Environmental Budgets

A typical family has a financial budget for what it can spend each month. Such a budget depends largely on its income, and is usually divided into expenditure categories: so much for mortgage or rent, so much food, so much for entertainment, etc. An economy is similar: it has an environmental budget for each biological flow that it requires for its economic activities.

Just as a family budget specifies how much can be spent on particular items in order to avoid financial ruin, an environmental budget specifies how much of a biological flow the economy can use without risking ecological ruin.

Because only the physical sciences can determine when such points are reached, establishing environmental budgets is largely a scientific rather than an economic matter.

If the analyst chooses regional scope, and if a biological flow impacts the economy's geographical area exclusively, then its budgets derive from the natural characteristics of that area.

For example, if local industries pollute regional waterways without spillover into other areas, then the regional economy can independently establish environmental budgets for these pollutants, based on the natural characteristics of its waterways.

However, if a flow spills over the region's boundaries and impacts the global environment, the budget must be established through a political process such as those that resulted in the Montreal protocol on ozone-depleting substances (1987) and the Kyoto protocol on greenhouse gas emissions (1999).1

If the analyst chooses global scope, the budgets are derived from the global environment, so no spillover is possible.

A broad consensus exists among environmental thinkers with respect to sustainable limits for two of the three biological flows — renewables and wastes. A typical formulation is the following statement by ecological economist Herman Daly, as quoted by the authors of Limits to Growth: The 30-Year Update:

For a renewable resource — soil, water, forest, fish — the sustainable rate of use can be no greater than the rate of regeneration of its source… For a pollutant [i.e., waste] the sustainable rate of emission can be no greater than the rate at which that pollutant can be recycled, absorbed, or rendered harmless in its sink.2

The limits for these flow categories have a firm biological foundation and have therefore been adopted by ENL.

Daly does not offer a guideline for the maximum rate of habitat destruction, so the authors provide their own. They reject species extinction as the criterion because the number of species is unknown and the extinction rate is extremely difficult to determine.

Their suggested method is one that has been developed by the World Wide Fund for Nature (WWF):

Instead of tracking the decline in the number of species, the WWF tracks the population sizes of a large number of different species. These trends are then averaged to obtain a quantitative estimate of the change over time in the population of a 'typical' species.3

More specifically, the WWF tracks 695 land-based species. Of these, 562 are in temperate zones and 150 in tropical zones. The population index shows that terrestrial species declined by an average of 30% between 1970 and 2003, although these declines occurred almost exclusively among tropical species.

For marine species, the WWF tracks the trends in 1,112 populations of 274 species. These populations show an average 25% decline between 1970 and 2003, concentrated mostly in the Indian, Southeast Asian, and Southern Oceans.4

Using the term "species decline" to mean a measurable population decrease for a typical species as estimated by this method, ENL's limit for habitat destruction is the level at which species decline is initiated.

These restrictions on the three biological flows have a common element: the effects of economic activities are not permitted to accumulate in the environment to cause escalating effects.

If a renewable resource is harvested at or below its regeneration rate, the resource will remain at a more or less stable level, and humankind's impact on the resource will not
accrue over time.

If expelled wastes can be safely absorbed by the environment, they will not build to concentrations that are dangerous to life: there is again no steadily increasing impact that could trigger threshold effects and precipitate an ecological crisis.

Finally, limiting habitat destruction below a level that causes species decline will permit existing species to survive until they are eliminated through natural processes.

This non-growing, non-accumulating human impact on nature is the essence of ENL's interpretation of the term "sustainability".

Aside from wastes that spill over regional boundaries, the other complicating issue for environmental budgets is trade. The question is this: if an output is produced in region A and then exported to region B, which region should be charged for the natural flows used in its production?

Unfortunately, there is no obvious answer to this question. The principle currently used by ENL is that an economy is responsible for the economic activities that occur within its boundaries.

In the example cited, the environmental budgets of economy A are charged with the natural flows incurred during the output's production, but the environmental budgets of economy B are charged with the natural flows incurred during the output’s consumption, maintenance, and disposal (on the assumption that disposal occurs within economy B).

Similarly, economies that participate in resource extraction and the production of intermediate outputs are charged with the natural flows associated with those activities. This approach ascribes the environmental impacts of economic activities to those most directly responsible for them. It is thus to some degree fair and provides an incentive for efficiency improvements.

Nevertheless, there are excellent reasons to consider an alternative approach, as can be seen from a perceptive article that appeared in the Boston Globe:

The West has worked long and hard to transform China into what it is today: an industrial platform for the world where some of the most noxious, occupationally hazardous production processes are concentrated. Western governments and corporations have not only benefited, but have helped lead China down this road of energy-intensive, environmentally destructive development with resulting rapid increases in greenhouse gas emissions. In addition, Western consumers have directly profited from the inexpensive products that pour from China’s factories.5

Given this consequence of capitalist globalization, it might be better to split the production-associated natural flows between the exporter and the importer. If a contractionary economy had to absorb 50% of China's pollution effects when importing goods from that country, the trade relationship would be significantly altered, and the Chinese economy might gradually become more balanced and less exploitive.

Consistent with its budgetary approach to ecological limits, ENL refers to an economy's biological flows as environmental expenditures, not as environmental costs. Value and cost apply exclusively to the human domain and thus have no bearing on the environmental sphere. Natural cost refers to the damage done to human beings through the environmental effects of production; it does not refer to environmental damage itself.

ENL's interpretation of an informal expression such as "high environmental cost" is that the economic activity in question entails significant expenditures of the economy's environmental budgets, and possibly significant depletion of the area’s nonrenewable resources.

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