Economics and the Environment

Reaction to Bjorn Lomborg, 
"The skeptical environmentalist", CUP 2001


I am not an environmental economist, only an economist who has some comments on the work of other economists who discuss environmental issues.

Also, my main advice is that democratic nations adopt a constitutional amendment for an Economic Supreme Court - see DRGTPE or, if you are in a hurry, the earlier working paper in html that is improved upon in DRGTPE.

Having an Economic Supreme Court makes that science gets a level playing field with political management (and economics is the science of management of the state). Having an Economic Supreme Court makes that we have a better decision making structure, to settle complex issues like on the environment.

For example, Bjorn Lomborg's book is thick, and the issues are very complex, and few people will have the time and resources, and the capacities, to tackle these issues. Those who could tackle the issues, might decline the challenge, since politicians would not need to listen, and all the work done could well be fruitless. Hence, we should work towards having an Economic Supreme Court, well embedded in a democratic structure, that could provide guidance in such complex issues.

Since we do not have an Economic Supreme Court now, I think that it is pretty useless that I spend much time on the issue. I would have the capacity to do so, see my cv, but who would listen to me ? The following hence is preliminary. But the following comments are crucial - so if you read this, please pay attention.

Lomborg's book indicates that coping with the environment would cost about 2% of national income for the next 100 years. I myself have presented an analysis that solves unemployment and the stagflation issue - see DRGTPE - and for the US that amounts to perhaps 4% of national income and for Europe that would be decidedly more. So I can only urge that people also look into this angle of the DRGTPE argument. However, Roefie Hueting argues that a proper approach for the environment might well cost 50% of national income. Bjorn Lomborg's book does not refer to Hueting's analysis. Given the complexities, we all should hope for an Economic Supreme Court indeed. 

The following discussion will look at the Hueting - Lomborg difference.
First note these three angles:

(1) The Club of Rome report 'Limits to growth' was published when I had just started university. The report caused concern, but later I learned that it overlooked price and income effects, so I became more of a fan of Julian Simon. Also, while I was concerned more about the issue of development and world poverty, it was also obvious that dictatorial regimes prevented development proper. Hence, I concluded that mass unemployment and stagflation in the OECD countries were the most important economic issue - and this became my topic of study. The argument namely is: If we solve unemployment, then the OECD does no longer need trade barriers to protect its own employment, and then 'trade not aid' has a better chance to be selected as the proper policy. Also, if we solve unemployment in a decent way, then the OECD model of democracy presents a more convincing model for developing countries. Hence, it was with joy and relief, when I finally could present, after years of study, an analysis on unemployment that solves it in a democratic manner (see DRGTPE). It is up to policy makers whether they adopt this policy, but at least the economic analysis clearly shows that it would be optimal if they did.

(2) In these last years I also got acquainted with the work of Roefie Hueting. As me, he is not an environmental economist, since his focus is not on the interaction of economics and the environment. Instead, he worked at CBS Statistics Netherlands, and his topic is the statistical measurement of economic welfare. Taking the environmental data as given, he then considers the impact on national income accounting. Hueting basically provides a way to measure welfare if sustainability is the norm. In doing so, he is critical of the standard environmentalists who appear less versed in economics. But due to Hueting's work, I have grown more conscious of the environmental problem again: see my three papers on his work: 1 (ESB), 2 (Seminal) and 3 (Meta).

(3) Interestingly, Bjorn Lomborg now shows that many current environmental 'data' would be just as overly alarmist as the Club of Rome report was in the past. The 'data' that Roefie Hueting's analysis relies on, might not be real data. 

I find Lomborgs book lucid, illuminating, balanced, and very useful. It reads easy, has a clear reasoning, uses the relevant sources, and, indeed, exposes some rather shocking errors on the part of some participants in the debate on the environment. However, Lomborg apparently has not studied Hueting's analysis, and that makes the argument seriously unbalanced again. 

Combination of these three angles gives an interesting result. 

(a) Both Hueting and Lomborg take the position of statistical scientists. 

(b) Hueting is critical of the same environmentalists whom Lomborg criticises, so there is already the seed of agreement. However, Lomborg criticises the environmental data and does not question the use of economics, while Hueting criticises the use of economics and does not question the environmental data. 

(c) Though Lomborg e.g. on page 156 shows him aware of the issue of increasing scarcity and the rising prices of environmental functions, he at other points seems to make errors that Hueting has shown us to avoid. Lomborg relies heavily on the issues of economic growth and the measurement of welfare, which is precisely Hueting's topic. Lomborg writes: "(...) only when we are sufficiently rich can we afford the relative luxury of caring about the environment" (page 33) and "can we start to think about, worry about and deal with environmental problems" (page 327). Hueting however shows that national income commonly is meausured in a wrong manner. Lomborg's graph on page 33 is improper. This is not only so, simply, since the 'high income' of the US depends upon pollution caused by imports from the poorer countries - as 'ecological footprints' could correct these. (I have to be careful here, though, since the 'sustainability index might do precisely that.) More complex, however, Hueting shows that national income is the wrong index.

(d) Hueting's analysis remains valid whatever the environmental data. These data are taken as given, and the analysis can be performed whatever their value. For example, Julian Simon presented the argument of ever lower prices for raw materials, and Hueting's answer is that the environmental costs are not included in those prices. Lomborg may show that those costs would be much lower than commonly stated, but this does not invalidate the idea that those costs should be included. It would be a great advance in the statistical measurement of economic growth if this principle could be established.

(e) Hence, if statistician Lomborg adopts the analysis of statistician Hueting, and national income and economic growth get measured properly, then the next focus is on properly measuring the environment. Here Lomborg's critique on environmental statistics becomes relevant. But here the ecologists must react. Lomborg is rather convincing that a claim concerning 40,000 species is shockingly wrong - but it is not clear whether this claim was widespread or just from a few people. The true ecological worry may still be very relevant. 

(f) Lomborg argues in the same way as I used to do: "(..) the major problems remain with hunger and poverty." (page 327) See here my analysis on unemployment, that shows that the main issues are social and psychological (DRGTPE). But, subsequently, due to Hueting's analysis, I have grown more conscious of the environment. Being rich also requires a certain use of natural resources, and this has an impact on the environment. Lomborg refers to the DICE/RICE models, but it is not clear whether this model is adequate. How does CO2 relate to temperature, and this again to the extinction of species ? And again, national income should be properly measured in Hueting's fashion. I still discern a lot of uncertainty.

(g) Lomborg is optimistic about the possibilities of technology. Basically I am optimistic too, about the combinations of social and technical possibilities. But the issues of the future should not be confused with the issues of statistical measurement of the past. In the volume of Van Ierland (eds, to appear September 2001), Hueting replies to Wilfred Beckermann about such technological assumptions, and this applies here as well. For statistical measurement, we should rely on observations (known technology). And for forcasting technology we should do better than just punch in 2 percent productivity growth.

(h) Concerning the future, indeed, Lomborg has a decent discussion on the precautionary principle (page 349), but he does not really answer the key policy question since he does not use a model. He writes: "Of course, if large-scale ecological catastrophes were looming on the horizon we might be more inclined to afford the extra margin of safety just for the environment. But as is documented in this book, such a general conception is built on a myth." No, the book punches some major balloons, but it does not provide the econometric model required. Merely referring to DICE/RICE does not convince, see the argument above. Note that Lomborg himself (page 30) emphasises that we should use the best data and the best models - but apparently much work still has to be done.

(i) Lomborg has a discussion on discounting (page 314). Hueting emphasises that the rate of discount reflects a choice of preference. Zero interest is a preference for equality of generations, higher interest shows a preference for current generations. Hueting then adds: But we don't know the preferences. All kinds of mechanisms, like the prisoners' dilemma, prevent that true preferences are expressed in the economy. Thus, a statistician must provide all information, both the national income figure as currently measured, and the measure that includes the norm for sustainability. (Interestingly, Lomborg studied the prisoners' dilemma.)

(j) Lomborg uses the word 'risk' in a proper sense. However, he and other readers still could be interested in my new definition of risk. (In some respect, this is about how to aggregate risks.)

(k) If we combine the analysis on the environment and the one on poverty, then there is a really powerful statement - dealing with democracy and the structure of decision making.

Lomborg writes: "My point is simply to stress that in important fields of research it can also be difficult to present information which goes against institutional interest." (page 38). 

Of course, this should not happen in science. But apparently, it happened in the discussion on the environment - and it happened with my own analysis on unemployment (see here for my protest).

Also, Lomborg writes: "In a surprisingly frank statement the UN states that "it is not the resources or the economic solutions that are lacking - it is the political momentum to tackle poverty head-on."" (page 66). Thus, the same political abuse of science, also causes an abuse that is deterimental to the basic security of citizens.

I noted that Lomborg also has an interest in voting theory himself, and I look forward to his reaction to my analysis here. The whole issue would also be relevant for Lomborg's colleagues at his political science department.

(l) On taxation, Lomborg discusses the 'double dividend' (page 308). He refers, among others, to an AER article by Bovenberg and De Mooij. However, Bovenberg has been vice-director of the Dutch Central Planning Bureau that has censured my analysis and that has eventually fired me with an abuse of power (see my protest). Bovenberg declines responsibility, but he was in a responsible position and did not do anything about it. Also, since there was no discussion about my analysis, he apparently does not know the argument of my analysis, and the AER paper is seriously flawed. Thus, also Lomborgs statements on the 'double dividend' are seriously flawed.

I might write a paper with the better analysis and try to get this accepted by AER as well. This however would not solve the censoring. And it would only concern the 'double dividend' while I think that more is involved, since the impact on the environment runs via taxes and umemployment. It is better that the censoring is stopped, that the abuse is corrected, that I am re-instated in my position at the planning bureau, and that a level playing field is created.
 

Thomas Cool, September 24, 2001
http://thomascool.eu
 
 

Literature


Cool, Th., “Roefie Hueting and Sustainable National Income”, a translation from “Roefie Hueting en het DNI”, included in the series ‘Key Figures in Economics’, Economisch-Statistische Berichten 24-8-2001, p652-653, NEI, Rotterdam.

Cool, Th., “The seminal contribution of Roefie Hueting to economic science: Theory and measurement of Sustainable National Income”, draft November 2000

Cool, Th., "The choice on sustainability: information or the meta-SWF approach 
 to a shift of preferences", Report TC-2000-06-01/21

Cool, Th., internet page on Uncertainty and Risk

Ierland, E. van; J. van der Straaten en H. Vollebergh (eds), “Economic growth and valuation of the environment: a debate”, E. Elgar 2001, to appear by the end of September 2001

Lomborg, B., "The skeptical environmentalist", CUP

This is a page that was critical on the original Danish version of Lomborg's book.