At a time when the energy transition appears to be slowing, discussions around climate change and sustainability have diminished. However, ignoring these issues will not make them disappear. Perhaps this pause offers an opportunity to reflect on the true meaning of sustainability. At its core, sustainability is a timeless economic principle that shows us how to provide a better future for generations to come.
Living sustainably
We live in an era of conspicuous consumption, social media and influencers—powerful tools that industries use to support consumerism, often in wasteful ways. But in a world of eight billion individuals, each seeking to express their uniqueness, who gets to define what is truly wasteful? Is there an objective measure of excess?
Perhaps a more practical question is: is there a level of consumption that a society can sustain indefinitely?
Unsurprisingly, economists have already been asking the very same question. It turns out that the degree to which we can substitute resources such as technology, capital and labour is the key to the answer. For example, the easier it is to substitute an asset such as crude oil with capital assets invested in producing clean electricity, gas and better efficiency, the likelier we are to maintain our high levels of consumption of transportation services, heating and using plastics, etc.
In 1974, Robert Solow, an American economist and a Nobel laureate, showed mathematically that, given high enough substitutability of a non-renewable resource with other factors of production such as capital, maintaining unchanged level of consumption is possible indefinitely. Three years later, another American economist, John Hartwick, demonstrated that—under the same assumptions—society could keep unchanged consumption sustainably if all of the rent arising from the extraction of the non-renewable resource were saved and then invested in reproducible capital.
In 1986, Solow elaborated on this rule, stating that, to be sustainable, one should save and invest so as to keep total wealth at least constant, where total wealth is the value of the capital stock plus the value of the natural resource. In other words, one should only consume an amount equal to the interest income on total wealth.
As an example, the Hartwick–Solow rule would imply that, if one extracted $100,000 worth of oil from the ground, that amount should be recorded as a negative number in the accounts. To sustain one’s consumption, one can invest this amount into a stock of capital—say, solar panels or a wind generator.
This would be recorded as a positive number, as the value of the new asset in the accounts. The two numbers cancel each other out, and there is no loss of natural or any other capital. Let us assume that the return on investment of the renewable electricity production is 15% or $15,000. One could live sustainably by consuming this amount, without denting the overall wealth for the future generations.
Clearly, sustainability is closely linked to two other important concepts: accounting for natural resource capital and future generations.
Environmental accounting and future generations
The most widely used measure of economic activity in the national accounts is Gross Domestic Product (GDP). GDP is normally measured in three ways: as the total output sold by firms and measured by value added at each stage of production or service; as the sum of the incomes earned by all the agents in the economy; and as total expenditure by individuals on consumption plus firms’ investment.
Over time, capital depreciates, and this amount should be deducted from GDP as capital needs to be maintained to retain its function and its value. In doing so, we obtain a Net Domestic Product (NDP). It is a far more accurate measure of economic growth than GDP, but it is a lot harder to calculate because of the need to measure capital depreciation.
As a measure of economic activity, GDP is far more inaccurate than that. When a country extracts natural resources such as oil and gas, these values are added to the GDP, even though the country is left with less resources or natural capital for the future. This is clearly wrong.
Sustainability is not just about resources in the ground—natural resources such as commercial fisheries and forestry are exploited and monetised as well. To that, we can also add non-monetised natural resources such as fresh air, beautiful lakes, rivers and oceans. These are normally public goods, with no property rights and markets to the value assigned to them.
But, as fisheries and forests get exploited, and rivers, lakes, oceans, and air get polluted, we are substantially diminishing the value of our resources. We also leave much less to the future generations. None of this is normally accounted for in the mainstream government economic statistics.
So, are there alternatives, and if so, why do we not use them?
The UN Statistical Division (UNSTAT) started developing the System of Integrated Environmental and Economic Accounting (SEEA) in the 1990s. The idea behind SEEA was to adjust the NDP figure by the environmental cost of economic activity during the same period. So, both the invested capital and natural capital would be adjusted for depreciation as well as degradation and made available alongside the mainstream statistics as ‘satellite accounts’. Some well-known economists even go as far as proposing that depreciation of natural assets should be enshrined in a country’s constitution.
Since we have better statistical methods available to us, why do not we use them?
Developed countries such as the UK do publish national accounts based on SEAA. One of the problems is a difficulty of compiling and evaluating these statistics in most of the developing world. Natural capital is hard to list in many countries, let alone value. Also, if we change the way we measure economic activity, it would be hard to compare data for different countries and even the same countries over time.
Perhaps more importantly, the politicians and industrialists probably would not be too fond of the change as the environmentally adjusted statistics would generally point towards negative growth once depreciation and degradation of natural capital is taken into account.
A clean environment is not something that only we enjoy—our children, grandchildren and all the future generations should be able to enjoy it too. By degrading the natural capital of our planet, we are effectively stealing from future generations.
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