5. Costing the Earth: economics still sends the wrong signals

Environmental costs still off the balance sheet

Among the 27 "Rio Principles" adopted at the 1992 Earth Summit was a recognition that industry has, throughout its history, been enjoying a free lunch at the expense of the environment, and an agreement that environmental and social impacts should be internalized into the machinery of trade. That way, free trade could flourish--but not by damaging ecosystems or depleting scarce resources.

Principle 16 stipulates: "National authorities should endeavour to promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution..."

However, progress on putting the "polluter pays" principle into action has been disappointingly slow. Because of the difficulty of putting a price on environmental damage--and in many cases a reluctance to do so--many environmental costs remain off the balance sheet. In effect, they amount to indirect subsidies for polluting industries.

When combined with direct financial support for activities that harm the environment, such as nuclear power or road construction, these subsidies amount to a huge outlay. Norman Myers and Jennifer Kent, in their 2001 work "Perverse Subsidies," tentatively put the figure in the region of $2 trillion a year. They finger six key areas in which ecological damage is being propped up by taxpayers' money: agriculture; fossil fuels and nuclear energy; road transportation; water; fisheries; and forestry.

As Myers and Kent put it, "Governments are becoming alerted to the virtues of the environmental cause, and many are taking safeguard measures. But what they supply with an environmentally supportive right hand is often taken away by half a dozen left hands wielding subsidies."

In particular, governments have come up more than $80 billion a year in fossil fuel subsidies since the Framework Convention on Climate Change was signed in 1992.

Internalizing environmental costs is one of those ideas that on paper seem unassailable, but in practice are fraught with difficulties. Foremost among these is the usually true perception that internalizing costs means higher prices. And anything that costs the public money is reckoned to cost governments votes.

In reality, of course, environmental taxation does not have to mean a higher overall tax burden. The principle of "revenue neutrality" can be used to ensure that taxes are shifted rather than simply being increased. But this message is often lost by politicians and the public.

Another problem is that environmental tariffs need to be introduced across the board, or else it will almost certainly put the protagonist at a competitive disadvantage. This, in turn, requires international cooperation, which is notoriously slow and painful to achieve.

A good start, in some minds, would be to scrap gross domestic product as the benchmark of a country's wealth. Not only does GDP fail to recognize environmental "goods," say the critics, it attaches positive values to over-consumption, resource depletion and environmental disasters.

Policies like environmental taxation reform (ETR) have been held back by criticism about the financial burden that green taxes would represent. But what the naysayers overlook is that the status quo itself carries a high cost--to people and to the planet.