Opinionista Grant Tungay 8 July 2015

The true cost of the environmental destruction is impossible to measure

Oscar Wilde, in Lady Windermere’s Fan, joked that a cynic was a “man who knows the price of everything and the value of nothing”. Apart from being a wisecrack, which was Oscar’s trademark, this line invites us to think about economics and the environment. How do we value the environment and can we even place a price on some common resources?

Pope Francis’ latest encyclical, Laudato Si, is extremely critical of our economic choices, and suggests humanity needs to change its production and consumption patterns in our role as stewards of creation, and protect nature from irrevocable damage. It is also critical of what Pope Francis calls a ‘throw-away’ culture and an introspective lifestyle that does not take into account the impact that this lifestyle is having on common resources; common resources which both the poor and rich benefit from. However, if we look at environmental litigation in the United States, we can see it can be extremely difficult to place an economic price on environmental damage to common resources, thereby enabling energy companies, for instance, to financially account to the state for accidents such as oil spills. If this is true, how do we even begin to assess the damage that we are doing to the environment, apart from being nostalgic that the beach we used to visit isn’t so great to walk on anymore?

Of course, common resources like the atmosphere and the ocean are not subject to private property rights and therefore do not have an easily identifiable market value. This has not stopped environmental litigation in the United States from attempting to place a value on common resources. One such attempt is the ‘you break it, you pay for it’ concept. This is the idea that if a company or a person causes damage to the environment, that entity or person is responsible for restoring it to its previous condition. This ‘replacement cost’ has been used extensively in environmental litigation in the US to attach a financial value to damage done to the environment by people or companies. So, whatever it costs to restore the damaged area to its previous condition is the financial value of the environmental damage. But what if you cannot restore the damaged area to its previous condition?

This was the situation that faced the Residents Association of Hout Bay and the Habitat Council in Cape Town in 2012. These two voluntary organisations are dedicated to protecting the environment and were involved in litigation with the company responsible for constructing the toll plaza being built on Chapman’s Peak Drive. The problem was that the construction of the toll plaza was going to destroy 2,000 square metres of Cape fynbos that lies in the Cape Floral Region. This region was inscribed as a World Heritage Site by Unesco in 2004, and contains about 1,500 plants species that have been identified as threatened. It also contains 20% of Africa’s flora and is therefore considered to be an important international biodiversity hotspot. These two voluntary organisations were not able to place a financial value on to the destruction of this area (what is the replacement cost of 2,000 square meters of irreplaceable fynbos?) and therefore lost their case. The Cape High Court rather unhelpfully categorised the litigation as, quoting Shakespeare, ‘Much Ado About Nothing’. But this is the problem. This area was valuable, forming part of a World Heritage Site. Ultimately the inability to place a price on the damage to be done to the site meant that the two voluntary organisations were unable to stop the construction of the toll plaza.

Another solution proposed in environmental litigation in the United States is interesting. Considering that some common resources do not have a market value since they are not traded in the market, like the Cape Floral Region or many beaches in the US, courts in the United States have increasingly favoured what is known as the contingent valuation method. This involves a potential litigant doing extensive market research. A questionnaire is handed out to the community, asking respondents what amount they would pay to enjoy a particular common resource, like a beach. Based on this research, it is possible to attach an economic value to this common resource. Using this valuation method, one case in the United States managed to value a day at a beach in California at $23. This is the value that the court ultimately agreed to. This raises some important questions: Is this really a measurement of what that beach means to people in California? Can you measure a common resource like the ocean or a mountain range in financial terms? The answer to this question is not simple, and the question must surely give us pause to consider how we value the environment and any damage we are doing to it by our economic choices.

Ivo Vegter, in his latest two columns in Daily Maverick dealing with the Pope Francis’ encyclical, demonstrates a seemingly unshakeable trust in the ability of the free market to keep us safe from an environmental disaster. As he mentioned in one of these columns (‘The eco-Pope: Critiquing a priestly critique of my critique’) he is critical of “exaggerated fear mongering” and “old school, fire-and-brimstone environmentalism”. Instead, he is confident that the market can steer us in the right direction and prevent an environmental apocalypse. He seems reluctant to admit the need for regulation of the market, stating that “everyone has individual priorities for their own lives” and that we get to express this in a free market without hindrance, or perhaps the need for hindrance. Moreover, he identifies the price mechanism as an internal mechanism which is perfectly capable of keeping our economic activities environmentally friendly. In the light of the these observations about the difficulty of arriving at a financial value for environmental damage, it would be interesting to talk with him about the free market, scarce resources and environmental damage.

First of all, Vegter mentions the price mechanism as a way to stop us running out of scarce resources. According to this logic, if economic resources become scarce, the price goes up and demand should be reduced. Of course, this depends on how elastic or inelastic the demand is for a certain product. If the demand for a product were inelastic, it would not be affected by a change of price. There is a case to be made that our demand for oil is inelastic, seeing that there are very few alternatives to this energy source. If the price for oil goes up, we may cut back on one or two trips to save money. But to cut back from oil completely if the price is too high? That may be a more difficult.

Secondly, it is not clear from Vegter’s article whether or not he thinks the price mechanism can help us avoid environmental damage. However, the free market does not take environmental damage into account in prices. One reason is that common resources are not subject to private property rights and do not have an easily identifiable market value. Therefore the cost to common resources of economic choices is difficult to calculate. But even if we were to allocate a cost to environmental damage, as the environmental litigation cases outlined above have tried to do, prices would not reflect this damage.

So, if we buy a tin of tuna which has to fly across a couple of countries to get to the Pick n Pay supermarket, the cost to the environment of all the carbon dioxide being pumped into the air by the aeroplane carrying it is not included in the price of the tuna. If it was possible to calculate the environmental damage in financial terms and this was included in what we paid for our products, then perhaps imported products may work out to be more expensive than local products, and we wouldn’t buy them.

This is the vital point of the Garrett Hardin article on the Tragedy of the Commons (1968). Vegter states that the purpose of this article was to illustrate what happens in the absence of the market. However, it precisely illustrates the limitations of the market’s ability to ensure that our economic choices are environmentally friendly. If the cost associated with the use of common resources was included in market cost, our economic choices might be radically different. This is why we need something external to the market to regulate the market’s activities, ensuring that our economic choices are ecologically sustainable. Hardin himself advocates what he calls ‘mutual coercion’. This means imposing on society some sort of limitation which we all mutually agree to. He suggests political or legal solutions to stop the tragedy of the commons from happening. That tragedy is precisely our inability to realise the real cost of the damage that we are doing to our common resources.

The economist Ronald Coase, at the University of Chicago in the 1960s, recognised the above problem of the market and came to believe that the impact of pollution should be calculated as a part of the costs of production. From his work and those following him, the idea of carbon trading came to be developed. This is an attempt to incorporate the costs of environmental damage into free market mechanisms and is one of the mechanisms the Kyoto Protocol identified to combat greenhouse gas emissions. Very simply, the idea is for governments to cap emissions at a certain level, and then they issue permits or quotas to those emitting in their locality. These permits are then traded if those entities do not require their full quota. However, carbon credits have also been introduced into this system, whereby some companies provide offset projects which try to reduce the impact of carbon emission. These companies to those who want to emit pollutant gases into the atmosphere give carbon credits, and in return these offset projects are funded.

Carbon trading is one attempt to make the market more aware of the environmental damage associated with economic activity. The Pope has been quite critical of carbon trading in his encyclical. He states that carbon credits can lead to a new form of speculation which would not help reduce polluting gases. This echoes the critique of others who say that the purchasing of carbon credits gives the illusion that the impact of the carbon emissions are neutralised. However, in many quarters carbon trading is praised as a response to climate change. The critical question, which is posed by carbon trading, is this: Does it help us to see and acknowledge the environmental damage we are causing by our economic activities? Or does it perhaps hide the real cost of these activities to future generations and ourselves?

The important question which arises from environmental litigation in the United States seems to be whether it is possible to adequately quantify the real cost of environmental damage. Pope Francis, in Laudato Si, is critical of a ‘superficial ecology, which bolsters complacency and a cheerful recklessness’. Moreover, he warns that the cost of the damage caused by a selfish lack of concern for the environment is greater than the economic benefits to be gained. This may be especially true when the environment we are damaging is irreplaceable and therefore hard to put a price to. In future generations, we may realise the truth of the saying ‘you don’t know what you have until you have lost it’. Not being able to economically quantify environmental damage shields us from the effect of our economic choices. We may end up knowing the price of everything in the market, but we are most likely blissfully unaware of the real value of the environment and the full cost of the damage we are doing to it. DM


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