Economic Scepticism And Optimal Pollution

These umbrella projects and hundreds of other individual experiences corroborate what appears to be a very general trend: preventive environmental protection really does carry with it the potential for economic benefits.

One of the reasons for scepticism amongst industrialists is that this conclusion runs almost completely counter both to the conventional viewpoint and to their own previous experience. The received wisdom has always been that environmental protection costs money. It would be fair to say that this general view has informed much of the political decision-making about environmental matters. Equally importantly, it has informed the reactions of many industrial lobbies, who have sometimes tended to regard environmental protection at best as a necessary liability, and at worst as an unnecessary nuisance.

It is not too difficult to see where this perception has come from. Cleaning up environmental damage caused by industrial emissions is very costly. These are the lessons from the incidents—such as the one at Love Canal—cited in Chapter 2. But clean-up technologies—end-of-pipe filters, scrubbers and collectors—are also expensive. The economic impact of these 'add-on' technologies is an 'add-on' cost over and above the basic costs of production (Plate 2). For example, the cost of fitting clean-up technology to just one 4,000 MW power station in the UK is expected to reach almost £700 million.5

Plate 2 Add-on technology adds on cost—a power station scrubber in

West Germany Source: © The Environmental Picture Library/H.Girardet

Plate 2 Add-on technology adds on cost—a power station scrubber in

West Germany Source: © The Environmental Picture Library/H.Girardet

This additional investment contributes nothing to revenues, but may involve substantial capital outlays. It might also involve higher running costs (such as the cost of limestone for flue gas desulphurisation) and operational overheads (such as storing and managing substantial quantities of gypsum waste). The more extensive the environmental

Figure 21 Economics of environmental protection—the traditional view

regulation and the tighter the environmental standards, the greater is the expense. Low-efficiency filters will have to be replaced with higher-efficiency ones as standards improve. Raw material inputs will be in greater demand. Costs will rise accordingly.

This view of the economics of environmental protection is summed up by the graph in Figure 21. The economics of environmental protection is represented by a rising technology cost curve. The curve in Figure 21 represents the marginal cost of providing the next unit of environmental protection. According to the conventional view, the costs of environmental protection rise ever more steeply as environmental quality is continually improved.

Based on this picture of rising marginal costs economists have been led to argue that environmental expenditure should be allocated according to 'optimal levels' of pollution. These 'optimal levels' of pollution are determined by the point at which the cost of reducing the next unit of pollution exactly matches the economic benefits of doing so. This economic benefit is determined in its turn by the present and future costs of environmental damage. Figure 21 shows how the theory works. The leftmost curve represents the costs of environmental damage: the costs rise as environmental quality deteriorates. According to the theory, the point X marks the optimal level of pollution. At this point, the cost of extra environmental protection exactly equals the cost of further environmental damage.

Later we shall see that this theory of optimal pollution is flawed precisely because it fails to account for the economics of preventive environmental management. But for the moment, I want to stay with the conventional economic view of environmental management. This view— that increased environmental protection means increased costs—has supported a particular attitude towards wealth creation.

The 'trickle-down' theory—which I shall revisit in a later chapter of this book—is really a theory about social equity, but it also has a kind of 'sidekick' theory relating to environmental protection. According to the theory, the top priority for development is to pursue economic growth. The social side of the argument is that this growth will then ensure that everybody in the population achieves a better standard of living, by continually raising the level of wealth in the country. In particular, economic wealth is supposed to 'trickle down' to those who are least well-off, raising the standards of the poor as well as the incomes of the rich. The environmental side of the theory is that economic growth is essential before environmental protection is possible. 'Environmental protection costs money; economic growth provides that money.' That is the way the argument goes.

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