When Nicholas Stern, former chief economist at the World Bank, released his ground-breaking study in late 2006 on the future costs of climate change, he talked about a massive market failure. He was referring to the failure of the market to incorporate the climate change costs of burning fossil fuels. The costs, he said, would be measured in the trillions of dollars. The difference between the market prices for fossil fuels and the prices that also incorporate their environmental costs to society are huge.
The roots of our current dilemma lie in the enormous growth of the human enterprise over the last century. Since 1900, the world economy has expanded 20-fold, and world population has increased fourfold. Although there were places in 1900 where local demand exceeded the capacity of natural systems, this was not a global issue. There was some deforestation, but overpumping of water was virtually unheard of, overfishing was rare, and carbon emissions were so low that there was no serious effect on climate. The indirect costs of these early excesses were negligible.
Now with the economy as large as it is, the indirect costs of burning coal—the costs of air pollution, acid rain, devastated ecosystems, and climate change—can exceed the direct costs, those of mining the coal and transporting it to the power plant. As a result of neglecting to account for these indirect costs, the market is undervaluing many goods and services, creating economic distortions.
As economic decisionmakers—whether consumers, corporate planners, government policymakers, or investment bankers—we all depend on the market for information to guide us. In order for markets to work and economic actors to make sound decisions, the markets must give us good information, including the full cost of the products we buy. But the market is giving us bad information, and as a result we are making bad decisions—so bad that they are threatening civilization.
The market is in many ways an incredible institution. It allocates resources with an efficiency that no central planning body can match and it easily balances supply and demand. The market has some fundamental weaknesses, however. It does not incorporate into prices the indirect costs of producing goods. It does not value nature’s services properly. And it does not respect the sustainable yield thresholds of natural systems. It also favors the near term over the long term, showing little concern for future generations.
One of the best examples of this massive market failure can be seen in the United States, where the gasoline pump price in mid 2007 was $3 per gallon. But this price reflects only the cost of discovering the oil, pumping it to the surface, refining it into gasoline, and delivering the gas to service stations. It overlooks the costs of climate change as well as the costs of tax subsidies to the oil industry (such as the oil depletion allowance), the burgeoning military costs of protecting access to oil in the politically unstable Middle East, and the health care costs for treating respiratory illnesses from breathing polluted air.
Based on a study by the International Center for Technology Assessment, these costs now total nearly $12 per gallon ($3.17 per liter) of gasoline burned in the United States. If these were added to the $3 cost of the gasoline itself, motorists would pay $15 a gallon for gas at the pump. In reality, burning gasoline is very costly, but the market tells us it is cheap, thus grossly distorting the structure of the economy. The challenge facing governments is to restructure tax systems by systematically incorporating indirect costs as a tax to make sure the price of products reflects their full costs to society and by offsetting this with a reduction in income taxes.
Another market distortion became abundantly clear in the summer of 1998 when China’s Yangtze River valley, home to nearly 400 million people, was wracked by some of the worst flooding in history. The resulting damages of $30 billion exceeded the value of the country’s annual rice harvest.
After several weeks of flooding, the government in Beijing announced a ban on tree cutting in the Yangtze River basin. It justified this by noting that trees standing are worth three times as much as trees cut: the flood control services provided by forests were far more valuable than the lumber in the trees. In effect, the market price was off by a factor of three.
This situation has occasional parallels in the commercial world. In the late 1990s Enron, a Texas-based energy trading corporation, may have appeared on the cover of more business magazines than any other U.S. company. It was spectacularly successful. The darling of Wall Street, it was the seventh most valuable corporation in the United States in early 2001. Unfortunately, when independent auditors began looking closely at Enron in late 2001 they discovered that the company had been leaving certain costs off the books. When these were included, Enron was worthless. Its stock, which had traded as high as $90 a share, was suddenly trading for pennies a share. Enron was bankrupt. The collapse was complete. It no longer exists.
We are doing today exactly what Enron did. We are leaving costs off the books, but on a far larger scale. We focus on key economic indicators like economic growth and the increase in international trade and investment, and the situation looks good. But if we incorporate all the indirect costs that the market omits when setting prices, a very different picture emerges. If we persist in leaving these costs off the books, we will face the same fate as Enron.
Today, more than ever before, we need political leaders who can see the big picture, who understand the relationship between the economy and its environmental support systems. And since the principal advisors to government are economists, we need economists who can think like ecologists. Unfortunately they are rare. Ray Anderson, founder and chairman of Atlanta-based Interface, a leading world manufacturer of industrial carpet, is especially critical of economics as it is taught in many universities: “We continue to teach economics students to trust the ‘invisible hand’ of the market, when the invisible hand is clearly blind to the externalities and treats massive subsidies, such as a war to protect oil for the oil companies, as if the subsidies were deserved. Can we really trust a blind invisible hand to allocate resources rationally?”
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Originally posted at earthpolicy.org.
Adapted from Chapter 1, “Entering a New World,” in Plan B 3.0: Mobilizing to Save Civilization (New York: W.W. Norton & Company, 2008) by Lester R. Brown, available for free downloading and purchase at earthpolicy.org.
Comments
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stevenearlsalmony Posted 10:57 pm
17 Dec 2008
In a world in which too many politicians are posers; too many economists are deluded; too many business powerbrokers with great wealth are con artists, gamblers and cheats; and too many of their absurdly enriched minions/'talking heads' in the mainstream media parrot whatsoever serves political convenience and economic expediency, Jim Hansen's truth about climate change is buried amid cascading disinformation and anti-information developed from a `tool box' of pernicious rhetorical devices.
Steven Earl Salmony
AWAREness Campaign on the Human Population,
established 2001
http://sustainabilityscience.org/content.html?contentid=1 ...
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archigeek Posted 1:20 am
18 Dec 2008
The mellotron is your friend.
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amazingdrx Posted 2:01 am
18 Dec 2008
With massive government bail out and even industry and banking nationalization all over the planet, most former "free" marketeers have started to cloister their religious faith in reaganomics. They hesitate to admit it in public.
When will environmentalists feel that they can stop pandering to "free" market efficiency? And stop apologizing for government policy designed to propell green revolution with subsidies, government planning, and massive government contracts.
It won WW II and pulled us out of the great depression, government contracting of specific technology can pull us out of this depression too. A pox on so-called free market efficiency, in reality it is nothing more than a religious illusion designed to justify a massive global Ponzi scheme. And the bill for the scam is due now.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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stevenearlsalmony Posted 2:59 am
18 Dec 2008
Steven Earl Salmony
AWAREness Campaign on the Human Population,
established 2001
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justlou Posted 3:29 am
18 Dec 2008
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2wheeler Posted 6:49 am
18 Dec 2008
The Dow Jones Sustainability Index (DJSI) is one metric which I'd like to see more widely applied and reported on a daily basis. Along with CSR reporting and transparent analyses thereof in every corporate quarterly and annual report. Likewise, I'd be interested in other workable transparent metrics that may exist or be developed along similar principles.
An old pop tune comes to mind. with these lyrics:
"Don't stop thinking about tomorrow
Don't stop-- It'll soon be here...
It'll be here, better than before.
Yesterday's gone, yesterday's gone..."
Just like the fossil fuels that were burned last week to power the SUVs, incandescent light bulbs and all the other inefficiencies wasted in our economy. They're gone. Along with the mined renewable resources that were not replaced or conserved.
How will tomorrow be "better" ? Only if we can all begin to make truly sustainable-based choices. Doing so will require all the information that so-called "free" markets on their own, can't really provide. (Note to EU and others: I'm thinking it will require more than a 20 percent cut in GHG emissions by 2020.)
Environmentalism is the true conservatism. It's based on values like quality of life and nature for its own sake, on equality and diversity, as opposed to crass personal greed.
Somehow I have to be optimistic that solutions will be found and implemented in time to make the future sustainable. Otherwise I would not bother caring at this point in time.
Moving toward sustainability with hopefulness, one revolution at a time.
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Pompey Road Posted 12:38 pm
18 Dec 2008
Where was the big 3 when Hillary tried to get us universal health care. They would have been the largest beneficiary. Well we will have to dump all health care and retirement on the government so we can stay completive with the countries who use this model. The new green technology jobs can and will be a new industrial revolution if we are smart enough to go back to our manufacturing base and outsource some lobbyist and congressmen. What good does it do to get off oil and then become dependent on China for batteries.
The eons of time and nature was good to us down here. It was not until we become civilized that destroying our habitat become fathomable or fashionable.
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amazingdrx Posted 1:14 pm
18 Dec 2008
Ponzi scheming: About 90% of the currency circulating the globe in electronic accounts, seems to be imaginary.
So, yes I think... "the global manmade economic colossus {a veritable and proverbial, modern Tower of Babel in all its glory} could crash before the overproduction, over-consumption and overpopulation activities of the human species worldwide collapse the frangible biological systems and finite physical resources of the planet...".
It has crashed for the poorest one third of humanity and is well into crashing for the next poorest third.
I guess we are next. We are the ones who most likely will not starve to death or die from bad water or disease.
Let's try as hard as we can to make this depression short, by making the recovery earth friendly. Symbiosis will save the biosphere and the humans at the same time.
If we had a real currency that was based not on imaginary economic theories, or gold and silver as it once was, but on the commodities we depend on day after day, just maybe the labor of honest people could be turned into financial security without global scammers taking a 150% cut.
I have no idea how this would work, scrap metal future certificates maybe? Or some average of all relevant commodities? Or maybe labor hour certificates.
Start over with a global currency, based not on the whims of hedge fund scammers and their cronies in "regulatory" agencies. A global electronic market where anyone holding this new currency could exchange it for the underlying commodities at anytime would make the "paper" have a real value that can't be simulated with normal currency.
Could the dollar be placed on this standard? And the euro and other currencies, as a transition to one standard global currency proceeds over a few decades? Sci-fi economics 101, hehey.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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stevenearlsalmony Posted 9:49 pm
18 Dec 2008
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Jon Rynn Posted 11:53 pm
18 Dec 2008
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amazingdrx Posted 2:13 am
19 Dec 2008
I want to see what Ellen says about the Incan corn based "federal reserve".
Are any sort of commodity futures just a form of derivatives? Were options the first derivatives?
"Star Trek" evolved beyond money, how do we do that in real life? Hehey.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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amazingdrx Posted 2:37 am
19 Dec 2008
I think the Ponzi scheme is at the point of no return, the ceiling on the exponential curve. Derivatives are up to $1 quadrillion, 16 times the gross domestic product of all the countries in the world combined. It has to collapse, and there's no further bubble that can replace it.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Jon Rynn Posted 3:24 am
19 Dec 2008
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stopgreenpath Posted 4:20 am
21 Dec 2008
They are just as bad as any other Big Energy paradigm, so why do people adorn them with halos and look the other way as these New Robber Barons destroy millions more acres of our open spaces for private profits, and we are denied cost-effective opportunities to become TRULY clean energy producers ourselves? This remote genration/lengthy transmission model was always crap, but while technology was still in its infancy, we traded its gross inefficiencies for what was then improved reliability. those tables have completely turned (see the hundreds of thousands of homes that lose power in every fire, flood, hurricane, ice storm, etc.), and now the ONLY SENSIBLE PARADIGM is point of use efficiency, generation and storage, with (smart) grids used for load balancing and distribution.
we cant just re-enslave ourselves to yet another wilderness-killing, Big Energy boondoggle in the era of sun and wind. policies must focus on getting every structure as close to net zero as possible, and generating excess sun and wind power on all structures sited for that opportunity, and R & D needs to focus on storage, efficiency and conservation, not on Big Energy Profiteering.
the greenest energy is that which you needn't ever produce.
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stevenearlsalmony Posted 6:18 am
21 Dec 2008
Yes, definitely yes, some of the darkest of dark days are passing into history......finally.
The future is about to begin.......mercifully.
An unnecessary and unjustifiable war at a cost of three trillion dollars; a crashing economy at a cost of trillions more; a degraded environment, a dissipated Earth.......priceless.
And people responsible for these nightmares want their 2008 bonuses......predictable.
Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilityscience.org/content.html?contentid=1 ...
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