SUSTAINABLE DEVELOPMENT

SUSTAINABLE DEVELOPMENT

A key concept for environmentalists is sustainable development;
defined as meeting the needs of present populations without
compromising the needs of future generations. This is a worthy
ideal. It is nonetheless difficult to achieve if we cannot measure environmental
costs and benefits accurately – although it is an important
principle that can give rise to valuable guidelines for practical policy.
All economic development is based to some extent on the
exploitation of natural resources. These include non-renewable
environmental assets such as fossil fuels, renewable resources such
as fish stocks and wildlife, and certain borderline assets that are
capable of regeneration though with a certain loss of uniqueness,
such as rainforests.
To insist that no exploitation of Earth’s rich bounty should take
place for fear of dispossessing future generations is nonsensical.
Living standards would collapse and there would then be no further
generations created to enjoy the future. The question, as always
in economics, is what price is acceptable in trading-off present
exploitation for the future? Paying too high a price to protect
the environment means condemning present populations – and
unborn future generations – to low levels of consumption and hardship;
too low a price means depriving our children of the
environmental opportunities we ourselves inherited. It is a matter
of INTERGENERATIONAL EQUITY.
© 2004 Tony Cleaver
Exhaustible Resources
Depletion of some non-renewable assets is inevitable if present
living standards are to rise and embrace millions more of the
world’s poor. As technologies improve, humankind can be more
efficient in its use of Middle Eastern oil and South American rainforests,
and alternatives can be increasingly generated, but there is
no ultimate substitute in the end for using some form of mineral,
exhaustible resource to fuel economic progress.
The loss of existing natural resources can be compensated for
to some extent by replacing them with man-made ones. Unique
native forests in much of the Earth’s temperate lands, for
example, have been largely replaced by agricultural landscapes
and plantations that are capable of much greater economic
outputs and yet are not environmentally impoverished. Similarly,
there may well be less coal, oil and iron ore left for the future
but maybe we can camouflage the holes we have left in the
ground and replace these supplies with more renewable energies
and materials.
If, however, we are bound to consume exhaustible resources by
some irreducible amount – albeit less in the future than at present –
what then is the OPTIMAL DEPLETION RATE of such assets that
balances present against future needs?
Consider an exhaustible resource that is a basic raw material
used in industry. If current extraction increases faster than demand
is growing, prices of this resource will fall. Conversely, if it is left in
the ground while current demand is mounting, prices will rise.
Should we mine it now or later, and by how much? It depends
on how we value the future – a concept we have met earlier –
embodied in our rate of time preference.
At equilibrium, the rate of growth of mineral resource prices
should just equal the market rate of time preference/rate of
interest. If interest rates are lower than the rate of growth of
mineral prices, we exploit and sell more resources now – bringing
their price down (see Box 7.7). If the prices are growing more
slowly than interest rates, then exploitation of resources will fall.
Prices will begin to rise faster. (As explained earlier, changes in
technology will impact on the rate of growth of prices and thus
slow down or speed up the rate of resource extraction accordingly.)