Economics & Planetary Boundaries

by Victor Anderson, Senior Policy Officer, Green Economy, WWF-UK

“Planetary boundaries” analysis originated in the science community, but it is such a powerful picture that it is rapidly drawing interest from people involved in politics, campaigning, law, and business.

But potentially the most interesting connection is with economics.  This is because “planetary boundaries” can be seen as a way of pinning down the idea of “environmental limits”.  Economists have discussed the possibility of such limits, for a long time now – the best-known contribution to this debate being ‘The Limits to Growth’ study, published 40 years ago.  However economists, being economists, have generally tended to conceptualise any such environmental limits in economic terms.

For example, the view has arisen that taking limits seriously means that total world GDP (Gross Domestic Product) cannot (or should not) be allowed to grow beyond a certain point, either because that is impossible or at least unsustainable, or perhaps sustainable but undesirable because of various costs necessarily involved.

However the “planetary boundaries” analysis does not have a maximum value for world GDP as one of the boundaries.  It doesn’t look to economic measurements to provide a definition of where the environmental limits lie.  It looks to physical, biological, natural science measurements.  So long as economic activity can fit within those, it lies within the limits, whatever the level of total GDP.  GDP measures the sum of what is bought and sold, and its ecological impacts vary enormously, depending on what it is that is being bought and sold.  So GDP figures are not a good way of getting at where the limits lie.

But that is not the end of the story.  Economics and planetary boundaries can be brought together in a number of other ways.

One is the possibility of a general principle of “contraction and convergence”.  This concept has been discussed in the climate talks.  It appears to be the only principle which combines sustainability (“contraction” of the total) with equity (“convergence” in the distribution).  There are of course issues about the time period over which the convergence would take place, and about how each country would keep its activities within its allocated total.

However the key point here in relation to planetary boundaries is that there is no reason to apply this principle only to climate and greenhouse gas emissions.  If there really are planetary boundaries, then “contraction and convergence” ought to apply to everything which has a boundary, particularly those where the boundary has already been crossed or where we are rapidly heading in that direction.

Whilst lawyers can imagine the general form of treaties to keep the world within the planet’s boundaries, there is a role for economics in analysing the ways in which such treaties could divide up the total world “cake”.

That in turns open up questions about how governments can devise policy instruments which keep their country within its allocated share (which might be economic instruments such as permit trading) and questions about the knock-on consequences of such a regime, which would be largely economic and might include, for example, more expensive nitrogen- and phosphorus- based fertilisers.  All this in turn would have distributional impacts, i.e. different impacts on different income groups, and raise questions about how to compensate for those in order to ensure that the poor do not yet again lose out.

All this is easy to shy away from on the grounds of political unacceptability and/or remoteness from current short-term political debate.  But the “planetary boundaries” picture puts all this on the agenda, because if there really are planetary boundaries, the policy response needs to be pretty radical and far-reaching, even if arrived at gradually and with its implications being tested out every step of the way.  This opens up the debate, for example, about whether some form of rationing would be fairer than a permit trading system.

Another economic angle on planetary boundaries concerns the current drive for economic “valuation” of “natural capital”.  Without going into all the issues this raises – such as whether “capital” is really the right word or just a misleading metaphor – one question obviously is whether the existence of boundaries should change the monetary valuation figures arrived at.

What is clearly ruled out is valuations based on “willingness to pay” or “willingness to accept compensation”, because those approaches depend on aggregating the preferences of individuals, and there is absolutely no guarantee that the values arrived at in that way will correspond to, or keep within, total levels which are sustainable.

Working the problem from the other end of the logic, we could say instead that the values arrived at need to be those which, if acted on in decision-making, would keep the world within the boundaries.  If keeping within the boundaries is to be achieved through the price mechanism, for example, by using taxes and “subsidies”, then the prices and “values” used need to be high enough to keep the world within the boundaries, not simply arrived at through investigating individual preferences.

Almost any valuation is going to be better in its consequences than the current implicit value of zero, based on the assumption that ecological resources are essentially unlimited.  But to get the values anywhere near “right”, planetary boundaries would need to be brought into the equations.

Economics with no basis in the scientific reality of the natural world is highly dangerous, and too much of economics remains in that sense an autonomous subject.  The economics of planetary boundaries offers an opportunity to anchor the study of the economy back into the real world.

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