Internalizing environmental costs

Internalizing pollution costs

Description

A key objective of environmental and sustainable development policy is ensure that environmental costs and benefits are properly and fully taken into account in public and private sector decisions.

In order to internalize environmental costs in the production process it is essential to calculate costs and benefits properly and to distinguish clearly between true income and the drawing down of assets by depletion or degradation.

Context

Because the environment is a shared resource, its protection requires collective action. Decisions about economic development must take account of the costs of potential pollution and waste and the value of resources that are consumed and, conversely, of the value of any environmental improvements made. It is difficult to establish what the environmental costs and benefits are or to ensure that they are taken into account. Where this is the case, the environment is in effect treated as a "free good", which can be damaged with impunity and whose enhancement secures no economic return.

Implementation

This strategy features in the framework of Agenda 21 as formulated at UNCED (Rio de Janeiro, 1992), now coordinated by the United Nations Commission on Sustainable Development and implemented through national and local authorities.

Agenda 21 recommends assessment of the practical implications of moving towards greater reliance on pricing that internalizes environmental costs appropriate to helping achieve sustainable development objectives.

While market systems have been inherently efficient at economic organization, environmental costs have traditionally been excluded from the decision-making process. This has allowed unsustainable exploitation of natural resources as well as unsustainable demands on natural pollution sinks. However, some valuation of environmental resources and services is gradually being established in the market through the regulation and assignment of property rights. The good example is the successful system of sulphur dioxide emission trading in the United States which has helped achieve substantial reductions in emissions.

Claim

The dominant paradigm of environmental economics fails to internalize the costs of resource degradation, socially and ecologically. Social internalization would imply that those responsible for environmental degradation should bear the cost. A genuine internalization would have to include values beyond those of the market, values that put limits on overexploitation.

Trade agreements must promote environmental cost internalization in traded goods, taking into account the principle that the polluter should bear the cost of pollution.

GDP does not adequately represent true income because environmental protection costs are treated as generating income and because depletion and degradation of natural resources are not charged against current income.

Many forms of development erode the environmental resources upon which they are based. Such environmental degradation can undermine economic development.