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A ‘whole systems’ approach in ecological economics

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Abstract

The systems approach to studying environmental and economic issues has grown significantly over recent years. Whereas between 1980 and 1990 only four articles in the Science Citation Index (SCI) and Social Science Citation Index (SSCI) contained reference to environment, ecological and system in their topic, during 2000-2009 the comparable figure had increased over a thousand fold to 1345 articles.1 This rate of growth is much faster than the overall rate of growth of scholarly articles included in the SCI and SSCI and thus reflects the growing importance of the whole systems or earth systems approach within science and social science research. This chapter looks at the characteristics of this ‘earth systems’ or ‘whole systems’ approach to ecological economics. The chapter is organised as follows. Section 1 defines the whole systems or earth systems science approach to environmental issues and considers its relationship with ecological economics. This discussion uses Hardin’s (1968) conceptualisation of the tragedy of the commons to illustrate a number of earth systems science concepts, most notably the possibility of systems effects. Sections 2, 3 and 4 compare and contrast ecological economics with traditional environmental economics and discuss a number of characteristics of the whole systems approach and their policy implications, dealing with areas where the two approaches use different underlying methodologies, including models of rationality and the role of social values. Finally, Sections 5 and 6 focus on politics and social choice and the case of governance-based policy solutions to global warming.
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This chapter should be referenced as:
Barker, Terry (2011) ‘A ‘whole systems’ approach in ecological economics”, chapter 5 pp. 99-
114 in Simon Dietz, Jonathan Michie and Christine Oughton (eds) The Political Economy of the
Environment, Routledge, 2011.
Chapter 5. The ‘whole systems’ approach in ecological economics
Terry Barker
The systems approach to studying environmental and economic issues has grown
significantly over recent years. Whereas between 1980 and 1990 only four articles in the
Science Citation Index (SCI) and Social Science Citation Index (SSCI) contained reference
to environment, ecological and system in their topic, during 2000-09 the comparable figure
had increased over a thousand fold to 1345 articles.1 This rate of growth is much faster
than the overall rate of growth of scholarly articles included in the SCI and SCCI and thus
reflects the growing importance of the whole systems or earth systems approach within
science and social science research. There is also clear evidence of the growing inter-
disciplinarity of research on ecological systems and economics with the number of articles
combining the keywords ecological, economic and systems in their topic increasing from
just one between 1980-90 to 1,069 between 2000-09.2
This chapter looks at the
characteristics of thisearth systems or ‘whole systemsapproach to ecological economics.
The chapter is organised as follows. Section 1 defines the whole systems or earth systems
science approach to environmental issues and considers its relationship with ecological
economics. This discussion uses Hardin’s (1968) conceptualisation of the tragedy of the
commons to illustrate a number of earth science systems concepts, most notably the
possibility of systems effects. Sections 2, 3 and 4 compare and contrast ecological
economics with traditional environmental economics and discuss a number of
characteristics of the whole systems approach and their policy implications, dealing with
areas where the two approaches use different underlying methodologies, including models
of rationality and the role of social values. Finally, Sections 5 and 6 focus on politics and
social choice and the case of governance-based policy solutions to global warming.
1. Earth systems science and the whole systems approach in ecological economics
The essence of the systems approach is that the behaviour of the system cannot be
understood by focussing on the behaviour of its individual components alone. Interaction
between components leads to outcomes at the system level that differ, in some cases
diametrically, from the behaviour of individual components. Classic examples of such
systems effects include the tragedy of the commons(Hardin, 1968, 1998), Keynesian
unemployment (Keynes, 1936) and lock-in to inefficient technologies (David, 1985). The
tragedy of the commons starts by assuming individual utility (or profit) maximisation but
when all participants adopt this behaviour, joint utility (or joint profits) are not maximised:
1 Source: Web of Science database, assessed on 20/05/10.
2 Source: Web of Science database, assessed on 20/05/10.
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With Adam Smith’s work as a model, I had assumed that the sum of separate
ego-serving decisions would be the best possible one for the population as a
whole. But presently I discovered that I agreed much more with William
Forster Lloyd’s conclusions, as given in his Oxford lectures of 1833. Citing
what happened to pasturelands left open to many herds of cattle, Lloyd pointed
out that, with a resource available to all, the greediest herdsmen would gain -
for a while. But mutual ruin was just around the corner. As demand grew in
step with population (while supply remained fixed), a time would come when
the herdsmen, acting as Smithian individuals, would be trapped by their own
competitive impulses. The unmanaged commons would be ruined by
overgrazing; competitive individualism would be helpless to prevent the social
disaster. (Hardin, 1998, p. 682)
Similarly, Keynes’ analysis of unemployment highlights contradictions between the profit
maximising behaviour of individual firms and the macroeconomic consequences of their
actions. Faced with a fall in demand it makes sense for individual firms to cut back
employment to reduce output. However, the macroeconomic effect of these individual
actions is a further fall in demand, still higher unemployment and lower profits.3
Interaction between individual components, dynamics and feedback effects are all part of
the complexity of systems level analysis. David’s (1985) study of the origin and
persistence of the QWERTY keyboard analyses a similar contradiction between individual
and system wide effects in the case of lock-in to an inefficient technology.4
The systems wide perspective has come to be applied to earth sciences where Pitman
(2005.p. 139) has defined earth system science as:
...the study of the Earth as a single, integrated physical and social system…
Earth System Science is not “Earth Sciences” the addition of “system”
fundamentally changes the focus of this super-discipline. Earth Systems
Science studies the functioning of, and interactions between Humans
(including population change, economic growth, social change) and
biophysical systems (including soils, hydrology, the atmosphere, ocean,
cryosphere and ecology).
This has particular resonance when applied to the issue of climate change:
The uncertainties surrounding global climate change provide ample evidence,
if any were necessary, of the need for a whole-system view of the Earth… It is
important to understand the Earth system as a system, rather than as a set of
disconnected components. (Kirchner, 2003, pp. 21-2).
The earth systems science approach is interdisciplinary, but its roots are to be found in
science and many of its scholars would claim science as their primary discipline. Closely
3 In this regard, Keynes’ theory embodies the central characteristic of a complex system a systems-wide
effect that is counterintuitive and unwanted.
4 This is discussed in more detail in the chapter by Michie and Oughton.
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related and coming at the same issue from the perspective of social science is ecological
economics which studies how ecosystems (large and small) interrelate with economic
systems. It is a new discipline that developed partly in response to the limitations of
neo-classical economics in its treatment of the interaction of human society and the
natural environment. The subject encompasses a more general view of values, including
intrinsic rights of ecosystems to exist. It emphasises uncertainty in effects and the major
intergeneration problems associated with irreversible damage to natural systems caused
by human activity. In its application to partial systems (e.g. Florida wetlands) ecological
economics is only one of a set of disciplines required to understand the problems. There
is an emphasis on the interconnections within and between natural and social systems.
Environmental problems are seen as highly specific in terms of physical effects, location
and timing. Their solution in terms of portfolios of policies adopted by government is to
be set in a social context, allowing for institutions and inertia.
The development of ecological research combining science and social science
disciplines was marked by the establishment of the journal Ecological Economics in
1989. The opening article of the journal defines the area:
Ecological Economics addresses the relationships between ecosystems and
economic systems in the broadest sense. These relationships are the locus of
many of our most pressing current problems (i.e. sustainability, acid rain,
global warming, species extinction, wealth distribution) but they are not well
covered by any existing discipline. Environmental and resource economics,
as it is currently practiced, covers only the application of neoclassical
economics to environmental and resource problems. Ecology, as it is
currently practised, sometimes deals with human impacts on ecosystems, but
the more common tendency is to stick to “natural” systems. Ecological
Economics aims to extend these modest areas of overlap. It will include
neoclassical environmental economics and ecological impact studies as
subsets, but will also encourage new ways of thinking about linkages
between ecological and economic systems. (Costanza, 1989, p. 1)
As the above definition makes clear, ecological economics addresses the problems
brought about by the damaging impact of modern economies on the environment, i.e.
environmental pollution. There are many aspects to these problems as covered in this
chapter, namely the relationship of economics to other disciplines; the traditional
treatment of the problem; the concepts of externalities, rights, obligations and
valuations; and finally social choice. The social and individual views of pollution are
influenced by the societies that produce the pollution and those that suffer from it. The
problems are evident at all spatial scales from the local to the global, and as such, the
solution in terms of social policy becomes complex, involving all scales of government
as well as individual personal behaviour.5
5 On this topic see the chapter in this volume by Whitmarsh.
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The tragedy of the commons
Hardin’s (1968) seminal article on the tragedy of the commons is central to
understanding the arguments for a systems approach that integrates science and social
science research. Hardin’s paper showed that the destruction of grazing pastures, over-
fishing and pollution were all examples of a class of problems with ‘no technical
solution’, but rather can only be solved by society, requiring an interdisciplinary
approach that combines science and social science.6
Writing on the 30th anniversary of
the publication of The Tragedy of the Commons, Hardin (1998) called for greater
interdisciplinary research to solve the tragedy, noting that “economics and ecology are
now in the process of being combined into ecological economics” (p. 682). However, he
remained cautious, recognizing the difficulties of interdisciplinary research:
The more specialities we try to stitch together, the greater are our
opportunities for mistakes - and the more numerous are our willing critics.
Science has been defined as a self-correcting system. In this struggle our
primary adversary should be “the nature of things”. As a matter of policy,
we must not reply in kind to those critics who love to engage in name
calling. (They are all too numerous in interdisciplinary undertakings.) But
critics who, ignoring personalities, focus on the underlying nature of things
are the true friends of science. (Hardin, 1998, p. 683).
The social problem of pollution arises from the use of inadequately regulated common
resources, i.e. open resources such as the atmosphere, rivers, seas, or public land or
infrastructure, such as parks or roads. The “tragedy of the commons” is the idea that
since the social costs are not paid, the use of the open resource will continue increasing
indefinitely, as long as the private or market benefits exceed the costs, since those
polluting may not take into account the social costs of the activity. The common
resource can be “over consumed” to the point of destruction if the rate of depletion
exceeds the rate of assimilation. It is not in the interest of any single party to undertake
action to preserve the common resource unless others also act. If governments do take
action and regulate or price the open resources, then all those using the resource will
benefit. However, if each is self-interested they will prefer that others take costly action,
so they can benefit without cost. This is the additional problem of “free riding”: some
individuals may seek to avoid or evade the regulations or prices and use the common
resource for their benefit at the expense of others. In the case of pollution, there is the
added difficulty that often the accumulation of pollutants is very slow and we may be
ignorant of their toxic effects. Moreover, these may arise far away from the region or
country where they were produced.
6 See Chapter 3 by Michie and Oughton which discusses Axelrod’s solution based on evolutionary game
theory. This solution is perhaps the closest to a purely technical solution to the problem, however, it
requires ‘rational’ agents to believe in the possibility (however small) of their own immortality, which is
at odds with the assumption of instrumental rationality and does not, therefore, provide a technical
solution to the game on the terms set out by Hardin (1968).
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Nevertheless, there are qualifications to the free-rider problem. Firstly, social groups are
also concerned with effects on others such as future generations - especially when the
open resource is a basic need (clean air and water) and institutions have been
developed to protect common resources. As Spash (1999, p. 430) says “the historical
tragedy has been the destruction by private profiteers of customs and cultures which
managed resources in common and prevented overexploitation.” Secondly, if the "free
riding” group is less well-off, then costly action by the better-off group can improve
equity. Thirdly, there are also interactions between social problems and solutions, so that
actions in one area by one group may be offset by actions elsewhere by another group.
In other words there may be potential for alliances, so that institutions can be developed
to ease or remove the “free rider” problem. The literature on how to resolve the tragedy
has grown significantly since the 1990s and encompasses both traditional neoclassical
treatments advocating market-based instruments (see for example, Arrow et al, 1996)
and newer institutional analyses of governance-based solutions (see for example, Dietz,
Ostrom and Stern, 2003).
Studying the ecological and economic systems in tandem highlights the fact that the
problems associated with pollution may be made much worse by the pursuit of
development and growth by governments. As Arrow et al (1996, p. 13) point out
‘National and international economic policy has usually ignored the environment’. The
possibility of a major disaster means that great caution is required. Without special
measures being taken, or special techniques being introduced, the higher the level of
national output, the higher the level of pollution, but because increases in pollutants are
gradual, the reduction in living standards due to the environmental degradation may go
almost unnoticed, or, it is assumed that such costs are an inevitable concomitant of
development if people are to be decently fed, housed and clothed.
Traditionally the various methods of controlling pollution have been divided into
command and control type instruments and market based instruments. Each has a role to
play, and include:
i. Outright Ban: Certain poisons are so potent and have such long-term effects that
a complete ban on their production and use seems appropriate. However, this is
an extreme measure: most pollutants are associated with activities which also
produce desired outputs, which may more than compensate for the undesired
pollution. Fierce penalties must be imposed on those who ignore the ban if it is to
succeed.
ii. Prescribed Limits: Very often a low pollution content (as in river water) is not
harmful to life or noticeable to the nose or eye. Once the tolerable limit has been
decided, then the would-be polluters can bid among themselves for the right to
pollute up to the limit, with the state benefiting from the auction. Or, more
simply, the state can allow unhindered pollution as long as it is beneath the limit,
as for example it does at present with noise levels. Again there is a need for
penalties if the limits are exceeded and they must be graded to suit the social and
personal costs imposed by the excess.
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iii. Taxes: This is a very flexible means of imposing the social costs of the pollution
directly on the producer or consumer. This encourages them to absorb or restrict
their waste wherever possible, or to use more expensive but less polluting
techniques of production or consumption. It also makes high-polluting products
more expensive, and therefore cuts back their demand.
iv. Property Rights: Provided the costs of transactions and litigation was low and the
individuals property rights in the environment were clearly and precisely defined,
a system of property rights could ensure that some forms of pollution were held
down to socially acceptable levels. However, this outcome depends on the
existing distribution of income and property also being acceptable.
Unfortunately, so many forms of pollution affect so many people (e.g. jet exhaust
in the upper atmosphere) that it would be very difficult to enforce the property
rights even if they could be defined.
2. Ecological economics and traditional environmental economics
As ecological economics has developed it has stimulated interest in systems-based
approaches to economics that fit more congenially with the evolutionary systems approach
adopted in ecology and the natural sciences, than neoclassical economics based on
instrumental rationality and equilibrium analysis. Maréchal (2006) defines “traditional”
environmental economics as “the set of concepts and theories articulated in ... textbooks. It
also includes concepts and theories that peer-reviewed surveys claim, or assume, that the
field generally agrees on.” (p. 24). Traditional environmental economics can be contrasted
with ecological economics, allowing for complexity, evolutionary and Post Keynesian
theory, and emphasising institutions, non-linear dynamics, and deep uncertainty. While
both traditional and ecological economists tend to share a common conceptual definition of
sustainability, they differ in their modes and extent of analysis and, in particular, in their
policy recommendations (see Illge and Schwarze, 2009).
Traditional neoclassical environmental economics emphasises instrumental rationality,
via the use of utility maximization, and equilibrium, downplaying fundamental
uncertainty (Dequech, 2008, p. 290). The traditional approach adopts a version of
expected utility theory with human welfare usually translating into private market
consumption per head in the applied models. The theory is applied to utility across
countries with huge differences in consumption and many years into the future, when
consumption can rise perhaps many times over. This method rests on the idea that
individual preferences are fixed and utilities can be aggregated and converted into well-
behaved mathematical equations in a “social welfare function”, and differentiated to give
stable marginal properties, as the basis for policy. It also crucially assumes that all natural
services can be converted to money and back again at any time, i.e. that there are no
irreversible effects (Ackerman and Heinzerling, 2004).
When the usual assumptions of traditional environmental economics are compared with
the realities of everyday life, a dissonance becomes apparent. All activities take place in
specific locations at particular times. Externalities are actually pervasive, returns to scale
(whether increasing or decreasing) are intrinsic in economic activity, and indivisibilities
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are a necessary feature of biology and technology. Economic organisations are
evidently multi-tasking and have multiple objectives. A theory that assumes human
beings are identical is offensive in the sense that each of us expresses our creativity and
humanity in a different way, a point that is reflected in models of ‘expressive rationality’
(Hargreaves Heap, 1989, 2004). Moreover, the instrumental model of human motivation
and behaviour that underlies neoclassical economics has been found wanting by the
growing body of empirical evidence resulting from research on experimental economics
which finds that even in the case of simple socio-economic choices under full
information and a single time frame, participants frequently adopt non-equilibrium
strategy choices that contradict the model of instrumental rationality. These realities
mean that traditional approaches in which space and time are treated as if they are
complications to basic theory rather than intrinsic to the problem are unsuited to
environmental analysis where location and timing of pollution is critical.
Moral philosophers have long debated the relative weighting to be given in utility theory
between social groups. Broome (2006) makes uncomfortable reading for traditional
economists, partly because he insists, rightly, that economics is not ethics-free, that basing
economics on the ethics of individuals assumed to be entirely self interested can go badly
wrong, and that “willingness to pay” is invalid as a means of valuation (Broome, 2005).
This is in direct contradiction to the analyses of Pearce et al. (1995, pp. 196-7), when they
contrast prescriptive with descriptive valuations of human life. In considering the ethics of
climate change, Broome positions justice centre stage, arguing that those who cause the
global pollution should cease to do so because it is unjust, and if they cannot cease, then
they should compensate those who suffer.
Ecological economics seeks to conceptualise and abstract in directions that are more
intuitive and more in accordance with natural behaviour and evolutionary theory. In
particular, it asserts that all people and all groups are different, and that these differences
should be one of the foundations of economic analysis.
3. Externalities
Externalities at their most general are effects emanating from one locality at a particular
time and affecting other localities at later times or periods. The effects occur later and
are spread wider as time passes, depending on geography, climate, and the physical
characteristics of the emissions, sources, transmission routes and destinations. Some
flow as emissions into the atmosphere, affecting the global climate or precipitating in
rain on to the land. Externalities are pervasive and their collective effects impact on
people, animals, vegetation, buildings and other infrastructure, now and in the future. In
order to define an externality the source must be defined in a locality with a boundary.
The effects within the boundary can be termed ‘internalities’ as opposed to the
externalities outside the boundary. The externalities considered in this chapter are
mainly economic externalities, i.e. those externalities associated with economic activity
or affecting economic activity.
Recently there has been a revival of interest in Hardin’s 1968 article that focuses on how
society or groups may govern the commons (see for example, Feeny et al 1990, Ostrom
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2000, Dietz, Ostrom and Stern, 2003, Lloyd, 2007). Institutions may make use of, or
manage, or capture beneficial externalities if it is either possible or viable, in the sense
that organisations can provide and market services based on the externalities (e.g. a hotel
in a particularly attractive location, or a lighthouse). In order to do this, they must make
sufficient profit to stay in business, or if this is not possible (and it is deemed socially
necessary to manage the externality) they may be provided with a public subsidy to do
so. Firms capture some of the externalities associated with research and development
(R&D), by patents, copyright and brand names; they also manage to a greater or lesser
extent their own externalities such as noxious fumes from chemical processes.
Institutions also manage many other costly externalities, such as those associated with
traffic congestion and water and air pollution; usually this is a function of government,
e.g. laws governing traffic and pollution. Governments manage social order, in the sense
that there are social and economic benefits from a framework of law and regulation,
enforced in a socially agreed manner. Markets manage information and have rules to
reduce the propagation of misinformation and abuse.
Timing of the externality can be critical. Typically the environmental effects are within a
non-linear complex system with chaotic behaviour e.g. the atmosphere, where timing
and duration of pollution and effects are intrinsic to understanding the problem. As a
result, the possibility of finding a market solution, such that taxes compensate for social
cost, is almost impossible.
Irreversibilities arise through accumulation of stocks e.g. those of heavy metals or
greenhouse gases. Problems are often systemic e.g. the climate change problem involves
long-term interactions between the economic and energy systems, the coupled ocean-
atmospheric system and the biosphere. Technological change is often central to the
solution of the problem, since technologies are often instrumental in producing the
emissions and controlling them. And there are uncertainties in the costs of changing
technologies and in the eventual damage and its location from emissions. The
evolutionary option of exploiting and polluting natural resources until an area becomes
uninhabitable, then moving on, is less and less viable as the whole planet has become
affected via the ozone layer, chemical residues, or climate change.
The nature of externalities has significant implications for how they are managed. Some
externalities are local, some are regional, and yet others are global, such as the emission
of greenhouse gases produced by the burning of fossil fuels. Externalities can be
classified as intended or unintended. They can also be classified as stock or flow
externalities: the stock externalities are those that add to a stock of the pollutant
dispersed over one or more regions, and the flow externalities are those which flow into
other regions. The externalities can be positive or negative, a positive externality being
one that is a benefit, and a negative being one that is a cost. The externalities can be
large and obvious or small and barely noticeable; they can be concentrated or diffused
over space, or time, or both. The huge number of possible types of externalities, and the
fact that all externalities are context-specific, occurring at specific places and times,
means that they are very difficult to conceptualise (Papandreou, 1994, especially pp.
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195-196 and p. 281). Moreover their valuation is problematic and the cause of deep
controversy.
The complexity of each environmental problem suggests that a portfolio of instruments
may be needed to solve them (regulations, taxes and government spending) depending
on climate, geography, institutions and technologies. Since problems often interact,
solving one may help or hinder solving others. In addition, instruments have different
side-effects. These effects suggest that the portfolio should contain complementary
policies to address the unwanted side-effects of some of the instruments, and to address
interacting problems. The standard neoclassical approach tends to favour market based
instruments, such as taxes and subsidies. There are well-known limitations to this
approach – most notably the difficulty of valuing externalities which makes it difficult
for governments to act with any precision. This problem has arguably been side-stepped
by tradable policy instruments, such as carbon trading schemes. However, as Lloyd
(2007) points out, a review of emissions trading schemes by Choi (2005) finds no hard
evidence to suggest that they work.
4. Obligations, rights and values
There are two mutually-exclusive positions that can be taken regarding values. One is
the absolute assertion of obligations and rights, e.g. the obligation of mankind not to
destroy the global ecosystem, or the right of a species not to be made extinct by our
own species. The other is the implicit relative value system derived from traditional
utilitarianism, which is the basis of much of modern welfare economics. In this
system, value is derived from maximisation of individual utility. It has its most
formal expression in the general equilibrium solution. In this, utility is maximised to
the point that no one can be made better off without making someone else worse off
(the Pareto Optimum), the allocation of production is at maximum efficiency, and
all prices and wages are determined by the market. It is solved to give the best
possible outcome for the most people possible. The flaws in this system are that: it
has an inadequate treatment of spatial and temporal aspects of economic activity and
its effects; damaging externalities are not included; there is no treatment of
pervasive increasing returns and endogenous technical progress; and equity issues
are set aside to be treated by the tax system.
How is the value of goods and services, and hence the appropriate level of social pricing,
to be determined, when allowing for environmental externalities? The values are social
concepts, and depend on social agreement and custom. This is made obvious by
comparing valuations or prices in different cultures and economic systems. Values in a
specific location at a specific time are influenced by values in adjacent locations and
times (the recent past in the same location and in other regions in the same industry, and
in other industries in the same region). The valuations are partly trial and error, since
both producers and consumers, and both buyers and sellers, are uncertain as to what the
‘correct’ values are. The process has to be like this because producers do not know the
extent of the economies of specialisation and scale they can achieve. They do not know
the extent of the market at a particular price (this demand may be years in the future at
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the time the production facilities are being designed). Market clearing, if it takes place at
all, is by adjustment over a range of variables, including prices.
5. Global warming as an externality
Economic behaviour and the availability of fossil fuels have led to greatly increased
greenhouse gas emissions from human activity, and the unrestrained future increase in
emissions is a risk to life on earth. However, greenhouse gas emissions are a by-product
of the demand for light, power, comfort and transportation; they not wanted for their
own sake. The conflict between environmental quality (represented by lower
greenhouse gas emissions in the future) and economic welfare (represented by higher
economic activity and improved quality of life) is not a direct one. Indeed some
greenhouse gases are poisonous (carbon monoxide), others are offensive (methane), and
greenhouse gas emissions in general are associated with other by-products of
combustion, such as sulphur dioxide, soot, oxides of nitrogen, which also damage health
and the quality of life, as well as the environment more generally.
However, there are economic services that are wanted - such as physical comfort from
warm or air-conditioned buildings - and we cannot escape the fact that, at least for the
present, they generate greenhouse gas emissions in production. The close relationship
between such economic services and emissions of greenhouse gases is due in large part
to the fact that the atmosphere has been traditionally treated as common property, with
no charge for its use in dumping wastes. This has meant that emissions are discharged
freely, subject at most to local restrictions concerned with local air quality. Although
these economic services could be provided at very low levels of emissions, or indeed in
some cases with no emissions whatsoever, the alternative processes of production are
perceived as being too expensive or inconvenient, or they carry with them other social or
environmental costs.
From a policy perspective, the problem of global warming possesses a number of
characteristics that affect the means by which it can be regulated. On the one hand,
while there is no economic technology to absorb the primary greenhouse gas, CO2, any
abatement policy must focus on source reductions and not clean-up technologies.
Moreover, since each of the individual fuels possesses distinct, but unique, carbon
contents, CO2 emissions are strictly a function of the type of fuel used. And finally,
since global warming is a global common property, the issue of the location of emission
sources is irrelevant to the determination of environmental damage. For these reasons,
differential taxation of fuel types will effectively tax carbon inputs, CO2 emission
outputs, and environmental damages. (This is in contrast with the abatement of acid
rain. Since different grades of coal possess widely varying sulphur content, since ‘end-
of-pipe’ abatement technology such as flue-gas desulphurisation exists, and since there
is spatial differentiation in environmental effects, the relationship between fuel and
environmental damage is not unique.)
Moreover, since the different primary energy carriers (coal, oil, and gas) have clearly
defined markets and sources of supply, it is a relatively straightforward matter to apply
such tax rates. And finally, given that the fuels are already taxed or subsidised
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extensively, the administrative and institutional costs of further taxation are relatively
small (the administrative costs of excise duties in the UK for example are a fraction of
those of the value-added tax, VAT). In addition emissions of most non-CO2 greenhouse
gases are closely associated with the burning of fossil fuels (the exceptions being CFCs
and methane from gas leaks, animals and waste tips). For these reasons, most of the
literature (e.g. Barker, et al., 1995) is concerned with CO2 abatement in particular rather
than with greenhouse gas abatement in general. An economic instrument for abatement
is a carbon tax, which in turn is expected to change energy and fuel prices and, via price
elasticities, energy demands and CO2 emissions (see Ekins and Barker, 2001).
Carbon taxation and emission trading schemes are market-based instruments and depend
fundamentally on the efficient working of the market system for their success. This
efficiency has many requirements and implications. First the legal and institutional
structure should ensure that contracts are (1) available, (2) freely entered into by both or
more parties and (3) enforceable under clear and widely accepted laws and rules; thus
taxation in countries beset by bribery and corruption may not be able to use taxation
because the taxes will be evaded or become an excuse for further corruption. A second
requirement is that prices should reflect costs to some degree, so that the policy will
increase the price of carbon-intensive production; in some special circumstances, e.g. if the
carbon-based energy is rationed, then the extra tax may have no effect on demand. Third,
buyers and sellers should be well informed as to the costs and availability of alternatives
and that future outcomes (even if not known) should at least be considered; in some cases,
especially amongst some socially disadvantaged groups such as the elderly, there may be
an unwillingness to consider alternatives, so extra taxation may have very inequitable
effects.
A further important limitation in using the price mechanism is the fact that the outcome of
the use of a tax or emission permit scheme may be more uncertain than that following
direct regulation of the industries and others. Of course the outcome of a regulatory regime
is also uncertain: the rules may not be clear; they may not be enforceable; and it may be
impossible to monitor the effects of the regulation on the emissions. However, even
assuming that the regulations are effective, the uncertainty of taxation is not much of a
limitation for two reasons. First the dichotomy between taxes and regulations is a false
one; an effective scheme may well combine both taxes and regulation, with each
instrument supporting the other depending on the countries, sectors and institutions
concerned. Second since some pollution abatement does not require a precise abatement
by a definite date, the aim of policy must be to achieve significant reductions over a
number of years, with policies adjusting to outcomes repeatedly over the years. In fact the
risk is that fixed targets for individual sectors achieved by regulation will be highly
inefficient in that the same target might be reached by means of taxation at much lower
costs.
A final limitation here is that in order to achieve the targets, the increase in prices from the
policies may have to be very high, as suggested in some studies. It is argued that they may
be unenforceable or they may distort the market. The first point to note is that proposed
and implemented taxes should have started at very low levels with the intention of
assessing the outcomes before tax rates are increased. The second is that the usual case will
12
be that the tax signal is made clearer and indeed amplified by changes in regulations,
advertising and energy-saving campaigns, so that the results from the studies are likely to
be over-estimates of the required increases in taxes to achieve a target. The argument
regarding distortion is completely misplaced. The whole point of the increase in price is to
improve the market signals so as to include the social costs of pollution; this is not a
distortion but a correction. It is the market prices for polluting activity without the taxes
that are distorted; indeed, in terms of the traditional treatment, it is the whole allocation of
resources that is distorted and inefficient if the damaging externality is excluded from
prices at whatever taxation level which may be required.
6. Politics and social choice in economics
Beder (1996) has argued that firms tend to favour and negotiate price-based instruments
over less attractive (from the firms’ perspective) stricter controls. More fundamentally,
Lloyd (2007) has argued that the structure of the modern corporation and its
prioritisation of shareholder value, places a duty on corporations not to be neutral in
negotiations but to argue for policy measures that maximise private (but not social)
returns. The standard approach to economics tends to ignore this problem or limit its
analysis to one of regulatory capture of a policy maker by a regulated firm or group of
firms. In contrast, a systems based-approach recognises that all - agents, government,
firms - may influence the strategy choices of other agents, this is an intrinsic element of
the systems approach. There is no impartial government, agent or auctioneer,
overseeing the economic system; government, policy makers and firms are all part of the
system.
A further and related difference between neoclassical economics and complex systems
analysis is that the latter relaxes the assumption of instrumental rationality. This
assumption implies that all agents are instrumentally rational and follow maximising
rules at all times, ignoring social norms and conventions. In contrast ecological
economics and complex systems theory allow for the possibility of agent-based
modelling whereby different agents follow different rules. Rules and norms evolve over
time. If this is the case, then it is easy to imagine that the whole feedback process could
work just as well to initiate and confirm cooperative rather than competitive behaviour.
This takes the form of social groups devising institutions that reward cooperation more
than competition, a key skill in the evolution of human society (Ostrom, 1990).
Mancur Olson (1965, 1982) analyses the formation of social groups under the
assumptions that all the individuals forming the groups are rational and self interested.
The basic point is “the larger the number of individuals or firms that would benefit from
a collective good, the smaller the share of the gains from action in the group interest that
will accrue to the individual or firm that undertakes the action. Thus, in the absence of
selective incentives, the incentive for group action diminishes as group size increases, so
that large groups are less able to act in their common interest than small ones.” (1982,
chapter 2). He concludes that for groups beyond a small size, no rational individual
would join voluntarily because the costs would exceed the benefits. “Free riding” is the
preferred option, always assuming that there is a vehicle with spare capacity going in the
right direction at the right time. In the case of collective goods with open access by all,
13
then the rational choice is to let others provide the goods, and then enjoy them without
paying for them. The problem is that with these assumptions and without institutional
structures to provide incentives, no collective goods will be supplied by society, even
though every member will benefit from them. The role of government is to provide the
coercive framework to provide collective goods, such as clean air or reduced risk of
climate change, and pay for any costs by taxing social groups to provide government
revenues.
The first and main problem with Olson’s thesis is the assumption regarding personal
motivation. He assumes that rational individuals are entirely self-interested and that
implicitly the welfare of others does not affect the individual’s decisions or actions. It is
as if social groups were collections of self-interested individuals without a legal
structure, history, and means of achieving consensus and sets of institutions of their
own. A second problem with the theory is that both the assumptions about personal
motivation and some of the results that have been tested are not consistent with
empirical evidence on personal and group behaviour (Ostrom, 1990).
A more promising approach is to assess how different social groups have solved the
problems posed by open access resources. Essentially, the problem is solved by the
development of institutions to manage it. This is Ostrom’s view: “The central question
in this study is how a group of principals who are in an interdependent situation can
organize and govern themselves to obtain continuing joint benefits when all face
temptations to free-ride, shirk, or otherwise act opportunistically” (1990). Social choice
involves social groups, “stakeholders”, such as government, industry, NGOs, and political
parties, in a process of consensus. But it also involves information. A real choice requires
the equal and simultaneous presentation of feasible alternatives. When a policy is the
subject of political debate and possible implementation by government, policy advisors
consider the benefit that such implementation would produce in each of various mutually
exclusive ‘states of nature’ that might follow it, the good being considered for each group
affected over space and time.
A key issue for mitigation policies, nevertheless, is how to get sovereign nations and
different social groups to agree to co-operate on the management of open access
resources, or, as Ostrom (1990: 29) puts it, to identify contexts in which: a group of
principals who are in an interdependent situation can organize and govern themselves to
obtain continuing joint benefits when all face temptations to free-ride, shirk, or
otherwise act opportunistically. Ostrom studied a variety of social groups in different
cultures and times to derive the following general conditions under which groups can
manage open access resources successfully: the people involved recognize the mutual
benefit in cooperation; the group has low discount rates, so takes account of future
effects; there is substantial mutual trust in others following the agreed rules and
behaviours; there is a capacity to communicate; there is a possibility of entering into
legal agreements regarding the resource and any property rights are respected and
secure; arrangements are made for monitoring the use and condition of the resource and
enforcing any agreements. These conditions also apply within countries in the formation
of coalitions between social groups interested in climate policy.
14
One of the great insights of Hardin’s analysis of the tragedy of the commons is that he
recognised that the problem of the over-use of common resources could not be solved by
science alone: it was a problem for science and society. Hardin’s work both called for
and inspired more interdisciplinary research and was instrumental in encouraging the
development of ecological economics and the systems approach to environmental
questions such as pollution. Forty years on there is still doubt about whether it is
possible to govern the commons and much need for further research. However, there is
greater understanding of the different types of instruments that may be used. Not all of
these are market based or command based: many are governance and institution based.
As Dietz, Ostrom and Stern (2003) note, the effects of this greater understanding leaves
the question of the commons open:
Is it possible to govern such critical commons as the oceans and the climate?
We remain guardedly optimistic. … Systematic multidisciplinary research
has ... shown that a wide diversity of adaptive governance systems have been
effective stewards of many resources. Sustained research coupled to an
explicit view of national and international policies as experiments can yield
the scientific knowledge necessary to design appropriate adaptive
institutions. (Dietz, Ostrom and Stern, 2003, p. 1910).
Acknowledgment
The author would like to thank the editors, especially Jonathan Michie for helpful
comments of the draft of this chapter.
15
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