Book Review

Blueprint for a Green Economy
A Report by David Pearce, Anil Markandya
Edward B.Barbier of The London Environmental Economics Centre, The UK Department of Environment, Earth-scan Publications Ltd.
London (2006, Revised editions) (First edition, 1995)

The book reviewed was originally a report prepared by the authors for the Department of Environment in the United Kingdom, which was later published as a complete reference book. The book draws upon exhaustive literature study in the subject and own experience of the authors, which make the publication rich and grandeur in its contents and expression.

The major aim of the book is to emphasize the role of environmental economics in development planning by presenting various themes, concepts and observations in a systematic manner with good support of data relevant. Implementing sustainable development is the theme of the book as a matter of fact that it is an outcome as a report for guiding and preparing policy and planning for sustainable development. The book is brought into seven chapters and it can be divided into five major parts, namely, Introduction, Sustainable Development, Valuation, Environmental Accounting, Project Appraisal, and Economic Instruments. The review is also presented in the same order with a conclusion at the end.

The term “Sustainable Development” has come to fore after the need for conservation of our living environment has been recognized (viz., IUCN, 1980); it was given renewed focus by the Brundtland Committee Report (1987) titled “Our Common Future”, which was an outcome of study constituted by World Conference on Environment and Development (WCED). It is now recognized that economic and environment systems are so integrated and well knit that an action in one system will have an impact on other. Simulating the impacts into models takes two approaches:-one treats economic system as a subsystem of environment and emphasizes on bringing economic development goals within the limits of environmental constraints; the other treats environment as a subsystem of economic system and emphasizes on rapid economic development with technological means of overcoming environmental constraints. The former is adopted by the authors enunciating it as a pragmatic approach to development paradigm.

Development is some set of desirable goals or objectives for society in a generic definition. Economic development aims at raising standard of living by providing goods and services to society for its consumption and whose production involves utilization of various forms of resources and generation of activities to the participants. Sustainable development process, according to the authors, involves devising a social and economic system which ensures these quality goals are sustained i.e., real incomes rise, educational standards improve, health of nation improves, and the general quality of life is advanced. The means of sustainable development involve - value of environment (natural, built, and cultural), extending the time horizon of planning, ensuring equity (inter- and intra-generational).

Sustainable development draws upon environmental economics to substantiate itself in designing development policies adopted by society. Environmental economics deals with study of interaction between economic activities and environment, and essentially comes into picture because of the non-existence of markets and thus value for environmental goods and services; distorted nature of markets where they exist; behavioral problems with individuals ignoring their actions causing damages (tragedy of commons). It, thus, helps in formulating policy, either anticipatory or preventive, while also acknowledging problems of reactive policy. Sustainable development is also elaborated by authors, theoretically and to some extent philosophically, in contexts of non-declining wealth (net income), non-declining natural wealth (net natural capital), and resilience (of system).

Environmental goods and services are functions of environment both as input resource and as sink for wastes, but exist as free goods with no monetary value attached to them. By valuation, the authors argue, they are quantified to monetary terms. Valuation can be either benefit measurement (either implicit in the market or elicited by preferences) or cost (mitigation scale and technology) measurement. The choice of valuation technique depends upon the resource and its function in question, and the method chosen from taxonomy of values. The total economic value (TEV) of a resource comprises of use and non-use values, where, use value is direct use value of user of resource as well as indirect use value of users not in it's vicinity, and non-use value comprises of option value - value of functions provided as an option, and, existence value - value expressed for the vicarious pleasure from it's use by others including those of current as well as future generations (bequest value). Valuation methods are also distinguished as direct and indirect. Direct valuation is measurement of environmental gains as money value using surrogate markets. Indirect valuation methods first try to establish a dose-response relationship and then exercise direct valuation techniques. However, the authors also find valuation methods are not free from problems and discuss their difficulties and limitations.

Economic valuation can be useful in several applications; one such is incorporating environmental accounts in to national income accounts. Conventional income accounts measure only value addition of economic transactions in markets, but the income accounting procedure is fallacious of not incorporating the quality of life improvements also incorporating spillovers into environment as a positive income. The authors feel that partially, defensive expenditures represent environmental control costs in income accounts. As with all accounting systems, the objectives of environmental accounting are to - prepare a balance sheet of stocks of resources available at a given point of time; to prepare an account of uses made of these stocks along sources of derivation and transformation undergone; to ensure that stock and flow accounts are consistent such that balance sheet of a year be prepared based on that of previous year.

Incorporating environmental concerns into economic accounting was started by Nordhaus and Tobin (1972) in the United States and Norwegian government (1974). Royal Norway and French Republic adopted physical approach to prepare environmental quality status accounts of major resources. The monetary approach to environmental accounting attempts to link the use of environmental resources to national income accounts, and invariably involves valuation. Defensive expenditures incurred by government, other agents and households against the adverse effects represent protection costs to mitigate the impacts of environmental damages but do not capture fully unless markets function perfectly to incorporate prices for all. Current Welfare; a measure of consumption less household defensive expenditures and monetary value of residual pollution damage can be a summary of such adjustment. However, natural (exhaustible resources, renewable resources, ecosystem functions) and manmade capital depreciation is still absent, which when incorporated into Current Welfare yields Sustainable Income, which could produce indefinitely. The authors, after giving careful consideration to the past work, advocate that Sustainable Income approach may be adopted by the UK.

Projects are the major means of economic development. To make public projects be successful in achieving these goals and the programs successful, environmental costs and benefits need to be incorporated into their decision making. The authors note that, Valuation, discussed above, thus becomes very useful in assessing the money values of benefits and costs associated with public project activities and enable decision-makers to act rationally. They argue project appraisal be extended to include such costs and benefits and alternatives that have cost effectiveness be taken. However, when environmentally compensating projects are taken they note the criteria shall be relaxed to weak sustainability (net present value of the compensating project equate that of other) or strong sustainability (the project net benefits compensate another).

The authors also note that, in the context of project appraisal, discounting emerged as an issue of debate between economists and environmentalists for the sensitive nature of the topic. Discounting arises from two basic reasons - the social rate of time preference and social cost of capital and both do not converge at one rate. Environmentalists object to discount rates on the grounds of- pure time preference, risk and uncertainty, diminishing marginal utility of consumption, opportunity cost of capital. The discount rate based on private capital may reflect market's discount of future consumption but it will not go in accordance with the social optimum as high discount rates mean high consumption for current generations and less consumption left for future generations. The authors call for discount rates based on sustainability of renewable resources and compensatory investments for exhaustible resources.

At the end, the authors call for an immediate attention to market based instruments to achieve proper prices in markets. Markets failure can be adjusted, according to them, by incorporating marginal environmental costs into the marginal costs of production by levying charges based on “polluter pays” rule. The instruments like standards, charges or taxes, tradable permits are discussed in detail with their relative advantages and disadvantages to conclude with their compliance costs and pragmatic means prescribe high usefulness in achieving sustainable development goals. They also ask for marginal opportunity costs for exhaustible resources to include the marginal user cost into the marginal social costs.

A gallery of definitions is provided at the end to the interested readers provides a good collection of definitions on the sustainable development by various personalities and agencies. One such by the Ex-Prime Minister Margaret Thatcher acknowledges the need for a sustainable development of the world. This book can be useful to various professionals to understand the concepts and importance of environmental economics at various levels of decision making. It is quite useful for its information to students, researchers, academicians, and policy makers in their profession as well as to the interested readers.

Ramakrishna Nallathiga
Knowledge Manager (Infrastructure & Environment), Centre for Good Governance, Hyderabad