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What Wasn't On The Rio Agenda? A Little Common Sense

Economic Viewpoint


As the Earth Summit in Rio de Janeiro moved through its contentious agenda, economists around the world held their collective breath. Their hope: that economic progress would not be hoisted on an environmental petard.

The reason is not that economists are callous about the environment. It is just that our occupational lenses make us see things such as cleaner air and water as "commodities" that societies "buy" in greater or lesser amounts by giving up other things of value--not as inviolable rights that must be guaranteed at any cost. It's a view that few outside the profession share, and it leads to precepts that fall somewhat short of moral clarion calls. For example:

-- Before making a decision, nations should tote up the costs and benefits of any proposed measure to improve the environment.

-- We should hesitate before spending huge sums to protect ourselves from hazards that may be as much imagined as real.

-- Once we set goals, nations should pursue them as cheaply as possible.

Let me defend each of these in turn. First, what about cost-benefit analysis, which has come under attack of late? Is it really a smoke screen behind which polluters can do their dirty deeds? Hardly. While specific elements of any cost-benefit calculation can always be called into question, the validity of the principle should not be.

The plain fact remains that the world cannot afford everything: Priorities must be set. It may well be nobler for a citizen of a rich country to spend $200 to reduce greenhouse gases than to buy another vcr. But in the poorest countries, where $200 is a year's income, something more precious than electronic gadgetry is given up whenever growth is slowed. The notion that we must eliminate some environmental hazard "regardless of the cost" cannot make sense. The only logical approach is to compare costs and benefits and seek out the good deals.

POLLUTION FUTURES. Which brings me to my second precept: Sacrificing economic growth to protect ourselves from dubious environmental hazards is, well, dubious. The very existence of global warming, not to mention its magnitude, is in some scientific dispute. Moving from climatology to economics, it is clear that a small increase in average global temperature (no one would welcome a large one) would have both beneficial and harmful effects in various locales. Even if we decide that global warming is a bad thing, we must still reckon in the costs of stopping it.

"Sustainable growth" is one of those nice-sounding phrases. Who, after all, favors unsustainable growth? But those who march under this banner need to be reminded that humankind's biggest problem remains abject poverty, not rising temperatures. With millions of people living on the edge of starvation, any slowdown in economic growth may be a death sentence for thousands. We may not know whether the earth is warming, whether that is harmful on net, nor how to prevent it. But we can see millions of people dying in poor countries from hunger and lack of elementary sanitation--things we know how to fix. Ask yourself which is the better bargain.

I come now to the third precept: When we spend the world's (or the nation's) antipollution budget, we should be penny-pinchers, not spendthrifts. Studies of the U.S. have estimated potential cost savings in the 10% to 90% range if air and water pollution are reduced by using market incentives rather than command-and-control. For years, economists asked: Why buy for a dollar what you can buy for a dime? Now, at last, the U.S. is beginning to achieve some of these savings by allowing companies to buy and sell emissions permits on a small scale. Similar savings are presumably available to the world. Yet some Rio summiteers want to freeze each country's carbon dioxide emissions at 1990 levels--a solution reminiscent of old-style Soviet planning.

CARBON TAX? But wait a minute. Why do price incentives sometimes save 90% of the costs of pollution abatement but sometimes only 10%? The answer becomes clear once you understand how the market works its magic: by assigning the task to the companies that can do it most cheaply. This ability is of little value if abatement costs are more or less uniform across the economy, or if society insists on virtually 100% cleanup. But if the goal is, say, to reduce emissions by 20% to 30%, and if abatement costs vary substantially from source to source, then the potential savings from using the market mechanism are enormous.

This reasoning points strongly to a carbon tax rather than to fixed national quotas on emissions. The goal is clearly not to zero out carbon dioxide in the atmosphere, but only to reduce it somewhat. And while I claim no expertise on the subject, I presume that emissions control costs are quite different in Bangladesh and Boston.

So what do we conclude? Not that we should ignore environmental degradation. Not that a worldwide approach is inappropriate. And certainly not that the rich nations should not pay some of the freight for the poor ones. The conclusion is simply that a little economic rationality after Rio would go a long way.Alan S. Blinder

Burger King's Young Buns

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