The Way Forward -Integrating the Environment and the Economy

Ten years have passed since more than 170 countries agreed upon a blueprint for sustainable development called Agenda 21 at the Rio Earth Summit.The very general and largely uncosted Agenda 21 was (and is) clearly imperfect.

Indeed, the concept of sustainable development - widely understood as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs" - is difficult to define in a more practical, applicable way. The approach taken by the National Round Table on the Environment and the Economy (NRTEE) - an independent advisory agency to the Canadian Prime Minister on how to achieve sustainable development - has been to view sustainable development as a direction rather than a destination, as a 100,000-piece jigsaw puzzle with no picture on the box to guide assembly. The complexity of sustainable development, however does not necessitate inaction. Rather, the complexity necessitates the deconstruction of sustainable development in order to tackle its constituent elements in practical ways, in order to bring about a more meaningful, lasting and fuller integration of the environment, the economy and social well-being. The value of Agenda 21 was in offering the world some guidance on the direction of sustainable development.

Many countries in the world have made real progress in the direction of sustainable development. For example, from the Kyoto to the BioSafety Protocols, the number and scope of multilateral environmental agreements continues to grow. Principles underpinning sustainable development, such as the polluter-pays and precautionary principles, are being applied in international, national and local level decisions all over the world. Whether the motivating factor is increased efficiency, responding to consumer or shareholder activism or accessing new niche markets for "responsible" goods or services, many corporations are improving their environmental and/or social performance. This includes transnational corporations, 40-some of which now control half of world trade and 80 percent of foreign direct investment. Even the investment community is demonstrating an interest in environmental and social responsibility, with some mutual or pension fund companies, for instance, offering funds that invest only in "responsible" companies or requiring disclosure relating to environmental and/or social performance. There is increasing use of voluntary certification and labeling of products, allowing consumers to select products that have been produced in a way that meets predetermined environmental, social and/or economic criteria.

Progress in the direction of sustainable development over the last 10 years has been real and significant. However, the question of whether we are living beyond the carrying capacity of the planet remains. From Canada to Kenya, the availability, accessibility and quality of the world's freshwater is in general decline. While there have been some improvements in air quality, the number and concentration of air pollutants is increasing in many urban areas around the world. Genetic, species and ecosystem diversity is decreasing faster than it is being discovered and catalogued, particularly at the genetic and micro-organism level. North Americans were recently reminded of the continuing threats posed by toxic substances, when a dead Orca whale was discovered off the west coast of the United States with the highest level of PCB ever recorded for that species, despite PCBs having been banned 25 years ago. Climate change is already leading to a breakdown of the Arctic ice shelf and increased extreme weather events, among other events, with concomitant impacts on biodiversity, freshwater resources, agricultural production, human health and more.

Compared to 10 years ago, we understand the issues of sustainability, and we generally understand where we need to get to in order to address the problems. So why hasn't the world made more progress on addressing these challenges in the last 10 years? While this question could be the subject of limitless debate, this article proposes that the problem is that we have reached a bottleneck on the path toward sustainable development. The bottleneck is the need to integrate our economic system with our natural environment. The economy and the environment are currently treated as separate things. We talk about "trade and the environment" as if the two are distinct. In fact, the economy is based on our environment - it is a subset of the environment. A healthy environment is the basis of a healthy workforce, and the basis of the essential elements that sustain our economies, from the insects that pollinate our agricultural crops, to the materials we mine from the Earth, to the forests that build homes, cook food and produce paper.

Another way to look at it is in terms of capital. Along with built (economic) capital, we have natural capital and social capital. We have created, and continue to create, a deficit in our natural capital. We have been living off of the capital rather than the interest, and the only way to rectify this is, in the first instance, to integrate and link economic and natural capital. I believe that this integration is the single greatest long-term challenge of the 21st Century.

In order for the world to integrate its economic systems with the environment, we must overcome two major, systemic barriers. These barriers are the way we measure and value things - our "economics", and the way we make decisions. Addressing these two barriers requires us to reorder our affairs dramatically - it means making change at a fundamental or at a systems level. We have till now been tinkering at the edges, making progress at the margins. In order to transgress the bottleneck we are currently in, and emerge on the other side, we need to address these two systemic barriers.

New economics
A major barrier to moving forward on sustainable development is that we do not account for the true costs and benefits of decisions at both a micro and a macro level. Most decisions made today by governments and private sector actors are made on the basis of a cost / benefit analysis. For example, if citizens of a country want to implement or maintain public health care, the government will determine what such a system costs, how much funding is available, and weigh this expenditure against other funding needs. The fundamental problem with this cost / benefit approach is that not all costs and benefits make it onto the balance sheet, either because these costs and benefits are not currently monetized or they are borne by a party or parties outside the transaction. We know that such "externalities" lead to inefficient and inappropriate decisions. Externalities are a major barrier to sustainable development, because decisions are effectively being made without full information. The challenge is to internalize these costs into decision making.

Urban air pollution such as smog has now been found to cause asthma, contributing to the near-epidemic levels of this disease among our children. The Ontario Medical Association estimates that health care costs associated with smog pollutants are in the order of $500 million each year in Ontario, based on hospital admissions and emergency room visits. Add the resulting worker sick days, and there is an additional $500 million charge to the province's employers. While these health costs are known, they do not factor into the cost-benefit analysis of individual decisions - the polluter is still not responsible for the health costs of the pollution - the public bears the cost.

Consider the example of New York City, which in 1991 faced a $4 billion to $8 billion expenditure to build a large water treatment plant. Instead of going ahead with the project, the city opted for an alternative, more sustainable solution. It decided to work with upstate interests to protect the purity of the water at its source in the Catskill Mountains. The city acquired undeveloped watershed land for long-term protection. It spent millions to help farmers and loggers adopt sustainable practices that strengthened traditional economic activities in rural areas while protecting a basic resource - clean water - for eight million New Yorkers. And it paid for upgrading upstream sewage treatment plants belonging to other municipalities - as well as its own. The result was a sustainable development solution at about 25 percent of the cost of conventional thinking. This is factoring in the costs and benefits of already monetized values. If the value of the ecosystem services, or potential health benefits (or costs avoided) of healthier ecosystems were factored in, the project might even have lead to a net economic benefit.

Clearly, not all things should be monetized. Some of the irreplaceable ecosystem services we depend upon, for instance, may simply need to be protected and not subject to any cost-benefit analysis. However, there are many other attributes of nature whose monetary value should be recognized and factored into decisions. For example, natural areas provide the useful materials that are the basis of Canada's resource extraction industries. They also provide an encyclopedia of genetically based ideas and patterns, and a pharmacopoeia of medicines. These nature attributes are, or natural capital is, a large, and largely unacknowledged, part of our wealth and economic prospects.

For millennia we have been filling our medicine cabinets with remedies found in Nature. The antibiotic penicillin is produced by a mould. The painkiller codeine is obtained from poppies. We owe the flower foxglove for the heart medicine digitalis. We treat malarial fevers with quinine from the bark of cinchona trees. Nature has not only been a source for medical advances, but also for technological innovation. Engineers have developed a substance stronger than steel by studying spider webs. It was the common field burr that inspired the fastener marketed as Velcro. This shortcut to technical innovation is called bio-mimicry and increasingly, as we expand bio-prospecting, we are basing new products and processes on it. In this way, much of our economic activity is financed by the DNA Bank of Nature, where the accumulated capital of 500 million years of evolution is on deposit.

Safeguarding natural capital is - among other things - an act of natural capital preservation that every banker, broker and treasurer will appreciate as conservative policy, and that citizens will understand in terms of saving the principle while living off of the interest.

Not only should we do a more fulsome cost-benefit analysis when making decisions at a micro, or individual, level, but we also need to do a better job accounting for, and measuring, our overall progress at a macro level. As noted earlier, we significantly undervalue the ecosystems that provide the land, clean air and clean water that underpin our economy and all life. One reason is that we simply are not counting our expenditures of natural capital. Our primary economic statistic - Gross Domestic Product - is a deeply flawed measuring stick. As we were over-fishing the Atlantic cod, for example, every year we added the value of the landed catch to Canada's total economic output. But the cost of depleting the fishery was ignored. The fish stocks collapsed. And the 40,000 people who earned their livelihood from the fishery must find other work. The GDP encourages us to look at revenue and mistake it for profit.

No private company keeps its books like this. When a company pumps and markets oil, for example, it deducts the volume from its proven and probable reserves, and it reduces the book value of its assets accordingly. But GDP neglects to account for this cost of economic activity - the drawing down of natural capital. We need to know how much and how fast we are using our natural capital.

The Government of Canada has recognized the limitations of GDP and is seeking supplemental economic indicators to better reflect the state and use of natural capital. It has asked Statistics Canada, Environment Canada and the Round Table to build a set of national environment and sustainable development indicators that take account of natural capital depletion. This means devising new economic measures that bring into our accounting system costs - such as "free" waste disposal into the natural environment - that have been previously considered to be outside the accountant's purview.

As Canadian Finance Minister Paul Martin said last year: "Understanding how ecological functions contribute to economic activity is an essential part of managing responsibly for future generations … failure to properly account for the use of natural capital results more often than not in its being depleted in ways that threaten the sustainability of future growth." He noted that sustainability indicators are "about giving governments, companies - and indeed all Canadians - the information they need to ensure that the economic growth we enjoy is sustainable." The Indicators will be released in 2003.

Reforming the way we measure progress and account for costs and benefits in decisions will illuminate countless inefficiencies in the fiscal policies of many countries. There has been a growing consensus among economists and environmentalists that the choice between economic growth and environmental protection is a false one. That is, of course, to be welcomed. But the practical reality is that our economic system - both public and private - continues to reflect the legacy of that false choice in the way it makes basic decisions. This is perhaps best illustrated by looking at the complex web of fiscal policies that govern the way we operate. Consider the hypothetical example of a farmer who one year is offered a grant by a provincial or state government to drain that marginal land called a "wetland" (an uncosted, free 100 million year old system for purifying water and air - often called the lungs of the planet) to expand his or her crop production. The next year, the same farmer is offered an incentive from the national or federal government to preserve or reclaim that wetland. From the perspective of the farmer, the taxpayer and the ecosystem, something's clearly wrong with this picture.

The NRTEE has begun examining this continuing contradiction in decision making in Canada by establishing a program on Ecological Fiscal Reform (EFR). The NRTEE has deliberately chosen a term that is broader than the traditional focus on ecological tax reform in order to include a broader spectrum of economic and policy instruments. EFR examines how to reform fiscal policy - the taxation and expenditures that dictate behaviour through incentives and disincentives - in a way that better serves both environmental and economic objectives.

In sum, sustainable development requires taking a longer-term, broader view of economic activity. It requires asking questions like "Have we accounted for the costs of all the inputs and outputs of a product or service?", "At what rate are we depleting key types of natural capital?" and "Are we formulating tax and regulatory incentives and disincentives in a way that encourages sustainable economic activity?" To think about and answer these questions, decision makers require new economic measuring tools, re-calibrated to account for previously externalized costs that must be considered if sustainability is to be perceived, much less achieved.

New way of making decisions
The second major systemic barrier we must overcome to pass through the current sustainable development bottleneck is to reform the way we make decisions, in the public and private sectors, and at a local to international level. All sustainability issues are interdisciplinary and involve the interests of multiple stakeholders. They are "horizontal" policy issues. Consider climate change, perhaps the quintessential illustration of a sustainability challenge. Climate change is about the environment, it's about human health, it's about energy and resources, it's about business and industry, it's about international relations and international trade, etc. From a systems thinking point of view, climate change is about trying to fit a square peg into a round hole. The square peg is the challenge of making change in a horizontal way while the entire government apparatus of most countries, the round hole, is structured like a series of vertical, stand-alone silos.

For instance, most governments have departments to cover off subjects, like departments of environment, energy, natural resources, industry, international trade, and more. Sustainability challenges such as climate change are relevant to most, if not all, government departments. When an issue is everyone's issue, it risks becoming no one's issue. It risks having no single department to champion the issue.

One of the ways to begin overcoming this institutionally ingrained vertical decision-making approach is to seek a neutral convener to bring multiple stakeholders to the table to work out solutions to public policy challenges. This is, in part, why the NRTEE was created. The NRTEE approach has been to bring representatives of all relevant interests on an issue to the table, and create a safe forum for those representatives to engage in a free and open debate. It's extremely important to bring the right variety of actors to the table in helping to formulate and bring about change. But it is critical to ensure that anyone desirous of a seat at the table understands that with that seat comes a serious responsibility to be constructive and solutions-oriented, and to bring forward positive alternatives, rather than creating obstacles to progress.

Though consensus is an ideal outcome, the goals of the NRTEE's processes are not necessarily consensus. Instead, the objective is to aim to determine the real state of the debate. This involves: defining the challenge or problem; identifying what are the barriers to overcoming this challenge; what interests are at stake; what are the impacts of taking no action, etc. Parties to the discussion state where they agree, and where they disagree. This approach frees up participants from arriving at the table with their baggage of interests and their elbows up, and avoids "participation by territoriality." In other words, it helps avoid a situation where stakeholders simply monitor debate closely in order to ascertain when their own interests are potentially affected - when their ox will potentially be gored - an approach which often leads to lowest common denominator results usually reflected in statements of principle or declarations of intentions. Moreover, this approach allows everyone to understand not just where there is agreement and disagreement on a given issue, but more importantly, why. Embracing difference ultimately strengthens the outcome. Ignoring certain viewpoints is damaging both to the integrity of the process and its ultimate success. Practicing censorship - from any perspective - is never helpful

Although this approach may lead to fewer consensus recommendations from a group, those recommendations that do emerge carry the full weight of authority of a representative group of stakeholders. This is critical for politicians and senior decision makers who are searching for the "palpable momentum" of society behind calls for change.

Conclusion
Moving in the direction of sustainable development, which at its core requires integrating the environment and the economy, is probably the world's most complex public policy challenge. The world has made tangible progress on sustainable development since the Earth Summit 10 years ago. However, in order to accelerate progress and catch up with the sustainability challenges that continue to grow, the world must address at least two systemic barriers to progress.

New forms of measuring our natural capital, and incorporating the full costs and benefits into a horizontal approach to decision making, are required to move sustainable development to the next step. This is fundamental change, but we must resist remaining paralyzed by a perceived lack of economic and political maneuvering room. Addressing these barriers will transform what are currently major sustainability challenges into opportunities for balanced economic, environmental and social health. We have hardly begun to develop cleaner technologies, and to explore the potential of economic instruments to propel us forward toward sustainability. We have all the space to operate within what our determination to innovate can create. The real risk inherent in our situation is the risk of doing nothing to adjust our activities to the emerging realities of the limited carrying capacity of the biosphere - we need to know just how badly we are fairing, or not.

The World Summit on Sustainable Development is an opportunity to take stock of where we have come from, where we are heading, and what adjustments we need to make in our course to advance progress towards sustainable development. Perhaps in another 10 years, we will be reflecting back on the decade in which sustainable development became a reality in the context of a global, rules-based, free market.

David J. McGuinty is President and CEO of the National Round Table on the Environment and the Economy.

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