution of income, and about what our current generation's obligations to future generations are. And for those determinations, we need, I think, to turn to ethics, philosophy, and how to get our social values translated into political outcomes, which is the topic of the next presentation. Thank you.
I mean, a lot of these approaches really use exactly the same components, they just rearrange them in different ways, sometimes with a bit of a different emphasis. And when we pay $4 or $3.90 now for a gallon of gasoline, we're not paying for the impact of those GHGs on the environment. And so, then--
SPEAKER 2: There's not too much out there about that. What would be the price per gallon?
DAVID LEE: Yeah. Well, there's a lot of estimates about that. Think about-- I don't know what the actual number is, but think about what-- how our behavior would be different if we were paying $6 a gallon, right, or just go across the pond to Europe, and that would be cheap, right? I don't know what the cost of gas in Europe now is, $7 or $8 a gallon.
And that then induces behavioral changes like, on behalf of public transportation, and cutting back use, and so forth. So that was sort of the point I was trying to make on terms of incentives. Housing's gone up, but food, of course, has gone way down, so but on net, our necessities have gone down.
SPEAKER 3: Thank you, David.
Professor David Lee, spoke about "Sustainability: Economics, Environment, and Equity" at the National Academy of Engineering Regional Symposium on May 16, 2012.
Cornell University and the College of Engineering hosted the Regional Symposium of the National Academy of Engineering on the topic, "Toward a Sustainable Future." The symposium brought together distinguished Cornell University faculty members to address the numerous elements of sustainability from the perspective of the physical sciences and engineering, environment, economics, business development, international implications and social sciences.
