economic models must factor environment issues

Paper a whitewash of the environment

Ross Gittins
Published: November 5, 2012 - 3:00AM

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THE most glaring weakness in Julia Gillard's white paper on the Asian century is its failure to factor in the high likelihood that mounting environmental problems will stop Asia continuing to grow so rapidly - as well as limit our ability to take advantage of what growth there is.

To be fair, most of the environmental problems that could trip up Asia's economies and ours are mentioned in the bowels of the 300-page document.

But it doesn't join the dots. Asia's environmental problems are dismissed merely as among the various ''challenges'' to be overcome. As for our own environmental problems, the government's existing policies have them well in hand.

It would be unfair to single out the Gillard government as unwilling to face up to the seriousness of our natural environment problems and start integrating them into its forecasts and projections.

That's just as true of almost all economists and business people. While most economists (and SOME business people) are prepared to acknowledge particular environmental problems - climate change, water, soil, fish stocks, biodiversity - they're not prepared to see them as symptoms of a much bigger problem: we may be reaching the physical limits to continued growth in natural resource use.

So, just like the white paper, they continue to put worries about environmental problems in a box separate from the box marked ''economy'', where they do their forecasts and longer-term projections of economic growth.

It's an uncontroversial statement that the global economy - the production, consumption and other economic activities of humans - exists within, and depends on, the natural environment.

It's obvious to anyone with eyes that certain economic activities are damaging the ecosystem, which is already rebounding on the economy in the form of costs and disruption (hurricane Sandy, for example). It's not hard to believe these costs and disruptions are likely to multiply unless we start organising the economy differently.

It thus makes all the sense in the world for economists to integrate the environment and the economy when thinking about what the future holds. So why don't they? Because they never have and find the idea pretty frightening.

Economists' standard way of thinking about the economy effectively assumes away the environment. That's because their conventional model, which has changed little in 100 years, is built around market prices, whereas most ''environmental assets'' - clean air, clean water, good soil, reasonably reliable weather - can't be bought and sold in markets.

Thus most of the costs and benefits generated by the ecosystem are ''external'' to the model and so liable to be overlooked. Schemes such as the carbon tax are attempts to put a price on greenhouse gas emissions and so get them into the price mechanism (and the model).

So you can bolt bits of the environment onto the model, but you have to do it case-by-case, which is hardly satisfactory. As economic ecologist Professor Herman Daly has said: ''If the survival of your society is external to your model, you probably need a new model.''

The funny thing is, if you're still not sure why so many scientists doubt it will be physically possible for Asia to grow as big as economists project, the clues are all there in the white paper.

To put things in context, at present the developed world accounts for just 15 per cent of the world's population, but 51 per cent of gross world product.

At present, the 19 per cent of the world's population living in China, has a standard of living equivalent to 20 per cent of America's. The white paper expects that to reach 40 per cent in 13 years.

India and Indonesia accounts for a further 21 per cent of the world's population and their standard of living could also double, from 10 per cent to almost 20 per cent.

Of course, living standards in other parts of Asia are also supposed to be rising rapidly, meaning more than half the world's population is applying to join to the profligate rich club.

Have you any idea what that would mean in additional use of the world's energy and other natural resources?

The white paper advises that, in the 19 years to 2009, Asia's energy consumption more than doubled and its share of world energy consumption jumped from 25 to 38 per cent. China is now the world's biggest energy consumer.

Having gone from consuming less than half as much energy as the US in 2000, China now consumes slightly more.

In 2009, fossil fuels accounted for about 82 per cent of Asia's energy mix. Asia accounts for about 40 per cent of global greenhouse gas emissions - up from 31 per cent in 2001. China recently overtook the US as the world's largest emitter.

The white paper happily assumes effective global action to limit climate change will be forthcoming, so makes no allowance for it in its projections.

It's not the done thing for economists to imagine we could ever run out of natural resources. Prices may rise a bit, but this will merely call forth the solution to the problem, whereupon prices will fall back. Every textbook leaves you thinking this process happens seamlessly.

So, no need to worry. Our faith in unending growth remains unshaken.

Twitter: @1RossGittins