Putting sustainable development into practice
GDP growth needs to be complemented with a valuation of assets, including natural capital
Prime Minister Narendra Modi has been an enthusiastic leader on environmental issues. In areas ranging from renewable energy capacity building to capping coal-driven power plants and curbing emissions, he has set ambitious targets. Given that India is the third-largest polluter from carbon emissions, such ambition is important. But ensuring sustainable development will need recalibration of our current understanding of progress.
With growing population and rising incomes, the challenge of the second half of the century will likely be sustainability, not poverty. This is not to trivialize the importance of growth today. About a billion people still live in poverty and improving their lives is of paramount importance. But it is increasingly becoming clear that a focus on growth in gross domestic product (GDP) to the exclusion of all else can sacrifice the interests of future generations.
The problem with such a single-minded focus is that it fixates on aggregate demand, irrespective of whether it is due to greater consumption or investment. Usually, durable investments do increase with GDP, but that is not necessarily true for natural capital. In fact, GDP can increase dramatically by exploiting natural capital. Given the absence of asset valuation in GDP calculations, debt is irrelevant. The contract with future generations, thus, is that greater future wealth will finance this debt. The future growth that is assumed, however, depends on the sustainability of natural capital, which is threatened due to the myopic pursuit of GDP growth.
One could argue that it is not the stock of assets but the economic value of assets that needs to be maintained. Since a forest can be converted into a farm, that seems to be the efficient use of the resource. This logic is sound, unless overuse starts threatening the sustainability of the forest itself. The problem is that there is no accounting for where those thresholds are, and whether the current rate of resource-use is sustainable.
Secondly, the marginal approach—that asks, “What is the optimal size of a rainforest?”—is incompatible with how complex ecosystems work. A rainforest is more than the sum of acres of trees. It provides habitat for different animals which support the ecosystem with host-prey relationships. The balance is easily threatened, and an ecosystem can quickly go pear-shaped before we understand how.
Usually, the process of change is slow enough for evolution to take place. Species evolve in response to changing climate and competition. But the pace of environmental damage today is such that scientists think 50% of species are facing extinction. This should make even those who are sceptical about obligations to future generations think about sustainability. The consequences of environmental degradation will start affecting immediate generations after all, not only those far in the future. This poses a challenge where the preferences of future people have to be represented in current policy decisions. Thinking about what inheritance will be left to future generations requires an asset-based approach.
The national income accounts tell us nothing about the state of our assets, especially natural capital. If the question is, “are we better off than last year?”, we must measure whether the state of assets, net of borrowing, has gone up or not.
The ethical rule guiding policy actions can be borrowed from Dieter Helm’s book Natural Capital: Valuing the Planet. He proposes an aggregate capital rule which requires that the aggregate level of natural capital should not decrease. The rule implies that any renewable natural capital that is destroyed should be compensated for with improvements in other renewable capital, and that rents from the exhaustion of non-renewable natural assets (such as oil and minerals) should lead to the creation of a natural capital fund.
The non-renewable capital stock is relatively easy to value. It is also less scarce than it is made out to be. The availability of non-renewables has increased, even as China’s economy has grown at 10% for three decades. In the case of oil, for example, rising prices have incentivised the development of energy-efficient technologies, offshore drilling and fracking, making it likely that we might leave oil in the ground before moving to alternative fuels.
Renewables, on the other hand, are difficult to put a value on. They regenerate automatically, so their marginal cost is zero, and the benefits are free, and thus infinite. The risk, however, is that if they’re exhausted, they are permanently gone. This concern is felt most palpably for the groundwater table in north Indian states where reckless farming of water-intensive crops has depleted groundwater reserves. But it is true as well for tropical rainforests, mangroves, corals, timber, soil and fish stocks. Thus, it is important to establish threshold limits for renewable natural capital, and maintain the stock well above the threshold.
Substitution between natural capital and man-made capital is an inevitable part of economic development. But an audit of natural assets, thresholds for ecosystems at the global, national and regional level, and the sharing of rents from non-renewable resources with future generations will incentivise us to figure out the least-polluting ways of economic development, and help agents internalize the costs where destruction is inevitable. This will be a radical improvement from the status quo, where sustainable development is a platitude that has little meaning in practice.
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