Ecological Truth: Avoiding an Economic Bubble

Stabilizing falling water tables is even
more difficult than stabilizing population because the
forces triggering the fall have their own momentum that
must be reversed. Stopping the fall depends on quickly
raising water productivity — the urgency of this effort
is difficult to overstate. Failure to stop the fall in
water tables by systematically reducing water use will lead
to the depletion of aquifers, an abrupt cutback in water
supplies and the risk of a precipitous drop in food
production. Many countries are now using highly efficient
drip-irrigation technology, which is ideally suited to
areas where water is scarce and labor is abundant, to
produce high-value crops.

With soil erosion, we have no choice but
to reduce soil loss to at least match the rate of soil
formation. Otherwise we face a continued decline in the
inherent fertility of eroding soils and cropland
abandonment.

South Korea and the United States stand out for their
efforts in stabilizing soils. South Korea, with
once-denuded mountainsides now covered with trees, has
achieved a level of flood control, water storage and
hydrological stability that is a model for other countries.
Only a narrow demilitarized zone separates the two Koreas,
but the contrast between them is stark. In North Korea,
little permanent vegetation remains, droughts and floods
alternate, and hunger is chronic. The U.S. record in soil
conservation also is impressive. Beginning in the late
1980s, government policies guided U.S. farmers to retire
roughly 10 percent of the most erodible cropland and plant
grasses on the bulk of it. In addition, the United States
leads the world in adopting minimum-till, notill and other
soil-conserving practices. With this combination of
programs and practices, the United States has reduced soil
erosion by nearly 40 percent in less than two decades.

A New Kind of Patriotism

Adopting Plan B is unlikely unless the united States
assumes a leadership position, much as it did in World War
II. After an all-out mobilization, the U.S. engagement
helped turn the tide, leading the Allied Forces to victory
within three-and-a-half years. Achieving this goal was
possible only by converting existing industries to the war
effort and using materials that previously went toward
manufacturing civilian goods. The year 1942 witnessed the
greatest expansion of industrial output in the nation’s
history — all for military use. Early in the year, the
U.S. government banned the production and sale of cars and
trucks for private use, halted residential and highway
construction, and banned driving for pleasure. It also
introduced a rationing program involving products such as
tires, gasoline, fuel oil and sugar. Cutting back on
consumption of these goods liberated resources to support
the war effort.

In retrospect, the speed of the conversion from a
peacetime to a wartime economy was stunning.
Harnessing U.S. industrial power tipped the scales
decisively toward the Allied Forces, reversing the tide of
war: Germany and Japan could not match the United States’
effort.

This mobilization of resources within a matter of months
demonstrates that a country, and indeed the world, can
restructure its economy quickly if convinced of the need to
do so. The issue is not whether most people will eventually
be won over, but whether they will be convinced before the
bubble economy collapses.

Creating an Honest Market

The key to restructuring the economy is the creation of an
honest market, one that tells the ecological truth. The
market is an incredible institution, but it does have three
weaknesses: It does not incorporate the indirect costs of
goods and services, it does not value nature’s services
properly, and it does not respect the sustainable-yield
thresholds of natural systems such as fisheries, forests,
rangelands and aquifers.

Throughout most of recorded history, the indirect costs of
economic activity — the sustainable yields of natural
systems or the value of nature’s services — were of
little concern because the scale of human activity was so
small relative to the size of the Earth. But with the
sevenfold expansion in the world economy over the last
half-century, failing to address these market shortcomings
and the economic distortions they create will lead to
economic decline.

As the global economy expanded and technology evolved, the
indirect costs of some products have become far more than
the market price. The price of gasoline, for instance,
includes only production costs.

Calculating the true costs to society of our reliance on
gasoline means including the medical costs of treating
those who are ill from breathing polluted air; the costs of
acid-rain damage to lakes, forests, crops and buildings;
and, by far the largest, the costs of climate change.
Higher temperatures can wither crops and reduce harvests.
They can melt ice and raise sea levels, inundating coastal
cities, low-lying agricultural lands and low-elevation
island countries. The interesting question is: What is the
cost of burning a gallon of gasoline to society?

No one has attempted to fully assess the worldwide costs of
rising temperatures and allocate those costs by gallon of
gasoline or ton of coal. Some studies on the external cost
of automobile use in the United States, however, were done
during the early — and mid-1990s, including direct
subsidies such as parking subsidies and many local
environmental costs. A summary of eight of these studies by
John Holtzclaw of the Sierra Club indicates that if the
price were raised enough to make drivers pay some of the
indirect costs of automobile use, a gallon of gas would
cost anywhere from $3.03 to $8.64. No studies,
unfortunately, incorporated all the costs of using
gasoline — including the future inundation of coastal
cities, island countries and rice-growing river flood
plains.

A world facing the prospect of economically disruptive
climate change can no longer justify subsidies to expand
burning coal and oil.

Something is wrong. If we have learned anything over the
last few years, it is that dishonest accounting
systems can be costly. Faulty corporate
accounting systems that overstate income or leave costs off
the books have driven some of the world’s largest
corporations into bankruptcy, costing millions of people
their lifetime savings, retirement incomes and jobs.

Unfortunately, we also have a faulty economic accounting
system at the global level, but with potentially far more
serious consequences. Economic prosperity is achieved in
part by running up ecological deficits costs that do not
show up ‘on the books but that someone will pay eventually.
Some of the record economic prosperity of recent decades
has come from too-rapid consumption of the Earth’s
productive assets — its forests, rangelands, fisheries,
soils and aquifers — and from destabilizing its
climate.

Some of the looming costs associated with continued
fossil-fuel burning are virtually incalculable; the
outcome, unacceptable. What is the cost of inundating half
of Bangladesh’s rice land by a 1-meter rise in sea level?
How much is this land worth in a country the size of New
York state with a population half that of the United
States? And what would be the cost of relocating the 40
million Bangladeshis who would be displaced by the 1-meter
rise in sea level? Could they be moved to another part of
the country? Or would they migrate to less densely
populated countries, such as the United States, Canada,
Australia and Brazil?

Another challenge in creating an honest market is getting
it to value nature’s services. For example, after several
weeks of flooding in the Yangtze River basin in
1998 — flooding that eventually inflicted $30 billion
worth of damage and destruction — the Chinese
government announced it was banning all tree cutting in the
basin. It justified the ban by saying that standing trees
are worth three times as much as cut trees. This
calculation recognized that the flood control service
provided by forests was far more valuable than the timber.

Forests also recycle rainfall inland. About 20 years ago,
two Brazilian scientists, Eneas Salati and Peter Vose,
published an article in Science stating that when
rainfall from clouds moving in from the Atlantic fell on
the healthy Amazon rain forest, one-fourth of the water ran
off and three-fourths evaporated into the atmosphere, to be
carried further inland to provide more rainfall. But when
land was cleared for grazing, the numbers were
reversed — with roughly three-fourths running off and
one-fourth evaporating for recycling inland. Ecologist
Philip Fearnside, who has made a career of studying the
Amazon, observes that the agriculturally prominent
south-central part of Brazil depends on water that is
recycled inland via the Amazon rain forest. If ranchers
convert the Amazon into pasture, he notes, there will be
less rainfall to support agriculture.

Once we calculate all the costs of a product or service, we
can incorporate them into market prices by restructuring
taxes. If we create a market that tells the truth, we can
avoid being blindsided by faulty accounting systems that
lead to bankruptcy.

Restructuring Taxes

Economists have widely endorsed the need for tax
shifting — lowering income taxes while raising taxes on
environmentally destructive activities — in order to
create an honest market. These taxes reflect the indirect
costs of an economic activity to society. For example, a
tax on coal would incorporate the increased health care
costs associated with breathing polluted air, the costs of
damage from acid rain and the costs of climate disruption.
Nine countries in western Europe have begun tax shifting,
known as environmental tax reform. The amount of revenue
shifted so far is small, just a few percent, but enough
experience has been gained to know it works.

Among the activities taxed in Europe are carbon emissions,
heavy metals emissions and the generation of garbage. Tax
shifting does not change the level of taxes, only their
composition. One of the better-known changes was a
four-year plan adopted in 1999 in Germany to shift taxes
from labor to energy. By 2001, this initiative had lowered
fuel use by 5 percent. A tax on carbon emissions adopted in
1990 in Finland lowered emissions 7 percent by 1998 in that
country.

Environmental tax reform is spreading outside Europe as
well. The United States, for example, imposed a stiff tax
on chlorofluorocarbons (CFCs) to phase them out in
accordance with the Montreal Protocol of 1987. At the local
level, the city of Victoria, British Columbia, adopted a
trash tax of $1.20 per bag of garbage, reducing its daily
trash flow by 18 percent within one year.

One of the newer taxes gaining popularity is called a
congestion tax. Two decades ago, Singapore was the first
city to adopt such a tax. Although it was quite successful,
only recently have other cities, such as Oslo, Norway, and
Melbourne, Australia, done so. City governments tax
vehicles entering the city, or at least the inner part of
the city, where traffic congestion is most serious. In
early 2003, London became the largest city to adopt a
congestion tax; the average speed of an automobile was 9
mph — about the same as a horse-drawn carriage. An $8
charge on all motorists driving into the city center
between 7 a.m. and 6:30 p.m. immediately reduced the number
of vehicles by 24 percent, permitting traffic to flow more
freely while cutting pollution and noise.

For some products where the external costs are large and
obvious, pressure is mounting to impose taxes. By far the
most dramatic example is the agreement negotiated between
the tobacco industry and state governments in the United
States. After numerous state governments launched
litigation to force tobacco companies to reimburse them for
the Medicare costs associated with treating smoking-related
illnesses, the industry decided to negotiate a package
reimbursement, agreeing in November 1998 to reimburse the
50 state governments $251 billion — nearly $1,000 for
every person in the United States. This landmark agreement
was, in effect, a retroactive tax on cigarettes smoked in
the past, one designed to incorporate some of the indirect
costs.

Environmental tax shifting also usually brings a double
dividend. In reducing taxes on income — in effect,
taxes on labor — labor becomes less costly, creating
additional jobs while protecting the environment. This was
the principal motivation in the German four-year shift from
income to energy taxes. The shift from fossil fuels to
more energy-efficient technologies and to renewable energy
sources reduces carbon emissions and represents a
transition to more labor-intensive industries. Similarly,
by lowering the air pollution from smokestacks and
tailpipes, carbon taxes also reduce respiratory illnesses
such as asthma and emphysema, and health care costs — a
triple dividend.

When it comes to reflecting the value of nature, ecologists
can calculate the values of services a forest provides in a
given location. Once these are determined, they can be
incorporated into the price of trees as a “stumpage tax”
similar to the sort Bulgaria and Lithuania have adopted.
Anyone wishing to cut a tree in these countries has to pay
a tax equal to the value of the services that tree
provides. Because forest services may be worth several
times as much as the timber, this tax reduces tree cutting
and encourages wood and paper recycling. These sorts of
taxes create a more truthful market.

Tax shifting also helps countries gain the lead in
producing new energy-efficient technologies. For example,
the Danish government’s tax incentives for wind-generated
electricity have made Denmark, a country of only 5 million
people, the world’s leading manufacturer of wind turbines.
Environmental tax shifting reduces taxes on wages and
encourages investment in activities like wind power and
recycling, thus simultaneously boosting employment and
lessening environmental destruction.

Shifting Subsidies

Each year the world’s taxpayers underwrite $700 billion in
subsidies for environmentally destructive activities, such
as burning fossil fuels, over-pumping aquifers,
clear-cutting forests and overfishing. A 1997 book-length
Earth Council study entitled Subsidizing Unsustainable
Development observes, “There is something unbelievable
about the world spending hundreds of billions of dollars
annually to subsidize its own destruction.”

Iran provides a classic example of extreme subsidies: The
country prices oil for internal use at one-tenth the world
price, strongly encouraging the consumption of gasoline.
The World Bank reports that if this $3.6 billion annual
subsidy were phased out, it would reduce Iran’s carbon
emissions by a staggering 49 percent. It also would
strengthen the economy by freeing up pub lic revenues for
investment in the country’s economic and social
development. But Iran is not alone. The Bank reports that
removing energy subsidies would reduce carbon emissions in
Venezuela by 26 percent, in Russia by 17 percent, in India
by 14 percent and in Indonesia by 11 percent.

Some countries already are eliminating or reducing these
climate-disrupting subsidies. Belgium, France and Japan
have phased out all subsidies for coal. Germany reduced its
coal subsidies from $5.4 billion in 1989 to $2.8 billion in
2002, meanwhile lowering its coal use by 46 percent.
Germans plan to phase these subsidies out entirely by 2010.
China cut its coal subsidy from $750 million in 1993 to
$240 million in 1995. More recently, it has imposed a tax
on high-sulfur coals. Together, these two measures helped
to reduce coal use in China by 5 percent between 1997 and
2001, when the economy was expanding by one-third.

Just as a need for tax shifting exists, we also dearly need
to shift subsidies. A world facing the prospect of
economically disruptive climate change, for example, can no
longer justify subsidies to expand burning coal and oil.
Shifting these subsidies to the development of
climate-benign energy sources such as wind power, solar
power and geothermal power is the key to stabilizing the
Earth’s climate. Shifting subsidies from road construction
to rail construction can increase mobility in many areas
while reducing carbon emissions. Eliminating
environmentally destructive subsidies reduces the burden on
taxpayers while discouraging the destructive activities
themselves.

In a troubled world economy facing fiscal deficits at all
levels of government, exploiting these tax and subsidy
shifts with their double and triple dividends can help
balance the books and save the environment. Tax and subsidy
shifting promise gains in economic efficiency and
reductions in environmental destruction, a win-win
situation.

Unless we respond to the social and environmental issues
undermining our future, we may not be able to avoid
economic decline and social integration.

A Call to Greatness

History judges political leaders by whether they respond to
the great issues of their time. For today’s leaders, that
issue is how to deflate the world’s bubble economy before
it bursts. This bubble threatens the future of everyone,
rich and poor alike. It challenges us to restructure the
global economy, to build an eco-economy.

A sense is growing among the more thoughtful political and
opinion leaders worldwide that business as usual is no
longer a viable option, that unless we respond to the
social and environmental issues undermining our future, we
may not be able to avoid economic decline and social
disintegration. The prospect of failing states is growing
as mega-threats such as the HIV epidemic, water shortages
and land hunger threaten to overwhelm countries on the lower rungs of the global economic ladder. Failed states are a
matter of concern not only because of the social costs to
their people, but also because they serve as ideal bases
for international terrorist organizations.

Thus, we now have some idea of what needs to be done and
how to do it. The United Nations has set social goals for
education, health and the reduction of hunger and poverty.
In my book Plan B: Rescuing a Planet Under Stress and a
Civilization in Trouble, I have sketched out a restructuring
of the energy economy to stabilize atmospheric carbon
dioxide levels, a plan to stabilize population, a strategy
for raising land productivity and restoring the Earth’s
vegetation, and a plan to raise water productivity
worldwide. The goals are essential, and the technologies
are available.

We have the wealth to achieve
these goals. What we do not yet have is the
leadership. And if the past is any guide to the future,
that leadership can only come from the United States. By
far the wealthiest society that has ever existed, the
United States has the resources to lead this effort.
Economist Jeffrey Sachs sums it up well: “The tragic irony
of this moment is that the rich countries are so rich and
the poor so poor that a few added tenths of 1 percent of
GNP from the rich ones camped up over the coming decades
could do what was never before possible in human
history — ensure that the basic needs of health and
education are met for all impoverished children in this
world.” How many more tragedies will we suffer in this
country before we wake up to our capacity to help make the
world a safer and more prosperous place not through
military might, but through the gift of life itself?

Unfortunately, the United States continues to focus on
building a stronger military, as though that were the key
to addressing these threats. The $343-billion U.S. defense
budget for 2002 (which does not include the most recent
appropriation of $87 billion for Iraq) dwarfs those of
other countries — allies and others alike. U.S. allies, most of them NATO members, spend
$205 billion a year on the military; Russia spends $60
billion; China, $42 billion; and Iran, Iraq, and North
Korea combined spend $12 billion. The United States
is spending more militarily than all its allies and
possible adversaries combined. As retired admiral
Eugene Carroll, Jr., observed, “For 45 years of the Cold
War, we were in an arms race with the Soviet Union. Now it
appears we are in an arms race with ourselves.”

The World Bank conservatively estimates the additional
external funding needed to achieve universal primary
education in the 88 developing countries that require help
at $15 billion per year. Funding for an adult literacy
program based largely on volunteers is estimated at $4
billion. The World Health Organization estimates that
providing for basic health care would cost $21 billion. The
additional funding needed to provide reproductive health
and family planning services to all women in developing
countries is $10 billion a year.

Closing the condom gap and providing the additional condoms
needed to control the spread of HIV in the developing world
and Eastern Europe requires $2.2 billion — $270 million
for condoms and $1.9 billion for AIDS prevention education
and condom distribution. The cost per year of extending
school lunch programs to the 44 poorest countries is $6
billion per year. An additional $4 billion per year would
cover the cost of assistance to preschool children and
pregnant women in these countries.

In total, this comes to $62 billion, less than one
tenth of what the world currently spends on military
programs! If the United States offered to cover
one-third of this additional funding, the other industrial
countries would almost certainly be willing to provide the
remainder, and the worldwide effort to eradicate hunger,
illiteracy, disease and poverty would begin.

It is easy to spend billions in response to terrorist
threats, but the reality is that the resources needed to
disrupt a modern economy are small, and a Department of
Homeland Security, however heavily funded, provides only
minimal protection from terrorists. The challenge is not
only to provide a high-tech military response to terrorism,
but to build a global society that is environmentally
sustainable, socially equitable and democratically based.
Such an effort would more effectively undermine the spread
of terrorism than a doubling of military expenditures.

The challenge is not just to alleviate poverty, but also to
build an economy that is compatible with the Earth’s
natural systems — an eco-economy, an economy that can
sustain progress. This means a fundamental restructuring of
the energy economy and a substantial modification of the
food economy. It also requires raising energy productivity
and shifting from fossil fuels to renewables. Lastly, it
entails raising water productivity over the next
half-century, much as we increased land productivity over
the last one.

We can build an economy that does not destroy its natural
support systems, a global community where the basic needs
of all the Earth’s people are satisfied, and a world that
will allow us to think of ourselves as civilized. This is
entirely doable. To paraphrase Franklin Roosevelt at
another hinge point in history: Let no one say it cannot be
done.

The choice is ours — yours and mine. We can continue
business as usual and preside over a global bubble economy
that will expand until it bursts and leads to economic
decline. Or, we can adopt Plan B and become the generation
that stabilizes population and climate, and eradicates
poverty. Historians will record the choice, but it is ours
to make.