The Rising Cost of Breathing

Kipling’s maxim – “East is East and West is West, and never the twain shall meet” – fits elegantly the human paradox of today. According to the Worldwatch Institute, while the Standard and Poor’s Index of 500 widely held stocks tripled during the 1980’s, nearly every measure of the Earth’s environmental health declined. By the end of the decade, the world’s forests were shrinking by an estimated 16 million acres a year, six billion tons of carbon dioxide were being pumped into the air, and the mean world temperature reached its highest level since record-keeping began more than a century ago. The economy grows, the environment declines, and government goes on as usual.

There is no economic market for clean air. Nor for clean water, open space, or most of the garbage we produce. As Garrett Hardin pointed out nearly two decades ago, there is a tragedy in the commons because public goods – air, land, and water quality – are by and large outside the economic system. Consequently, our national assets, our stock of natural resources, are being depreciated in real, accelerated terms. The very base of our economy is steadily dwindling, threatening in the near future not only the foundations of economic growth but also, in the case of the growing ozone hole and dwindling rain forests, our very lives.

Some governments, however, are beginning to recognize the problem. The Amicus Journal reports that Norway, Sweden, France, the Netherlands, Canada, and Japan have already introduced rudimentary forms of natural resource accounting. Although such accounting has yet to affect economic policy, it is at least understood as an important component. In Germany, for example, economists have embarked on a ten-year project to develop an “Ecological Gross Product” as a refinement to “Gross National Product,” the currently accepted cornerstone of economic well-being.

Unfortunately, far too little is being done to tie the price of public goods to their supply and demand. Consider California. In 1980 there were 23.7 million Californians. In 1991 there were 30.3 million. The state’s estimate for its population in 2005 is 38.9 million, a 64% increase in 25 years.

More people means more demand for all public goods, including clean air. Yet more air isn’t forthcoming. Vast areas of the state suffer from chronic air pollution. If air were subject to market forces, its price would rise in relation to demand. But air quality is publicly regulated, more or less as a monopoly by regional air quality districts that have only limited powers over the price of those commodities that create air pollution – gasoline and automobiles, for example. The price of air, therefore, bears very little relation to demand. In fact, it is always undervalued, because the monopoly that controls its supply (via indirect regulations) cannot control its demand. Consequently, it is always over-subscribed.

Drive Plus (SB 431), introduced by California State Senator Gary K. Hart (D – Santa Barbara), is one of the first attempts in the United States to bring prices in line with environmental costs. Its features are well worth considering as a model for more comprehensive environmental cost-accounting legislation.

As currently drafted, Drive Plus establishes a market-based incentive program to encourage the manufacture and purchase of less environmentally damaging cars and trucks. Under the program, cars that are cleaner and more fuel efficient than the average new car sold in California are eligible for tax credits, while those that are more polluting than average are assessed a surcharge. Through its system of “feebates,” Drive Plus seeks to incorporate the true costs of automobile pollution into the price of the car.

These credits and surcharges balance out so the effect is “revenue-neutral;” and a separate Drive Plus Account is created within the General Fund. Projected benefits of the legislation include annual savings of 100 to 200 million gallons of gasoline each year and an increase of two miles per gallon in fuel efficiency among cars in California. That increased fuel efficiency also means less air pollution.

Drive Plus is an example of the kind of costing mechanisms that governments will need to develop if our environmental capital is not to be permanently depreciated. Drive Plus isolates and quantifies environmental costs, assigning them directly to the product. As important, Drive Plus is revenue-neutral; “feebates” can be accounted for, separate from the General Fund. Consequently, outcomes (e.g., changes in automobile emissions) can be directly correlated with the system of positive and negative incentives (e.g., rebates and fees) and, if necessary, accelerated or slowed down, depending on cost/benefit assessments.

Looking ahead, Drive Plus suggests some fundamental changes in the way governments do business. Markets must be established for public goods, and the price of those goods must reflect changes in supply and demand.

Ecology teaches that there is no free lunch: economic and environmental policy are one and the same. Eventually, economic policy will become a triad of fiscal, monetary, and environmental factors, perhaps with an semi-autonomous institution like the Federal Reserve Board- call it the Environmental Reserve System – managing environmental costs and environmental capital, separate from but coordinated with fiscal and monetary policy.

This, of course, will require a small revolution in how we perceive the world. But don’t count on this happening anytime soon. It took nearly a century of banking panics occurring roughly once a decade before the U.S. Federal Reserve System was established in 1914.

Malthusian prognostications aside, if we don’t start acting to protect our stock of environmental capital through mechanisms that pass on the true costs of public goods, then that stock will certainly continue to dwindle. And without that stock – clean air and water, productive topsoil, renewable forestry, and a balanced atmosphere – economic growth cannot be sustained and indeed human life cannot flourish.