Unveiling Wealth: On Money, Quality of Life and Sustainability

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UNVEILING WEALTH

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Unveiling Wealth On Money, Quality of Life and Sustainability

Edited by

Peter Bartelmus Director, Division for Material Flows and Structural Change, Wuppertal Institute for Climate, Environment and Energy, Wuppertal, Germany

KLUWER ACADEMIC PUBLISHERS NEW YORK, BOSTON, DORDRECHT, LONDON, MOSCOW

eBook ISBN: Print ISBN:

0-306-48221-5 1-4020-0814-7

©2003 Kluwer Academic Publishers New York, Boston, Dordrecht, London, Moscow Print ©2002 Kluwer Academic Publishers Dordrecht All rights reserved No part of this eBook may be reproduced or transmitted in any form or by any means, electronic, mechanical, recording, or otherwise, without written consent from the Publisher Created in the United States of America Visit Kluwer Online at: and Kluwer's eBookstore at:

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Contents Foreword by E. U. von Weizsäcker Preface

xi

xiii

I. INTRODUCTORY STATEMENT BY THE EXECUTIVE DIRECTOR OF UNEP

Klaus Töpfer Unveiled wealth takes environmental cost into account

3

II. NEW INDICATORS OF SUSTAINABILITY

Peter Bartelmus Unveiling wealth — accounting for sustainability Discussion

9

39

III. WHICH INDICATORS, AND FOR WHAT? Udo E. Simonis On expectations and efforts – some introductory observations

51

Hartmut Bossel Indicators for sustainable development — a systems analysis approach

55

Paul Klemmer Economic, ecological and social indicators

59

Arno Gahrmann Acquisition and numerical hocus-pocus — profits and costs are misleading targets and indicators

63

Wolfgang Brühl The debate about sustainability in industry

73

Gerhard Bosch Indicators of sustainable employment

77

Discussion

91

vi

Contents

IV. THE PHYSICAL BASIS OF THE ECONOMY

Peter Hennicke Dematerialisation and energy efficiency — the message of ecoindicators

103

Stefan Bringezu Material flow analysis — unveiling the physical basis of economies

109

Howard T. Odum Emergy accounting

135

V. ASSESSMENT AND POLICY ANALYSIS

Robert Repetto Assessment of sustainability in growth and development — approaches and policy applications

149

Questions and Answers

157

Hansvolker Ziegler How can sustainability become a measure of success in politics?

167

Robert U. Ayres and Benjamin Warr Economic growth models and the role of physical resources

171

Wolfgang Sachs Post-fossil development patterns in the North

189

Peter Bartelmus Outlook: From paradigm to policy

205

Notes

213

The authors

218

Index

220

vii

Tables

II.1

Indices of sustainable development

20

II.2

SEEA Germany 1990–1995 (preliminary results)

27

II.3

SEEA application: integrated environmental and economic acconts for Germany 1990

34

Distribution of one-couple households with at least one wage-earner 1997

78

Long-term unemployment rate of men, corrected for prisoners 1993

85

GNP per working hour, per employee and per capita (in ECU, per cent of US value)

86

Employment rates of men and women (aged 25–54) in the EU 1997

88

III.1 III.2 III.3 III.4

IV.1 IV.2 IV.3

IV.4 IV.5 IV.6

Indicators for measuring impact potentials of human-induced material flows

116

Economy-wide material balance with major flow categories and derived indicators

119

Ratio of unused to used extraction for domestic and foreign resource requirements of the European Union, 1995

128

Annual emergy flows in shrimp pond mariculture in Ecuador, 1986

141

Emergy indices for shrimp mariculture, evaluated in Table IV.4

142

Benefits (+) or losses (–) due to shrimp mariculture in Ecuador

143

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Figures II.1

The daily toll of environmental impacts

12

II.2

Sustainability in environmental accounting (MFA and SEEA)

14

II.3

Too heavy to marry?

16

II.4

Annual TMR per capita for selected industrialised countries

25

Innovation process and indicators of technological capacity

81

III.2

R&D intensity in selected OECD countries 1981-1997

82

III.3

The high- and low-income gap grows in the USA and the United Kingdom

83

International comparison of income differences and impacts of education on employment

83

III.5

Comparison of education in Germany and USA

84

III.6

Annual working time per person in working age (aged 15–65) in selected industrialised countries

87

III.1

III.4

IV.1

The metabolism of an economy and derived indicators

117

IV.2

Qualitative links between the extraction of industrial minerals and metals and the resulting impacts on the environment

120

Total material productivity in selected industrialised countries

123

IV.4

Development of Total Material Requirement and GDP

124

IV.5

Composition of TMR in selected countries (tonnes)

125

IV.6

Domestic and foreign resource extraction of the European Union

127

Share of carbon dioxide emission in domestic processed output

129

IV.3

IV.7

Figures

ix

Net addition to stock for the EU and selected countries (tonnes)

130

Energy systems diagram of shrimp mariculture in ponds of coastal Ecuador

138

Diagram of the interface between environment and economy with definitions of emergy indices

140

V.1

Salter cycle growth engine

176

V.2

The ratio of exergy inputs to GDP, USA 1900-1998

181

V.3

The ratios f (“efficient work” U: total exergy input B) and g (economic output: work input), USA 1900–1998

182

Cobb-Douglas production function and Solow residual, USA 1900–1998

183

LINEX production function — fn (L, K, total exergy, incl. phytomass), USA 1900–1998

184

LINEX production function — fn (L, K, total exergy, excl. phytomass), USA 1900–1998

185

Residuals from US GDP (1900–1998): Estimates for Cobb-Douglas and LINEX “best-fits”

186

Environmental Kuznets Curve (EKC) — confirmed or rejected

206

IV.8 IV .9

IV.10

V.4 V.5 V.6 V.7 V.8

x

Acknowledgements The author and publisher would like to thank the Hirzel Verlag and the public relations department of the Wuppertal Institute for their assistance in preparing the book. Permission to reproduce copyright material by Berlin Verlag, Arno Spitz GmbH is also gratefully acknowledged. Alexander Scrimgeour and Claudia Schleipen translated the German texts, and Rainer Klüting, Stephan Preuß, Jacqueline Sairawan, Dorothea Frinker, Mary Walker and Jörg Albert provided valuable editorial and technical support.

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Foreword “Prices should tell the ecological truth” is a slogan I introduced in the 1980s in support of the idea of an ecological tax reform. Alas, not much has happened since then. Prices are still misleading us. They ignore the overload of our natural systems by megatons of harmful substances, as well as the depletion of natural resources. As a consequence, conventional indicators undermine economic performance in the long term. Should we therefore remove the monetary veil, and set out for an alternative compass that will show the way towards genuine wealth? At the Wuppertal Institute, we have already tried to find indicators that speak the ecological truth but which can also be tied to the goal of economic prosperity. Balance sheets of material flows were the result. They point to the need for at least halving the use of materials as well as energy, while doubling wealth at the same time. In other words, we need a Factor 4 improvement in the efficiency of natural resource use. By now, a number of national and international organisations have incorporated this “Factor 4” concept into their environment and sustainability policies. However, possibly blinded by our success, we have somewhat neglected the international work on the monetary measurement and analysis of sustainable development. We are lucky, therefore, that Peter Bartelmus, one of the leading international experts on the quantitative economic analysis of sustainability, has joined our institute to give us a more complete, ecological and economic picture of sustainability. The main intention of this book is to build a bridge between economists and environmentalists, using operational indicators of sustainability. Peter Bartelmus has asked the pertinent questions: What is the significance of prosperity for our quality of life? Does the monetary veil, that is, the monetary evaluation of environmental functions, distort the significance of the environment for quality of life? Can our standard statistical systems incorporate environmental issues? This book will of course not provide final answers to these questions. However, the variety of articles, presented here by renowned scholars, experts in the field and decision makers can be expected to overcome a prevailing lethargy — as denounced in the book — in the sustainability discussion. Robert Repetto gave new impetus to the modification of our most cherished indicators, the national income and product. In this book he shows

xii

Foreword

furthermore how misleading our typical productivity analyses can be when based on conventional indicators. Other national experts stress the significance of sustainability for long-term policy making, research and environmental management in industry and the energy sector. The diversity of their views and suggestions provides a sound basis for overcoming the polarisation of economic and ecological approaches to the measurement and analysis of sustainability in industrial and post-industrial economies. There is no way around: we need material “guardrails” for the dematerialisation of our economy, as well as an efficient price system that accounts for the costs of environmental damage. Ernst Ulrich von Weizsäcker

Member of Parliament, Federal Republic of Germany, and Founding President of the Wuppertal Institute for Climate, Environment, Energy

xiii

Preface Unveiling wealth is the translation and expansion of Wohlstand entschleiern — a book based on the congress of the same name organised by the Wuppertal Institute for Climate, Environment and Energy (Wuppertal, 10 December 1999). This conference was unique in bringing together representatives of all walks of society: scientists, experts in the field, representatives of industry and civil society, and policy makers. Their common hope was to revive the languishing discussion of sustainable development by filling the concept with operational content. There was agreement that opaque notions like wealth, quality of life and sustainability can only be communicated and implemented if they are measured and monitored by widely agreed and understood indicators. This book includes further contributions by internationally renowned scholars in the fields of material and energy accounting and policy analysis. The purpose is to provide a more comprehensive picture of empirical analyses of sustainability in economic growth and development. Sustainable development was the leitmotiv of the first Earth Summit in Rio de Janeiro. Many consider this summit a success in raising awareness of the paradigm, but at the same time a failure in supporting adequately its implementation. The United Nations Environment Programme (UNEP), more than any other institution, has attempted to keep environmental concerns on the international agenda. The introductory statement of UNEP’s Executive Director sends a clear message: the victory of the market economy will remain victorious only if markets succeed in “internalising” environmental costs. Part II provides an overview of the use and usefulness of different methodological approaches to the assessment of sustainability. Major challenges lie in overcoming dichotomies in measurement and analysis that include economic vs. ecological concepts of sustainability and their monetary/ physical counterpart measures, development of indicators for vs. compound indices of sustainable development, descriptive accounting vs. predictive modelling of trends in sustainable growth and development. These and other concerns such as the neglect of social and cultural dimensions of sustainability, or the need to complement national by corporate accounting, are taken up by a large variety of studies in part III. Part IV addresses the measurement of the physical basis of sustainability, with a view

xiv

Preface

to reducing the flow of matter and energy through the economy. Part IV provides thus a counterpoint to, and at the same time the basis for, integrative “green” accounting presented in part II. Part V takes up the different sustainability notions and indicators and examines how they can be translated into analyses, strategies and policies. With scientific consensus not yet at hand, the “outlook” section calls for politically negotiated partnership among stake- and shareholders of sustainable development. Such social compacts might help to sustain the long-term vision of sustainable development, even in the face of overwhelming security concerns.

I. Introductory Statement by the Executive Director of UNEP


Klaus Töpfer

Unveiled wealth takes environmental cost into account It is the most outstanding qualification of the market economy that, linked with decentralised decision making and ex-post coordination, the system has proved to be by far the best for allocating scarce resources for the benefit and welfare of people. The recent collapse of the Soviet Union demonstrated that a centrally planned and ex-ante coordinated economy cannot compete with a market-oriented system. Moreover, inefficiency, owing to the lack of stimulation of individual interests through competition, was one of the main rootcauses for the demise of a communist society. The defeat of the bipolar world in favour of the market economy encouraged an unprecedented process of globalisation. This development was naturally associated with technological progress, faster and more revolutionary than ever before. Modern information and communication technologies made a global, instantaneous information system possible; incredibly high levels of capital can now be transferred around the world in a second, for purposes of arbitrage and speculation on a global level. Mass transportation technologies by air and sea come with sharply declining costs; reduced transportation costs in turn remove barriers to global markets in goods and services. People’s mobility is associated with a tendency towards cultural and spiritual uniformity. The consequences of global television networks, movies and radio programmes are directly fostering such development to an ever greater degree. At the same time the gap between rich and poor is widening. It will continue to do so as long as the globalisation of the economy is not linked with the opening of markets in developed countries and with access to technologies on preferential terms — all this in an atmosphere of good national governance and capacity building, especially in developing countries. The rules of the market economy provide us with market prices as the main indicators for economic bottlenecks. Prices are the principal instruments for the efficient allocation of limited resources. They determine the direction of science and research towards the development of new technologies with a view to eliminating the bottlenecks. For just this reason it is so important to know which costs are integrated in and which ones are externalised from 3 P. Bartelmus (ed.), Unveiling Wealth, 3–5. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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K. Töpfer · Unveiled wealth takes environmental cost into account

market prices. The effects of the externalisation of costs on achieving an optimum level of welfare have for a long time been intensively studied in economic science. Wherever there is a possibility of externalising costs in a market economy — legally — economic agents will have to do just this; the alternative of internalising “social” costs would mean to lose out to the competition in the market, since, through cost externalisation, the competitors would gain a superior competitive position. The externalisation of social and environmental costs by private business is well-known textbook knowledge. We know there is a specific kind of “beggarmy-neighbour” policy directly connected with this approach, but we are even more conscious of not paying the full price for our welfare. We know that the welfare in developed countries is more or less heavily subsidised by “exporting” the environmental costs to other regions of the world and indeed to future generations. Similarly, we are aware that this kind of cost externalisation is also occurring across the broad range of social interrelationships. The welfare we enjoy is reflected, albeit incorrectly, in the prices we pay. Ernst Ulrich von Weizsäcker stressed the need for prices to speak the ecological truth, but this is not the case at present. The fact that market prices systematically avoid integrating all costs externalised to the environment has severe consequences. On the one hand limited resources are of course not allocated in the best possible way. On the other hand consumers base their consumption patterns on these price signals: I always stress the point that the structure of today is a reflection of yesterday’s prices. An excellent example of this relationship is the settlement structure in society. It is easy to demonstrate: give me information on your settlement structure and I can tell you about the prices of private mobility in the past. Where prices for private mobility were low, there will be an extensive settlement structure. Where very high prices were paid for private mobility, a concentrated settlement structure with much better preconditions for public transport will be the result. There are similar consequences for the location of retail business — either in the city centre or out of town. The development of the retail sector in Germany’s new States after re-unification is a clear demonstration of this relationship. Especially with respect to regional structures, it is of course quite difficult to change the subsidisation of the past by integrating externalised costs into today’s prices. Those structures resulted from capital-intensive long-term investment. Any short-term changes in prices for mobility will therefore face a very low price elasticity since people cannot react quickly to short-term changes. The political costs of such strategic decisions on the internalisation of environmental costs would therefore be very high: in a democratic system,

K. Töpfer · Unveiled wealth takes environmental cost into account

5

with regular elections, such a decision may be swiftly rejected. It is therefore particularly important that reliable medium-term forecasts of changes in specific prices are provided so that people can include such price developments in their decisions well in advance. Systematically subsidised prices, concealing the real cost of welfare, have another negative consequence. Especially in market economies, technical progress never drops like manna from heaven. Technical progress will aim at overcoming bottlenecks to development, and these bottlenecks are linked to prices. As long as water and air were free goods without a price tag, there were no incentives for water-saving technologies or for avoiding the use of air and atmosphere as quasi-landfills for emissions. Since the developed countries, who in the past were mainly responsible for the development of new technologies and innovations, are all situated in water-affluent regions, it comes as no surprise that market incentives for the development of water-saving technologies or water-recycling took a long time to come about. From a global viewpoint, these technologies are essential bearing in mind that the ongoing urbanisation process, higher standards of living and industrialisation have brought about demand for water that is increasing at twice the rate of population growth. Water-catchment areas shared by more than one country (and where the water is used for different purposes, such as agriculture, nature, industry and household consumption) bear the risk of increasing tensions about the distribution of water. Water-saving technologies and water recycling are therefore of the utmost importance for preventing such tensions that can easily develop into conflict situations at national and regional levels. All these considerations call for “green taxation”, or “ecotaxation”. Their main purpose is to stimulate technologies and to change consumption patterns without damaging the welfare status. Green taxes should change consumption and production patterns by enhancing the use of the most important national resource, human capital. The message of “Unveiled Wealth” is therefore by no means one of scarcity or resignation. On the contrary it sends a clear signal for the need of assessing the environmental costs of economic growth for a better allocation of existing resources. It is a message urging the reduction of the export of environmental costs to other parts of the world or to generations to come, and is therefore a stimulus for solidarity in a globalised world.


II. New indicators of sustainability


Peter Bartelmus

Unveiling wealth — accounting for sustainability1

Unveiling wealth? The name of the conference, which prompted this book, points to an unfortunate polarisation of scholars tackling sustainability. Economists and environmentalists disagree on how to assess and prevent the further destruction of nature. Environmentalists maintain that market prices hide important ecological impacts behind the monetary veils of income and wealth; they call upon the government to protect the public good “environment” by means of standards and regulation. Environmental economists, on the other hand, bank upon the market’s ability to account for hitherto ignored environmental “externalities”. Whom should we rely on in our quest for continuing prosperity? Is it the invisible hand of the market or the visible authority of government which will make this quest sustainable? Who puts the veil on what?

Almost two decades ago the United Nations established a commission to investigate continuing policy failures in both environment and development. The so-called Brundtland Commission (WCED 1987) considered the neglect of interdependences among nature, economy and society as the principal cause of these failures. It also advocated integrative policies of “sustainable development” for overcoming a prevailing compartmentalisation of policy making. In order to attain such integration environmentalists and economists applied their particular tenets and methodological tools to the counterpart field. As a result, each side blamed the other for imposing its own values in an attempt of colonising, respectively, the economy or the environment. Most environmentalists, and among them in particular the rather moralistic “deep ecologists”, refute the commodification of the environment. Pricing an indivisible public good for sale represents, in their view, a form of colonisation since the monetary veil distorts the true intrinsic value of the 9 P. Bartelmus (ed.), Unveiling Wealth, 9–38. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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New indicators of sustainability

environment and its significance for the quality of life of the present and future generations. Physical indicators of the carrying capacity of ecosystems and of their destructive exploitation by humans are the only way to assess the state of these systems and their importance for human survival. Economists have a different view of nature. They consider losses of natural resources and of capacities for safely absorbing pollutants as new scarcities in environmental source and sink functions. Like any scarce product these functions compete for human preferences, whether traded in markets or not. Citizens of free nations need not be told, neither by governments nor by experts, about their “true” needs and aspirations. Free markets reveal their preferences and confront them with the limited supply of goods and services. If markets succeed in determining the costs and prices of scarce environmental goods and services, they will also succeed in avoiding colonisation by environmental norms and regulation. Facts and figures may resolve, or at least appease, such methodological disputes. Unfortunately, the economic-ecological polarisation has permeated measurement as well. Physical and monetary measures have rarely been linked or compared, and both sides insist on their particular indicators and corresponding conclusions. Besides contributing to the reconciliation of environmentalists and economists, the comparison of physical and monetary indicator systems should shed some light on the elusive relationships among wealth, well-being, quality of life and their sustainability. The key questions are: How does wealth affect the human quality of life? And where does sustainability enter these notions? Does the extension of the monetary veil to nature distort the significance of the environment for the quality of life? Or are there alternative ways of combining meaningfully physical, biological and other (“social”) indicators? What are the possibilities and results of extending the standard statistical systems into the realm of environment? Let us start with the first two questions. What is the purpose of striving for economic wealth and welfare? Does wealth make us happy?

Olet aut non olet — how does money smell: fine or foul? The pursuit of happiness, as opposed to riches, has become a new social trend. Numerous internet sites, notably in the USA, raise the question of how to attain happiness — with or without wealth. There is even a secret society of happy people

P. Bartelmus · Unveiling wealth — accounting for sustainability

11

(actually not that secret, as you can find it on the Net under www.sohp.com). In line with this trend, various surveys tried to find out whether a person, as well as a country, can augment happiness by acquiring income and wealth. Are people happier in rich countries than in poor ones? There is no need to discuss the results of these surveys; they all suffer from lack of coverage and questionable survey methods. Take questions like “are you: (1) happy, (2) quite happy, (3) unhappy?” What would be the meaning of any summing up of the answers? Happiness or even welfare are not measurable directly and objectively. This is hardly news. Instead of trying to make the unmeasurable measurable it is more realistic to assess the most glaring symptoms of unhappiness, i.e. the negative impacts of our quest for income and wealth. As a first step we should thus lift the money veil from those things that wear it but whose production and consumption generate undesirable non-monetary effects. Also, we have to capture ecological concerns which do not wear the veil and are therefore ignored by the key indicators of economic progress. Four deficiencies of conventional indicators of wealth, income, production, capital formation and consumption come to mind: Inclusion of so-called “defensive expenditures” (Leipert 1989) for consumption and capital formation which do not generate additional welfare or utility; rather, they serve the maintenance of current quality of life or, worse, may impair health (drugs, cigarettes, etc.). Neglect of environmental impacts of production and consumption, in particular emission of pollutants and waste, and depletion of natural resources. Neglect of goods and services which are produced outside the monetised economy. Disregard of social effects, notably the distribution of wealth and environmental damage.

Safeguarding natural wealth: operational concepts of environmental sustainability Proliferation of indicators

Attempts at measuring all the ecological, economic and social impacts of economic activity generated long indicator lists. The social indicator movement of the 1970s never reached consensus on social concerns and representative statistics and indicators. Similarly, environmental and sustainable

12


development indicators vary from country to country and among international organisations, notably those of the Organisation for Economic Cooperation and Development (1994,1998), the World Bank (1997), the European Union (European Commission 1999) and the United Nations (2001). Moreover, environmental concerns are expressed in so many tons of depleted fish stocks, hectares of fertile land lost, microgrammes of concentrations of pollutants, or numbers of endangered species. Figure II.1 illustrates this situation by presenting the “daily toll” of these impacts. A policy maker who is shown such a list of indicators will concede that it conveys a bleak environmental picture. The next question, though, will be: how bad is all this? And what are the reasons? In other words his request will be for information on (1) the significance of environmental damages as compared to the benefits of goods and services, and (2) the causes of and responsibilities for environmental damage. Our task is therefore to find a way of assessing and comparing positive and negative effects of production and consumption by means of appropriate (integrative) data systems. It may come as a surprise, but the exalted sustainability notion is going to help. Popular definitions of sustainable development as the satisfaction of the current and future generations’ needs (WCED 1987) or the economist’s


13

favourite as non-declining human welfare (Pezzey 1989) are opaque. Both definitions do not specify categories and contents of human needs and welfare, nor do they give any indication of the time frame (future generations!) and the roles of the environment and social concerns in long-term development. As a result and as described below, hardly-comparable indicators of genuine progress or human and sustainable development have proliferated. Material flow accounts (MFA) and the System of integrated Environmental and Economic Accounting (SEEA) The interaction of environment, economy and society is the starting point for operationalising an integrative sustainability notion. As discussed above, the focus is on the negative effects of this interaction. Social concerns are however more difficult to assess than environmental and economic ones, as attempts at quantifying distributive equity, or human and social capital have shown. The following pragmatic approaches to measuring material flows and natural capital deal, therefore, only with the environment-economy interface.2 Owing to their systemic features and the use of official statistics, two accounting systems have become, at least in part, national and international standards in measuring the — environmental — sustainability of economic activity. Figure II.2 outlines the two systems of (1) Material Flow Accounts (MFA) (Adriaanse et al. 1997; Matthews et al. 2000; Eurostat 2001; see also Bringezu in part IV) and (2) the System for integrated Environmental and Economic Accounting (SEEA) of the United Nations (1993,2000). MFA present the material throughput through the economy (inner, broken-lined circle). These flows include so-called “ecological rucksacks” of materials which are moved or otherwise altered in production but which do not physically enter a product (gangue in mining, erosion from preparing agricultural land). For a country (but also for any other region) material inputs from abroad and the domestic environment are balanced against “outputs” of wastes and exports of materials. During the accounting period some materials may accumulate in long-lasting fixed assets or inventories. This accumulation can be interpreted as — physical — growth of the economy. On its own, such accumulation and its counterpart, the wear and tear of fixed assets, cannot be kept up in the long term (see Bringezu in part IV). The SEEA incorporates environmental assets and their services into the asset and production accounts of the national accounts. The asset accounts present the stocks of natural resources and absorptive capacities (of wastes and residuals) and changes in stocks as part of the balance sheets of the national accounts. At the same time the production and income generation accounts include the consumption of natural capital as environmental costs. Both types

14


of accounts (stock and flow) overlap when measuring capital formation and consumption. Capital formation (non-financial investment) and the cost of depreciation of capital are key indicators of economic growth. The SEEA modifies these indicators by extending the capital concept to natural assets. The appendix illustrates this extension with a pilot study for Germany.3 Economic and ecological sustainability

Using tons in the MFA and monetary units in the SEEA as measuring rods reflects the above-described ecological-economic dichotomy. The corresponding operational concepts of sustainability maintain this dichotomy as illustrated in Figure II.2 by lightning arrows onto material input flows and capital stocks. Two basic sustainability concepts can thus be distinguished: Economic sustainability sets out from the conventional income concept, which reflects a principle of prudence in the use of income. According to this principle, income is to allow consumption without impoverishing the


15

consumer (Hicks 1946). At the national level, the main source of impoverishment is the consumption of capital without making an allowance for reinvestment. Economic sustainability thus derives from extending the principle of capital maintenance to non-produced natural capital. Ecological sustainability is based on the goal of reducing material flows. It also caters to a principle of precaution. The dematerialisation of the economy is to delink economic growth and development from current and potential environmental impacts. The question is how much dematerialisation do we need for a desired level of economic growth? Sustainability standards like “doubling wealth while halving the consumption of nature”, i.e. “Factor 4” according to Weizsäcker, Lovins and Lovins (1995), provide a normative answer. The norms or standards inherent in ecological sustainability need further elaboration. Underlying Factor 4 is a further norm, namely “environmental space”, which calls for equal access to natural resources (for countries and individuals). This is because we would roughly require two or more planets to extend the rich countries’standard of living to all others (Wackernagel and Rees 1996, p. 15). Achieving this goal without undue burden for poor countries would require industrialised countries to reduce their use of materials by a factor of 10 (over the next 50 years) so as to permit some increase in material consumption by developing nations (Schmidt-Bleek 1994, p. 168). However, contrary to the Factor 4 model, Factor 10 does not predict or claim a particular rate of global economic growth. The main concern of environmental scientists is the enormous transfer of materials from the environment to the economy and eventually back to the environment. They aim to reveal environmental pressures on natural systems in a comparable and aggregative fashion. This is indeed one of the objectives of the MFA which add up the weight of different material flows. The resulting sums are interpreted as environmental pressure indices. Figure II.3 depicts the anxiety of a bride under pressure to accept a 5-gramme wedding band (and a somewhat heavier bridegroom) with an ecological rucksack of 2000 kg. Economic sustainability, on the other hand, makes use of a sustainability principle which has been part of economic accounting at all levels, by corporations as well as governments: it is simply the need to maintain the factors of production for ensuring the continuation of economic activity. Making an allowance for the depreciation of fixed capital (infrastructure, buildings, machines, etc.) is common practice: it is to facilitate the reinvestment of depreciation costs for replacing worn-out capital goods. The “only” novelty of green accounting is the realisation that producers and consumers use up not

16


only their own (produced) capital but also the common-property good “nature”. Both types of capital are indeed needed for the long-term maintenance of economic performance. Dematerialisation and capital maintenance: two sides of the same coin? Is there a way of linking the two basic sustainability assessments of MFA and SEEA? Such linkage could well make a significant contribution to the reconciliation of economists and environmentalists. At first sight, both dematerialisation and natural capital maintenance seem to pursue the same sustainability goal, viz. the long-term protection of environmental source and sink functions. The physical data of the MFA focus on material inputs for the measurement of non-sustainable pressures on natural assets. SEEA, on the other hand, addresses physical and monetary flows of both outputs of wastes and residuals and inputs of natural resources that lead to depletion. Are these approaches two sides of the same sustainability coin? A closer look reveals important differences in concepts, scope, coverage and interpretation of material flows and natural capital consumption:

Extending the capital concept by including environmental capacities covers produced and natural capital consumption in an integrative (additive) manner. In contrast, material flows are linked to economic activity by classifications of supply (origin) and use (destination) of these flows, setting sustainability standards (Factor 4), and by calculating ratios (e.g. of “resource productivity” as economic output per material input).


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Relating material flow reduction to a desirable standard of Factor x implies a strategy of attaining a state of the environment which might have existed in earlier, more pristine periods. This can be viewed as the removal of an “environmental debt”, owed by past to future generations. Capital maintenance, on the other hand, is a principle of sustainability that refers to the replacement of capital depleted or degraded during one accounting period. The purpose is to assess economic performance during the accounting period in consistency with the production and cost concepts of the national accounts. This approach permits to modify the conventional accounting aggregates without distorting their meaning. Capital consumption represents the permanent loss of a production factor. The SEEA assesses, therefore, as environmental cost only the non-sustainable use of natural resources (beyond natural regeneration, in case of renewable resources) and the emission of residuals that were not safely absorbed. The MFA do not make this distinction and hence exaggerate the actual environmental impacts to the extent that material inputs and outputs are used sustainably. The reasons for this simplification are difficulties in assessing the sustainable use of environmental functions of different natural systems. Natural capital consumption refers to actual environmental impacts that occurred during an accounting period. The MFA aim to capture not only actual but also potential impacts which could result from the use of natural resources (but are in many cases not even known at present). The monetary valuation of resource depletion and residual emission reflects in principle the preferences of economic agents for the preservation of environmental functions. In contrast, the summation of material flows weights different environmental impacts by weight — perhaps more controversially but also more graphically. Sustainable dematerialisation calls for the reduction of the sum total of material flows by a certain factor. As a consequence, substitution between material flows and other production factors is not admissible, though substitution of non-renewable by renewable resources is considered in principle. Such a sustainability notion is “stronger” than the “weak” economic sustainability of overall capital maintenance. Weak sustainability implies thus potential substitution in the use of all types of natural, human and produced capital. These significant differences have to be kept in mind when assessing the sustainability of a country’s economic performance. Before getting to this issue in the case of Germany we shall briefly discuss the methods and meanings of the main indicators that have been advanced for the measurement of sustainable development and sustainable economic growth.

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Indicators of sustainability in growth and development Lifting the monetary veil from key economic indicators reveals that wealth and income are not necessarily the main determinants of happiness. The quantity of total economic output, national product, fails to capture important dimensions of the quality of life. The broader notion of development aims at assessing non-economic, social, cultural, political and ethical issues that are essential to individual well-being and national welfare. As already mentioned, some economists defined sustainable development as non-declining welfare, although this definition did not help much to operationalise the concept. The monetary evaluation of non-economic development objectives, for example through opinion polls, intended to detect willingness to pay for an equitable distribution of income and wealth, the preservation of species, or security, is rather unreliable even at the project or programme levels and hardly useful at national and international levels. Alternatives of assessing sustainable development or the quality of life in non-monetary terms did not fare much better, producing long and differing lists of indicators or difficult to-interpret compound indices.

Indicators for sustainable development

As early as the 1980s, an international framework for environmental statistics (United Nations 1984) presented an organisational structure for environmental indicators and underlying data so as to make them more accessible and comprehensible. This Stress-Response Framework has been the basis for most of the recent indicator developments, notably OECD’s (1994) environmental indicators and the United Nations (1996) indicators of sustainable development. The basic principle of this framework is to present the indicators in a sequence of (1) human activities, (2) resulting environmental impacts and subsequent welfare effects and (3) social responses to these effects. The weakness of such lists is of course the difficulty of directly comparing and aggregating the different indicators. After all, political decision makers want to know about the condition of the forest, rather than about individual trees, if only to set priorities for land use and forest development. Clearly, individual indicators or particular indicator lists are more useful for the management of specific areas of sustainable development than for its overall planning and policy making.


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Indices of sustainable development — a critique

In response to the drawbacks of long indicator lists, numerous attempts at combining selected indicators into compound indices were made. The problematique of these indices lies in their choice of indicators and in weighting their contribution to the common sustainable development objective. Table II.1 reviews four popular indices, advanced for the assessment of sustainable development and related notions: The ecological footprint (Wackernagel and Rees 1996) is based on the concept of the carrying capacity of natural systems. Like all measures of carrying capacity the index is difficult to conceive on a regional level, because sustainability can be imported and exported (through trade in natural resources and the translocation of environmentally damaging production to other regions). Furthermore, the level of carrying capacity depends on the normative setting of desirable standards of living within and among countries. The Environmental Sustainability Index (ESI) has been compiled for the World Economic Forum by various US institutions (http://unisci.com/ stories/20001/0201006.htm). The index simply calculates an unweighted (or more precisely: equally weighted) average of indicators that are available and “somehow” related to sustainable development. The Human Development Index (HDI) (UNDP 1999) is another average — of indicators of life expectancy, education and per-capita income. The purpose is to go beyond economic growth by providing a more complete picture of human achievements. The Index of Sustainable Economic Welfare (ISEW) became popular, after slight modification, as the Genuine Progress Indicator (GPI) (Cobb, Halstead and Rowe 1995). As might be expected, this indicator suffers from the afore-mentioned problems of selection, measurement and valuation of damages/benefits, and the controversial deduction of defensive expenditures, notably for the protection of the environment. It is debatable, however, to what extent such expenditures actually increase welfare. Furthermore, the GPI’s use of economic indicators like consumption, saving and investment is inconsistent with the national accounts definitions, which makes the index difficult to interpret. The selection of issues and indicators, the weighting of indicators and the definition of index components are often arbitrary, and lack transparency. The purpose might be advocacy of a particular cause rather than support of sustainability strategies and policies. This limitation is aggravated by the fact that

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ultimate damages, resulting from environmental impacts, cannot be traced back unequivocally to causing agents and the period of time when the initial impacts occurred. Two more systematic approaches to data gathering, processing and analysis, MFA and SEEA, focus, therefore, more narrowly on measuring the environmental sustainability or non-sustainability of economic growth.

Indicators of sustainable economic growth The MFA provide the Total Material Requirement (TMR) indicator as the sum of materials imported from the environment and from abroad, including their ecological rucksacks.4 Allocating the material flows to the importing sectors, for instance in physical input-output tables, establishes a first link to economic activity. Further steps are necessary, however, to relate TMR to a sustainability notion for economic performance. As discussed above, this requires the introduction of a normative sustainability standard like Factor 4. Ratios of TMR over GDP and its reciprocal value GDP per TMR measure the material intensity and resource productivity of economic performance. In both cases, the intention is to provide evidence for ecological sustainability by showing to what extent we have succeeded or failed in delinking (increasing resource productivity) resource consumption from economic growth. The ratios, which can be seen as technical coefficients of production and consumption, point to technological innovation as a key strategy of attaining sustainable production and consumption patterns. The SEEA extends the economic sustainability concept of capital maintenance to natural capital. By deducting additionally the costs of natural capital consumption it modifies directly the conventional growth indicators, national product and capital formation. The results are “green” economic indicators, above all Environmentally-adjusted net Domestic Product (EDP), Environmentally-adjusted Value Added (EVA), Environmentally-adjusted Capital Formation (ECF) and Environmental Assets (EA). It can easily be shown that these indicators, as opposed to the welfare indices described above, are consistent with the accounting rules, concepts and identities of the international standard System of National Accounts (SNA) (Bartelmus 2001). Hence, growing EDP records a “more sustainable” economic growth in the past, because it accounts for the hitherto neglected consumption of natural capital as the input of an important additional factor of production. One might ask whether this growth can be sustained in the future. Firstly, further factors such as technological progress, discovery of natural resources, or changes in consumption patterns affect the sustainability of future growth. Secondly, the modelling or simple extrapolation of relatively short time series

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for the prediction of long-term sustainability (for future generations!) is problematic. It seems therefore more convincing to look into a country’s capability to produce new capital — net, that is after consideration of produced and natural capital consumption. This is indeed the task of the modified net investment indicator ECF.

The valuation problem: pricing the priceless? Economists have criticised the weighting of different environmental impacts by the weight of material inputs as “ton ideology” (Gawel 1998). Counter-arguments stress that the majority of known and yet unknown damages from environmental impacts cannot be assessed by means of selected emissions whereas material-flow-reduction targets represent at least “directionally safe guardrails” (Hinterberger, Luks and Stewen 1999). The debate about material flow analysis, as a reaction to the Wuppertal Institute’s “Sustainable Germany” study (BUND/Misereor 1996) is well known in Germany (Linz 1998), and there is no need for going into details here. On the other hand, more attention should be paid to the criticism of monetary valuation in the SEEA. Putting a monetary value on environmental effects permits a high degree of integration of these effects with economic standard variables. Unfortunately such valuation has often been the reason for official national statistical services to opt out of greening the SNA, even in a parallel (satellite) system. The SEEA (United Nations 1993) principally presents three approaches to the valuation of environmental problems: Market valuation uses the prices of natural assets that are traded on the market for the valuation of natural resource stocks and their depletion. Maintenance costing, especially when expressed in avoidance costs, serves to evaluate (by weighting) the losses of natural waste absorption capacity. Contingent and related damage valuations are meant to assess the actual welfare effects, notably from pollution, on human health, recreation and other ethical and aesthetic values. Damage valuation is hardly applicable in national accounts. This is because contingent valuations are inconsistent with the market-price orientation of the SNA. Moreover, it is near-impossible to trace back environmental damages and their welfare effects to their causes and to the periods when the initial environmental impacts occurred. In order to create comparability between natural asset consumption and economic performance indicators it appears sensible to limit monetary valuation to the immediate interaction between the economy and the environment. As we move away from this interface,


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monetary valuation becomes dubious, for example when pricing ecological processes within natural systems or costing the effects of environmental degradation on human welfare (Bartelmus 1998). For such concerns, assessment by physical indicators is more suitable, even though the integrative advantages of monetary accounting are lost in the process. The weighting of pollutant emissions by means of maintenance costs is controversial. These costs are imputed in that they were not actually “internalised” by those who generated them. As “social costs” they should have been internalised, however, according to the polluter-pays principle. Environmental accounting thus creates a snapshot of the environmental impacts of past economic activities. The potential effects of cost internalisation on the structure of the economy would have to be modelled with the usual (but by no means agreed) assumptions and predictions about human behaviour and the impacts of changes in natural processes. This is why the national accountants, especially in industrial nations, have been hesitant to implement monetary environmental accounts. Official statisticians fear they may lose their reputation for objectivity if they open their systems to controversial concepts and valuations — even through the backdoor of supplementary “satellite” accounts. The current revision of the SEEA by the national accountants and environmental statisticians of the so-called London Group is a good example. The revision, expected to be completed in 2001, rejects comprehensive monetary valuation. As a consequence, the new SEEA largely abandons the systemic approach in favour of a set of difficult-to-link modules.5 This is reason enough for a research institute to pick up the loose ends and to assess the necessity and feasibility of comprehensive material flow analyses and monetary accounting by means of case studies. The following investigation of the sustainability of Germany’s economy is an example. It employs recent MFA data and applies the SEEA method and software (United Nations 2000) for the first time in the country.

Case study: Is Germany’s economy sustainable? Wealth at the expense of other countries Let us recall the widely discussed study “Sustainable Germany” (“Zukunftsfähiges Deutschland”; BUND/Misereor 1996)6. Its message was clear: Germany’s economy is not sustainable. The authors argued (mainly based on the results of material flow analyses) that we had extended our activities beyond our “environmental space”, that is, beyond the volume of source and

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sink functions which an industrial nation like Germany is entitled to. As discussed above, the definition of environmental space is based on the assumption that all countries should have access to the same amount of environmental services per capita. MFA figures confirm the violation of environmental space by German production and consumption patterns. Annual TMR per capita in selected industrial nations seems now to converge at 75 to 85 metric tons (Figure II.4). Japan and Poland are the exceptions with 45 and 28 tons respectively. In Japan, the reason is lower energy consumption; in Poland, it may be the low level of development, although this would suggest a high pent-up demand and therefore higher material consumption in the future. Because GDP has grown in all countries, a certain (relative) delinkage from economic growth has indeed taken place. However, given the fact that the current levels of material flows are far from reaching the standards set by Factors 4 and 10, the situation in these nations remains ecologically unsustainable. Figure II.4 shows a decrease in German per-capita TMR from 80 tons in the early 1990s to 72 tons in 1996. The reason is above all the closure of unprofitable lignite mines and a corresponding drop in gangue (mining waste material) in the new German States. Presumably this decrease, due to institutional changes, does not indicate a genuine trend reversal. The pursuit of greater prosperity in Germany by means of unabated economic growth, is thus not sustainable with respect to necessary dematerialisation. If we further consider the direct and hidden (in ecological rucksacks) environmental impacts in other countries that are caused by the import of materials, we see that a good deal of economic growth has been made possible by importing sustainability. The 1991 MFA confirm a “trans-national material input” (excluding water and air) at about the same level as domestic material extraction (Bringezu 2000, p. 99). A further shift of domestic resource extraction to other countries and hence a further increase in imported sustainability can be expected (Bringezu and Schütz 2000). Bringezu’s analysis (in part IV, Fig. IV.6 and Table IV.3) indicates that such “burden shifting” to other countries is a generic feature of economic activity in the European Union. Further studies will reveal to what extent this impact of sustainability is from developing, transition or other industrialised countries. ... but sustainable in “development”? Broadly defined indices of sustainable or human development, notably the ISEW/GPI and the HDI, tell different sustainability stories. In the USA, the GPI dropped by 45 per cent between 1970 and 1995, with a concomitant increase of GDP by approximately 50 per cent (Cobb, Halstead and Rowe


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1995). In contrast, the German ISEW rose by 30 per cent between 1979 and 1992, while GDP increased by 50 per cent (Diefenbacher 1995). For Germany this suggests a trend of sustainable development, albeit at lower growth rates. The question is whether the differences in development trends between the two countries are a matter of greater sustainability of Germany’s economy, or whether it can be attributed to differences in concepts, contents, valuations and methods of estimation. As described above, this index is not exactly characterised by transparency and coherence. The HDI is probably of even less use. It merely shows a decline of Germany’s development status from place 14 to 16, compared to a ranking by GDP per capita (UNDP 1999). Both GDP and HDI give Germany a relatively high status among a number of 174 countries. Considering, however, Germany’s reliance on the import of sustainability at the expense of other countries, this result cannot really be seen as an indication of sustainability. Somewhat cynically one might deem such development as “human” indeed, but in the sense of exploitative behaviour.

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Weak sustainability in economic growth The author presented a pilot study of monetary environmental accounting in the UN/SEEA format at the congress which prompted this book. Table II.2 shows first results for 1990 with some provisional estimates for 1991 and 1995. Application of the SEEA software ensured compatibility of concepts and methods with the accounting identities and aggregates of the System of National Accounts, SNA (United Nations et al. 1993). The synopsis of the 1990 results in the appendix (Table II.3) illustrates this consistency. Most pollutants covered by official environmental statistics (with the exception of dust, methane and volatile organic compounds) were taken into account in this study. Future projects, and hopefully also official statistics, are expected to improve data availability. Particularly important would be the development of wealth accounts that include natural capital as an indicator of potential economic growth. Total environmental costs generated by natural capital consumption, i.e. depletion of natural resources and degradation of environmental sinks, amounted to DM 59 billion or three per cent of the net domestic product (NDP). In other words, EDP was about 97 per cent of the conventional aggregate. The assumption in this calculation was a reduction standard of 40 per cent for emissions, using best-available technology. An alternative reduction scenario by 25 per cent, with different marginal reduction costs, significantly decreased environmental costs to about DM 28 billion or 1.4 per cent of NDP. More recent preliminary estimates indicate an increase in environmental costs from 1990 to 1991 due to the inclusion of the new German States: the proportion of the environmental costs in NDP rose from three per cent to 3.3 per cent (i.e. from DM 59 to 83 billion). In the following years the new States adjusted to the modern economic structures and production methods of the old States with the result of reversing the trend: the share of the environmental costs in the NDP dropped to 2.7 per cent (approximately DM 80 billion) in 1995. Environmental costs (in 1990) are made up largely of costs for the avoidance of and emissions (61 and 17 per cent respectively), and nitrogen discharges into water (21 per cent). Utilities are responsible for generating over 20 per cent of total environmental cost. In Germany, the costs of resource depletion are negligible: 0.6 per cent of total environmental costs in the 40-per-cent scenario. Germany possesses relatively few natural resources, and most of them, like (mineral) coal, are extracted at such high costs that they fetch no long-term economic returns and are thus heavily subsidised. The study also shows that water and forest


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(timber) resources were used sustainably at the national level. Only fisheries and the extraction of some metals and minerals, notably oil and gas, incurred any depletion costs. Environmentally-adjusted net Capital Formation (ECF) remained positive. Germany’s economy exhibited, therefore, weak sustainability if we assume that the consumption of natural capital has successfully been substituted by produced, renewable/natural and/or human production factors. However, the amount of natural capital consumption does point to considerable losses in Germany’s sustainable economic growth potential. The environmental costs incurred are approximately 2.5 times higher than the average annual revenue from the solidarity tax supplement (in support of the economically less developed new States) to income and corporation taxes.7 Is it asking too much to raise two or three times that tax amount in solidarity with the next generation and with developing countries? Can we convince the economic agents to internalise these hypothetical costs in their profitability calculations? Modelling would be needed to find out whether such internalisation is feasible without radically changing our production and consumption patterns in the medium-term, over a period of, say, 30–50 years (as assumed in the Factor 4/10 strategies). Our environmental cost estimates show at least a realistic initial level8 for setting market instruments like effluent charges or user fees for different sectors of the economy. Such calculations could defuse the current emotionally loaded discussion about ecotaxes. Producers and consumers will indeed change their behaviour significantly in favour of the environment only if the fiscal disincentives for cost internalisation are well above the frequently evoked “pain barrier”. Annual ecological tax returns in Germany over the next few years will amount to 20 to 30 billion DM.9 These figures are far below our environmental cost estimates of nearly 60 billion DM. It is important in this context to bear in mind how the term “environmental cost” is used in the SEEA. Environmental costs are defined in line with the national accounts concept of capital consumption, valued at market prices (in the case of natural resources) and at maintenance costs (largely avoidance costs when dealing with degradation of environmental sinks). In Germany, the latter make up the largest part of environmental costs. However, these costs do not record environmental damage that could, in principle, be higher or lower than the costs of damage avoidance. As already mentioned, the valuation of damage, i.e. of a loss in welfare, is inconsistent with the SNA notion of production cost, and is at any rate hardly possible to measure at the national level. Damage estimates for the late 1980s and early 1990s in Germany confirm this: they vary between 100 and 1000 billion DM (Wicke 1993, p. 60 ff.), depending

P. Bartelmus • Unveiling wealth — accounting for sustainability

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on the definition and range of recorded environmental damage, and on the (mostly intransparent) valuation mix. If we decide to ignore all these problems and compare one of the more careful damage estimates (Wicke 1993, p. 114) with our own environmental costing, we would reach the conclusion that environmental damage in Germany is about double the re-investment cost in natural capital. A European Union project comes to the opposite result, however, probably because of differences in scope and coverage, and concepts and methods applied. The project thus presents overall environmental damage in Germany (1990) at about 50 billion DM (Markandya and Pavan, 1999, p. 129), which is considerably lower than our maintenance costs. Nonetheless, the good news is: avoiding environmental damage is cheap. The bad news is: environmental damage cost could be considerably higher. We can take this as a call and incentive for public and private (re)investment in nature. On the road to sustainability? The incorporation of material flows and environmental costs in projections and scenarios is an important use of the results of MFA and SEEA. Best use of the data is made when the structure of the models is similar to that of the national accounts. This is the case for input-output analysis, whose data base is an integral part of the national accounts. Input-output tables and calculations can be of a physical, monetary or mixed nature. With the objective of incorporating material flows, environmental taxes and social criteria in a dynamic input-output model, the Wuppertal Institute cooperated with the University of Osnabrück in a project about “Labour and Ecology” (HansBöckler-Stiftung 2000). The model appears to demonstrate that Germany’s sustainability objective of reaching Factor 10 is realistic. However, this statement must be qualified by the fact that the model makes numerous, and sometimes heroic, assumptions about production and consumption functions, price formation, as well as ecological and social standards, which limit the general validity of the results. Nevertheless, the so-called ecological-social scenario claims that over the 2000-2020 period it is possible to reduce material inputs by a third, and emissions by 40 per cent. This is to be achieved by a material input tax of 60 DM per tonne, an energy tax which increases until the year 2020 from zero to 250 DM per tonne reform and reduction of subsidies, further tax differentiations according to social and ecological criteria.

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Compared to an alternative economic-social scenario, the ecological-social scenario concedes to a relatively insignificant reduction in annual growth rates by about 0.3 per cent. If such a trend could be maintained in the future, it would indicate that reducing emissions and attaining the Factor-10 objective would be possible, even at positive economic growth rates. Models of the instruments and effects of environmental cost internalisation on production and consumption patterns may shed some light on the practical use and usefulness of the polluter/user-pays principle. Frequently heard sweeping statements about the insignificance of environmental costs, or the risk of overcharging the economy with such costs, could thus be judged more rationally. Conclusion From an ecological viewpoint, the German economy has not been sustainable in the past. The physical pressure on the environment from German production and consumption behaviour has not diminished. However, model calculations show (if we decide to put our faith in them) that a reversal of trends is possible. Comprehensive accounting for environmental and other social costs has not yet been carried out. Still, preliminary estimates indicate relatively low environmental costs of two to three per cent of NDP in Germany. The German economy should be able to carry these costs without radical structural changes, and without causing stagnation or recession. Is Germany sustainable? Not really, in the way it has been run in the past, but possibly in the future.

Which indicators, for what? It is difficult to give a complete picture of the data requirements for sustainability analysis. The notion of sustainable development embraces all fields of human and non-human living conditions. Practically all fields have been addressed by applied statistics. A useful first criterion for reducing the information overload is to focus on the interface of the sustainability dimensions. In this manner, some comparability between these dimensions would be created. Comparability of information is also needed at different levels of decisionmaking: from the micro-level of households and businesses and different groups of civil society to governments and international organisations. We should also bear in mind that environmental sustainability is a regional


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phenomenon as it is closely tied to the carrying capacity of ecosystems. Material flow analysis is particularly well-suited to assess interdependences of economic regions because it assesses imports and exports of sustainability by means of cross-boundary material and pollutant flows. Physical indicators, which are typically organised in loose frameworks, are capable of covering in principle all dimensions of sustainability. However, owing to their use of different units of measurement, they are difficult to link and aggregate. As discussed above, the result has been a proliferation of social and environmental indicators. The idea of channelling these indicators into the filters of models has met with partial success only, because of frequently unrealistic or limited model assumptions. As an alternative, narrowing down the scope of direct indicator use does render the indicators more useful for the management of particular environmental issues. It is however not possible to justify policy priorities with such indicator sets and thus to support the formulation and implementation of overall sustainability strategies. Attempts to create indices of sustainable development by calculating (equally or otherwise weighted) averages of “representative” indicators reflect subjective value judgements about concerns of sustainability and development that are included or ignored. Often these indices transmit the world-view of their creators, rather than a transparent and objective picture of regional and national sustainability. For these reasons, transparency in diagnosis can probably only be gained with the help of standard data systems like the physical and monetary accounts of economic activities. The physical MFA is to a large extent the basis of monetary environmental accounting. A bridge can therefore be built from the MFA to the SEEA and related sustainability analyses by means of physical and monetary input-output calculations. Would this be a first step towards the reconciliation between environmentalists and economists? Or even just between environmental and ecological economists? The capacity to aggregate the data of individual activities to sectoral and national indicators is an inherent advantage of accounting systems. The task of this “micro-macro link” (Krcmar et al. 2000, ch. 8) is the comparison of the ecoefficiency of individual enterprises and material intensity of household consumption with the corresponding sectoral and national ratios. At the macro-level, MFA illustrate the general trend of environmental impacts. They become increasingly relevant strategically at the level of economic sectors and the micro-level of households and individual businesses. At this level detailed information on specific material flows is available, which diminishes the significance of the weighting (by weight) problem.

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Wherever price and cost valuations of environmental phenomena can be applied, the SEEA provides the most consistent indicators at all levels; its most important fields of application can be summarised (Bartelmus 2001) as diagnosis: evaluation of economic sustainability during an accounting period at sectoral and macro-levels, support of sustainable growth and investment policies with modified indicators of capital (including natural capital), its productivity, and capital formation and consumption, changes in production and consumption behaviour through internalisation of quantified environmental costs, increasing the efficiency of sustainability policies: assessment of the economic and environmental effects of environmental protection expenditures. In conclusion, we see that long indicator sets do unveil conventional economic aggregates and opaque welfare indices. They provide detailed information about ecological, social and institutional aspects of sustainability. However, their use and usefulness lies more in the management of specific fields of sustainable development than overall policy making. Total Material Requirement (TMR) and its components are particularly useful for the comprehensive assessment of trends and structural change of environmental impacts. Their main limitation lies in giving equal “weight” to different impacts. Given the problematique of alternatively pricing priceless environmental services, “green” accounting indicators, like EDP or ECF, are the worst indicators of economic sustainability — except for all others.


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Appendix: SEEA Germany 1990 — first results and evaluation10 Figure II.5 is a synoptic presentation of a pilot SEEA for Germany. It includes the supply and use accounts, incorporating environmental costs, and, in principle, the asset accounts, extended for non-produced natural assets. Time and data constraints prevented, however, the compilation of asset stocks, and only stock changes are shown for now in the asset accounts. Both categories of accounts overlap in the areas of capital formation and consumption, covering produced and natural capital. Total environmental cost generated by the consumption and use of natural capital, i.e. depletion of natural resources and the degradation of environmental sinks, amounted to DM 59.2 billion or 3% of NDP. As also shown in text Table II.2, agriculture, energy supply and other mining incurred the biggest shares of environmental cost per value added. Over 20% of the total environmental costs were caused by the energy sector, followed by agriculture (14%). The largest share (45%) was generated by “Others”, consisting mainly of environmental costs of commercial and private transportation. Lack of data prevented the further breakdown of this sector. Natural resource depletion in Germany is negligible (0.6% of total environmental cost). There are few mineral resources, and those that are extracted are subsidised to the extent that they do not show a positive economic value (notably coal). Moreover, the use of water and timber resources was found to be sustainable — at the national level — with current production patterns. Depletion costs were thus only incurred in selected fish stocks (exploited beyond sustainability) and some minerals and metals, especially oil and gas. Since there were no usable market prices for natural resource stocks, the net price, using a 6% rate of normal return to fixed capital,11 was applied as a proxy for the net present value of the resource. Actual environmental protection expenditures, made during the accounting period, are already part of conventional accounts and indicators, albeit not always presented separately. In our own calculations, gross capital formation for purposes of environmental protection amounted to 0.8% of GDP. In the 1999 environmental accounts of the Federal Statistical Office, total expenditures (capital and current outlays) reached 1.5% of GDP. While not directly comparable with annual environmental cost, such expenditures are sometimes interpreted as a nation’s willingness to pay for the environment. Of course, such willingness should not be compared to other countries without some knowledge about their differences in environmental conditions. The overall results depend significantly upon the two reduction standards. This is because marginal costs increase considerably with higher

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reduction targets. Nonetheless, the emission of greenhouse gases can be considered as the most significant environmental cost factor in Germany’s economic activities. Considering Germany’s commitment to reduce its emissions of greenhouse gases by 25% (from its 1990 level) by the year 2005, we obtain an amount of DM 16 billion or 0.8% of the 1990 NDP. This is a relatively small expense, compared to the results of case studies in developing countries, but is of the same order as in other industrialised nations.12 When considering the much lower depletion cost of natural resource use (0.02% of NDP) one has to take account of the dependence of the German economy on resource extraction in other countries. In 1990, natural resource imports amounted to about 6% of NDP. Not all of it may reflect nonsustainable natural capital consumption but the number is a first indication of Germany’s need to “import” sustainability. The above rough estimates are the results of a first attempt at greening the German national accounts, carried out in the course of two months. They illustrate the feasibility of such accounting, reveal major data gaps and point to the need of improving the data base. Still, the case study does provide some insight into the causes, responsible sectors and significance of environmental concerns of natural resource depletion and pollution. It does so in terms of costs which, owing to the systemic character of the national accounts, can be compared to other costs and to the monetary value (benefits) of output, consumption and capital formation. Much of the — physical — data base underlying the monetary accounts was derived from the Physical Input-Output Table (PIOT) of the German Federal Statistical Office. Input-output tables are an integral part of the national accounts, facilitating the linkage of physical and monetary data. Other important data sources are those listed in note 10.


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References Adriaanse, A. et al. (1997). Resource Flows: The Material Basis of Industrial Economies. Washington, D.C.: World Resources Institute. Bartelmus, P. (2001). Greening the national accounts: approach and policy use, in: P.J.J. Welfens (ed.), Internationalization of the Economy and Environmental Policy Options. Berlin and others: Springer. Bartelmus, P. (1998). The value of nature — valuation and evaluation in environmental accounting, in: K. Uno and P. Bartelmus (eds), Environmental Accounting in Theory and Practice. Dordrecht, Boston and London: Kluwer Academic Publishers. Bartelmus, P. (1997). Whither economics? From optimality to sustainability?. Environment and Development Economics 2, 323–345. Bartelmus, P. with A. Vesper (2000). Green accounting and material flow analysis — alternatives or complements? Wuppertal Papers No. 106. Wuppertal: Wuppertal Institute for Climate, Environment and Energy. Bringezu, S. (2000). Ressourcennutzung in Wirtschaftsräumen. Berlin and others: Springer. Bringezu, S. and H. Schütz (2000). Indicators Study: Total Material Requirement of the European Union (TMR-EU 15). Final Report. Wuppertal: Wuppertal Institute for Climate, Environment and Energy. BUND and Misereor (eds) (1996). Zukunftsfähiges Deutschland. Basel, Boston and Berlin: Birkhäuser. Cobb, C., T. Halstead and J. Rowe (Oct 1995). If the GDP is up, why is America down? The Atlantic Monthly. Diefenbacher, H. (1995). Der “Index of Sustainable Economic Welfare”: Eine Fallstudie für die Bundesrepublik Deutschland 1950–1992. Texte und Materialien der Forschungsstätte der Evangelischen Studiengemeinschaft. Heidelberg. European Commission (1999). Towards a European Set of Environmental Headline Indicators (draft). Eurostat (2001). Economy-wide Material Flow Accounts and Derived Indicators — A Methodological Guide. Luxembourg: Eurostat. Gawel, E. (1998). Das Elend der Stoffstromökonomie — Eine Kritik. Konjunkturpolitik 44 (2), 173-206. Hans Böckler Stiftung (ed.) (2000). Wege in eine nachhaltige Zukunft: Ergebnisse aus dem Verbundprojekt Arbeit und Ökologie. Düsseldorf: Hans Böckler Stiftung. Hicks, J. R. (1946). Value and Capital (2nd edn). Oxford: Oxford University Press. Hinterberger, F., F. Luks and M. Stewen (1999). Wie ökonomisch ist die Stoffstromökonomik? — Eine Gegenkritik. Konjunkturpolitik 45 (4), 358–375. Krcmar, H. et al. (2000). Informationssysteme für das Umweltmanagement. München and Wien: Oldenbourg. Leipert, C. (1989). National income and economic growth: the conceptual side of defensive expenditures. Journal of Economic Issues 23, 843–856. Linz, M. (1998). Spannungsbogen — “Zukunftsfähiges Deutschland” in der Kritik. Berlin, Basel and Boston: Birkhäuser. Matthews et al. (2000). The Weight of Nations, Material Outflows from Industrial Economies. Washington, D.C.: World Resources Institute. Markandya, A. and M. Pavan (eds) (1999). Green Accounting in Europe — Four Case Studies. Dordrecht, Boston and London: Kluwer Academic Publishers. Organisation for Economic Co-operation and Development (OECD) (1998). Sustainable Development Indicators. Proceedings of an OECD Workshop (Paris, France, 8–9 October). Paris: OECD. Organisation for Economic Co-operation and Development (OECD) (1994). Environmental Indicators. Paris: OECD. Pezzey, J. (1989). Economic Analysis of Sustainable Growth and Sustainable Development. Environment Department Working Paper No. 15. Washington, D.C.: The World Bank.

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Sachs, W. et al. (1998). Greening the North — A Post-industrial Blueprint for Ecology and Equity. London and New York: Zed Books. Schmidt-Bleek, F. (1994). Wieviel Umwelt braucht der Mensch? Mips, das Maß für ökologisches Wirtschaften. Berlin, Basel and Boston: Birkhäuser. United Nations (2000). Integrated Environmental and Economic Accounting — An Operational Manual. New York: United Nations. United Nations (1996). Indicators of Sustainable Development: Framework and Methodologies. New York: United Nations. United Nations (1993). Integrated Environmental and Economic Accounting. New York: United Nations. United Nations (1984). A Framework for the Development of Environment Statistics. New York: United Nations. United Nations et al. (1993). System of National Accounts 1993. New York and others: United Nations and others. United Nations Development Programme (UNDP) (1999). Human Development Report 1999. New York and Oxford: Oxford University Press. Uno, K. and P. Bartelmus (eds) (1998). Environmental Accounting in Theory and Practice. Dordrecht, Boston and London: Kluwer Academic Publishers. Wackernagel, M. and W. Rees (1996). Our Ecological Footprint: Reducing Human Impact on Earth. Gabriola Island, BC and Philadelphia, PA: New Society Publishers. Weizsäcker, E.U. von, A.B. Lovins and L.H. Lovins (1995). Factor Four. Doubling Wealth Halving Resource Use. London: Earthscan. Wicke, L. (1993). Umweltökonomie: Eine praxisorientierte Einführung. München: Franz Vahlen. World Bank (1997). Expanding the Measure of Wealth. Washington, D.C.: The World Bank. World Commission on Environment and Development (WCED) (1987). Our Common Future. Oxford and New York: Oxford University Press.

Discussion KARL SCHOER There won’t be a green GDP

In his article Peter Bartelmus presents a green GDP, or more specifically an “Eco-Domestic Product” (EDP). In his view, this compilation of a German EDP is a boon that the Federal Statistical Office has so far withheld from the public. The Federal Statistical Office originally also hoped to realise such a calculation in the foreseeable future. However, when constructing the environmental accounts, it soon became apparent that various problems stand in the way of a reliable measurement of such a depreciated magnitude. The result is that there will not be a “green GDP” in the form of one figure in the official German statistics. The object of study (the value of environmental consumption) is too complex to be assessed using one single methodical approach. The modular construction of the environmental accounts and the methodological pluralism used by the Federal Statistical Office suitably reflect these difficulties. Peter Bartelmus failed to specify in his article precisely how he calculated the EDP. I am familiar with the main features of his approach from a previous conference, in Weimar. My criticism of his approach is based on two points. Firstly, the label “EDP” is misleading. Secondly, the “direct avoidance costs” are merely an intermediate product, which should not be marketed in its present form. The basic idea behind the calculation of the EDP is the adjustment of the traditional domestic product by accounting for the consumption of natural assets, which is ignored. The intention is to integrate two components of natural assets: the quantitative aspect of natural resource depletion, and the qualitative degradation of natural assets that are caused by economic activity. This aspect of qualitative change is especially important in Germany. Peter Bartelmus uses avoidance costs to measure capital consumption. As far as I know, he takes two components into consideration for the assessment of degradation: the emissions of carbon dioxide and nitrogen oxides. For these impacts, he calculates ex post hypothetical direct avoidance costs on the basis of certain reduction standards. In principle, there is nothing to criticise about calculating avoidance costs, although a lot depends on the details of how the calculations are performed. 39 P. Bartelmus (ed.), Unveiling Wealth, 39–47. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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However, as soon as the term “EDP” is used, the claim is made that natural asset depletion has been comprehensively taken into account. But if such a claim is made, all other important impacts, apart from carbon dioxide and nitrogen oxide emissions, would also have to be considered. They include, for example, other material impacts, the way and intensity of using land and space, and other structural interference that affects the quality of landscapes, ecosystems or biodiversity. Especially these last impacts can hardly be valued in monetary terms. The figure that Peter Bartelmus proposes as the corrective for calculating EDP (he suggests 2 to 3 per cent of the NDP for environmental consumption in Germany) is misleading. At best this figure takes into account only part of our environmental problems. The choice of the environmental standard affects greatly the result of such calculation: to what extent are current emissions to be reduced? Furthermore, it is important to remember that the avoidance costs at first only indicate how much those responsible for environmental impacts have saved by exploiting the environment as a free-of-charge absorption sink. This exploitation is defined by the environmental standards applied in the calculations. Thus, the avoidance costs provide information that is by all means relevant, but they do not necessarily measure the decrease of natural assets. Let me come to my second point of criticism: Peter Bartelmus’ approach is limited to the assessment of direct avoidance costs, and so neglects the indirect costs. The direct avoidance costs are the hypothetical additional costs that would be incurred for meeting a given target of emission reduction. Possible measures to be taken are above all technical adjustments or changes in production or input structures. Graphs that illustrate the course of hypothetical avoidance costs form an important basis for such cost calculations. For particular impacts, technical avoidance costs, which represent the relationship between costs incurred and environmental impact, can be compiled and plotted on graphs, also at the level of the national economy. As part of a research project, the Federal Statistical Office calculated such graphs of hypothetical technical avoidance costs for different types of air pollutants. These graphs provide information about the additional costs that would be necessary to reduce emissions of a substance by a certain amount with currently available technology. However, the problem is that generally measures to reduce emissions affect the total system non-marginally. That means that apart from the direct effects there are also important indirect effects on input and output structures, and prices. Peter Bartelmus’ descriptive ex-post approach neglects these indirect effects. Let me elaborate, using the example of the reduction of carbon dioxide

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emissions. A reduction of emissions could be achieved, for instance, by means of a large-scale substitution of high-carbon lignite by less carbonic natural gas. Apart from the direct costs, taking such a step would have important effects on the whole economy. The reason is that domestically produced lignite would have to be substituted by imported natural gas. Such processes can be assessed comprehensively only by econometric models that would suitably include a time element for a dynamic process of adjustment. Some research institutes have already carried out such analyses for Germany. This type of scenario modelling illustrates paths of economic development that comply with politically determined environmental standards. Such scenarios seem to use the most sensible way to estimate the costs of avoiding certain environmental damages for the national economy. According to the division of labour that is common practice in Germany, official statistics provides the necessary data, while scientific research institutes carry out model calculations.

PAUL WELFENS The need for valuation of assets and development

According to Peter Bartelmus, environmental costs amount to approximately 2.5 per cent of the net domestic product (NDP).13 2.5 per cent of the GDP is an extraordinarily high amount. In 1999, expenditures for research and development were 2.3 per cent of NDP, representing a significant driving force for economic growth. Therefore, I would like to warn against reaching mistaken conclusions about the magnitudes involved. There is a different point that appears to me more important than some critical comments. As an economist, I am very interested in the physical side, the input-output analysis. But this is only one aspect. Another aspect is monetary valuation. In my opinion, we ought to think much more about the asset valuation. More environmental protection and improved environmental quality lead as a matter of fact to an increase in the value of assets. Half of the private net assets in Germany are real-estate assets. The centrally planned economies of eastern Europe did not fail only because of their incapacity to achieve a high national product, but also because they were unable to maintain assets, to increase their value and to improve their use. There are still no meaningful figures on this aspect, neither on a regional level, although these figures are important for the government and economic policies. When we invest in

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environmental protection and thereby increase private wealth, we have to consider whether the state should be able to claim back part of this increase in wealth through taxation. Another important aspect is the coverage of international impacts and repercussions: the cross-border flows of emissions and assets, as well as the environmental effects of trade. To my knowledge, there is not much data about these effects. I would like to know whether anyone is carrying out research in this field. One last point: if researchers do not provide economic policy makers with an Eco-Domestic Product, this indicator will never play a significant role in political discussions. However, environmental accounting is so important that it will become an absolute necessity at some point.

ARNO GAHRMANN Our accounting system is incapable of measuring sustainability

In my opinion, the term sustainability is limited far too narrowly to environmental damage. The term should be used as in the Agenda 21, calling for global, social and political, equality. To give an example: in the context of cost reductions, employers are demanding an amount of flexibility from their employees which makes maintaining family structures more and more difficult. A sustainable society in the original sense of having families and bringing up children is largely forgotten and more and more ignored by the indicators which have been used so far. As a business economist, I am amazed at how pennies and cents are counted, percentages calculated and alternative definitions debated. At the same time, the basic question of whether the conventional cost concept is at all suitable for assessing sustainability is not discussed at all. In essence, what I want to say is that the term “costs” in corporate accounting actually reflects the present-day material situation only by means of an equally present-day monetary estimate. It does not reflect future developments. If we operate with this cost concept in the system of environmental accounting, we attempt to measure environmental costs — which are intended to reflect future developments — with an approach which specifically excludes future developments (Ankele and Gahrmann 1999, section 3.1.3 and 3.1.4). It seems to me that this discussion about the system of national accounts is like trying to find the best way to the summit of a mountain by looking at a flat map. People argue and

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argue about the map, but do not take into account that one important dimension is missing. If my assessment is correct, then damage to the environment and to the future can by their very nature not be measured at the macro-level (and here especially in the system of national accounts). The reason is that the conventional cost concept as derived from business economics is unable to capture these damages by their very nature. In particular, the focus of economic agents on the all-pervading indicators of costs and profits would point them in the wrong direction — away from the overriding question of their own sustainability and also the sustainability of the system as a whole. This would also explain why shareholders and economic policy base real decisions on the fictional measures of profit and costs (as in discussions on Germany’s competitiveness). This is all the more regrettable as convincing models for a realistic restructuring of the economy (von Weizsäcker and Seiler-Hausmann 1999; Sachs et al. 1998; Kessler 1996; Binswanger et al. 1983) do exist. As explained in my article below, we face the task of revising the established accounting system with its core indicators, costs and profit. The purpose of this revision is to render the system capable of measuring sustainable performance so as to achieve a new model of wealth.

PETER BARTELMUS Some answers

Paul Welfens asked about cross-border dimensions and balance sheets of wealth. The system of green national accounts actually does incorporate both aspects. We have not done so in this study for reasons of money and time: A student colleague and I carried out the compilation of the accounts within eight weeks. The balance sheet of wealth, augmented by natural capital, and the principle of the sustainability of asset and capital maintenance are indeed key aspects of the SEEA. The recording of cross-border environmental damage is more controversial, however. At the moment, such damage is not regarded as production cost but as a transfer from and to abroad and hence as a part of a (disposable) “green” national income. The pilot study of the monetary environmental accounts was intended to provoke such responses as that of Karl Schoer. I think it is important to hear different opinions, and I would welcome it if the Federal Statistical Office became more active in this area. This might help to break the prevailing silence

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and lethargy mentioned in the discussion. Without the support of the Federal Statistical Office, such green accounts cannot be regularly compiled. In the meantime we intend to further develop these preliminary estimates in our institute. We will attempt to improve above all two aspects of environmental accounting: (1) the balance-sheet of wealth: the recording of environmental assets, notably of natural resource stocks, is an important task for economic and environmental statistics. Accounting for natural wealth provides important information for growth and development, assessing the distribution of property rights to resources, and facilitating the portfolio analysis of available produced and natural capital. Changes in land use are actually recorded in the environmental accounts, albeit as “other” asset changes (as in the conventional system of national accounts). They are therefore not counted as “cost”; (2) coverage of pollutants: we did try to include the most important emissions — apart from the ones mentioned by Karl Schoer, also and phosphorus and nitrogen emissions into water — using data from the Federal Statistical Office where available. But obviously more detailed studies need to be carried out. A frequently made point is that avoidance costs do not represent actual environmental damage. This is of course correct, and economists know that in the final analysis it is the damages that ought to be internalised for the optimal allocation of resources (under ideal conditions). The problem is that the valuation of damages is highly controversial, even for single projects and programmes. For this reason, damage valuation does not make sense at the national level, even if some studies have attempted this. For example, people are asked how much they are prepared to pay for one or another environmental service; another approach estimates the loss of these services as the additional travel costs to recreational areas that we no longer find in our vicinity. This is why we have reverted to avoidance costs. These costs can be derived from “best available technologies” and are consistent with the known and practiced principle of depreciation in conventional economic accounts: Depreciation is there to make provisions for the replacement of consumed real capital and hence to sustain the production of goods and services. If avoidance costs were internalised, changes in the structure of the economy would be the result. Hence, the picture we create in the environmental accounts is a snapshot, as Carsten Stahmer (of the Federal Statistical Office of Germany) has put it. If we want to analyse the effects of a potential inter-

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nalisation — which has de facto not been carried out — we have to revert to models. However, economic modelling faces the well-known problems of defining and quantifying production and consumption functions, price elasticities and investment behaviour. Typically these functional assumptions are hightly unrealistic. This does not mean that model analyses cannot provide information about potential structural changes resulting from the internalisation of environmental costs. Taking the quite restrictive model assumptions into account, inputoutput analyses have been successfully applied, since they are relatively closely connected with the system of national accounts. We have already begun working with the dynamic input-output model of the University of Osnabrück (Meyer 1999). There is one thing I would like to make clear, and I think Robert Repetto would probably agree with me. Some of the critics of his study in Indonesia, in which he assessed only natural resource inputs, considered his approach as slightly extended national accounting which ignored the environment. Indeed, if we do not take into account the deterioration of environmental quality as environmental cost, we do not compile ecological-economic accounts, but merely improved economic accounts. Another reason for environmental cost accounting is that some of these costs, especially on the input side, are probably already accounted for at the micro-level. I cannot believe that an enterprise which extracts resources does not incorporate the depletion of these resources as costs in its profit calculations. If these costs were indeed accounted for, the national accounts would show inflated aggregates and the environmental accounts would only correct this distortion. On the output side, such a situation of actual internalisation of “externalities” by companies is less likely. There are examples of corporations, however, such as Monsanto in the USA, which have reflected their potential legal responsibility for environmental impacts in their accounts as a cost item. In these cases, too, the environmental accounts would correct inflated economic indicators. Arno Gahrmann is entirely right in saying that social and institutional aspects are ignored in green accounts. The reasons are problems with definitions and data, which have so far prevented a clear-cut approach to measurement and evaluation. Promising approaches are attempts by the United Nations Statistics Division to account for human capital formation, mostly education, as investment. One could perhaps also measure the decrease in the educational level of a population, for example in striking cases of the erosion of traditional tribal knowledge. However, the valuation of these losses by means of changes in economic productivity is too narrow and thus controversial.

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As to corporate cost accounting: International approaches, such as the ISO 14000 series of standards, deal with the question of how sustainability can be assessed in both physical and monetary terms. We at the Wuppertal Institute are also working on linking ecoefficiency, based on physical material inputs, with the conventional cost calculations. Such linkage would facilitate the analysis of a “micro-macro link”, allowing companies to compare their environmental behaviour with that of their business sector and the total economy. As to the mountain summit metaphor: If we compare our task with climbing a mountain top, we should remember that the environmental accounts do not take us all the way to the peak but only quarter or half of the way, that is up to the point where the future begins. Environmental accounts are illustrations of the past. They show what has already happened, in other words how the economy had affected the environment and how we can measure and evaluate these effects. By contrast, sustainability, as an ex ante concept, aims at assessing how we can pass our environment on to future generations — as we received it from our ancestors, or modified only to a point of no complaint. Unfortunately, future generations can make their voice heard to a limited extent only (the young of the next generation), but above all they have no right to vote. The evaluation of future generations’ needs is thus likely to cause insurmountable problems for any model calculations. In general, I agree with Paul Welfens’ conclusion: we, the researchers, have to provide politicians with monetary ecoindicators in order to add environmental issues to their “vocabulary”. As Robert Repetto explains below, a committee of experts in the USA has also reached this conclusion. Karl Schoer says “there will not be a green GDP in the form of one figure in the official statistics”. I agree with this statement, albeit in a different sense: Apart from the green GDP, which now does exist “unofficially”, we also have to take into consideration all the other figures in the environmental accounts for the formulation and evaluation of sustainable economic policies.

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References Ankele, K. and A. Gahrmann (1999). Die Ökobilanz als ökologische und ökonomische Entscheidungshilfe, in: J. Friedrichs and K. Holländer (eds), Stadtökologische Forschungstheorien und Anwendungen. Berlin: Analytica. Binswanger et al. (1983). Arbeit ohne Umweltzerstörung: Strategien für eine neue Wirtschaftspolitik. Frankfurt: S. Fischer. Kessler, W. (1996). Wirtschaften im dritten Jahrtausend: Leitfaden für ein zukunftsfähiges Deutschland. Oberursel: Publik-Forum. Meyer, B. (1999). Research — statistical — policy co-operation in Germany: Modelling with Panta Rhei, in: European Commission (ed.), From Research to Implementation: Policy-driven Methods for Evaluating Macro-economic Environmental Performance. EU RTD in Human Dimensions of Environmental Change, Report Series 1999/1. Luxembourg: European Communities. Sachs, W. et al. (1998). Greening the North — A Post-industrial Blueprint for Ecology and Equity. London and New York: Zed Books. Weizsäcker, E. U. von and J.-D. Seiler-Hausmann (eds) (1999). Ökoeffizienz: Management der Zukunft. Berlin, Basel and Boston: Birkhäuser.


III. Which indicators, and for what?


Udo E. Simonis

On expectations and efforts — some introductory observations

My hope is that the new millennium will see renewed efforts and greater success in creating the indicators that are needed to guide us toward sustainable use of the earth’s resources. Robert Repetto

This quotation from Robert Repetto is illustrative of how much is expected of new indicators. There are a great number of different reasons for these high expectations. The search for new indicators has been going on for a long time since the conventional indicators were revealed as unsatisfactory: The social indicator movement started around 30 years ago. It was an attempt to counter the shortsightedness of conventional knowledge and approaches which became apparent around this time. One of the projects of the German Sociological Association still carries the name of this movement: the Social Indicators Group. Since then, some complex systems of indicators have been developed to measure the quality of life, using sophisticated methodology and a broad empirical basis. I personally found the work of UNRISD (Drewnowski 1970, 1974) particularly attractive (Simonis 1975). Together with colleagues I brought the extensive Japanese indicator systems for assessing Net National Welfare (NNW) to the attention of the German speaking public (Maruo 1974; Simonis 1974). And indeed the standard of social reporting has improved since then, at least in Germany. One example is the “Data Report” which is now published every second year (Statistisches Bundesamt 2000). Environment experts made the next significant contribution to the search for new indicators. I would like to leave open whether this can be described as an environmental indicator movement. At any rate, participation was quite limited. But there were some outstanding studies and project groups, of which the following deserve mentioning: 51 P. Bartelmus (ed.), Unveiling Wealth, 51–53. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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Which indicators, and for what?

Leipert’s (1989) defensive expenditure approach. The environmental satellite accounts which were developed at the United Nations Statistics Division (United Nations 1993) by a group headed by Peter Bartelmus and given momentum by the German Scientific Advisory Board on Environmental Accounting. There followed the sustainability debate, which continues to the present day, and in which the Wuppertal Institute is actively involved. It has led to physical indicators taking centre-stage. Their relationship to monetary indicators is the subject of this book. There is widespread consensus on the sustainability approach, based on the “three-pillar model” of economic, environmental and social goals. However, these three pillars are often of different heights — unable to support a common roof. And so it is with the “sustainability triangle” whose sides differ in length, depending on the partial interests (economic, environmental, social) pursued. What is still missing is a consensus about a plausible, comprehensive and globally applicable indicator of sustainability, or possibly an appropriate system of sustainability indicators. Should there be an overall indicator? Do we really need one? According to the criteria specified, only the Human Development Index (HDI) can so far be considered a real success (e.g. UNDP 1999). The HDI is an equally weighted three-pillar index, which has been compiled by a highly motivated and professional UNDP team for 162 countries, i.e. nearly the whole world. Its regular publication always makes newspaper headlines. In contrast, the poverty indicators of the UN Committee for Development Policy (CDP), particularly the Economic Diversification Index (EDI), do not make the headlines; nor do the current studies on ecological vulnerability which draw attention to the urgency of the climate problem (United Nations 2000). The HDI fulfils the requirement of simplicity. Johan Galtung’s incisive observation on the neglect of simplicity is apposite here: An indicator which cannot be understood within five minutes by a person with a standard level of secondary education is not a means of investigation, but an instrument of political power. This verdict could also apply to indicators of sustainability: if they are to be understood and accepted by the whole world, their simplicity is essential. But can they be constructed in such a manner? How are they to be created, and what for? What are our expectations with regard to measuring sustainability?

U. E. Simonis · On expectations and efforts

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Whenever we refer to expectations, the “Schopenhauer trap” is just around the corner. The structural pessimist Arthur Schopenhauer once devised a law of happiness and contentment, which can be summarised as follows: If you want to be happy and content, and want to stay that way, you have two options: you either lower your expectations, or intensify your efforts! You may decide for yourselves what you want to do with your expectations. The following pages, I am sure, set out on the intensification of efforts, approaching the subject from a variety of perspectives.

References Drewnowski, J. (1974). On measuring and planning the quality of life. Publications of the Institute of Social Studies. The Hague and Paris: Mouton. Drewnowski, J. (1970). Studies in the Measurement of Levels of Living and Welfare. Geneva: United Nations Research Institute for Social Development (UNRISD). Leipert, C. (1989). National income and economic growth: the conceptual side of defensive expenditures. Journal of Economic Issues 23, 843–856. Maruo, N. (1974). Measurement of welfare in Japan. A new basis for social planning, in: H. Simonis and U. E. Simonis (eds), Japan: Economic and Social Studies in Development. Wiesbaden: Harrasowitz. Simonis, U.E. (1974). Nettowohlfahrtsindikator. Ein japanischer Ansatz, in: W. Zapf (ed.), Soziale Indikatoren: Konzepte und Forschungsansätze III. Frankfurt and New York: Campus. Simonis, U.E. (1975). Lebensqualität. Ansätze zur Gewinnung inhaltlich neuer sozioökonomischer Ziele, in: Umweltstrategie: Materialien und Analysen zu einer Umweltethik der Industriegesellschaft. Gütersloh: Veröffentlichungen des Sozialwissenschaftlichen Instituts der Evangelischen Kirchen in Deutschland, Vol. 4. Statistisches Bundesamt, in Zusammenarbeit mit WZB und ZUMA (ed.) (2000). Datenreport 1999: Zahlen und Fakten über die Bundesrepublik Deutschland. Bonn: Bundeszentrale für Politische Bildung. United Nations (2000). Poverty amidst Riches. The Need for Change. Report of the Committee for Development Policy. New York: United Nations. United Nations (1993). Integrated Environmental and Economic Accounting. New York: United Nations. United Nations Development Programme (UNDP) (1999). Human Development Report 1999. New York and Oxford: Oxford University Press.


Hartmut Bossel

Indicators for sustainable development — a systems analysis approach From a basic, systems science perspective, indicators should provide reliable, compact information about two things: firstly the condition of a system or its variables, and secondly the changes in this condition, i.e. the development of the system (cf. in particular Bossel 1998, 1999). The selection of indicators expresses the world-view, systems understanding and interest of the observer: which information is considered important, and for what objectives? It is not possible to create scientifically objective systems of indicators — subjective evaluations always have an influence. The systems of indicators currently in existence almost all suffer from systemic imbalances and gaps. Wealth (which is a condition) and social progress (which is a development process) are generally based on the effective functioning of the total system, comprised of human society and the natural environment, and their component systems. This means we have to be concerned with what could be called the total system health or viability. The basic requirement is therefore the preservation and improvement of the viability (i.e. in fact the sustainability) of all systems that contribute to overall success. It is thus not acceptable to monitor the condition of only one of the component systems, for example the economic or employment system. The viability of a self-organising system has several essential components or “orientors” that are completely independent of each other, and hence need separate monitoring: existence / environmental compatibility effectiveness freedom security adaptability coexistence 55

P. Bartelmus (ed.), Unveiling Wealth, 55–58. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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Where human interests are involved, psychological needs have to be taken into consideration as a further orientor — for example identity, affection and others that cannot be deduced from system requirements in the same way as the other orientors. The indicators under observation must reflect the extent to which all the requirements of the orientors are met. One single indicator can thus not adequately describe the development of a system. Society can be considered as being constituted of component systems, each contributing to its overall function and performance. For each of the systems involved we need information about: (1) its viability (i.e. the sufficient fulfilment of all orientors), (2) its contribution to the viability of other systems which depend on it.

The same duality can be found in all managed systems, for example, an airplane: The pilot always has to deal with two kinds of indicators. One indicator group provides information about the current state of the airplane, its position in the air, its speed, its altitude, etc., while the other shows whether the objective of the flight, i.e. reaching the destination, will be achieved. In other words, one set of indicators informs about the functional integrity of the system itself, the other set shows the system’s contribution to the objectives of its operator. In practice, this system relationship is usually recursive on several levels; complex systems can be broken down accordingly. For example, the education system influences the viability of the economic system, which affects the prosperity of society — but also the state of the environment, which in turn affects the viability of the system as a whole. It is not necessary (and would hardly be possible) to create a detailed description of the total system and the complex relationships of its component systems. It is sufficient to find indicators that provide information about the viability of those subsystems that are essential to the development of the whole. The subsystems that are relevant to future development can be summarised in six categories: infrastructure economic system social system individual development government and administration environment and natural resources.

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To develop a practical system of indicators, these six sectors can be aggregated into three subsystems of the total system: social organisation

=

support system natural system

= =

social system + individual development + government and administration infrastructure + economic system resources and environment

Wealth and progress of overall social development are secured when each of the subsystems firstly is itself viable, and secondly makes a positive contribution to the viability of the total system. This results in a structure of questions for three systems, two categories of questions (see above) and seven orientors, which can be answered by 42 (3 x 2 x 7) relevant indicators. Experience has shown that monitoring a large number of indicators is less problematical than it may seem at first glance. Indicators that can provide reliable qualitative answers to questions such as the following are sufficient14: “Is the support system effective and efficient?” (Seattle indicator: residential water consumption) “Does the support system contribute to effective and efficient functioning of the total system?” (Seattle indicator: work required for basic human needs) “Is the social organisation capable of adapting to new challenges?” (Seattle indicator: adult literacy) “Does the social organisation contribute to the adaptability of the total system?” (Seattle indicator: youth involvement in community service) “Is the natural system stable, and does it function reliably?” (Seattle indicator: soil erosion) “Does the natural system contribute to the security and stability of the total system?” (Seattle indicator: pollution prevention and use of renewable natural resources). Changes in indicator values over time demonstrate reliably an increase or decrease in the viability of the subsystems and the total system. Furthermore, and most importantly, such time series alert to risks and threats which could be caused by inadequate fulfilment of a single orientor of one of the systems. The most useful indicators are those relating the actual rate of change to the rate of change which the system is capable of supporting (Biesiot indicators). If this ratio is larger than one, the system is under threat.

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It only makes sense to talk of wealth and social progress if all these systemic indicators are in the “satisfactory” (“green”) range, i.e. when sufficient fulfilment of the orientor requirements ensures the viability of the systems involved. As soon as a single “red light” comes on, the system is no longer sustainable.

References AtKisson, A. et al. (eds) (1997). The Community Handbook: Measuring Progress Toward Healthy and Sustainable Communities. San Francisco: Redefining Progress. Bossel, H. (1998). Earth at a Crossroads — Paths to a Sustainable Future. Cambridge, UK: Cambridge University Press. Bossel, H. (1999). Indicators of Sustainable Development — Theory, Methods, Applications. IISD International Institute for Sustainable Development, Winnipeg, Manitoba: http://iisd.ca/ about/prodcatperfrep.htm#balaton

Paul Klemmer

Economic, ecological and social indicators The fundamental question is: Which indicators do we need? How can we measure sustainability? I distinguish two large groups of indicators. One group consists of what I call “guide-beam indicators”, and the others are “nonsustainability indicators”. I make no secret of the fact that I long suspected the Wuppertal Institute of being on the side of the guide-beam indicators. Whenever an indicator such as “Factor 4” or “Factor 10” comes up, I tend to suspect that someone is trying to force the complex jumbo jet “German economy” onto one single beam or path of a particular avoidance strategy. Such a strategy decides on one variable as the target variable, and every deviation from this optimal course is interpreted as non-sustainability. But if I am reading the message of recent projects correctly, these guide-beam indicators are viewed more cautiously now, which I can only welcome. There is a second group of experts (including some members of the German Scientific Advisory Board on Environmental Accounting who focus on guide-beam models rather than guide-beam indicators. The underlying idea is that the complex system “Germany” can be represented by one comprehensive mathematical system. Such a system is to simulate several divergent paths of development by specifying alternative restrictions. Iterations of model runs are to find a path of development which is as sustainable as possible. This is without doubt intellectually intriguing and fascinating. As a professor, I should welcome it as a tool of keeping us busy. But as the president of an institute which works with such complex models, I know what will be the outcome: five different institutes will produce five different models. The real world is so complex that scientists always face the following questions: do we capture the essentials? Have we interpreted the economy correctly? Does our model approximate reality? Therefore, I am very sceptical about such concepts. They are hardly suitable for long-term forecasts. Whenever economic forecasts are made for more than five or six years, the forecasters can only hope that the people who have to work with these forecasts have a short memory. Typically, forecasts are wide of the mark. 59 P. Bartelmus (ed.), Unveiling Wealth, 59–61. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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For this reason, there is the second group of indicators, the non-sustainability indicators. Peter Bartelmus’ work goes in this direction. In my course on “Economic Policy I”, which deals with the objectives of economic policies, I use to quote Camus: “There is no justice, but there are limits to injustice”. With this I want to make the point that human society has learnt by painful experiences that there are some states of existence which it cannot accept. Society has thus developed what could be paraphrased as “indicators of unhappiness”. Peter Bartelmus refers explicitly to unhappiness in developing his accounting indicators (see part II, above). Casually speaking, it looks like we use these indicators to make people who are actually quite happy realise that they ought to be unhappy. Sometimes I do get the impression that this might be the purpose of some such indicators. However, I do consider it legitimate to approach our target by identifying initially non-sustainable processes. Our society relies for economic questions and other concerns on initiatives of the private sector. Sustainability policies must therefore attempt to shape society by generating an optimal search process within a small number of guardrails. For indicators to become politically relevant, they need to be limited in number. If I were against sustainability policies, I would support all projects which create a hundred, two hundred or three hundred indicators. Such projects would indeed obfuscate the issue at hand. By no means do they constitute a method of unveiling wealth. Rather, they generate confusion among policy makers and are thus counterproductive. To be specific: indicator systems with more than four to ten indicators are of no use to policy making. There is another requirement which I would like to promote: indicators should be easily comprehensible to the average citizen, whose vote is to influence policy decisions. What are the consequences, if we want to take the three pillars of sustain ability — its economic, ecological and social dimensions — into account? How can we express the target variables through indicators? My answer is: attempting this would be the wrong approach. I support a different way: let us latch on to the classic idea behind the policy of sustainability, that is to preserve the basis of the long-term development of our society. Peter Bartelmus addressed the principle of capital maintenance which should be applied to as many fields as possible. Let us thus take a look at the three main capital categories. Economic (non-financial) capital involves in particular the presence and the condition of certain infrastructures. Our national economy is capitalintensive, focusing on the long-term. German reunification has shown that the transformation of a national economy requires time and that the destruction

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and erosion of an infrastructure results in a long-term impairment of development. Natural capital includes a few essential categories which (also according to the German Scientific Advisory Board on Environmental Accounting) are not substitutable: land, soil and the limited absorptive capacity of the earth’s atmosphere. The latter provides us with the guardrail “prevention of an undesirable greenhouse effect”. As I see it, this would be a conceivable indicator for efforts of preserving this particular type of natural capital. The third pillar, social capital, is the most difficult to pin down. A large number of economists and social scientists tackled this issue in a problematic fashion. In my view, a totally different approach is more promising. Research on developing countries provides some valuable starting points. Why are the social structures in many Asian countries (especially those where Chinese people or a Chinese minority live) the source of particularly productive ideas and initiatives? In Malaysia, there is a saying that “the Chinese pull the train forwards, the Indians jump aboard, and the Malaysians are pulled along”. In Indonesia the Chinese set development in motion, as of course also in Hong Kong. Is there a special cultural element, a cultural characteristic of Chinese population groups? Modern studies of developing countries reach the conclusion that there is such a thing as social capital, which conveys cultural characteristics. Keywords in this context are: “spirit of competition”, “culture of self-reliance” and, following Germany’s arts and crafts organisation, a culture of solidity. A strict master’s supervision affects the apprentice, producing a sense of identification and solidity. Is it possible to introduce a cultural element of long-term responsibility into these cultural patterns which I see as social capital? Can it be measured? For me, that would be one of the most important challenges for indicator development. Sustainability policy in this sense is the attempt to maintain, manage and build up the above-discussed three categories of capital. Natural capital should cater to essential and non-substitutable factors; economic (produced) capital represents the fixed assets required for long-term economic growth; and social capital should reflect those cultural facets which guarantee a society’s survival.


Arno Gahrmann

Acquisition and numerical hocuspocus — profits and costs are misleading targets and indicators “Economic miracles are created by encouraging consumption, or by reducing it”.15 This advertising slogan, coined with reference to Germany’s “father of the economic miracle” Ludwig Erhard, is just as intentionally attention grabbing as it is (in all probability unintentionally) profound. It makes us notice a seemingly insoluble dilemma in our economy and society: increasing profits by reducing costs in one area leads to losses in other areas. This results in schizophrenic and actually quite scandalous situations, for example when the population of the former German Democratic Republic pounced on the better and cheaper products from the West — thus making their own work worthless. Another example is the car industry — nobody dares to make a serious attempt to reduce the high number of young people who are killed in traffic accidents. The loss of human life and the love, effort and money invested in their lives by their parents is not taken into account (at best alluded to by decorated crosses). And the well-known contradictions of the agricultural market are further compounded by the fact that some of the excess produce is exported to Africa, where it displaces the production of small farmers who are subsequently subsidised by development aid from the very same exporters. This article intends to show that an economic system fixated on cost and profit figures, by its very nature, cannot resolve such paradoxes and dilemmas, and especially cannot ensure sustainability. The widespread discontent with the economy (“la terreur de l’économie”) is thus not a result of human lack of understanding, but a result of the incapacity of the dominant economic system for dealing with the realities of life. The first part of this article is to demonstrate this from a theoretical angle, based on business accounting methodology. The second part will show that many problems in the economy and in society are the consequence of a focus on dead matter, reflected in costs and profits, rather than on life itself. This is demonstrated by a critique of tackling environmental damage, pensions schemes, unemployment and loss of diversity from a purely economic point of view. 63 P. Bartelmus (ed.), Unveiling Wealth, 63–71. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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Costs and profits in the system of business accounting Costs and profits as indicators of net worth development The basic objective of business is to produce a product or service (for example commodities of a specific quality) efficiently, that is with the least use of “value” stored in inputs like material consumption, expenditure for staff and capital and depreciation of material assets. In the system of business accounting, this use of input value is assessed in monetary terms and defined as cost. Profit is the balance of revenue from product sales and costs incurred. The costs can thus be viewed as a decrease in net worth, a fictive, imputed balance of monetised assets and liabilities, which entrepreneurs call net assets (or total equity). Revenues increase net assets. The profit for an accounting period reflects thus an increase in net worth, generated during that period, calculated as the balance of revenues and costs. Scope and coverage of assets Debt (i.e. capital from outside sources) is relatively easy to assess. Assets are more difficult to define with respect to the time period under consideration and their scope and coverage. The explanatory power of business accounting is limited by the coverage of different asset categories. In principle, only material objects that can be sold singly are taken into account (including, of course, claims and licences or patents). Other important “intangibles” such as the ability to motivate staff and create enthusiasm in customers are essential for the survival of a company but cannot be captured in business accounts. Thus, business accounting pictures the currently visualised and measurable (in money terms) situation. This means, however, that business accounting is incapable of revealing potential risks or development opportunities for a company. Net worth and discounted cash flow Calculating the balance of material assets and liabilities (the net worth as defined above) provides a useful indicator of the net revenue gained by winding up a company, that is by selling off all assets piece-by-piece. In fact, today’s system of accounting was developed around 500 years ago in order to give partners in a time-limited “enterprise” (for example the construction and operation of a merchant ship) an indication of the expected net surplus after ending the enterprise. This made it possible to distribute profits in advance (Schneider 1997).

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However, if a company is intended to exist “for ever” (i.e. as a going concern), as is usually the case, the net worth of assets becomes less significant. Highly sought-after companies (whether a kiosk with a good location or a practically asset-free dot.com) show this: their price is determined solely by the discounted future cash flow which exceeds net worth to an extent that its meticulous calculation becomes pointless. This turns the value of net worth and derived costs and profits into fictional business indicators. The professionals in the field are, of course, very familiar with this divergence. Nonetheless, current approaches to a “modern” valuation of companies16 continue using the net worth as the most important indicator. The reason is that, otherwise, company results would become almost meaningless, given the sometimes extreme fluctuations in estimates of future cash flows. Summary assessment of business accounting

Business accounting is an attempt to approximate the value of a “living” company by its net worth. However, business accounting fails in this task as soon as qualitative, non-saleable material assets such as image, programme and marketing concepts, staff motivation or location make a significant difference to the effective purchase price and/or the sustainability of a company. The maximisation of the fictional quantity profit is frequently presented as the main company goal in textbooks of business administration (albeit sometimes subject to side constraints). Such focus on profit maximisation fails to consider whether this goal actually and unequivocally serves the real metaobjective of securing the future of the company, i.e. its sustainability. For example, economising on expenditure for research and development may spare the monetary net worth in the short and medium term; it may endanger, however, its market position and thus its very existence on ever-changing markets in the long term. Similar to living organisms, an increase in assets is neither a necessary nor a sufficient condition for ensuring survival in the long term. However, an ongoing decrease in assets alerts to risks of resource depletion and to survival.

The consequences of net-worth oriented accounting The focus of business accounting on net worth and hence a “skewed” presentation of costs, profits and assets in annual balance sheets and profit/loss statements does not have to have major consequences beyond the company itself. This would be the case especially if management, shareholders, creditors and auditors evaluate the accounts in an informed way and with the necessary

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scepticism as to their real significance. However, the situation becomes critical when these figures are used as the only guide for company practice, and when companies are assessed only by up-to-date profit statements and not with regard to their long-term policies. Such assessment affects not only the company itself, but also the total economy, society and the environment. I will show in the following that many economic and social problems are the result of the prevailing conventional objectives for our economy and its agents — objectives which focus on fictional indicators rather than on survival and sustainability. Environmental damage: offset by high valuation of benefits? Passing on to other economic agents and/or future generations asset depletion and other, notably environmental damages is by now a muchdiscussed concern. According to environmental economists, it should be possible to solve this issue by making the responsible agents pay for their “externalities”: either with taxes or other charges. However, this approach calculates asset losses at current values only for the present generation. Moreover, these values may fluctuate significantly with external parameters such as exchange rates, interest rates or crude oil prices. Above all, these losses are generally unrelated to the evaluation of those affected by them, where it is hardly possible to identify all affected parties. Damage to forests is thus often valued by willingness-to-pay techniques (“What are you prepared to spend for a walk in the forest?”). Apparently this valuation depends on the respondent’s level of income. Also, such assessment may differ considerably from that of other generations that might face overall forest decline. The incorporation of external costs does not necessarily bring about sustainability. This is in evidence when the reduction of costs in other areas, such as staff, and/or price increase, offset the disincentives generated by social cost internalisation. In reality, the situation has not changed at all in this case. Sufficient cost reduction and/or price increases make it possible in this way to show profits on the books — both for the company and for the economy as a whole, even in situations of considerable environmental damage and sustainability loss. However successful its short-term guiding effect, this approach is caught in the same trap of unreflected profit maximisation as the main company objective: it is the consideration of high current profits as success rather than as a failure to make the necessary “sacrifice” for long-term sustainability. Transportation specialists like Willeke (1996, pp. 132 et seq.) and Baum (1998) have made such calculations. They consider transportation as a


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necessary condition for the functioning of an economy and hence as an indispensable economic benefit. Despite the considerable impacts of traffic on humans and the environment, they see an overall net benefit, without checking for better alternatives to the existing transportation system. Even the first step of this benefit valuation is questionable: why not justify the costs of a gold-plated rear view mirror with the argument that these costs are much less than those of an accident avoided by installing the mirror. The conclusion they reach is devoid of any economic logic: external costs need not be accounted for because they are exceeded by the benefits for the national economy. In the same way, one could argue that the car industry should give trucks away for free, because the purchasers receive a benefit which is generally higher than the purchasing price. It is thus simply not possible to measure the loss of sustainability, using an evaluation system that is oriented around material assets and their net worth. In addition, it is by no means true that all economic activities contribute to national welfare which could be set off against environmental and sustainability loss. For example, Leipert (1989) describes economic output such as increased travel to and from work, forced upon the economy, as “defensive expenditures”. Pensions: your money or your life?

Securing pensions through private savings schemes is currently propagated in Germany as a supplement to the public pension system. In this system the working generation supports the growing generation of pensioners. The claim made for such “pre-funded” schemes is that the older generation would not have to depend on the mercy of the generation that will be working in the future. This future generation would thus have to carry less of the financial burden than in the public system. In fact, buying shares or hoarding cash as an investment for retirement secures only a trip to the AGM and an abundance of paper (documents). Real benefits like care at old age, food, shelter, culture, enjoyment of nature or friendship depend, however, on the actual situation of the economy, the environment and society at the time of retirement. To ensure favourable conditions at that time all three dimensions of this future situation need to be controlled and cared for. Obviously money made available at the time cannot buy all the future benefits, promising only present financial claims on things that can be bought. Pension funds in the USA are invested in high-yield companies and might very well overcharge the economy, society and the environment. The result could be that the people who are today paying into these funds will see their

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wealth increase dramatically on paper. However, in old age, people might live in a world that has been physically and socially destroyed and in which their investments are not worth a dime and caring for. But we too need to ask whether sustainability, in its most narrow sense, is not impaired if so-called socioeconomic necessities are given higher priorities than family-friendly working conditions. (Does it make sense to compare financial yields falling below U.S. standards with a famine?) What I mean is overtime, increase and greater flexibility in working hours, working at weekends, or the relocation and closure of businesses justified as a cost-saving measure. One is tempted to say that the future of the present working generation looks bleaker the more these people are striving to earn money for old age. Employment and labour cost

A high level of productivity causes unemployment; it also facilitates the financial support of the unemployed. Concepts for reducing unemployment — which is, after all, still not acceptable for society — were for decades passed to and fro between (neo-)liberals who advocate lower labour costs and those who advocate their increase as a means of generating purchasing power and stimulating the economy. Those who want to save on labour costs seem to have gained the upper hand. There seems to be no limit to rationalisation in order to secure Germany’s competitiveness. The Internet community, on the other hand, envisions a post-industrial society, which only works ad libitum. Both scenarios reflect today’s situation. At any rate and regardless whether working or non-working, the whole population needs to be provided for out of the total economic performance. Reducing employment for cost-saving reasons may make sense from a corporate point of view; however, it is selfdefeating for the national economy and from a sustainability perspective. It is not work itself which causes a loss in net worth, but rather the sustained overexploitation of people. On the contrary, the opportunity to work must be seen as a positive contribution to sustainability17, rather than as a troublesome cost item to be cut back as much as possible. The almost revolutionary-sounding conclusion would be not to “punish” working itself with costs, but rather find a way of punishing a non-sustainable mode of working and living. Increasing efficiency to insane levels; or: the precious islands

In practice, increasing efficiency helps to reduce costs. Obstacles and detours are removed (processes are simplified, temporal obstacles such as Sunday’s idling abolished, islands connected with fast transport routes), production processes and outputs are standardised, and new products are brought


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into global series production as quickly as possible in order to reduce unit costs. The actual consequences of this could be: (1) Developments get out of control, once brakes are removed. We lose in this case the possibility of evaluating the medium- and long-term consequences of these developments, as well as the opportunity of gradual optimisation. Damages and misleading developments could spread all over the world before one realises, only to be repaired later at great cost, if at all.18 On the other hand, “merciless” competition leaves little room for mistakes either by individuals or by companies. Fear and a paralysis of originality and creativity are the results. (2) The uniformity of processes, products and people produces a technological

and cultural “soup” (note, though, that the “Internet economy” may generate new creativities, e.g. Enzensberger 2000). Sustainability requires, however, diversity so as to be adaptable to changing circumstances. Brodbeck (1998, p. 256) calls thus for a new, non-mechanistic economy with creativity as an independent factor and a “diversity of situations” (“Mannigfaltigkeit der Situationen” as defined by Wilhelm von Humboldt, 1980, p. 64).19 Eisner (1999) sees the diversity and interaction of regional cultures as the model for peaceful and sustainable globalisation. Glissant (1999) contrasts (in a literary treatise) eurocentrism and European unitarism with the diversity of the Creole population in the Caribbean as a model of a sustainable society. This is also the source for the title of this section: islands, both real and metaphorical, are costly in the sense of “bearing” high costs. But they are also costly in the sense of “preciously”, since they make individuality possible and thus preserve valuable, life-sustaining diversity. A prerequisite for this is a balanced relationship between individual self-development and the ability for reversal, on the one hand, and exchange and cross-fertilisation, on the other. (3) Corporate efficiency through increased flexibility and Taylorism can

seriously affect employees through fear of losing their job, impairment of family life, necessity of continuous re-orientation, or insufficient scope for development. None of these “intangibles” are accounted for in any system of cost accounting. A free-market choice of working conditions comparable to the choice of products is hardly ever possible. Especially insecurity about the type and scope of one’s own field of work can result in significant strain on a community.

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(4) It is clear that efficiency gains make at the same time many products

cheaper for consumers (who may be those very employees who are affected by increased efficiency). We leave aside the question whether ten quartz watches at the price of one single hand-made one increase happiness and utility. Still, one thing is for sure: outputs and concomitant environmental and waste problems increase rather than decrease with sinking prices. An increase in efficiency, primarily justified by cost cutting, fails to register the bivalent nature of costs, symbolised by the “costly islands” (both cost-bearing and valuable). Costs may mirror non-sustainable resource consumption and excessive demands on people, but they can also reflect sustainability enhancing activities and effects. The problem is that these “external benefits” are not rewarded with prices in the market economy system. Nor can they be valued in monetary terms for reasons given above with regard to external costs.

Summary: working and living — instead of counting costs Global sustainable development has taken centre-stage since the 1992 Rio conference (Agenda 21). The conference also proclaimed that such development should be environmentally sound, socially equitable, (economic) growth accelerating. These criteria are dynamic in nature and focus on the diversity of life. In contrast, the notions of costs and profits (as discussed above) are based on dead matter (assets) which is measured in monetary terms. As elaborated in the preceding section, these notions, in their static obsession with products instead of life, are not suitable for assessing the sustainability of live communities. Sen (2000), the 1998 Nobel Laureate in economics, pleads for a concept of wealth which regards the possession of goods just as a means to develop individual freedom, and he cites Hayek (1960, p. 35): Economic considerations are merely those by which we reconcile and adjust our different purposes, none of which, in the last resort, are economic (except those of the miser or the man for whom making money has become an end in itself).


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This article intends to show that it is just this system of calculating cost and profit which makes people and managers become those men, cited above in parentheses, and to set aside their real purposes. Not only wealth needs to be unveiled, but (even more so) the target indicators costs and profits, which allegedly make wealth possible and under which society more and more subsumes other areas of life. Costs and profits thus endanger the balance between (lifeless) matter and life itself. Nature can create and maintain life with little material input (in a glass of water just as in the tropical rainforest). On the other hand, what we get out of a system that is built only around costs and profits is a great deal of material goods with less and less life — ultimately these materials are just as valuable and just as dead as the surface of the moon. Maybe the advertising slogan, quoted at the beginning of this article, just needs to be modified a little to facilitate our departure from acquisition and numerical hocus-pocus: Encouraging life creates sustainability. So does reducing consumption.20

References Baum, H. (1998). Verkehr schafft Wohlstand. ADAC Motorwelt (2). Brodbeck, K.-H. (1998). Die fragwürdigen Grundlagen der Ökonomie. Darmstadt: Wissenschaftliche Buchgesellschaft. Elsner, W. (1999). Diversität und Interaktion regionaler Kulturen: Ein neues Leitbild friedlicher Globalisierung. WSI-Mitteilungen 11/99. Enzensberger, H.-M. (2000). Das Evangelium der neuen Medien. Der Spiegel 2/2000. Glissant, E. (1999). Traktat über die Welt. Heidelberg: Wunderhorn. Hayek, F.A. von (1960). The Constitution of Liberty. London: Routledge and Keagan Paul. Humboldt, W. von (1980). Schriften zur Anthropologie und Geschichte: Werke. (Vol. I). Darmstadt: Wissenschaftliche Buchgesellschaft. Leipert, C. (1989). National income and economic growth: the conceptual side of defensive expenditures. Journal of Economic Issues 23, 843-856. Pohl, M. (1999). Tempolimit gegen den globalen Crash. Frankfurter Rundschau of 31 December 1999. Schneider, D. (1997). Die Geschichte der Betriebswirtschaftslehre. Wirtschaftswissenschaftliches Studium 10. Sen, A. (2000). Development as Freedom. New York: Knopf. Willeke, R. (1996). Mobilität, Verkehrsmarktordnung, externe Kosten und Nutzen des Verkehrs, in: Verband der Automobilindustrie (VDA) (ed.), Schriftenreihe des Verbands der Automobilindustrie e.V., No. 81.


Wolfgang Brühl21

The debate about sustainability in industry When representatives of industry are invited to participate in a debate with environmental experts, they inevitably ask themselves whether they are expected to play the role of the black sheep. This may be the case especially when they represent the chemical industry, and even more so when they come from the Hoechst Group. I am actually more optimistic: in the chemical industry‚ both in Germany and elsewhere, promising steps are being taken towards solving the sustainability problem. My personal evaluation of the practical possibilities and limits within the industry is based on experience with a large-scale project carried out by the Hoechst Group. It was developed in co-operation with the Institute for Applied Ecology, Darmstadt, under the heading “Hoechst sustainable” (also meaning “highly sustainable” in German). Frankly‚ I find it annoying that sustainability is again and again treated as a purely, or at least mostly, ecological issue. It should, in fact, rest on the three pillars that are (at least theoretically) well known: the economic, social and ecological dimensions of sustainability. Other authors do mention these pillars in this book, but it appears to me that the emphasis is still placed on the ecological pillar. It is disappointing that we have not left this idea behind, since we have been warned many times that the “building” of sustainability cannot be supported by one column alone. Even a proper definition of our understanding of social sustainability is rare. We can choose between different interpretations of the term: the German notion of “social” is very different from the Anglo-Saxon notion. There is still a lot of work to be done in this field. The basic requirements for theoretical and practical work on the social and economic components of sustainability are not yet in place. Maybe there is also still a lack of political and public interest because the model of sustainability is not firmly established in society. I am also surprised at how sustainability and influencing the environment almost always have negative connotations. Whenever we think about indicators, green GDP or the like, we ought to bear in mind that modern forms of natural resource use can by all means have positive effects on the environment and sustainability. Let us avoid the emotionally charged concept of genetic 73 P. Bartelmus (ed.), Unveiling Wealth, 73–76. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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Which indicators‚ and for what?

engineering. But especially in the pharmaceutical sector, the positive aspects cannot be ignored. The production of medicines not only causes emissions that impair the environment‚ but does help to improve human health and welfare, thus enhancing our social system. Another example is the preservation of biodiversity to which the pharmaceutical industry has made significant contributions. Companies increasingly produce environmental reports. There are even so-called sustainability reports, although I have not so far come across one worthy of the name: none of them have yet met the conditions for describing sustainability comprehensively. Even those companies that cater to sustainability standards supplement only their “standard”environmental reports with ecological indicators. In this way, they imply that their activities fulfil the requirements of economic and social sustainability. Genuine sustainability reports, which take into account all three pillars, are still work in progress. The selection of indicators of sustainability — in companies as well as in society — depends on pre-set objectives. Surprisingly‚ these objectives are rarely defined clearly. The debate about sustainability is accordingly vague. As to companies, one can surely say that the notions of growth and competitiveness do not cover all aspects of sustainability. Moreover, we need to make clear whether a term such as “shareholder value” reflects short-term considerations as in the American sense, or long-term ones as in the German sense. The short-term interpretation does not seem to be compatible with the requirements of sustainability. Concepts of economic appreciation, such as economic value added, can certainly be deemed sustainable. The ecological dimension of sustainability may also suffer from deficiencies in the formulation of objectives. For example‚ the objective of installing closed-loop processes may clash with the concept of sustainability when it requires a huge expense of energy. Hence the debate about ecological effects needs to be intensified: should we pay more attention to‚ for example, the enormous scale of material flows, or rather to tiny amounts of toxic substances? Public opinion often wrongly accuses companies of not working sustainably, nor making any efforts in that direction. As a matter of fact‚ even those companies which do not know the exact meaning of sustainability always have — at least in some fields — acted in a sustainable way, for example by an economical use of raw materials and energy. Two figures highlight the true situation: in the European Union‚ industrial output grew by 20 per cent between 1985 and 1995. During the same time‚ energy consumption remained constant, while carbon dioxide emissions dropped by 10 per cent. If other sectors of our society had matched this achievement of the industrial sector‚

W. Brühl · The debate about sustainability in industry

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the current charged discussion of implementing the Kyoto agreement would not have been necessary. The fact that the pursuit of profit‚ not noble-mindedness, is the motive for the economical use of natural resources does not invalidate the result. If companies are to be encouraged to behave more sustainably, the rationale for such behaviour needs to be demonstrated. It is generally undisputed that ecological and economic business objectives do not contradict each other, at least in the long term. For far-sighted companies‚ sustainability is certainly an economically rational objective‚ which is compatible with the pursuit of profit. However desirable it may seem to develop a limited number of easy-tohandle indicators, practice tells us otherwise. Even for purely economic evaluation or steering, it is not enough to know just the national product of an economy, or to assess the return on investment (ROI) of a company as the only measure of profitability. The same principle applies to social and ecological data. A wide range of data and analyses is required to measure sustainability. However, the same set of data with identical definitions is necessary for a meaningful comparison of the sustainability of different countries, sectors, and companies. On the one hand, this is understandable, but on the other hand, there is a risk that the resulting statistics will be meaningless, or will only make sense to specialists. Obviously the direct emissions of a chemical plant will always be higher than those of a bank or a travel agent. It is not a fact, however‚ that the chemical plant works in a less sustainable way than a company in the service sector — at least when the relative potentials for sustainability are taken into account. The conclusion is that there is a need for indicators of sustainability‚ tailored to the specific circumstances of a business sector or a country. There is also the question of examining the sustainability of a whole industry, a company or of single products on a case-by-case basis. The latter is the idea behind the PROSA (Product Sustainability Assessment) approach, which the Institute for Applied Ecology (Öko-Institut) developed for Hoechst. It is widely assumed that the most important indicators have to originate in the company itself. Even if one accepts this premise, an agreement has to be reached about the requirements for company data. It appears almost selfevident that it is necessary to include not only the actual process of production in the company itself, but also preceding and subsequent stages, and also to define the parameters of the system. Similarly, not only the present situation ought to be evaluated, but also its changes and trends. More controversial are requests by companies to generate the necessary information with the help of

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data which can be derived from existing systems. Naturally, the companies expect the data to provide benefits for them, as well as a hard-to-define “society”. All in all‚ the costs and benefits of compiling company indicators ought to be assessed objectively and rationally. The question of whether sustainability should be measured in physical or in monetary units appears rather theoretical from a company point of view. It seems that this question presupposes a choice between, for example, physical output indicators and monetary aggregates. But how can economic sustainability be measured, if not in monetary units? Thus, the question is not an “either/or” but rather an “as well” issue. Thanks to their common numéraire, money, monetary indicators have the obvious advantage that they are easily comparable. On the other hand, it is near-impossible to value in monetary terms many of the social and ecological phenomena. The much-used slogan “micro-macro link” is also connected with the capacity for comparability and aggregation. As a need for aggregating microeconomic data from individual companies, groups or regions at a macroeconomic‚ national or regional level, such linkage appears almost self-evident. However, one can argue about the necessity of aggregation in individual cases, for example when environmental impacts are regionally but not internationally relevant. The methods of linkage and aggregation pose great and perhaps unsolvable problems to economists and statisticians: how can we develop a reporting system, or how should we add up different emissions? In view of the problems we face when it comes to sustainability, I would like to make three wishes for the future: Sustainability must be better “propagated”. It is a shame that the great majority of Germans do not understand what the term “sustainable development” really means. In order to completely grasp the problem (according to the “three-pillar model”), the emphasis must shift from the ecological dimension to social and economic aspects, which have so far been neglected. Earlier approaches in the 1960s such as “social accounting” should be examined and, if suitable, incorporated. Facing the complexity of the sustainability conundrum, a focus on especially important areas of investigation and‚ at the same time, a high degree of patience is advisable. Just as it took centuries for translating the tenets of theoretical economics into a system of national accounts, it will take a long time for getting a reliable system of sustainability accounting established. Patience is not to be confused, however, with a wait-and-see attitude.

Gerhard Bosch

Indicators of sustainable employment The ideal nature of indicators is heatedly debated: Should there be many or few; should they be simple or complex? I do not think that we need only simple and readily understandable indicators. Both simple and complex, globally comprehensive indicators can be useful. The functional value of indicators lies in their providing information about a problem in a nutshell. Different problems and different people tackling them require different indicators. Attempts to define the characteristics of indicators “per se” are not helpful.

Monetary and social indicators In this article, I will discuss indicators of sustainable employment. Contrary to the discussion of environmental indicators, the monetary veil hiding quality of life is not an issue here. The level and distribution of income and wealth are key indicators of the quality of life. The debate about poverty and combating poverty focuses on such monetary indicators. These are important‚ but they are not the only meaningful indicators. They need to be linked to other indicators in order to reach conclusions about quality of life. Indicators of sustainable employment are even more controversial than environmental indicators‚ for three reasons: Firstly, there are quite different theories on sustainable employment. Neoliberal economists, for example‚ demand differentiation of wages and a reduction in social services as a prerequisite for future growth of employment. Lower quality of life today is to be traded for more quality of life tomorrow. Other economists favour offensive strategies, such as innovation and investment in education. However, a more homogeneous distribution of education opportunities is not compatible with growing income inequality. The same indicators‚ for example of income distribution, are thus interpreted differently. This is why the development of indicators cannot replace the theoretical discussion. 77 P. Bartelmus (ed.), Unveiling Wealth, 77–90. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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Secondly‚ people’s visions of life and culture are heterogeneous. As a consequence, the evaluation of indicators of employment policies cannot be uniform either. For example, the employment rate of women will be evaluated differently, depending on the adopted family model. In Germany, there is a stalemate between the representatives of the male breadwinner model, the part-time employment model for women and the model of equal participation in working life. Each of these models represents a significant proportion of the present types of households (Table III.1). Thirdly, in discussions of the environment, absolute limits of carrying capacities or the collapse of systems are advanced. There are no such limits in social systems, least of all in the developed industrialised countries. Compared to the rest of the world, poverty in industrial nations is at a high monetary level‚ and the social concern is about the relative evaluation by the persons affected. For these three reasons, there is no consensus about sustainable development in the social and employment policy fields. However, social indicators can rationalise controversial debates. Furthermore, they have their own social effect beyond theoretical debates: they can concretely reveal defaults that are often ignored in specialised and interest-

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oriented economic policy discussions. Social indicators can “scandalise” social problems, thus introducing the whole range of social reality into the debate of employment policies. Just think of indicators of poverty or social cohesion (e.g. levels and distribution of crime). The social significance of such indicators shows that there are beliefs in the fundamental values of justice, equality‚ tolerance and future security, beyond the debate about sustainable development. These values can often only be brought into the professional debate from the outside. This explains why indicators are often deemed to be controversial. In political debates‚ the competition for opinion leadership is frequently decided by the choice of relevant indicators. The selection of indicators‚ for which data is regularly collected, reflects established priorities. These days discussions are oriented around measurable information, and issues that cannot be backed up by such information are deemed beneath notice. However, other concerns are perpetually in the news. One example is the German debate on business location and competitiveness which took place in the 1990s. Indicators should be action-oriented at different levels. This is why they can be neither just simple nor complex. One example is the indicator system of the United Nations (which I will return to later). The Human Development Index (HDI) is merely one of these indicators. There is also a poverty indicator, an indicator of regional differences, and an indicator of gender equality. These are global indicators. Such global indicators, as for example the poverty indicator, can illustrate the effects of, say, World Bank or IMF policies on Third World countries. However, we also need indicators to describe the situation within particular policy fields. For example, the European Commission has compiled an indicator of the level of unemployment among people under 25 years of age. This indicator attempts to measure the degree of preventive orientation in employment policy. The quite reasonable assumption is that an early integration into the employment system is a precondition for later employability of young people. There are also policy-oriented indicators like the share of expenditures for active measures over the total expenditure on labour market policies. These indicators are to measure the extent to which labour market policies have been reoriented from the mere provision of unemployment benefits, as customary during the 1970s and 1980s‚ towards reintegration of the unemployed. These indicators are clearly cut out for individual fields of action. Their purpose is to create comparability and reveal best practice. Since these policy fields are complex, it is not possible to concentrate on only one indicator. Systems of field-specific indicators need to be developed as a basis for evaluation and controlling.

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Indicators of sustainable employment — some examples What are the useful indicators of sustainable employment? It is hardly possible to give a conclusive or even remotely complete answer to this question. But let me give some examples. I will proceed from four indicators of sustainability: (a) level of potential development; (b) avoidance of social polarisation; (c) increasing wealth; (d) equal employment opportunities for women. The preservation of the natural environment‚ which is the subject of other articles in this book‚ is of course another one of these indicators. Complex indices attempt to combine the different individual indicators. I will discuss, below‚ these indices. (a) Level of potential development: In today’s knowledge society, decisions about the quantity and quality of future jobs are made in institutions of research and education. Our capacity for innovation is the precondition for remaining competitive, developing new products, opening up new markets, and solving urgent social and environmental problems. Strong clusters of innovation in the economy generate the purchasing power which makes it possible to create jobs in other sectors. Economic statistics illustrate the situation of the past‚ whose assessment is not sufficient. We need to develop futureoriented indicators. The German Federal Ministry for Education and Research has advanced a set of such indicators (Figure III.1). These indicators make sense only in the right context. Thus, a big share of expenditures for research and development (R&D) in GDP improves sustainability only if these expenditures are spent effectively. Patent statistics are one indicator for testing this. Let us have a quick look at the share of R&D expenditure over GDP in Germany (Figure III.2). This share has fallen since 1989. In my opinion, the reasons are the German re-unification and the ensuing diversion of budget expenditure to East Germany, as well as the collapse of East German industrial research. In the long run, this is a worrying development. Note, on the other hand, the significant rise in R&D spending in Sweden and Finland. Both countries attempted to overcome their economic crises of the early 1990s through more investment in the future. This strategy has shown some initial successes. Note also the differences between the AngloSaxon countries, USA and United Kingdom. The USA is much more innovation-oriented than the United Kingdom. The USA spends nearly five times the amount of Germany’s R&D, with a population of only three times that of Germany. Maybe this is one of the secrets of the growth in US employment.22 On the whole, the shortcoming of the German indicator system is that education has not been given a prominent enough role.


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(b) Avoidance of social polarisation: The price some countries pay for growth in employment is an increase in income inequality and poverty. Thus‚ the income gap has widened significantly in some countries, in part because of the deregulation of labour markets, but also because of insufficient opportunities for education for part of the population. For example, in the USA in 1995‚ the top 10 per cent in the male income hierarchy earned approximately 4.4 times as much as the bottom 10 per cent. Compare this to 1979 when the difference was only 3.2 times. In the United Kingdom, this difference grew from approximately 2.5 times in the 1970s to 3.3 times in 1995. In most EU countries‚ notably Germany, Sweden or the Netherlands, where labour markets were not

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deregulated so far, the difference in incomes has remained more or less constant (Figure III.3). A US citizen at the bottom 10 per cent of the income hierarchy earns only 44 per cent of the income of a German citizen of the same group (expressed in purchasing power parities)‚ despite the fact that average purchasing power is higher in the USA than in Germany (Freeman 1997). These income indicators are evaluated in different ways. The neo-liberal camp argues that unemployment can only be eliminated through greater income differentiation, because the productivity of many unemployed persons is too low. The counter-argument is that productivity can be increased through education, so that the lowest wages do not need to be reduced. We do not have indicators of productivity for low-income groups, although there are indicators of the unemployment of poorly educated people and of the education structure. The unemployment of poorly educated as compared to better educated people is not lower in countries with a larger income differentiation than in countries with a smaller differentiation (Figure III.4). This gives rise to doubts about the argument that unemployment of poorly educated people can be reduced through an increase in wage differentiation.

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Furthermore‚ we see that the education structure varies significantly from country to country. In Germany, the per centage of unskilled employees is significantly smaller than in the USA (Figure III.5). Germany’s more egalitarian distribution of income is thus backed up by its education policy, and (if this is accepted as an indicator of productivity) is therefore also economically viable. Indicators of income distribution are not sufficient on their own for discussing low-wage employment. We also need indicators which compare the unemployment of different groups and their productivity. Using only one indicator risks proceeding in the wrong direction. It is not an easy task to find internationally comparable indicators for employment and social policy. Data collection methods and the significance and definition of social facts differ greatly from country to country. The usual approach to dealing with this problem is to try to standardise indicators. The OECD and the US Bureau of Labor Statistics calculate standardised statistics on unemployment. However, different societies may deal differently with similar phenomena. The social security system of most European countries supports the long-term unemployed quite well. Through this support‚ they remain part of the unemployment statistics, resulting in high figures of longterm unemployment. In the USA‚ the period of social security support is relatively short. Thereafter the unemployed are forced to support themselves


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“on their own”. This is done partly only through poorly paid jobs. Another part drifts away into crime. If you take male prisoners and long-term unemployed together, as two different types of social exclusion from the labour market, European countries are doing quite well in comparison (Table III.2). The evaluation of labour market policies can change completely if such indicators are used to complement the social effects of certain employment strategies. In this context‚ another indicator that is frequently used for sustainability and future orientation of employment appears in a different light: the employment rate. Nowadays, many experts in the field (e.g. Streeck and Heinze 1999; Kommission für Zukunftsfragen der Freistaaten Bayern und Sachsen 1997) consider the employment rate crucial for the evaluation of “employment performance”. I believe there are significant problems with this approach. In extreme cases, the employment rate can be raised if child labour is reintroduced. A high employment rate‚ for example in the age group of the 15- to 25-year-olds, is therefore not a sensible indicator for the future. In my view, a better education for youth and delayed entry into the working life is in the long term much more desirable for society. I would accept the employment rate as an indicator only for the age groups above 25, and we would have to talk about setting the upper limit at 55 or 65.

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A second objection is that a high employment rate implies a low freedom of choice between working life and leisure. We ought to ask ourselves whether high employment should be our model for the future. Is the ideal that everybody between the age of 25 and 65 should be employed without interruption? Is it not rather part of the quality of life to be able to opt for temporarily reducing one’s occupation under certain conditions, and with some kind of remuneration? (c) Increasing wealth: It is often said in economic discussions that the Dutch employment model is not sustainable, because it does not raise the volume of work in the economy. Rather, the Dutch model has reallocated work whereas in the USA the volume of work has significantly increased. Such arguments imply that working hours should not be reduced with increasing income. Even from a narrow economic viewpoint, I cannot agree with such an assessment. Time becomes relatively scarcer with growing income. It might thus be preferable to benefit from an increase in hourly productivity through a reduction of working hours, rather than through higher wages. Short working hours, preferred by employees, are an indicator of a country’s increase in wealth. A prerequisite for accepting short working hours is sufficient income, and hence the fact that employees and their families can afford working less. Absolute income levels, as well as the distribution of income, are significant indicators for the development of working time. Gross national product


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(GNP) per working hour‚ per employee and per capita are our indicators for the level of income.23 Table III.3 shows that Denmark, Germany and Sweden have higher per-capita GNPs than the EU average. It makes sense that a reduction in working hours is preferred to higher wages in these countries‚ compared to the United Kingdom whose income level is below the EU average. The table also illustrates that high productivity per hour and short working hours combine to bring about a high GNP per capita in Germany‚ with the highest one in Denmark. GNP per working hour in Denmark is 66 per cent higher than in the US, while GNP per employee is nearly the same in the two countries. The reasons are that (1) Danish employees work significantly less hours than their US-American counterparts, and (2) per-capita GNP is higher in Denmark because of the country’s higher employment rate. Quality of life as expressed in the German or Danish combination of “high productivity per hour and short working hours” is presumably more desirable than the American brand of “low productivity per hour and long working hours”. The strain that work puts on households is thus significantly higher in the USA and the UK than in Germany or the Netherlands. In the USA, people aged between 15 and 65 work‚ on average, 465 hours more than in Germany and 558 hours more than in the Netherlands (Figure III.6). There are probably very different employment models which all generate the same level of employment, albeit at very different levels of wealth and prosperity.

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(d) Equal employment opportunities for women: Women’s employment has increased significantly in the last decades and will continue to do so. The extent to which women can enter the labour market on equal terms is becoming an increasingly important indicator for assessing the sustainability of employment. From a purely economic viewpoint, it can be argued that the scope for economic development is restricted if half the population is excluded from working. This holds even more true when women are highly educated. From a social point of view, we see traditional roles being abandoned. The employment rate is a purely quantitative indicator of female integration into working life. The employment rate at age 25-54 years of age should be considered here. Raising the employment rate of persons under 25 is not desirable since an increase of employment rates of younger women would entail a reduction of time spent in education. Furthermore, the employment rate has to be standardised according to working hours, since many women work parttime only. Table III.4 indicates the great difference in the integration of women on European labour markets. The gender gap is smallest in Sweden and Denmark.


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A final evaluation of these indicators certainly depends on the preferred model of society.

Complex indicators of quality of life The United Nations (UNDP 2001) has compiled the Human Development Index (HDI) for several years. The index measures the average performance of a country in three fundamental dimensions of human development: longevity, knowledge and a decent standard of living. It is made up of three indicators: life expectancy at birth, literacy (adult literacy and the combined gross enrolment in primary, secondary and tertiary education), and real GDP per-capita (in purchasing power dollars).24 Since the index calculates only country averages‚ but ignores the distribution within the country, three distributional indices are added. The Human Poverty Index (HPI) assesses deprivations in essential dimensions of human life. In principle‚ it is based on the same indicators of human development as the HDI. The other two indices relate to the gender dimension. The Gender-related Development Index (GDI) also includes the same indicators as the HDI, but differentiates them for women and men. The Gender Empowerment Measure (GEM) attempts to illustrate to what extent women are able to participate in social and political life. These indices are complemented by numerous individual indicators such as “investment in education”, “regional income distribution”, and others. The HDI ranks Germany as number 17 in the world in 1999 (UNDP 2001). This relatively poor rating is largely a result of the low level of German schooling. In the UNDP indicators, which focus on schooling‚ the German system of dual training is simply overlooked. The gender indices rank Germany in several places higher up‚ which is due more to the greater level of inequality in other countries than to a high level of equality in Germany. Such indices, which have been complemented by the ILO (1999), are highly aggregated and problematic when it comes to comparability. However, they are nonetheless indispensable for policy making. They reveal poverty, and inequality between social classes, men and women, and regions. Such indicators also reveal the long-term social consequences of flawed economic and development strategies.

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References Buchele, R. and J. Christiansen (1998). Do employment and income security cause unemployment? A comparative study of the US and the EU-4. Cambridge Journal of Economics 1 (22), 117–136. Bundesministerium für Bildung und Forschung (BMBF) (1999). Zur technologischen Leistungsfähigkeit Deutschlands. Bonn: BMBF. European Commission (1998). Employment in Europe 1997. Luxembourg: EU. Freeman, R.B. (1997). When Earnings Diverge: Causes, Consequences and Cures for the Inequality in the US. Commissioned by the Committee on New American Realities of the National Policy Association, Washington D.C. Freeman, R.B. and R. Schettkat (1998). Low wage services: Interpreting the US-German difference. Paper submitted to the LOWER Conference, Groningen, the Netherlands, Nov. 19–21. International Labour Organisation (ILO) (1999). Key Indicators of the Labour Market. Geneva: ILO. International Labour Organisation (ILO) (1997). World Employment 1996/1997. Geneva: ILO. Kommission für Zukunftsfragen der Freistaaten Bayern und Sachsen (1997). Erwerbstätigkeit und Arbeitslosigkeit in Deutschland. Entwicklung, Ursachen und Maßnahmen, Leitsätze. Zusammenfassungen und Schlußfolgerungen der Teile I, II und III des Kommissionsberichts. Bonn. Organisation for Economic Co-operation and Development (OECD) (1997). Employment Outlook 1996. Paris: OECD. Streeck, W. and R. Heinze (1999). An Arbeit fehlt es nicht. Der Spiegel, no. 19, 38–45. United Nations Development Programme (UNDP) (2001). Human Development Report 2001. Making new technologies work for human development. New York: Oxford.

Discussion Udo E. Simonis: The papers presented here show that the prevailing systems of indicators, and especially the national accounts, are based on concrete conventions. These conventions have been developed in the course of several decades and continue to be improved. When looking, therefore, for indicators of sustainability, we should have the courage to support those indicators which are based on conventions and are the result of a long discourse. Another issue is social questions that can always be debated. In the environmental field, however, we face limits we must not violate. Paul Klemmer did not use the term “irreversibilities”‚ but that is what he referred to. These are the arguments for meeting criticism of the dominance of ecology in the sustainability debate, raised here by Wolfgang Brühl. I would like to comment on two conceptual terms used in the preceding contributions. Choice of words is important. We all have a problem with the term “sustainability”. In German we can also use “Zukunftsfähigkeit” (being fit for the future), which I personally prefer. I am under no illusion, though, that it is possible to object to this word, too. Second, Paul Klemmer introduced the term “guide beam”. With this I connect an airplane. On the other hand, with “guardrail”, I see a motorway. If it were possible to “ecologise” these concepts, which are fundamental to our debate, I would be entirely happy to adopt them. Wolfgang Brühl: I have a question for Peter Bartelmus, which may sound provocative but is not meant to be so. Do you believe that we can compile a sustainable national product in the foreseeable future? You have presented a “green” national product. I would like to see a sustainable one. Gerhard Bosch: Let me comment on the relationship between paradigms and indicators. This relationship is particularly relevant for social issues. If you want to define the sustainable development of employment you need to have an idea of how the future can and should develop. To look to the past will not do. The Chinese social capital may change in the future because social structures do change. What indicators will we need then? Purely normative selection and definition of indicators — independent of analysis — will fail since social developments, for example in the labour market or the family‚ can only be regulated so far. Hence my criticism of the “Sustainable Germany” 91 P. Bartelmus (ed.), Unveiling Wealth, 91–99. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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report by the Wuppertal Institute (BUND and Misereor 1996): both the labour market and social policies are treated there normatively rather than analytically. Two examples on the supply and demand side can illustrate this. On the supply side, the major trend is towards women seeking and finding employment. This trend cannot be reversed‚ regardless of any views of family values. This is because the level of education of women is increasing, marriages end more and more in divorce and no longer offer reliable social security‚ and lifestyles are changing. Moreover‚ the German institutional system is not sustainable, because it is still built around the model of the male breadwinner. If we do not change the institutional system, women will end up either marginalised in the employment system or will remain childless. The worst-case scenario is a combination of both as is the case in Germany now. This is why an increase in the employment rate of women aged between 25 and 55 is necessary and should be worked into a change of the institutional system. I think such an increase is right and should be part of any model of the future society. Among other things‚ this requires improving public child care and full-day schooling. Indicators of both requirements thus become decisive measures of sustainable employment. The demand-side example refers to changing company needs. In Germany, the trend is towards a knowledge society, towards higher levels of education and greater flexibility. How can we ensure flexibility? Two elements are of decisive importance: (1) the level of education of employees and (2) the way work is organised within companies. The skills of employees need to be used in flexibly organised forms of work that cater to lifelong learning. Otherwise, skills are lost, companies lose flexibility in adapting to structural change, and job security is reduced. This is why investments in human capital, training and work organisation are important indicators of the employability of personnel and of the stability of companies facing change. This leads me to conclude that Germany is currently not on a path towards sustainable development. Taylorist, inflexible forms of work organisation are still the rule, and not enough is invested in training and education. If nothing is done about this situation, many employees will end up marginalised because they are “ejected” from the system at some point and become unemployable. Therefore, we need to combine the analyses of different developments rather than relying on fixed indicator systems. We need to develop our models for the future and then derive indicators therefrom. Peter Bartelmus: The answer to the question of whether we can and will have a sustainable national product in the near future is “yes”. In fact, we have already got one. Net domestic product accounts for the consumption of

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produced capital, deducting its value from GDP. The message of capital consumption and net indicators of domestic product and capital formation is: reinvest the cost of capital consumption and you preserve your capital and your capacity for future production and economic growth. As we have just been reminded, sustainability has further dimensions. For this reason we extended the system of national accounts to include the criterion of environmental sustainability, which is easier to measure than social concerns. In accounting terms this means the incorporation of natural capital, together with its (re)source and sink functions and their impairment. The answer is again that extended sustainability, taking produced and natural capital consumption into account, can and has been measured. Many case studies of environmental accounting, including the one for Germany presented here, confirm this. I have my doubts with measuring and valuing the social dimension in terms of human and social capital. I do not think, therefore, that we will be able to capture all three pillars of sustainability in one single indicator in the near future. Martin Viehöfer (Foundation for the Rights of Future Generations): I believe that the equal status accorded to the three pillars of sustainability is the core issue in the sustainability debate. At the Foundation‚ we do not talk about social sustainability. Rather, we address social justice‚ as we see a problem in defining social sustainability. The basic problem is that there is no real consensus about the meaning of sustainability, nor about the weighting of its three dimensions. The environment is the basis for all life, which is why the ecological aspects of sustainability should have the top priority. The best job is of no use if nature no longer provides the food required for survival. Second priority should be allotted to the financial aspects of sustainability. Future generations should not take on a mountain of debt which would seriously restrict their options. These objectives must, of course, be pursued while taking social justice into consideration. In addition, greater attention should be paid to the concept of “intergenerational equity”. This notion refers in part to the original concern of living today at the expense of the present young and future generations. In my opinion this concept is easy to understand and communicate. Gerhard Voss (Cologne Institute for Business Research): The significance of indicators depends on how sustainability is defined. If sustainability is seen as an objective, you are caught in the definition trap, since then sustainability has to be precisely defined by means of indicators.

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But there is, after all‚ a general consensus about seeing sustainability less as an operational objective and rather as a regulatory idea, whose final result is still open. In this sense sustainability is a process of development, which takes ecological, economic and social aspects equally into consideration. For such a concept of sustainability, the role played by indicators is different. They have a pedagogic function, and they do not necessarily require a theoretical foundation. We do not always need information which is based on theoretical approaches. We do need‚ however, information about what society views as “non-sustainable”, in the same way as recognising “lack of freedom”. Seen in this way, indicators play an important role as an overall information tool, possibly reflecting pedagogic purposes. Policy making based on operational sustainability objectives is an altogether different question. In my opinion‚ overall, easy-to-measure indicators are insufficient in this case. Political decisions need to factor in societal knowledge and scientific expertise. What we need to remember in this context is the limited cognitive faculty of humans. Let me illustrate this with an example. The European Union’s Committee for Product Safety recently banned so-called plasticisers in toys. This was a purely political decision. A few days before this decision, a scientific EU panel had decided against a ban. The scientists pleaded for limits to plasticiser levels in such products and called for initiating a procedure to determine the limits. The limit-setting procedure, intended to bring theory-based information into the decision-making process‚ never had a chance. To put it in a nutshell: it is important to distinguish between two kinds of indicators, those with and those without a theoretical foundation. Udo E. Simonis: Thanks for reminding us indirectly of the origins of the sustainability debate. Didn’t it all begin with the notion of sustainable development? This concept implies, indeed, not only a holistic world-view by defining certain deficits, but also a dynamic approach. Jochen Luhmann (Wuppertal Institute): I would like to discuss the subject “sustainable science”. I will be ironical, but I do mean it seriously. It has been said here that dealing with indicators means simplification. Also, the task of indicators is to “scandalise”. But should science really assume the role of the scandaliser? Let us imagine we create scandals by using professional public relations strategies in our Institute. What if the German Scientific Council then turns up to assess the Institute? Should our defense then run like this: “We have mostly refrained from publishing in academic and scientific journals — with their rigorous standards and peer reviews; instead, we have scandalised”?

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Wolfgang Flieger (Kaiserslautern University): It is interesting to note that Paul Klemmer spoke in favour of using potentials — social, ecological and economic ones — as sustainability criteria. Most writings on the subject, for example in reference to the Pressure-State-Response framework‚ focus however on state indicators. In other words, indicators are seen to assess social and ecological outcomes. My question, which was not answered, is: does long-term unemployment constitute an indicator of potential in Paul Klemmer’s sense? Is it an element of social capital? Or is it just a state indicator? Arno Gahrmann: Households and companies are the driving forces of our economy. From this perspective we cannot but realise the importance of developing indicators for the sustainable performance of micro-economic agents. It was already mentioned that the shareholder value is not an indicator of sustainability. However, a focus on shareholder value need not necessarily have a short-term perspective. Let us consider the interest in shareholder value by US pension funds, which have to ensure that their shareholders can live off these funds 20 years later. Any investment into these funds should then have indicators at hand which tell something about the future. Hence my own concern of involving the micro-economy more strongly‚ as it is after all at the origin of all economic activity. Gerhard Bosch: I appreciate mentioning the fact that sustainability in the social sphere is a process. Even our discussion of paradigms actually affects the structure of social values. This is a reciprocal process. Our understanding of sustainable patterns of family, employment and society is not rigid, but evolves in line with changes of lifestyles and work patterns. We are thus not in a final state‚ but in a process, as we can see from current changes in our family model. It was important to draw attention also to the “generational contract”. This is, in Germany, one of the major “battlefields”, where the question of social sustainability will be decided. I do not like‚ though, the way the discussion is carried on. People only talk about debt. If we shrink the debt burden and cut back on education, we are not helping the next generation. This is why it is imperative to increase the social capital of the next generation. If only debt makes it possible, this is still better than inaction. A point typically made in discussions is that the younger generation has to pay for the pensions of the older generation. What is left out is that the older generation — the richest generation that has ever existed in Germany — creates jobs for the younger generation‚ by spending money. Furthermore, it is worth noting that the younger generation will inherit more than any previous generation.

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It is risky indeed to discuss the generational contract and social sustainability from only one perspective, such as debt or payments to social security. Unfortunately‚ this is usually the case. Discussions about the inter-generational problem frequently lose sight of intra-generational equity. Only part of the coming generation will of course benefit from the large inheritances. Since these people can expect a historically unique and large inheritance, we can anticipate a wholly new dimensions of social inequity. A major group of people will not only be well educated but will also have a great deal of money when entering the labour force. Intra- and inter-generational equity is thus indeed one of the great challenges for the future. Udo E. Simonis: I cannot accept what has just been said. If a society spends 40 per cent of its national budget on financing and refinancing accumulated debts, this has an enormous impact on the options and opportunities for future generations. Hartmut Bossel: First of all‚ I would like to comment on our notion of sustainable development. We are dealing with a co-evolutionary development of different systems. That is, we do not know where it will all end up. There are any numbers of possible sustainable societies. Therefore, it is not possible to work now with a fixed vision of a sustainable society‚ other than saying that our goals and targets need to consider the physical, ecological and economic requirements for sustainability. We have to keep within these guardrails or feasibility space. Society has to know early enough whether it performs within the boundaries of this space, where it would remain sustainable in the long term. On the one hand, this is about maintaining the essential capital stocks: human, produced and natural capital. These stocks are essential for ensuring the survival of the system as a whole. Furthermore, we need to check that the three component systems (the social system, the support system and the natural system) are also capable of adapting to a rapidly changing environment. Thus we need to investigate the fulfilment of their basic orientors: environmental compatibility, effectiveness, freedom of action, security‚ adaptability and ability to coexist. All these aspects need to be investigated separately. This is why we have ended up with a relatively high number of indicators. I would rather prefer one or three indicators. But the fact remains that these 42 “Seattle” indicators were applied without major difficulties. They were accepted by politicians and citizens alike who themselves developed this system after all, and who reached the conclusion that fewer indicators would

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not suffice. The system of 42 indicators can be graphically presented so as to see at a glance where something is going wrong. Green arrows pointing up and red arrows pointing down indicate progress or threats to sustainability. Taking in 42 indicators is not a problem at all, provided they are given a suitable visual presentation. Just think of the memory capacity of a television picture. I have also worked with 21 indicators, which is also possible. But we need to make sure that the different indicators assess separately system interests (basic orientors) that are completely independent of each other. Freedom, for example, cannot be replaced by security. We need both. Wolfgang Brühl: The weighting of the economic, ecological and social aspects of sustainability is not at all obvious. It is not possible to rank and hence weight these aspects because of their interdependence. Economy and society require an ecological basis, but this ecological basis also requires an economic one. Both are interrelated. Environmental protection is costly for companies as well as other sectors of society. Costing environmental protection provides the most direct and simple link between the environment and the economy. It is important to remember that sustainability is a process. We should avoid creating one new indicator after the other as the “true” measure of sustainability. We should also steer clear of the idea that sustainability will ever be achieved. At least, if we adopt sustainability as a regulatory concept, much is gained for society. The notion of scandalising makes me uneasy. Should a scientific institute like the Wuppertal Institute scandalise? Science‚ including policy-oriented science, should in my opinion not make an impact by creating scandals. Rather it should continue reaching out to all sides, seeking balanced approaches and taking on the role of a — moderate — voice in the wilderness. One further point concerns the range of micro-level approaches using indicators at the company level‚ i.e. micro-indicators. As to the ecological side, maybe we have made good progress, maybe even enough progress. But there is a difference between large and small companies. Larger companies have taken all these topics on board, especially in Germany, but not exclusively in Germany. Some large companies have published environmental reports — notably, for obvious reasons, those of the chemicals industry. These reports are generally up to standard. Smaller companies are not so advanced yet, particularly in economic and social reporting. It is probably too early for these companies to establish a comprehensive reporting system. First of all they need evidence that working on sustainability and sustainability reports is worth their while. Experts in the field have to tackle this task. Large companies understand now that medium-term and long-term economic and ecological

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objectives may not contradict each other. Smaller companies still have to learn this. One more comment about shareholder value. In the true sense of a longterm balance of interests, this value is of course not incompatible with sustain ability. But these days we face a widespread misunderstanding of shareholder value‚ implying that shareholders are intent on maximising their “values” on a quarterly basis. Udo E. Simonis: With regard to what you were saying about small companies, I have at least one counter-example. Our village carpenter, with 25 employees, carried out ISO 9002 certification — a typical win-win situation. He spent some money, only to be quickly recovered. At the same time, compliance with the ISO rules has reduced environmental impacts. Paul Klemmer: In answer to Wolfgang Flieger’s question about the categorisation of long-term unemployment, I would say that it is a state (outcome) indicator. What we have here is a whole lot of workers who were drained out of the employment system and who are difficult to reemploy and reintegrate. In the case of redundancy programs this is intended by politicians, but in other cases this is an undesirable development. But Wolfgang Flieger has opened a can of worms, which I would like to look into, briefly. Social, economic (produced and natural) capital can be seen as assets‚ but how should we handle these assets? We attempt to have an effect on economic capital in order to improve economic performance. Social capital, we tend to interpret as the limits to what society can bear. When will society protest and refuse ecological obedience? Up to what point is it possible to raise the price of petrol without a riot, and at what point will a politician give in, considering the next election? Similarly, the ecological dimension also has to face social limits. Open questions in this context are: what needs to be done to improve or increase social capital? How can cultural concerns be factored in? Natural capital is also an exciting subject. In the past, we have dealt with natural capital from a conservationist point of view. We want to preserve it. In the German Advisory Council on Global Change we asked ourselves if it were possible to enhance the performance of natural capital through active intervention? We called this the demiurge model (of “world-building”). A brief look into this can convinced us quickly to leave the worms alone. Nonetheless, there is no harm in giving it some thought.

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Udo E. Simonis: At the beginning I asked myself what actually is an indicator? Is it‚ for example, simply a statistic? I think it has become clear now that a useful indicator covers more than only its immediate significance as a statistic. It is intended to bring into play broader problem areas and processes than can be made out directly from its definition. The discussions that have taken place here were highly stimulating. I am confident that they will bear fruits, both for the Wuppertal Institute and everyone else involved. And, since we are speaking about the future, I do hope that next time around we will not be among men only.

Reference BUND and Misereor (eds) (1996). Zukunftsfähiges Deutschland. Basel, Boston and Berlin: Birkhäuser; an English summary was published as: W. Sachs et al. (1998). Greening the North: A Post-industrial Blueprint for Ecology and Equity. London and New York: Zed Books.


IV. The physical basis of the economy


Peter Hennicke

Dematerialisation and energy efficiency — the message of ecoindicators The Wuppertal Institute’s mission is to play a mediating role between research, politics and economics. Thus, for us, indicators are also instruments of providing scientific advice to business and policy makers. Compound indicators such as the “green” national product are instruments of social learning. Two conferences organised by the Wuppertal Institute in autumn 1999 illustrate the range of our efforts for social learning, that is education for sustainability. One topic, the assessment of genuine wealth prompted this book; the other was the closing event of an unconventional project called “MIPS for Kids”. The MIPS25 project was intended to teach children about the “ecological rucksacks” of everyday products. The subject of this book is certainly also connected to the “MIPS for Kids” project. In both cases, the main focus is on environmental education. However, here we focus on interested members of the general public and experts in the field rather than children and young people. Indicators can and should show where action is needed. In addition, they are to assist our search for new programmatic perspectives. Good indicators are a compass. They also help to close the “implementation gap”, for we know much more than we implement. In this context, I would like to ask three questions and present a few theses as an economist in general and an energy-economist in particular. The first question is: do we really have to know everything that can be measured and evaluated with indicators? The thesis is: we already know a lot about what we have to know for proceeding on a directionally safe course. In the face of urgent environmental problems and non-sustainable trends, we do not have the time to wait for new and better indicators. The direction we need to take in the interest of greater sustainability is clear, even if many questions do remain open. Waiting for better indicators is therefore not an acceptable excuse for political inactivity regarding the environment. The second question: do we need monetary or physical indicators? An economist is bound to reply: of course we need primarily monetary indicators. 103 P. Bartelmus (ed.), Unveiling Wealth, 103–108. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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However‚ if we look closer, we find that market prices cannot comprehensively tell the ecological truth. Biodiversity‚ nature’s beauty or the suffering of ecological refugees cannot be monetised. Still, the material MIPS concept, developed by our former colleague Friedrich Schmidt-Bleek (1994)‚ lifts the monetary veil. We at the Wuppertal Institute know however that MIPS also leaves many questions unanswered and may even disguise some aspects of reality. We obviously need both: a materially defined set of objectives and a price-oriented allocation system for scarce resources. This is especially the case when we are to establish the central message of all ecoindicators, avoiding the environmentally damaging use of materials, energy and land, within capitalist market economies. This poses, above all, a third question: Can we delink economic growth and environmental consumption not only relatively but absolutely? Is von Weizsäcker’s formula “Doubling Wealth — Halving Resource Use” (Factor Four) (von Weizsäcker‚ Lovins and Lovins 1995) realistic on a large scale and not only in selected cases? If so, economic growth would have to be accompanied by an annual worldwide reduction in the use of land area, natural resources and energy. In a profit-oriented economic system this is only conceivable within the framework of an “economy of avoidance”. A policy framework needs to be established which makes the avoidance of environmental consumption economically feasible and, in the long term, even more profitable than the current waste of materials and energy. There is a direct relationship between the delinkage of material flows from economic growth‚ the reduction of energy consumption and thus also the quality of economic growth. The quality of economic growth also involves questions about the transition to a service-oriented society, which is ecoefficient and caters to international and inter-generational equity. The comparison of important environmental indicators (OECD 1998) with economic growth shows a trend over the past ten years of relative decoupling between economic development and environmental consumption in industrialised countries. This applies, for example, to the emission of sulphur oxides and phosphates‚ as well as to the use of the total primary energy in industrialised countries. Parallel trends in waste production and energy use with growth in the transport sector have however been observed. Still, the relative delinkage of key indicators in industrialised countries gives us at least an indication of and hope for one possible solution: energy and resource productivities can and must be drastically increased. If environmental consumption is to be reduced globally, we have to take Third-world development into account. Can we gear developing countries’ “catching up” towards a more sustainable process, given that the global popu-

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lation will reach ten billion? If so‚ how and when will this be possible? So far‚ in developing countries, the indicators of economic growth and of energy/material consumption run mostly parallel, aggravating global risks. Let us take the example of energy. Industrialised and developing countries share several technological perspectives on their journey towards sustainability and climate protection. Systematically introducing energy saving techniques‚ combined heat and power generation and the use of renewable energy into the market is a prerequisite for sustainability and needs to be accelerated. This will doubtlessly make possible a delinkage of energy benefits (energy services such as warm apartments, cold beer or motor power) from energy use, on the one hand, and a delinkage of ecoefficient services from material and land use, on the other hand. A significant contribution to the solution of the problem would be to send kilowatt-hours off into “unemployment”‚ rather than humans, whose unemployment devalues innovation and productivity. The catchwords are dematerialisation, de-energetisation, ecoefficiency revolution, and “new models of wealth” (von Weizsäcker 1994). We need sustainable production and consumption patterns. Also, distributional concerns play an important role in the evaluation of environmental and social indicators. However, there are two basic differences in the challenges faced by industrialised and developing countries. Industrialised countries have to delink economic growth from resource use in absolute terms, that is by a drastic reduction in per-capita consumption of natural resources. Energy-efficient and ecoefficient services would only need to grow moderately if wealth were more equally distributed and redefined to include non-material aspects. Industrialised countries can indeed “double” the “good life” while halving resource consumption. Focusing on doubling GDP, we would only be wealthy on paper‚ whilst being poorer in other ways. Developing countries, on the other hand, need to drastically reduce the rate of increase in energy and material consumption. An absolute reduction, as for industrialised countries, is out of the question, even in the long-term. Yet, leapfrogging to the stage of development and relative delinkage prevailing now in industrialised countries is achievable quite soon with an appropriate transfer of capital‚ technology and know-how. For example, the energy sector could “leap” immediately onto softer‚ decentralised energy efficiency technologies and solar power. A detour via the hard and no longer economical largescale technologies (such as nuclear and high-capacity lignite-based power stations) of our industrial history to catch up with industrialised countries is not necessary. These theses are substantiated by looking at the development of the global energy system. One of the most interesting global energy scenarios, presented

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by Shell, shows that renewable energy sources can provide approximately half of our energy consumption by 2060. A second Shell scenario considers dematerialisation. This scenario indicates that energy consumption does not have to grow as suggested in the first scenario, and again, about half of it would come from renewable sources. However, this rosy picture changes when we take into consideration the key indicator emissions”. The first scenario (problematically called “Sustainable Growth”) and the second “Dematerialisation” scenario show both a near-doubling of emissions by the middle of the century. Only then‚ and too late for the global climate, is the trend reversed. The risks of nuclear energy also persist. The reason is that both scenarios illustrate the future of energy from the seller’s perspective. They thus confirm the thesis: global energy problems cannot be solved by diversification and increase of energy supply alone. The same applies to the scenarios of the World Energy Council (WEC and IIASA 1998), which are held in high repute among energy suppliers. All these scenarios refer to the transgression of limits: too much greenhouse effect, more geo-strategic conflicts about scarce oil and gas and/or heightened nuclear risks. Obviously none of the scenarios is sustainable, nor does it minimise risks. That is why we developed, over several years of collaboration with Amory Lovins (Lovins and Hennicke 1999), a new global energy scenario. It is a “Factor-Four Scenario”, whose principal idea is annual growth in efficiency‚ besides reduction and risk minimisation. If annual efficiency growth can be doubled globally, energy consumption can be kept constant until 2050, even with a reasonable level of growth for energy services. We showed in a bottom-up model, assessing over 150 countries and 11 large regions that such a development is possible technically and also‚ in principle, economically. In the year 2050, renewable energies would provide an estimated 50 per cent of total energy consumption. At the same time, emissions are reduced by half. Compare this with all other scenarios of the World Energy Council, which predict either a significant increase in emissions or a reduction that comes too late. In fact, it would not even be necessary to implement a “true” Factor Four strategy by 2050 because of the enormous potential of renewable energies: a tripling of energy efficiency (hence a “Factor Three scenario”) by 2050 would suffice for humanity to progress towards sustainability. This is clearly a point in favour of realising the scenario and its efficiency gains. Efficiency increases by two per cent annually over 50 years, which is ambitious compared to the historical trend, but is without doubt technically feasible. All other

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assumptions about economic and population growth were intentionally taken from the other scenarios of the World Energy Council in order to ensure comparability. But what is the connection between these scenarios, which are for now focused on material flows and energy technology‚ and foreseeable cost development? This is a fundamental question. There is a close connection with studies that set out from very different premises, notably the calculations of a green national product. Peter Bartelmus and his colleagues at the United Nations Statistics Division developed this and other “eco-nomic” indicators in the System for integrated Environmental and Economic Accounting (SEEA). However, it makes a fundamental difference whether positive and increasing avoidance costs are taken, as in many top-down models, or whether the avoidance costs for an appropriate reduction are deemed to be negative.26 Based on collaborative efforts with other bottom-up analysts, we believe‚ the latter to be the case. According to the analyses by the Energy Division of the Wuppertal Institute, climate protection generates a net profit in many fields, since additional costs for efficiency techniques are offset by savings in energy costs. We believe it possible to reduce emissions by up to 40 per cent with a net profit if we remove obstacles and reduce transaction costs by an intelligent policy mix. For us, climate protection is a necessary condition for the transition to sustainability, which is an even more ambitious goal. According to the standards of the German Parliament’s Enquete Commission on “Preventive Measures to Protect the Earth’s Atmosphere” (Enquete Kommission 1994), it is not only emissions which should be reduced by 80 per cent in Germany, but also the emission of other significant abiotic key substances. Given these dynamics of material reduction, why am I speaking of an economy of avoidance? How can we argue that a dynamic process towards avoidance can be achieved, and that avoidance can, in the real world, be turned into good economics? The technical potential for saving energy‚27 for example, is no longer controversial: it would be possible to save up to 100 billion DM of the national energy costs per year in the “old” German states. An economy of avoidance, which would drive all market forces towards sustainability, would aim at benefiting from this potential in perhaps 20 to 30 years. For material flows, the technical potential for reduction is even greater. A study by the business consultancy firm Kienbaum showed that residual material, which cannot be used anymore and thus possesses no economic value (e.g. waste, waste water and waste heat), incurs costs of 300 billion DM per year in manufacturing. This figure includes energy costs. If these material and energy flows and waste material costs were avoided, not only would

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environmental impacts decrease significantly, but the companies involved would also enhance their competitiveness. One last point: the technically possible ecoefficiency revolution is surely connected with lifestyles and consumption patterns and our definition of wealth, if we look at it from the sustainability angle. After all, that is why this book is called “Unveiling Wealth”; it intends to reveal the direction in which we and our understanding of wealth are moving. Let us take one more example from the energy sector: If all measures to increase efficiency in the electricity sector were implemented in the large European countries‚ we could temporarily achieve an absolute reduction in electricity consumption. This would be possible despite further growth of electricity services. However, if this growth does not slow down, the trend is reversed, and growth offsets any increase in efficiency. We can win time by increasing efficiency. But we cannot, at least not in Europe, establish in the long-term an energy system that is fed by renewables only while quantitative growth continues. However, if growth in energy services could be limited to a sustainable level (i.e. a social consensus on “sufficiency” could be reached), energy consumption on a purely renewable basis could be stabilised in the long term. In this respect, efficiency and sufficiency are two sides of the same coin.

References Enquete Kommission “Schutz der Erdatmosphäre” (1994). Mehr Zukunft für die Erde — Nachhaltige Energiepolitik für dauerhaften Klimaschutz, Bundestagdokument No. 12/8600, Bonn. Lovins, A. and P. Hennicke (1999). Voller Energie. Vision: Die globale Faktor-Vier-Strategie für Klimaschutz und Atomausstieg. Frankfurt and New York: Campus. Organisation for Economic Co-operation and Development (OECD) (1998). Eco-efficiency. Paris: OECD. Schmidt-Bleek, F. (1994). Wieviel Umwelt braucht der Mensch? Mips, das Maß für ökologisches Wirtschaften. Berlin, Basel and Boston: Birkhäuser. Weizsäcker, E.U. von (1994). Earth Politics. London and others: Zed Books. Weizsäcker, E.U. von, A.B. Lovins and L.H. Lovins (1995). Factor Four. Doubling Wealth Halving Resource Use. London: Earthscan. World Energy Council (WEC) and International Institute for Applied Systems Analysis (IIASA) (1998). Global Energy Perspectives to 2050 and Beyond. Cambridge: Cambridge University Press.

Stefan Bringezu

Material Flow Analysis — unveiling the physical basis of economies28

Introduction When unveiling our wealth we should take a look at the material basis of our economy. In one of the richest and most developed regions of the world‚ in California, a shortage of electricity supply disclosed that the high-tech and service economy is still, and even heavily so, bound to energy and materials supply. The quick-shot governmental remedy followed the traditional way of securing abundance. Rising demands on the consumption side should be fulfilled by increasing supply. But where does supply come from, and where does it end? The coal used for California will be extracted in other regions, where it may contribute to the devastation of landscapes. Carbon dioxide emissions from coal combustion will add to global warming, with impacts elsewhere. Continuous and even increasing extraction of raw materials will have implications for nature and society, at different locations and over different periods of time. Scarcity of resources is not the problem. Rather, it is the direct and indirect consequences of using primary resources that impact on the wealth-sustaining functions of the environment. Each economic activity is linked to a certain amount of resource extraction and waste disposal. It is the entirety of all activities and the magnitude of man-made material flows which affect the sustainability of the physical economy. Sustaining the physical basis of our economies goes beyond the control of selected hazardous substances or the abatement of critical emissions. The question is how to guarantee the future supply of materials and energy under conditions which reflect basic laws of nature and which are socially acceptable. For that purpose we should forego the eclectic view of the traditional “fire jump policy”, and develop a more systematic‚ long-term and preventive approach. 109 P. Bartelmus (ed.), Unveiling Wealth, 109–134. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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Such kind of sustainability policy requires appropriate information, not least on the material basis of our economies. The following provides an overview and empirical evidence of the possibilities to monitor and assess the metabolism of society, especially the physical exchange between nature and economy. The basic method applied is material flow analysis or material flow accounting (MFA). MFA refers to the analysis of the throughput of process chains, comprising the extraction or harvest, chemical transformation, manufacturing, consumption‚ recycling and disposal of materials. The accounts use physical units of measurement (usually tonnes) for quantifying the inputs and outputs of these processes. MFA at the national and regional level has become a fast-growing field of research with increasing policy relevance29. MFA serves as a system-wide diagnostic procedure related to environmental problems, supports the planning of adequate management measures and provides the basis for monitoring the efficacy of those measures. MFA allows early warning and supports precautionary measures. As also shown here‚ MFA reveals problem shifting between regions and sectors. MFA quantifies the linkage of environmental problems and human activities, and provides aggregated information to support decision making.

A holistic view: The metabolism of society Most people in industrialised countries do not directly affect the environment. There is a growing distance between each economic activity and its ultimate impact “somewhere else”. The worker in the steel mill is usually not aware of the impacts of iron ore mining and the consequences of his fossil fuel use. Nor do we know what happened to make the products available which we buy in the supermarket. Yet, each activity has a certain impact on the environment. In turn, impacts are mediated by product flows between the processes in production and consumption and the corresponding material flows between the economy and nature. Material flows between action and impact Most changes to the environment are brought about by human-induced material flows. Their impacts comprise (eco)toxic effects, physico-chemical changes (acidification, etc.), nutritional effects (eutrophication or water stress due to groundwater abstraction by mining), mechanical destruction (e.g. by excavation, deposition, “clearings”)‚ and structural effects (e.g. landscape changes, habitat disruption through infrastructure building). The conse-

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quences can be short-term or long-term‚ direct or indirect, local to global, predictable or unknown. Each material flow may affect different environmental media at various scales. The flow of construction minerals starts with excavation which gives rise to hydro-geologic and biocoenotic changes. In this process‚ top-soil is completely removed and restructured. Thereafter, the use of the minerals often leads to additional built-up area, associated with a loss of ecological buffering and/or productive land. Finally, the ultimate demolition of the buildings and infrastructures and their deposition again requires land area and may impact on soil. All these processes require energy whose consumption with current technology burdens the atmosphere with fossil fuel emissions. Whereas the single activity and its related upstream and downstream flows may be neglected in terms of the ultimate effect, it is the combined impact of all single processes and process lines which determines the overall effect. Most of these activities are market driven and constitute the realm of the economy. It is the volume, structure and composition of the material throughput of the economy — and we will see — also of its physical growth, which determine the quantity and quality of the resulting environmental pressure. The notion of societal metabolism refers to the physical exchange between society, economy and technosphere (altogether the “anthroposphere”), on the one hand, and the environment, nature and bio-geosphere, on the other hand (Baccini and Brunner 1991‚ Ayres and Simonis 1994). The metabolism also comprises the material and energy flows and their functions and interlinkages within the anthroposphere. Ayres (1989) was one of the first to coin the term “industrial metabolism”. The idea reflects a systems perspective where the socioeconomic-technical system is embedded within a surrounding carrier system. A sustainable development requires the coexistence of both subsystems and will thus depend on essential preconditions of the metabolic exchange. The paradigm of a societal metabolism is rooted in different academic disciplines (Fischer-Kowalski 1998; Fischer-Kowalski and Hüttler 1999). Requirements for a sustainable societal metabolism The preconditions for a sustainable societal metabolism may be defined from an ecological systems analysis view as:

Maintenance of natural resource supply and waste absorption capacities: The extraction of resources from the environment and the release of emissions into the environment can only be continued if the volume and composition of the flows do not exceed the spatial-temporal capacities of the environment. This relates to the local, regional and global capacities of

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resource supply and the assimilation of emissions and waste by nature. These requirements had long been defined by the so-called management rules (Barbier 1989; Daly 1990). The requirements also imply that the material exchange between countries and regions via trade, and inflow and outflow through waterways or the atmosphere should be balanced in quantitative and qualitative terms. Limiting physical growth of the economy: The physical growth of the technosphere must be superseded by a flow equilibrium of resource extraction and residual release, on a level which guarantees a long-term coexistence of man and nature. Currently the economy of most countries is in a phase of physical growth with the input of primary materials exceeding the output of emissions and waste. This expansion of the technosphere in form of additional buildings and infrastructures cannot be continued infinitely when one regards the limitation of available land. The physical stock of the economy must be confined to a level at which life-sustaining and service functions of nature can be maintained. This level is still unknown. However, accounting for the physical growth rate indicates the deviation from equilibrium between inputs and outputs. Intra-generational equity: A region should not seek development at the expense of others. This applies not only to regions but to individuals as well. Hence, the use and burden of the environment by resource use (materials extraction and land use), on the one hand, and the release of emissions and waste, on the other hand, should not be unequally distributed on a per-capita basis. Inter-generational equity: The opportunities of future generations resulting from the societal metabolism must not be impaired by the current use of resources, the resulting materials and energy throughput, and the physical growth of the technosphere. Clearly, this requirement is the most challenging. It implies developing the volume and structure of the societal metabolism towards a dynamic as well as continuous flow equilibrium system. Dynamic in that sense refers to the flow character and the required changes in technology and in the composition of the flows. Continuous means that we need to establish supply and waste management systems, which can be continued in the long run. Strategies for sustaining the societal metabolism Historically, human beings started to solve material flow problems within a limited scope of time and space (e.g. handling sewage and water pollution). Later they proceeded to tackle long-term and wide-range issues (e.g. global warming). The principle of “dilution and diversion” in pollution control policy


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then aimed at the reduction of critical emissions and the substitution of hazardous substances. After conspicuous incidents as in Minimata and Seveso, control of ambient concentrations (“immissions”) and chemicals assessment became compulsory in the 1970s and 1980s. The “detoxification” of the societal metabolism effectively reduced selected hazards in a variety of industrial countries. In a wider sense‚ this strategy can be related to any substancespecific impact such as toxicity to human beings and other organisms, eutrophication, acidification‚ ozone depletion‚ global warming, etc. Regulatory governmental actions like banning substances or restricting their use represented first measures of environmental policy. Cleaner technology aimed primarily at the mitigation of critical releases to the environment. Pollution problems in the spatial-temporal short range could thus be solved. However, transregional and global problems, and the problem shifting to future generations, as well as the complexity of the industrial metabolism made it necessary to analyse the flows of hazardous substances, selected materials or products in a system-wide approach, i.e. from “cradle-to-grave”, and with respect to the interlinkage of different flows. Since the 1990s‚ another complementary strategy has increasingly been propagated, namely the “dematerialisation” of the industrial metabolism. Huge amounts of resource requirements of industrial economies made the reduction of the global primary resource consumption a prerequisite for sustainability. Taking into account the needs of developing countries and the social objective of equity in resource use, as well as ecological and economic concerns, scientists of the Wuppertal Institute proposed an increase of resource efficiency by factors of 4 and 10 over the next 30 to 50 years30 (Schmidt-Bleek 1994; von Weizsäcker, Lovins and Lovins 1995). The perspective had changed and comprised the total material throughput of economies and life-cycle-wide resource requirements (Bringezu 1993). The proposed strategies made use of the systemic linkage between inputs and outputs because a reduction of overall output requires an a priori, or at least simultaneous, reduction of resource inputs. Meanwhile many international organisations and national governments adopted the Factor 4 to 10 goals.31 The Factor 4/10 concept aims at the provision of increased services in the sense of utilities as well as economic value added with reduced resource requirements. The concept of ecoefficiency goes even further. It includes not only the major inputs (materials, energy, water, land) but also specific critical outputs to the environment (emissions to air, waste water, solid waste) and relates them to the products, services or benefits produced (EEA 1999a; OECD 1998a; WBCSD 2000). However, an increase in ecoefficiency does not necessarily mean an absolute reduction of resource requirements or emissions.

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Ecoefficiency is a relative measure and may grow with rising environmental pressure. But for the environment the reduction of the absolute impacts through material flows is essential. Thus, the quantity of human-induced material flows through the industrial system has to be adjusted to tolerable levels of exchange between economy and environment. In the future, we will not only have to eliminate or reduce the flow of critical substances and reduce the total resource requirements by using resources as efficiently as possible, but we will also have to find out which material flows can and should be continued in the long run. We will have to find out down to what level dematerialisation on a macro-scale can, and should be, implemented. In other words‚ we will have to describe the future physical basis of (post)-industrial economies. This means developing a perspective of a future societal metabolism where its volume, structure and composition meet the basic requirements of sustainability. In the long run we will have to approach a level and composition of the overall materials throughput which can be continued. The system-wide regeneration of resources will therefore come into perspective as a necessary prerequisite for a sustainable societal metabolism, along with detoxification and dematerialisation. Regeneration goes beyond renewability and comprises the regeneration of biotic and abiotic resources by natural and technological processes, respectively.32 So far, biomass production and waste recycling were optimised for selected flows only. In the future, a life-cycle or system-wide perspective will have to be applied to increase the regeneration rate of the whole resource basis of our economies‚ adjusted to local and regional conditions. Before we attain that kind of fine-tuning of the societal metabolism, overall steering through dematerialisation seems to be a precondition to reduce the currently dominant non-renewable and non-regenerated resource requirements33. We may keep in mind that the above-mentioned approaches are no end in itself but strategies to steer the societal metabolism towards a situation where resource inputs and residual outputs are compatible or consistent with natural functions of environmental processes.

Assessing the metabolic performance of an economy In order to sustain the physical basis of an economy, monitoring instruments must be developed for the assessment of the above-described material requirements and strategies. Appropriate instruments to account and assess the metabolic performance should


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indicate relevant environmental impact potential associated with economic activities, provide an overview on the total material throughput of an economy‚ for a summary perception and the identification of possible shifts of environmental burden, show whether necessary conditions of sustainability are fulfilled, compile indicators for progress towards sustainability, allow for a combination of the analysis of bulk material flows, carrying a generic impact potential‚ with the analysis of selected substance flows carrying a specific impact potential, provide useful information for the planning, implementation and evaluation of policy targets‚ indicate potentials for improvement in a quantitative manner, compile data for modelling future scenarios of materials and energy supply, and waste management, support the comparison of different countries and regions, provide a reference for complementary and consistent monitoring and assessment at the local, firm and product levels. Indicators of environmental impact potential Turnover (mass flow per time period), multiplied by impacts per unit of flow, determines in principle the impacts of human-induced material flows. Correspondingly, impact potentials of material flows can be indicated by turnover-based and impact-based indicators (Table IV.1). Impact-based indicators can only be compiled for selected substancespecific effects for which quantitative measures are available. Most of them relate to releases to the environment as an output of the economy or society. The derivation of substance-specific indicators requires sufficient knowledge on cause-effect relationships. However, it is difficult, if not impossible, to predict most of the longterm/wide-range effects of many material flows with adequate precision. For instance, continuous excavation of building minerals may contribute to a loss of species diversity, even if an environmental impact assessment (EIA) is performed each time to minimise local impacts. Depending on the scale of these activities, the induced material flows may represent a growing pressure to the natural environment. At the same time, one may not be able to quantify expected impacts of species extinction, change of groundwater composition, etc. Therefore, turnover-based indicators are used to measure a system-specific generic environmental pressure, associated with resource consumption. These

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indicators cannot assess substance-specific effects, as they relate to resource extraction, i.e. an input into the economy/society‚ in a more comprehensive fashion. Both the substance- and system-specific indicators are complementary in supporting policy for controlling specific hazards, as well as generic impacts of human-induced material flows. The impact/substance-oriented indicators are necessary to implement and evaluate more reactive types of policies, whereas turnover/system-oriented based indicators are useful for planning and monitoring more proactive policy measures. Economy-wide Material Flow Accounts

Material flow accounts for national economies quantify the physical exchange of the economy with the environment34. Aggregated material flow balances comprise domestic resource extraction and imports (inputs) and domestic releases of residuals to the environment and exports (outputs) (Figure IV.1). Upstream or downstream flows (resource requirements or emissions), associated with imports and exports, may also be accounted for (Bringezu 2000a). Physical input-output tables can provide a sectoral disaggregation. Economy-wide material flow accounts are also part of the United Nations (1993‚ 2000) System for integrated Environmental and Economic Accounting (SEEA, see part III of the 1993 version). Eurostat (2001) issued a methodological guide on “Economy-wide material flow accounts and derived indicators”. National material accounts exist for Austria‚ Denmark, Germany, Finland, Italy, Japan, the Netherlands, Sweden‚ United Kingdom and USA. Work is going on for China, Egypt and Amazonia.


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The results and value of the accounts depend critically on the system boundary and the categories of material flows considered. The system boundary defines the start and the end of the flows considered and thus the inputs and outputs of the system. Usually the input side is defined as the extraction of resources from the environment by means of technology. The first interaction of humans and the environment thus takes place when primary materials are removed from their natural site (e.g. ores extracted by mining). On the output side, the environment receives wastes and emissions, with humans no longer exerting control over composition and location of these materials (e.g. emissions to air or water). The choice of the accounting categories determines the measurement of the structure and composition of the metabolism of the economy. The categories chosen should reflect the accounting requirements mentioned above, as well as practical considerations. For instance‚ the main categories should distinguish between abiotic (non-regrowing) and biotic (regrowing) primary materials. Biomass represents the latter within the material balance scheme. At the same

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time the material flow accounting categories should as far as possible relate to the categories of production statistics. Also, the accounts should reflect the basic functions of the societal metabolism (energy supply, construction, nutrition and maintenance). If we want to consider the total material requirements (TMR) of an economy, we have to account also for those extractions which are not further used in the economic process but which are nevertheless induced for economic reasons. The unused extraction of mining and quarrying, as well as the erosion induced by agricultural practice‚ are so-called hidden flows. They represent a resource extraction or movement which is closely linked to actual primary production. For example, the extraction volume for lignite production in Germany is ten times higher than the volume of the lignite itself. At the same time, the disruption of the landscape relates to the overall extraction volume. The derivation of indicators Material flow accounts provide an important basis for the derivation of indicators for sustainability (Berkhout 1999; Jiménez-Beltrán 1998; Ministry of the Environment 1999). In order to monitor and assess the environmental performance of national and regional economies, a variety of indicator systems has been proposed (Moldan‚ Billharz and Matravers 1997). As a framework the Driving Force-Pressure-State-Impact-Response (DPSIR) scheme has been advanced (EEA 1999a,b; OECD 1998b).35 The extraction of resources on the input side and the release of emissions and waste on the output side relate to environmental pressures. (Sectoral) activities represent driving forces. The flows may change the state of environment which in turn may give rise to various impacts. Response categories represent the societal or political reactions to the pressures and changes in environmental quality. Hopefully, these responses will move the metabolic situation towards sustainability. MFA-based indicators in official reports provide an overview on the “headline” issues of resource use, waste disposal and emissions to air and water as well as eco-efficiency (EEA 2000; DETR 1999; Hoffrén 1999). On the one hand‚ economy-wide material flow accounts provide a more comprehensive picture of the industrial metabolism than single indicators. On the other hand, they can be used to derive several key indicators and thus facilitate international comparison of the metabolic performance of national or regional economies (see Table IV.2). Figure IV. 1 showed the place of indicators in the metabolic scheme. Table IV.2 presents the indicators in the accounting format.The choice of the accounting categories also determines the indicative value of the aggregates. The aggregation of different material flow categories may be questioned as different materials reflect different properties and


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impacts. A priori, however‚ economy-wide material flow accounts are to monitor environmental impact potentials rather than specific environmental impacts. As indicated in Tables IV.1 and IV.2, bulk material flow categories and their aggregates are thus the basis for deriving generic indicators rather than substance-specific indicators.

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Nevertheless, the analysis of the potential impacts of the main categories of economy-wide material flow accounts provides some insight into the connection between material flows and their qualitative effects on the environment. As an example for industrial mineral and metal resources Figure IV.2 presents the linkages of their extraction with other flows and with environmental impacts. The extraction of the raw materials is linked to the excavation of unused material. Various impacts occur in this process at the mining or quarrying site. The use of raw materials may add to the technosphere stock and may generate impacts similar to those at the extraction site (in terms of changed land use). Final disposal of waste material may generate emissions or add to waste deposits. Mineral fertilisers‚ which are produced from industrial


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minerals, are used in a dissipative manner on fields and in forests; a significant part of these minerals is not taken up‚ however, by crops and thus discharged to the environment. When extending the analysis to all major categories of material flows, we found that many categories generated similar impact clusters. Our conclusions are that the material flow aggregates on the input and output side of the economy are associated with a multitude of different impacts on the environment‚ different flow categories are often linked with a similar cluster of impacts, at high aggregation levels of material flows it is hardly possible to attribute particular impacts to different material aggregates, it is plausible to assume that the overall mass turnover of material flows is related to a generic environmental pressure potential, reflected by the observed impact clusters. Even if all hazardous emissions are controlled and most efficiency potentials are used, the question will remain which material flows can be sustained within a certain region and time period — in other words, which flows are compatible or consistent with natural and societal capacities? The development of indicators of the regeneration status of the societal metabolism (“consistency indicators”) requires more research. For the time being, one may use the percentage of biomass used and produced by agriculture and forestry that meets certain minimum standards for sustainable cultivation as a first proxy for continuously reproduced biomass.36 Direct Material Input (DMI) measures the input of materials into the economy which are of economic value and are used in production and consumption activities. DMI measures the domestic used extraction plus imports. Materials which are extracted or otherwise moved by economic activities but that do not normally serve as input for production or consumption (mining overburden, etc). are termed “hidden flows” or “ecological rucksacks”37. They are not used for further processing and are usually without economic value. Total Material Requirement (TMR) 38 includes DMI and hidden flows of domestic extraction as well as hidden flows which are associated with imports and predominantly burden the environment in the countries of origin. It measures the total “material base” of an economy, i.e. the total primary resource requirements of the domestic production activities.

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Total material consumption (TMC) is the total primary material requirement associated with domestic consumption activities. TMC equals TMR minus exports and their hidden flows. Net Additions to Stock (NAS) measures the physical growth of an economy. New materials are added to the economy’s stock each year (gross additions) in buildings and other infrastructure, and other durable goods such as cars, industrial machinery, and household appliances. At the same time old materials are removed from stock as buildings are demolished, and durable goods disposed of. Efficiency measures relate services provided or economic performance (in terms of value added or GDP) to either input or output indicators. For instance‚ GDP per TMR indicates the Total Materials Productivity. Altogether it seems appropriate to use the main resource flows categories and their aggregates to indicate a generic environmental impact potential, reflecting both the resource requirements of an economy and their environmental consequences. The metabolic performance of an economy can be described by indicators on input, output, balance, consumption, efficieny and consistency (Bringezu 2000). In summary, various approaches of MFA improve our understanding of the societal metabolism. Their information may contribute to strategies of sustaining the volume and composition of resource requirements and emission of residuals. Economy-wide MFA gives an overview of the metabolic performance of economies, which can be supplemented by disaggregated and more detailed information. Compared to traditional environmental and sectoral policies‚ MFA thus provides an improved information basis for strategic policy planning and evaluation, as well as the integrated management of particular natural resources.

Empirical evidence: Material requirements of industrial economies In the following we look at selected results of studies on the metabolism of national economies. First international comparisons were conducted on input and resource efficiency indicators by Adriaanse et al. (1997). Matthews et al. (2000) compiled output and balance indicators. Other examples were reviewed by Bringezu (2000), with more detailed sources given in Bringezu and Moriguchi (2001).


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The good news: economic growth has decoupled from resource requirements Total Material Productivity (GDP/TMR) indicates the efficiency of resource use. In most of the countries studied this indicator shows an upward trend. Figure IV.3 presents selected results for the USA‚ Japan and the European Union. As GDP has grown faster than TMR, a certain delinkage of economic growth from the use of natural resources has taken place. As more value added is generated with given resource requirements, it appears that market forces — through competitive advantages — work in favour of increased resource efficiency. The bad news: absolute levels and composition of TMR are unsustainable39

The increase in resource productivity does not indicate the trend of absolute resource requirements. In fact, absolute levels of TMR are generally

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increasing with economic growth (Figure IV.4). There are two exceptions. In the case of the USA, the negative trend was due to an effective policy of reducing erosion on arable land. In Germany the reduction resulted from a decline of lignite mining in the Eastern part after reunification. In those countries‚ where TMR is significantly lower‚ like in Japan or the UK, the absolute level of TMR is either slowly increasing or constant. In transition countries such as Poland one may expect that the level of TMR will increase when joining the European Union through associated technological convergence. In China economic development is at an even lower level, although TMR has already reached 35 tonnes per capita. Likely, this level will be exceeded with future development. The data thus suggest that business as usual will not automatically bring about absolute reductions of TMR.


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The structural analysis of TMR reveals similarities as well as differences in the countries investigated (Figure IV.5). The major constituents of TMR are fossil fuels, minerals and metals. Including hidden flows these natural resources represent almost three quarters (72%) of the European Union’s TMR in 1995. Fossil fuels hold 29% of TMR of which nearly two thirds (63%) are from domestic resources. Coal, crude oil, refinery products and natural gas are the main components. 72% of the fossil fuels resource requirement are hidden flows. Metals hold 21% of TMR of which most (95%) are imported. The main components are ores and concentrates, metals and products manufactured from iron, copper and other non-ferrous metals. Again, most (92%) of the total resource requirements for metals are hidden flows. Minerals represent 22% of TMR, most of which (91%) are domestically extracted. The main components are construction minerals, in particular sand

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and gravel, natural stones and clays, as well as a variety of industrial minerals like salts, phosphates‚ diamonds and other precious stones. In contrast to metals and fossil fuels‚ a much smaller portion (24%) of the mineral resource requirement is due to hidden flows. Biomass accounts for 12% of the TMR of EU-15. The level of six tonnes per capita is similar in the USA. Most of the biomass stems from agriculture. Finland is an exception. Its input of biomass amounts to 23.5% of TMR and is dominated by forestry, a significant basis for the Finnish exports. The proportion of regrowing resources in Finland is almost twice the level of EU-15. In total (including excavation for buildings and infrastructure, and soil erosion from agricultural land), non-regrowing materials account for 78% of the TMR of EU-15. The greater part of TMR (60%) are hidden flows. More than one third of total resource requirements (37%) come from foreign resources. The conclusion is that the current composition of TMR is not sustainable in the long run, owing to the non-renewable character of extraction and the impacts of producing and using these resources. A closer look at the extraction of non-renewables such as coal reveals that current depletion reduces the production volume but increases significantly the volume of hidden flows.40 What if ...?

One may argue that the current level of resource requirements does not prevent the world from existing, and that the (actual state of the) world economy is in transition towards a sustainable future. However, even if one accepts this hypothesis there is still the question about the future level and composition of total resource requirements and their implications for the national and international environment. We would like to know whether, when and how the necessary conditions for a sustainable societal metabolism will be met. What would happen if the world adopts the total material consumption of the leading industrial economies? The studies on Germany, the Netherlands, UK and USA indicated that TMC made up 85% of TMR in 199141. In 1994, Finland, Germany, Japan, the Netherlands and USA had an average TMR of 68.8 tonnes per capita;42 TMC can thus be estimated at 58 tonnes per capita. If this actual consumption were adopted worldwide by 6 billion people, the global resource consumption would be about 350 billion tonnes yearly. No one and no scientific model can really predict the consequences of this enormous amount of material use for the global environment and its life-sustaining and quality-of-life ensuring functions. For a first impression of this magnitude, compare the 350 billion tonnes of mostly earth, rock and soil to the weight of 300 billion middle-class cars, about a million Empire State Buildings, or


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58.000 Cheops pyramids‚ produced every year. Lacking scientific evidence, these examples are just crutches for our imagination. What would happen if China doubles its TMR? Available data compiled by Chen and Qiao (2000) do not even consider the requirements for construction. Most of the actual Chinese resource requirements are associated with earth excavation for infrastructures and water dams. If China‚ too, follows the path of the USA, TMR per capita would double. The consequences for the Chinese environment, notably of landscape changes, loss of arable land, etc. would be tremendous. These data clearly support calls for an absolute dematerialisation. Given prevailing patterns of resource use and global economic growth rates, there seems to be no alternative to a strategy of increasing resource productivity by a Factor 4 to 10. Targeted action is required to steer the current development towards an absolute reduction of resource use.

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The absolute volume and composition of the total resource requirements is not the only cause for concern. Firstly‚ there is an increasing tendency within developed economies to shift the environmental burden of resource use to other regions. Secondly‚ the physical growth of the economy represents a growing problem. Burden shifting between regions In the course of globalisation, developed economies increasingly source from foreign countries. For instance, domestic resource extraction within the European Union has been slowly curtailed whilst resource requirements are increasingly being supplied through imports from foreign countries (Figure IV.6). Some of the European mineral deposits, for example iron ore mines, have been depleted for a long time. Other mining activities continue, also for metal resources, within European countries. However, resource extraction within the EU is more resource-efficient (in terms of the ratio of unused to used extraction) than resource extraction abroad for export to the EU (Table IV.3). Only for energy supply does domestic resource extraction per unit of raw material exceed that of the imported energy carriers. Developed countries have increased both imports and exports. In order to detect any imbalance in the physical characteristics of foreign trade, the material requirements of imports and exports (commodities plus hidden flows) can be compared. For instance, in the UK foreign trade showed a trend towards an equilibrium of the mass of imports and exports. However, when we consider also the hidden flows of raw materials and semi-manufactured goods, the total


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resource trade balance shows a distinct trend towards a surplus (Bringezu and Schütz 2001b). In other words‚ the UK economy tends to use more foreign than domestic resources even when exports are accounted for. Another case of transregional burden shifting is associated with carbon dioxide emissions as one of the main outflows of economies to the environment. Carbon dioxide emissions hold a dominant share of the domestic processed output (DPO) (Figure IV.7). Thus, most of the outputs to the environment from production and consumption processes is released to the atmosphere. In comparison, the flow of solid waste disposal is of minor importance. Moreover, the share of carbon dioxide in the DPO is expected to increase in several countries. This trend would not be problematic if most of the carbon were not of fossil origin. As a consequence, a significant and increasing translocation of earth crust material to the atmosphere is taking place. The equilibrium between the environmental media appears to be increasingly upset.

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The physical growth of the economy: a long-term risk Material balances provide information on the net annual growth of the physical economy. Growth takes place when the input of materials exceeds the output of materials. The difference is termed Net Addition to Stock (NAS) which embodies mainly additional buildings and infrastructures. The EU-15 and its member states‚ as well as Japan and the USA, are characterised by continuing NAS (Figure IV.8). Therefore, these industrial economies are growing steadily in physical terms. The expansion of the technosphere is associated with additional built-up area at the expense of naturally productive land. This situation is not sustainable, and economies will have to adjust in the future towards a flow equilibrium of inputs and outputs, i.e. zero net material accumulations in stocks of the technosphere.


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The accumulation of artefacts could be beneficial to the environment if primary resources were substituted and waste disposal diminished. However, current buildings and infrastructures are not yet designed for optimal reuse, remanufacturing and recycling. For now, the accumulation of stocks means increasing potential for future waste volumes. In general, growing stocks lead also to a rising demand for maintenance which is associated with additional resource requirements. The findings also indicate that the value of additional material assets within the economy should be reconsidered also in economic terms if the sustainability principle of capital maintenance is to include natural reproductive capital (cf. Bartelmus in part II). Before drawing any conclusions in this regard, the physical framework conditions need further clarification. We need to determine, for different world regions and countries‚ the thresholds up to which a further expansion of the technosphere and built-up land is acceptable. Scenarios of resource availability, supply and demand (combining materials, energy resources and land use), and a societal discourse on tolerable impacts should be the next steps in defining the thresholds.

Conclusions and recommendations The material flows of an economy provide a link between wealth and its environmental burden. Analysing the material flow system‚ i.e. the metabolism of an economy, is an important means of assessing the sustainability of economic performance. Empirical findings indicate that there is a decoupling of economic growth from resource requirements in many countries; however, absolute levels of total material requirements are non-declining and their composition is still unsustainable, business as usual will lead to a significant increase of global resource consumption and enormous changes to the environment, whose severity is largely unknown‚ industrialised countries are increasingly using resources in foreign countries where extraction for the export of commodities burdens the environment, material flow analysis corroborates that fossil fuel combustion and the emission of carbon dioxide are of special concern, the physical expansion of the economy’s technosphere (continuing addition of buildings and infrastructures) represents a severe and growing environmental risk for the future.

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The major constituents of TMR in most economies are fossil fuels, minerals and metals. Thus policies which significantly reduce the requirements for these resources will contribute to an increase in overall materials productivity. Hence‚ policies should reduce the consumption of fossil fuels and increase the efficiency of energy use in industry, transport and households, increase the resource productivity of the construction sector, and foster dematerialised methods of construction, limit the expansion of transport infrastructure and urban sprawl, implement a recycling economy, reduce subsidies for resource extraction and foster markets for recycled resources where they effectively contribute to a reduction of TMR, foster innovation towards dematerialised services, support the development of technological and management systems for integrated supply, use and waste management of materials, energy and water. Future reporting on progress towards sustainability will depend on statistical records about the metabolic performance of the economy. Material flow accounting (MFA) is an important tool of generating pertinent information. On the one hand, the availability of valid and timely data is limited, especially for wastes and emissions to water. On the other hand, up-to-date data on direct material inputs can be compiled with relatively high accuracy. Monitoring the metabolic performance of the economy will provide information on the material input of the economy and its productivity, the total material requirements and the “hidden trade balance”, the material flow balance and derived indicators (e.g. on the physical growth of the economy). Assessing the material basis of the economy is a prerequisite for policies of effectively securing national and global wealth in the future.


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Eurostat (2001). Economy-wide Material Flow Accounts and Derived Indicators — A Methodological Guide. Luxembourg : Eurostat. Fischer-Kowalski, M. (1998). Society’s metabolism: The intellectual history of material flow analysis, Part I, 1860-1970. Journal of Industrial Ecology 2 (1), 61–78. Fischer-Kowalski, M. and W. Hüttler (1999). Society’s metabolism: The intellectual history of materials flow analysis, Part II, 1970-1998. Journal of Industrial Ecology 2 (4), 107–136. Hoffrén, J. (1999). Measuring the Eco-efficiency of the Finnish Economy. Research reports 229. Helsinki: Statistics Finland. Japanese Environmental Agency (1992). Quality of the Environment in Japan 1992. Tokyo: Environment Agency. Jiménez-Beltrán, D. (1998). A Possible Role of Material Flow Analysis within a European Environmental Reporting System — Changing Course in Environmental Information, in: S. Bringezu, M. Fischer-Kowalski, R. Kleijn and V. Palm (eds)‚ Proceedings of the ConAccount Conference (11–12 September 1997)‚ Wuppertal Special 6. Wuppertal: Wuppertal Institute. Matthews, E. et al. (2000). The Weight of Nations: Material Outflows from Industrial Economies. Washington D. C.: World Resources Institute. Mäenpää, I. and A. Juutinen (1999). Time series for the Total Material Requirement of Finnish Economy, Summary, . Ministry of the Environment (1999). Material Flow Accounting as a Measure of the Total Consumption of Natural Resources. The Finnish Environment. Helsinki: Ministry of the Environment. Moldan, B., S. Billharz and R. Matravers (eds) (1997). Sustainability Indicators: A Report on the Project on Indicators of Sustainable Development. Chichester: Wiley. Mündl, A., H. Schütz, W. Stodulski, J. Sleszynski and M.J. Welfens (1999). Sustainable Development by Dematerialisation in Production and Consumption: Strategy for the New Environmental Policy in Poland, Report 3, 1999. Warsaw: Institute for Sustainable Development. Organisation for Economic Co-operation and Development (OECD) (1998a). Eco-Efficiency. Paris: OECD. Organisation for Economic Co-operation and Development (OECD) (1998b). Towards Sustainable Development: Environmental Indicators. Paris: OECD. Schmidt-Bleek, F. (1994). Wieviel Umwelt braucht der Mensch? MIPS — Das Maß für ökologisches Wirtschaften. Berlin, Basel and Boston: Birkhäuser. Schmidt-Bleek, F., S. Bringezu, F. Hinterberger, C. Liedtke, J. Spangenberg, H. Stiller and M.J. Welfens (1998). MAIA — Einführung in die Material-Intensitäts-Analyse nach dem MIPSKonzept. Berlin, Basel and Boston: Birkhäuser. Schütz, H. and S. Bringezu (1993). Major material flows in Germany. Fresenius Environmental Bulletin 2, 443–448. Steurer, A. (1992). Stoffstrombilanz Österreich 1988. Schriftenreihe Soziale Ökologie, Vol. 26. Wien: Institut für Interdisziplinäre Forschung und Fortbildung der Universitäten Innsbruck‚ Klagenfurt und Wien. United Nations (2000). Integrated Environmental and Economic Accounting — An Operational Manual. New York: United Nations. United Nations (1993). Integrated Environmental and Economic Accounting. New York: United Nations. United Nations (1984). A Framework for the Development of Environment Statistics. New York: United Nations. World Business Council for Sustainable Development (WBCSD) (ed.) (2000). Measuring Ecoefficiency — A Guide to Reporting Company Performance. Conches-Geneva: WBCSD. Weizsäcker, Ernst. U. von, A.B. Lovins and L.H. Lovins (1995). Factor Four. Doubling Wealth Halving Resource Use. London: Earthscan.

Howard T. Odum

Emergy accounting43

Introduction This article introduces emergy accounting with a view to comparing it to conventional economic accounting indicators and analysis. Emergy-emdollar accounting provides the fundamental natural value to which people ultimately adapt. The example of shrimp mariculture is used to explain concepts and methods and the use of emdollars for the assessment of real wealth in natural systems at different regional scales.

Concepts and methods A century of previous efforts to use energy for evaluation (Martinez-Alier 1987) failed because all kinds of available energy, i.e. potential energy or “exergy”, were regarded as equivalent measures of useful work. Starting in 1967, we used the term embodied energy for the calories (or joules) of one kind of energy required to make those of another. However, that same name was used by others for different ways of thinking and calculating. In 1983 we chose, therefore, a new name, emergy (spelled with an “m”) as suggested by David Scienceman.44 In papers and books since, many groups around the world used emergy to mean the “energy memory” of what was required of one type of energy to make another. Systems of nature and humanity on all scales are part of a universal energy hierarchy. This hierarchy is the network of energy transformation processes which joins small scales to larger scales, and these to even larger scales. We represent the networks in systems diagrams from small on the left to larger on the right. Available energy (exergy) at one level is used up in each transformation process to generate a smaller amount at the next larger scale. Self-organisation reinforces designs in which the higher-quality energies on the right feed back to the left to reinforce the input process (autocatalytic feedback). Calories of different kinds of energy are not equivalent in their contribution of useful work. Directly and indirectly it takes about 1000 kilocalories of sunlight to make a kilocalorie of spatially dispersed organic matter, about 40,000 to make 135 P. Bartelmus (ed.), Unveiling Wealth, 135–146. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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a kilocalorie of coal, about 170,000 to make a kilocalorie of electrical power, and 10 million or more to support a typical kilocalorie of human service. The larger the scale, the higher the quality of the energy, but the less there is of it. There is less energy but more emergy per unit in valuable things. The numbers are largest for genetic information. Thus, the emergy of anything is the available energy of one kind previously used up to make it. For example, the solar energy previously required is called the solar emergy. To keep from confusing energy that is in a product with that which has been used up to make it, emergy units are called emcalories (or emjoules). The emergy of one kind, required to be transformed to make one unit of energy of another kind, is called the transformity. In this article, solar insolation emergy is used as the common measure. Solar transformities are then defined as solar emergy per unit energy, and the units are solar emjoules (sej) per joule. Transformity measures the quality of energy and its position in the universal energy hierarchy. As illustrated below with the shrimp evaluation example, ordinary kinds of data on materials, energy and money are used in emergy evaluations and then multiplied by a unit emergy value (for example, emergy per energy, i.e. transformity, emergy per money, emergy per mass, emergy per individual, emergy per bit, etc.). Each emergy evaluation table generates some new unit emergy values for the systems products. Tables of transformities and other unit emergy values are available from previous emergy evaluations (Odum 1996), and others are being assembled as part of a new Handbook of Emergy Evaluation issued in folios (Odum, Brown and Brandt-Williams 2000; Odum 2000b).45

Emergy contributions to the economy Since people do not think in emergy units, the economic equivalent called the emdollar is obtained by dividing emergy by the ratio of emergy to money in the economy. Emdollars are the economic equivalent of emergy. They reflect the emergy contributions to an economy as the money circulation whose buying power is supplied by use of a quantity of emergy. The buying power of circulating money depends on the real wealth (emergy) available to be bought. The emergy per unit money is calculated for an economy in a particular year by dividing the emergy use by the gross economic product (gross national product for a single nation). Emdollars are estimated from emergy and vice versa, using emergy/money ratios for the economy concerned. For example, the global emergy/money ratio was estimated as sej/$ in 1995 by

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dividing the estimated gross world product by the global emergy use (Brown and Ulgiatti 1999). 70% of the whole world’s annual real wealth use thus came from non-renewable fuels and materials, and 30% from the renewable environment (sun, tide and earth heat). Emergy can be considered as the correct measure of real wealth, because successful surviving designs in self-organisation of nature and the economy are those that maximise emergy power (empower) on every scale.46 In the short range humans may evaluate products and services in other ways, often expressing their choices with market values. In the longer range and the larger scale of societies and their environment, humans are forced by trial and error or by logic to fit their ideas and behaviour to maximise empower. This is because of the natural selection that favours network relationships that draw in more emergy and use it to do more. Those systems designs with more emergy use displace those with less. Networks that maximise the whole systems empower may include low emergy components that contribute to efficiency. To determine whether something makes a net contribution to the economy, everything can be put in solar emergy units. Then you can correctly compare the yield to the economy with what was required to be purchased from the economy. Fossil fuels, depending on their concentration and price, provide 3-15 times more emergy than the economy uses to get and process them. Oil from oil shale and photovoltaic electricity have no net emergy contribution. They yield less emergy to the economy than is required in emergy of materials and services to operate them. Thus, they cannot independently support the economy nor become economical as primary sources. Emergy evaluates exchanges on a common basis. There are large inequities in real wealth of international trade. Developed nations, using raw products of some less developed nations, take many times more emergy from those economies than is in the buying power of the money they pay in exchange.

Emergy evaluation procedure A system of interest is selected, and main components, inputs and outputs, are identified. To illustrate the approach we use the example of shrimp mariculture in Ecuador (Odum and Arding 1989). Figure IV.9 presents the energy systems diagram with main parts and pathways. The diagram shows causal relationships. Minor parts are never intentionally left out, but they may be aggregated with other items to keep the overview simple. Circles outside the defined boundary frame are sources of external resources, goods and services;

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tank symbols are for stocks and storages; pointed blocks are interactions of more than one commodity or factor in productive processes. Hierarchy within each diagram is represented by the position of symbols, with increasing scale of territory and turnover time, from left to right.47 The boundary selected for the diagram is used to identify all the important input pathways crossing into the chosen system. If there is a stored quantity within the boundary, which is supplying available energy and/or materials faster than it is being restored, it is acting as a non-renewable source and is included as a line item. Each of these inputs becomes a line item in Table IV.4 which is an example of an evaluation table.48 Column (2) of the table is the name of the input. Column (3) has the rate of flow of the input. For a steady state evaluation,


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annual values of required inputs from nature and from the human economy are listed in usual units for materials, energy and money (grams, joules, $, etc.). These include the flows necessary to sustain structural storages and assets.49 In column (4), emergy per unit (g, J, $, etc.) is inserted from previous studies. The input requirements in column (3) are multiplied by the emergy/ unit values in column (4) to obtain the emergy flow, or empower value (in solar emjoules per year), for column (5). For inputs in money units, representing services, the money flow, converted according to the currency exchange into international dollars, is multiplied by the emergy/money ratio (sej/$) of the economy from which the human services were contributed. Annual emdollar flows are calculated in the last column (6) of Table IV.4 by dividing solar emergy by the emergy/money ratio of the economy of the intended audience (example: sej/yr 2000 $) to obtain annual emdollars (abbreviated em$). Emergy/money ratios come from emergy evaluations of whole nations. Some of these have been published (Odum 1996), and there are summary tables (Odum 1971, 2000a; Odum, Brown and Brandt-Williams 2000). An interpolation appendix table in Odum (1996) evaluates the US emergy/money ratio for different years from the total fuel use and gross economic product. Figure IV.10 summarises in an energy systems diagram the environmental and purchased inputs, the money flows, yields and by-products, all given in annual empower units. Numerical emergy values are written on the pathways to give an overview perspective and make it easy to calculate emergy indices. To evaluate the emergy stored in resource reserves, capital assets, organisms, diversity, information, etc., an emergy storage table can be prepared. It would have the same columns as in the emergy flow (empower) table, except that columns (3), (5) and (6) have stored quantities rather than flow rates. No evaluation of stored assets was made of the shrimp ponds because they are harvested after a few months and started over.

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Emergy indices The following indices can be calculated from the evaluation table in order to draw inferences from emergy analyses (see Table IV.5 and Figure IV.10). To evaluate the quality of the energy flows, transformities can be calculated and compared with other energy forms. The solar transformity of services and products, generated by the system under study, is obtained by dividing the total emergy input required by the energy of the product or service. For interpretation of net benefit, the net emergy ratio is calculated. The emergy yield ratio is the emergy of an output divided by the emergy of those inputs to the process that are fed back from the economy (Y/F in Figure IV.10). This ratio indicates whether the process can compete in supplying a primary energy source for an economy. Recently, the ratio for typical competitive sources of fuels has been about 6 to 1 or higher. Processes yielding less than this are not economical as primary emergy sources.


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To anticipate whether an investment is well matched by free resources, the emergy investment ratio is calculated. It is the ratio of the emergy, fed back from the economy to the emergy inputs, from the free environment (F/E in Figure IV.10). This ratio indicates if the process is economical as utiliser of the economy’s investments in comparison to alternatives. To be economical, the process should have a similar ratio to other regional activities. If it takes more from the economy than alternatives, it will not survive the high costs. If it receives less from the economy, the ratio is less, and its costs are less so that it will tend to compete, prosper in the market, and increase its investment. The emergy exchange ratio is the ratio of emergy received for emergy delivered in a trade or sales transaction. Raw products such as minerals, rural products from agriculture, fisheries and forestry, all tend to have high emergy exchange ratios when purchased at market price. Money is only paid for the human services and not for the extensive work of nature that contributed to these products. An emergy flow may be a benefit or a loss depending on the area and scale of view. Something can be a loss from one area that benefits another. An emergy flow may thus have a net benefit to a small area but have a different net benefit when considered within the larger system (see Table IV.6).


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Example of emergy evaluation: shrimp mariculture in Ecuador50

The shrimp example highlights recurring problems with environmental development, international aid and investment. Shrimp mariculture in 1986 was based on getting the post-larval shrimp from the natural system, which also supported an older trawl shrimp fishery. Thousands of ponds were built in the coastal zone of Ecuador, displacing the mangrove swamps that had been supporting local people with food, fuels and environmental services. Understanding shrimp ponds, their estuarine basis and their relationship to the international economy requires systems thinking and wealth evaluations at several levels of size: the pond system, the regional economy, the national economy, international exchange and the world economy. Ideally, a new development should contribute to the wealth of all these, without one benefiting at the expense of another. Maximising one may not maximise the whole system’s wealth and performance. Nor are such developments sustainable.

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In the diagram of the shrimp ponds (Figure IV.9) estuarine waters containing post-larvae, shrimp food and fertiliser nutrients are pumped into the diked ponds. More organic food is generated by the pond algae and other plants. The pond managers add additional fertiliser, foods, post-larvae, utilising goods and services, fuels and electricity. Harvested shrimps are sold, and the money obtained is used to cover expenses for purchased items, pay interest and repay loans, with the balance retained as profit. Flows of emergy are evaluated in Table IV.4 and grouped in three headings: environmental inputs, items purchased from the local economy, and output products. The annual emergy flows (empower) from column 5 are plotted on the pathways in Figure IV.9. After dividing by the area of ponds, the annual emergy per hectare was plotted on the summary diagram of Figure IV.10. The total of emdollars used, expressed in US dollars of year 2000, was 2147 em$ per hectare per year, four times the economic costs. Only a third of this came from people and was paid for in dollars. Like most other environmental products, they contribute more to the economy than is recognised by money paid for them. Table IV.5 presents the emergy indices, calculated from the totals in Figure IV.10. The emergy yield ratios are small, not unlike those of industrialised agriculture. The emergy investment ratios are about half those of the United States (7.0), but for Ecuador they indicate relatively high levels of economic intensity and environmental impact. Transformities are similar to other agricultural protein sources (beef, lamb). The effect of using organic feed was evaluated by calculating the ratio of the emergy increase in yield divided by the emergy of the added fish meal:

The organic feed amplified the production of the pond system 2.8 times. The inequity of the sales of the shrimp to markets in the United States is indicated by the emergy exchange ratio:


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where shrimp from Ecuador going to the United States is (3 E10 g/yr) (0.2 dry)(6.7 kcal/g)(4186 J/kcal)(18.2 sej/J) = 31.2 E20 sej/yr, and emergy of US buying power going to Ecuador (3.15 E8 $/yr)(2.4 E12 sej/US 1986$) = 7.6 E20 sej/yr. The US economy and standard of living were enriched, and those of local people, formerly using the coastal zone of Ecuador, were depleted. Whether a flow of real wealth, evaluated as emergy, is a benefit or a loss may depend on the scale of viewpoint. The emergy of the shrimp aquaculture is considered from five viewpoints in Table IV.6. Of the 1092 million emdollars that went into the shrimp, 602 more were diverted from the use of local people than were received by them. Calculated on a national basis, the net emergy loss from Ecuador was 1100 million emdollars. Much of this loss contributed to the net gain of 710 million emdollars per year, which increased the standard of living of consumers in the USA. There was little if any net global benefit from the aquaculture.

Summary Concepts of environmental and economic accounting on a common basis are explained and illustrated with an evaluation of shrimp mariculture in Ecuador. The principles of energy hierarchy are used to express real wealth value in units of emergy and their economic equivalent emdollars. Public policy can anticipate a successful fit of economy and environment by selecting alternatives that maximise production and use of emergy-emdollars.

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References Brown, M.T. and S. Ulgiati (1999). Emergy evaluation of the biosphere and natural capital. Ambio 28(6), 468-493. Collins, D. and H.T. Odum (2001). Calculating transformities with an eigenvector method, in: Brown, T. (ed.), Emergy Synthesis. Gainesville: Center for Environmental Policy, University of Florida (in press). Lotka, A.J. (1925). Physical Biology. Baltimore, MD: Williams and Wilkins. Lotka, A.J. (1922). A contribution to the energetics of evolution. Proc. National Academy of Sciences, US, 8, 147-155. Martinez-Alier, J. (1987). Ecological Economics. New York: Basil Blackwell. Odum, H.T. (2001). An energy hierarchy law for biogeochemical cycles, in: M.T. Brown (ed.), Emergy Synthesis. Gainesville: Center for Environmental Policy, University of Florida. Odum, H.T. (2000a). Emergy evaluation of an OTEC electrical power system. Energy 25, 39893993. Odum, H.T. (2000b). Emergy of global processes. Folio #2, Handbook of Emergy Evaluation. Center for Environmental Policy, Environmental Engineering Sciences. Gainesville: University of Florida. Odum, H.T. (1996). Environmental Accounting, Emergy and Decision Making. New York: Wiley. Odum, H.T. (1983). Systems Ecology. New York: Wiley. Revised 1994: Ecological and General Systems: An Introduction to Systems Ecology. University Press of Colorado. Odum, H.T. (1971). Environment, Power, and Society. New York: Wiley. Odum, H.T. and I.E. Arding (1989). Emergy analysis of shrimp mariculture in Ecuador. Working paper, Coastal Resources Center, University of Rhode Island, Narragansett. Odum, H.T., M.T. Brown and S. Brandt-Williams (2000). Introduction and global budget. Folio #1, Handbook of Emergy Evaluation. Gainesville: Center for Environmental Policy, Environmental Engineering Sciences, University of Florida. Odum, H.T. and E.G. Odum (2000). Modelling for All Scales: An Introduction to Simulation. San Diego, CA: Academic Press.

V. Assessment and policy analysis


Robert Repetto

Assessment of sustainability in growth and development — approaches and policy applications Peter Bartelmus and I go back a long way. I remember when I first got into this issue of green accounting, I did not then think of him as a friend as I do now; I thought of him more as a target. When he was working at the United Nations, we at the World Resources Institute were urging them to go faster and further with their work. Ultimately, of course, they have done a great deal to promote expanded concepts of accounting. I have great respect for the Wuppertal Institute and its own path-breaking and leading research on many issues of sustainable development, including ecological tax reform, material flows and other important issues. In a certain sense the Wuppertal Institute and the World Resources Institute find themselves as partners time after time, because they are working on a common agenda. I found the work that Wuppertal has done on material flows especially informative. It in fact inspired me some years ago to begin a research project on a similar theme for the United States economy. We tried to construct a set of material accounts for the United States and learned a lot from the exercise. Our estimates were that, barring construction waste and soil erosion from agriculture, the United States economy incorporates as much as ten billion tons of material throughput every year. That is an enormous amount, because at least 80 or 85 per cent of it becomes waste within a very short time. Building on work that Robert Ayres from INSEAD did years ago, we estimated that our material throughput is declining as a per centage of GDP but still rising in percapita terms. So it is rising faster than population. We found, interestingly, that at least half of these ten billion tons become waste even before any saleable product is generated. A lot of the waste in the United States is thus generated very early in the production process. So, it is as if, in an economy-wide sense, people are going into McDonalds, unwrapping the hamburger and immediately throwing away the wrapper. We also found that each year at least two billion tons of material are dispersed throughout the 149 P. Bartelmus (ed.), Unveiling Wealth, 149–155. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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landscape in dissipative uses. Some of this consists of fertilisers and pesticides. As we all know, only a small fraction of the fertilisers and pesticides that are put onto the agricultural land ever reaches the target; much of it just runs off. Most of the rest of the dispersed material use is fossil fuels. People sometimes forget, and Wuppertal has forcefully reminded us, that we burn the fuels but none of the matter goes away. It either goes up the stack or goes into a slagheap. Another three quarters of a billion tons are production waste that end up as various forms of emissions. We tried to use this kind of information in the context of fiscal policy. Material flows typically carry large negative environmental externalities. Yet, in the United States material inputs are virtually untaxed. Net of subsidies, the marginal tax rate on material resource use is approximately zero. By contrast, payroll taxes and labour charges in the United States are high and continue to rise. Moreover, with an aging population and a move toward earlier retirement and longer periods of disability later in the life, and given our current system of financing, labour charges are likely to increase even more in order to finance the social insurance system. There is thus a tremendous disparity between the way we treat material inputs that have negative externalities and the way we treat labour inputs which have positive externalities. There are positive externalities in the sense that an increase in employment brings with it a reduction in all sorts of social problems. When people get a job they are less likely to get sick, divorced, arrested, addicted, or drunk. Despite all these positive externalities of increasing employment, we tax it heavily. However, what I would like to address mostly is the need to improve our widely used economic indicators. We have such indicators, we refer to them all the time, we embody them in various analytical exercises, and yet, many of them are quite misleading as indicators of progress towards sustainability. They are misleading even in measuring what they intend to measure. I believe therefore that, in addition to creating new kinds of indicators, it is important to improve the ones we have. Take, for example, the measure of productivity: all economists put this indicator high in the pantheon of important economic statistics. Productivity changes are the consequence of technological innovation and other improvements in the efficiency with which we use inputs. Historically, they are responsible for at least half of the improvements in living standards of our populations. The decline in the growth rate of productivity during the 1970s and 1980s was, at least in the USA, the source of much soul searching and browbeating among economists and politicians. And yet, the measure that economists use for productivity growth is biased. It produces misleading indicators, particularly with respect to the economic effects of environmental improve-

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ment. Economists traditionally measure productivity growth as the difference between the growth rates of an index of outputs and an index of inputs. If outputs are going faster than inputs that must be because productivity is improving. This itself is at odds with the physical reality that inputs and outputs have to grow the same way, as a consequence of the conservation of matter and energy. You cannot make nothing out of something. So, how can you get a measure of productivity that has outputs and inputs going at different rates? Economists achieve this strange result by accounting only for saleable outputs and purchased inputs, that is those sold and purchased on private markets, ignoring the generation of waste products and the use of “free” natural products and services. For example, in measuring productivity growth in the electric utility sector, economists count the increase in kilowatt-hours of electricity sold as the industry’s output. Utility corporations will be happy to sell you electricity, but the productivity measures ignore the emissions of carbon oxides, nitrogen oxides and sulphur oxides, which utilities are happy to give away for nothing. Measuring only the inputs and outputs that are exchanged in private markets is a strange approach for governments to adopt in assessing productivity. Most economists and political philosophers, at least in the English tradition, regard a government as an institution whose main function is to provide people with public goods that can be obtained collectively but not privately. The government exists, in a certain sense, to provide public goods like national defence, justice, social insurance and environmental quality. It is ironic, then, that in measuring economic performance in terms of productivity, the government should adopt a narrow measure which excludes the public good of environmental quality. As a result of this bias, in the United States, during the 1970s and 1980s, when our electric utilities were responding to the Clean Air and Clean Water Acts by reducing their emissions, conventionally measured productivity declined. Since utilities had to acquire additional inputs of capital, labour and energy to install and operate pollution controls, the growth rate of conventional inputs rose. At the same time, however, the utilities produced more kilowatt-hours per ton of emission than before, but this decline in the ratio of bad outputs to good outputs was not captured in productivity measures. Only if outputs are defined to include the outputs of bads, i.e. power-plant emissions, and if those emissions are assigned negative prices equal to the estimated marginal damages they bring about, can one get a clear picture of the implications of environmental protection. An unbiased measure of productivity, calculated in this way, reveals that productivity did not fall at all during this period, but actually rose.

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Over the whole period from 1970 to 1991, according to the conventional measure, productivity in our electric utility sector declined by an average of 0.38 per cent per year. Over a twenty-year period this is quite a substantial drop in productivity. In fact, properly measured productivity actually rose at just about that rate. So the conventional measure got the magnitude about right, but was wrong about the sign. Actually, the difference between the biased and unbiased measure was larger in the first decade, the 1970s, when utilities were responding most rapidly to the new environmental laws and regulations. At the World Resources Institute we did similar calculations for other energy and pollution-intensive industries, notably heavy industries, and we obtained more or less the same results (WRI 1997). The implication is that much of the intensive discussion of why productivity growth was declining in the United States was based on a misconception. Productivity was actually not declining; it was just measured in a biased and misleading way. This illustrates clearly the need for improving the conceptual and empirical underpinnings of many of our common economic indicators. We are all familiar with another profoundly misleading indicator, at least of sustainability. It is the widely used measure of GDP and the whole underlying system of national economic accounts. Its principal shortcomings with respect to the environment are that natural resources are not treated as economic assets which are subject to depreciation, depletion and capital investment. Drawing down or impairing natural resources is recorded as a form of income generation, not as a loss in wealth, because the damages caused by losses in environmental quality are not valued and identified as such. Chemical spills and similar environmental disasters are recorded as increasing GDP, because they result in higher levels of final expenditures. There have been long-standing efforts to correct these shortcomings, including the activities undertaken by Peter Bartelmus and his colleagues within the United Nations Statistics Division. So far, however, the successes have been rather meagre. I would have to qualify that by learning of all of the activities going on in the Statistical Office in Germany and perhaps in a few other countries. But this effort has not yet been translated into a comprehensive conceptual or empirical revision of the conventional national accounts. In the United States we tried hard to promote reforms in the national economic accounting system, and we thought in the early months of the Clinton administration that we had succeeded. Vice-President Gore, at the time, directed the US Bureau of Economic Analysis (BEA 1994) to begin constructing satellite accounts for national resource assets, and preliminary results were published in 1994 for land, subsoil minerals and forests. However, the response was not long in coming. Two congressmen who represented coal mining


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States, Kentucky and West Virginia, immediately inserted a provision in the Department of Commerce appropriations bill, which funds the Bureau’s activities, halting any further efforts of environmental accounting. Obviously they believed that such accounts would give a bad image to the coal industry. And indeed, so it would. The congressmen directed therefore that there should be an independent review of the methodology and validity of such environmental accounting. The study was delegated to the National Academy of Sciences (NAS), and a committee was formed. The committee under the chairmanship of William Nordhaus issued a report, which confirmed the need for green accounting (Nordhaus and Kokkelenberg 1999). Along with William Nordhaus, a professor at Yale who was one of the earliest US researchers into expanding measures of welfare, the authors included Dale Jorgensen, professor at Harvard and president elect of the American Economic Association, Robert Eisner, who is a past president of the Association, Martin Weitzman, another Harvard professor, who is known for his contributions to the theory of sustainability, and a number of other people including myself. With that membership, it was extremely encouraging that there emerged almost at once a clear consensus on unanimous recommendations. The committee strongly endorsed the BEA’s work and emphasized the importance of augmenting the national accounts to include environment and natural resource values. It recommended that the work programme be resumed, and not just resumed but resumed in a much more comprehensive way. This was encouraging, because it indicated that, at least in the United States, the idea and effort to expand, improve and reform the national economic accounts have moved right into the mainstream of the economic profession. Green accounting is no longer a dissident movement. Rather, it has become accepted wisdom. To quote the report: The panel concludes that extending the National Income and Product Accounts (NIPA) to include assets and production activities associated with natural resources and the environment is an important goal for the United States. Environmental and natural-resource accounts would provide useful data on resource trends and help governments, businesses, and individuals better plan their economic activities and investments. The rationale for augmented accounts is solidly grounded in mainstream economic analysis. The underpinnings for this conclusion lie in the economic theorem that net national product, if properly measured to include capital formation and all forms of consumption of both marketed and non-marketed goods and services, is the best available current measure of sustainable income.

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When it came to recommendations, the panel was also unequivocal. It recommended that Congress authorise and fund the BEA to recommence its work on developing natural resource and environmental accounts, and that it be directed to develop a comprehensive set of market and non-market environmental accounts. By “comprehensive” they meant that the satellite accounts should not only include asset accounts for important natural resources such as subsoil minerals, lands, forests and fisheries, but should also include sectoral accounts for waste generation and environmental damages. This was actually quite encouraging and surprising to me because it went quite a way beyond what I thought was likely to emerge. The panel recommended that environmental damages caused and damages suffered from major forms of pollution should be compiled, which is quite an extensive mandate. It also noted that the United States had fallen behind the European countries in efforts to construct and expand the national accounts. Unfortunately, Congress has not yet acted on these recommendations by the National Academy by increasing the necessary funding for the BEA. The current budget wars in the US, where the parties are competing to reduce the budget deficit or increase the budget surplus, do not augur well for an early increase in budgetary allocations to the BEA. Even such routine expenditures as the US census, which has been going on every year since the 1790s, is now treated as an emergency in the United States. A case study may illustrate the insights to be gained from improving the national accounts. When the NAS committee made its report, I was concerned that fisheries and other marine resources would be excluded from the work programme. In the United States our fisheries resources are one of the few natural resources that unambiguously can be shown to be depleted and declining. However, there are doubts whether it is feasible to construct asset accounts for our fishery. So I decided to carry out a case study and try to demonstrate that the data are ready available for such an effort. With the assistance of our fisheries management agency we chose a sample fishery, which turned out to be the sea scallop. Scallops are easy to study because they are not subject to much recreational fishery. The accounts make use of population estimates, based on sampling by the fishery service and population modelling. The evaluation of these stocks used two common alternative approaches: the net price method and the discounted present value approach. The net price essentially represents the liquidation value of the stock, i.e. what a ton of fish would be worth if harvested and brought to the dock immediately. The discounted present value represents the value of the stock as a going concern, if those same fish were left to live, grow, reproduce and to augment future harvests according to a fisheries management schedule. Note that in an


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efficiently managed fishery those two values would converge. The net income, derived from harvesting a ton of fish today would approximate the discounted net income from leaving the fish alive to augment the future harvest. Yet our findings were that these values are systematically different and divergent. Consistent with predictions regarding the effects of open access, the value of a fish left to grow and reproduce far exceeded its liquidation value. These differences in asset values provide a measure of the extent and cost of over-fishing, of stock depletion in this resource. Note that this little creature doubles in size between age three and age four, and it doubles in size again between age four and age five. A single scallop, when reproductively mature, generates millions of larvae per year — it is highly fecund — and many of these survive. Furthermore, in the market place, people would pay a larger price per pound for large scallops than for small scallops. The question is: do fishermen invest in this growth? Who would not consider investing in a start-up company that was going to double in size next year and the year after, and then franchise itself, producing tens of thousands of franchisees every year? But fishermen routinely capture scallops at age three, just as soon as they reach the minimum size to get caught in the mesh of the net. So, they do not make this investment in growth. Why not? The answer is: they do not do it because they cannot. The scallop fishery in the United States is virtually an open access fishery. There is no assurance that if a fisherman leaves a scallop alive this year, he will be the one to capture the scallop next year. There is no incentive to conserve the stock. This premature harvest creates an enormous capital loss from inefficient management of fisheries — it represents a measure of economic loss owing to the lack of any kind of property rights or harvesting rights in fisheries in the USA. This is probably also true in parts of Europe. Such insights can indeed be obtained from economic accounting systems that assign appropriate values to natural resources and to environmental damage. And yet, our progress in reforming outmoded systems is extremely slow, even in the face of economic and demographic expansions that impinge increasingly on these precious resources. We have a long way to go. I hope that, while we will be moving into a new millennium, we will be able to progress a little faster, we will support each other’s work, we will learn from each other’s work, and we will encourage our colleagues in and out of government to increase their efforts of providing the information we need to manage our resources more sustainably.


Questions and Answers Peter Bartelmus: Robert Repetto has guided us through various approaches to physical and monetary accounting and presented challenging information about material flows. The question is indeed: what are the consequences of using annually ten billion tons of material by the US economy (and corresponding amounts in other countries) for policy analysis, political decisionmaking and for the reactions of society to environmental deterioration? We were told of a fiscal-policy solution: the taxation of material flows according to their negative environmental externalities, and the reduction of labour costs because of positive externalities of employment. Next, Robert Repetto discussed the monetary values of conventional economic indicators. He showed us a surprising distortion of productivity measurement. Conventional productivity analysis compares inputs and outputs, which are sold and purchased on markets, without considering the costs of resource depletion, and the benefits of pollution prevention or environmental clean-up. This has led to a biased picture of productivity changes in the USA. Once the indicator is corrected for environmental costs and benefits, the decline in productivity between 1970 and 1991 is turned into an increase in productivity by about the same amount. It would be interesting to know what the development of productivity would look like in other countries if they adopted Repetto’s modified indicator. We have here an example of mutual learning and inspiration he hoped for as a result of our discussions. The story about the US Congress blocking environmental accounts actually serves to expose the need for their implementation. I do not think the congressmen would have reacted with such zeal were it not for fear of revealing something they would rather keep hidden. Revealing things that are hidden is probably the most important function of statistics and information. The USA did apply the UN/SEEA system (before it was halted by the US Congress), although in a modified form.51 This “initial” application showed a decrease in natural resources similar to Repetto’s fisheries example. But in this case, the depletion of non-renewable resources was largely offset by the discovery of new reserves in the USA. Thus, in the end, the accounts did not show a real decrease in reserves. However, it is still a subject of debate whether to set off the depletion of non-renewable resources against the discovery of new deposits and create in this manner the impression that non-renewable resources are inexhaustible. 157

P. Bartelmus (ed.), Unveiling Wealth, 157–166. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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We could also discuss the term “satellite accounts”, which was adopted by the US National Academy of Sciences. I wonder why such a supplementary system, which opens the door to experimentation and offers a platform for controversial and alternative approaches, makes some official statisticians so nervous. Why not develop further both systems, demonstrating in a transparent way how they function, and then leaving it up to the users to decide about their usefulness? Maybe the conventional system is more useful in the short term, because it can illustrate cyclical movements and imbalances in the economy. Green accounts might be preferable, on the other hand, in the long term for evaluating the sustainability of economic growth and development. Philipp Schepelmann (Wuppertal Institute): At the end of 1999, the leaders of European Union governments met in Helsinki. They discussed a package of sustainability indicators in the context of the “integration principle” which calls for the integration of economic, social and environmental policies. The summit took place at the same time as the Wuppertal Institute’s “Unveiling Wealth” congress. Hardly any of the experts in the field of indicators registered this possibly historic event for the development of indicators of sustainability in Europe. This tells us a great deal about the political involvement of German scientists. A month before Helsinki, Jonathan Lash, president of the World Resource Institute, had drawn attention to the fact that in the USA there is nothing like this European integration process, where politicians discuss how various aspects of policy making can be integrated. Hence my question for Robert Repetto: does what you have told us have any link to the policy makers, other than your story of the congressmen? Robert Repetto: Policy integration in the USA is a contradiction in terms. The structure of government in the USA was created by people who put little faith in governments. The idea was to prevent any major changes, and that has functioned fairly well. Power is intentionally distributed among different segments which are largely independent of each other. There are the different branches of the legislature, each of which has a different power base. The political parties in the USA, of which there are really only two, are large melting pots where different factions with very different opinions are all thrown together. Being a member of the Republican party, for example, does in itself not mean anything, politically. It must therefore be very puzzling for those outside this system — and also, incidentally, for many US citizens — how something like a US position is created in the international arena.


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As to the question of sustainability, a marginal issue at best for most politicians, it is not surprising, therefore, that there have hardly been any serious efforts of addressing policy integration. The only chance of achieving something in this regard would be if most of these power centres reached the conclusion that it was not worth while fussing about policy integration, and decided to let grassroots developments take their course. Paul Welfens (Potsdam University): I would like to see the figures Robert Repetto mentioned (and maybe also additional ones from other sources) on a specific internet site. Researchers in Germany and surely also in many other countries are engaged in discussions with politicians and businessmen, in which they could profit from such data. The internet offers an opportunity to disseminate such ideas, and we should use it to this end. Robert Repetto’s article illustrates the conflict between economic and ecological thinking. I would suspect that the problem of over-fishing would be less dramatic if all the small fisheries were joint-stock companies. People who invest in stocks look to the future, by nature. A good deal of the ecological discussion shows unfortunately a deep mistrust of economic processes, shareholder value and other economic concerns. In my opinion, we still have to discover the benefits of some capitalist institutions — in this case the stock market — for the environment. Remaining questions are: is it possible to introduce a kind of artificial property right to fishery resources? Would the G8 countries take on this issue? In November 1999, the WTO published a report on global trade, which had been preceded by a discussion of over-fishing. As we saw in Seattle, the WTO is quite slow in taking up new issues in a sensible way. Therefore, the subject should be dealt with on the G8 level, above all by the USA and possibly by Europe, too. I have a question for Robert Repetto: if you do not make progress at home, does it make sense to make an attempt at the international level, or is it necessary to maintain a particular sequence? Do we need to make advances in large countries first, for example the USA, before we bring them onto the international stage? One more question. The leading institutes in Germany have developed macro-models, which have only just reached the stage where they can take up ecological subsets. For example, the Panta Rhei model factors in emissions and resource depletion of the energy sector (Meyer and Welfens 2001). Have the USA and Canada made more progress in this field? From a political point of view, the level of sophistication of modelling is relevant. It makes a difference to political discussions whether the focus is on GDP or whether analyses and arguments are conducted, such as those of Robert Repetto’s.

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Robert Repetto: Of course there is a connection between accountants and modellers. I carried out a kind of meta-analysis of all models in the USA, which attempt to estimate the costs of Kyoto-Protocol-related policies. The results differed considerably. We investigated sixteen models and approximately 160 model runs. Approximately 80 per cent of the variance in the cost estimates was the result of around six fundamental assumptions made in the models. Some of these assumptions were closely connected to political decisions, such as the development of the coal market or the use of coal tax revenues. Some of the assumptions can be traced to differences in the accounting methods of the models: for instance, whether the models take into account that burning less coal not only reduces the amount of carbon dioxide emisand sions, but also of conventional emissions such as Most models simply do not take such factors into account. In conclusion, the comparison demonstrated that differences in results are due to differences in the empirical estimates and analytical model assumptions. As to the relationship of national and international policies, the globalisation of information (via the Internet) plays an important role here. There is a much broader flow of information in all directions and between all kinds of virtual groups. People who have the same interests, whether privately or professionally, are communicating much more closely than in the past. Knowledge, opinions and analysis are all spreading much more quickly. If you think of ideas as seeds, then these seeds travel much further and much faster than in the past, and nobody knows where they will take root. Thus, the idea of an ecological tax reform took root in Europe much more quickly and much more productively than in the USA. We make sure that all our reports and data are available in the Internet under wri.org, and we hope that people will find them useful. There is without doubt a trend towards the globalisation of knowledge and experience. Should fisheries be joint-stock companies? It would certainly revolutionalise the way the whole fisheries industry is run and result in incredible improvements to incomes in the sector. In our institute, we even have a fairly wealthy businessman who would love to invest in the fisheries industry; he would like to buy shares and thus obtain part of the catch quotas, if these quotas could then be used according to a unified concept. There has been a good deal of restructuring, both in the USA and in Europe. Can you imagine a privately owned company whose input you could reduce by around 75 per cent (a conservative estimate), while at the same time increasing its output by 25 per cent? Would that be a case for a takeover? A hostile one? Would somebody buy this company and implement the structural changes? Would shareholders tolerate a management that would forego such


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a potential level of income? I do not think so. Yet, this is an accurate description of our fisheries industry in the United States and also in your fisheries industry in Europe. The question is, would it be possible to find someone for such a hostile takeover of the national fisheries? Again, I do not think so. Could this buyer fire the management and replace it with another? I do not think so. We are, in a way, caught in a trap. The only solution is to make the fisheries adopt, step by step, industrial forms of organisation, or at least more formal cooperative forms. The potential profits would be stunning. Peter Bartelmus: I understand, you suggest a kind of property right to natural resources, in the hope that this would improve the management of commonaccess resources. This leads me back to our system of environmental accounting, the SEEA. The system presents not only flow accounts, but also assets (stock) accounts which include the distribution of assets over different sectors. Such distributionary accounts reveal where and by whom more efficient resource management should be established. A different question: in our cost calculations, we should include as consumption of a resource only that part which is not sustainable. This is to take into account the fact that some resources are renewable at speeds that differ for different species, and age and size of the original stock. Such calculations require, however, complex modelling. Did you consider these difficulties in your calculations? Robert Repetto: There is considerably more information on sustainable yield for renewable resources than one would be expect. There is, for example, a whole line of fishery biologists and other scientists who deal with fisheries, spending their professional lives on this particular kind of population modelling and measuring. A great deal of information needs only to be picked up from existing studies in order to calculate population losses and corresponding decrease in resource value — as compared to a (quasi-normative) optimal return. With regard to property rights: typically such systems allocate catch quotas to qualified fishermen.52 Fishery experts set sustainable catch quotas for each year, based on estimates. Thus a quota of five per cent determines the total amount of fish a fisherman is entitled to catch. This is a quasi-property right to part of the total catch. Even on its own, this encourages the preservation of the fish population. The reason is that the population increases because of preservation measures which in turn increases the allocated catch quota, with everybody profiting

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from this growth in capital. Also, such measures reduce greatly the political pressure on the government (from the fisheries) to abolish catch quota. If these rights are also made transferable, then the fishermen can choose to opt out and be compensated. As long as enough people want to work in the industry, a fisherman can decide to lease or to sell his quota, to look for different work and thus to increase his income. This is a kind of exit strategy. At present fishermen are justifiably afraid to stop fishing as they would lose their job without compensation. Where this model was introduced in the fisheries industry, it led to exactly the results predicted by economists: Pressure on fish populations was reduced, productivity (measured in tons caught per catch unit) of the fisheries increased, and fishermen are now ready to invest in the future, whether in research, fish farming, or measures to increase fish populations. The WTO Seattle conference was mentioned. Many of the protesters call themselves anarchists. Their anarchism can be summed up in the phrase: “Property is theft”. However, as we have seen from the fishery example, in a certain sense the absence of property rights is theft indeed, as it leads to depletion of the resource. The forestry sector faces the problem that forests produce different outputs, some of which are easier to measure than others. The conventional measurement of productivity and changes in productivity can therefore be quite misleading. The most obvious measure of output is timber. Timber is a saleable product and is therefore easily measured. More problematic is the measurement of other forest services, such as protection of water reserves and regulation of drainage, the provision of space for life and recreation, and so on. A forest can be managed so that measured or measurable productivity is maximised. However, neglect of these “other” services leads to the mistaken conclusion that forest management is unproductive. The problem with forestry in the United States is that all of our public forests — of which there are roughly 215 million acres (87 million hectares) — are all run by the US Forest Service as a monopoly. Of course, a public monopoly ensures neither efficiency nor sustainability. Rather, it is exposed to a strong lobbying influence. A colleague of mine in Colorado refers in this context to the “lords of yesterday”. By this, he means the companies of traditional raw materials industries such as the timber industry, mining and livestock farming, which exert a very strong influence, indeed, on national raw materials policies, and in their own (profit) interest.


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Peter Bartelmus: The situation in Germany is different. Our own rough estimates show that forests are managed sustainably with regard to timber production.53 For fish stocks, we estimate a relatively small capital loss. In total, the costs of natural resource depletion amount to only 0.6 per cent of the total environmental costs. The bulk of environmental costs is caused by pollution. But, as I said, these figures are preliminary estimates. Stefan Bringezu (Wuppertal Institute): I appreciate Robert Repetto’s contribution, because he started with some examples of physical accounts and then moved on to examples for monetisation. Since Peter Bartelmus arrived at the Wuppertal Institute in February 1999, we have engaged in a very interesting discussion about the complementary value of physical and monetary accounts. Karl Schoer from the German Federal Statistical Office raised an interesting point. It is the option of compiling (or not) a green GDP and the question of its use and usefulness. Further questions are to what extent the compilation of this indicator requires complementary physical and monetary accounting and how, for example, biological diversity can be captured in these approaches. Your example of scallops is a persuasive case, and the situation is fairly clear for forests as well. Even erosion processes in the agriculture sector clearly imply a reduction in the harvested quantity, which can be accounted for as profit foregone. But how about natural goods that are not cultivated? Let us take erosion in the Sahara region. It is a consequence of desertification which in turn is a result of climate change. Hence erosion in this region is not a direct consequence of harvesting methods or harvest quantities. And what about the reduction in biological diversity in the North Sea and the Baltic? The decline in biodiversity is caused there by various factors, among them overfertilisation through nitrate and phosphate inflows from various littoral States, and chemicals discharged from oil rigs. The situation is complex, but beyond dispute: the biodiversity of these seas decreases also in those parts which are not overfished. I wonder, therefore, what is the benefit of monetising these losses, apart from the political decision to value these resources as more or less important than others? Let us remember that these decisions are based on conclusions about the physical reserves of natural systems. Robert Repetto: Since the beginnings the discussion about green accounting has been about physical versus monetary accounting. I have never seen this as an “either-or” scenario. The results of scientific research and testing are almost

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always of a physical nature. We measure greenhouse gas concentrations and emissions and we attempt to assess the consequences of climate change such as flooding, sea-level increase or droughts. This is how we create knowledge. Even if we wanted to, it would be very difficult to make progress using some kind of monetarisation without any knowledge of the physical basis. To use my fishery example, we have to know how many scallops there are and what is their age structure. So, what is monetarisation actually good for, apart from making clear that something is important, or more important than something else? This function of monetarisation is anything but trivial. With just about every environmental subject I have ever come across there are various stages of argumentation, especially by those opposing environmental policies. The first is: there is no problem. Tobacco does not damage health, climate does not change, and so on. If this is wrong, science wins this argument in the end. The second line of defence is that it isn’t really bad enough to take action: it would cost far too much. If we did everything to reduce greenhouse gas emissions in the USA, the economy would collapse and people would be left unemployed without a roof over their heads. At this point, there is no other option than to compare the costs of action with those of inaction. Both are costly. The third stage of argumentation, which we have not yet reached in the discussion of climate change but will no doubt reach in the future, is: okay, something has to be done. But it isn’t me who has to pay, but him over there. We could continue with this line of arguments. But let us approach the subject from the other side: we have economic indicators, and we use them all the time. They have an enormous influence on public awareness, business management and politics. However, if the compass does not point north properly, we are on the way to more or less serious problems. I first briefed former Vice-President Al Gore with our work on green accounts when he was still in the Senate. He listened to what I had to say for a couple of minutes, and then told me the following anecdote: My daughter sometimes gets bad migraines. So I decided to take her to a therapist who uses biofeedback against migraines. He attached the girl to a machine, which measures the dilation of blood vessels in the brain and shows the results on a dial. Over the course of a few sessions, my daughter had learnt to move the dial downwards and thus to improve the blood circulation in her brain. This got rid of the migraine. In further sessions, she learnt to achieve this effect even if she was not attached to the machine. Now, imagine that someone had mixed up two cables when attaching my daughter to the machine. The dial would have shown an improvement although my daughter would actually have got worse.


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We are exactly in this situation with the economic indicators to which we are attached. They tell us everything is going to get better, although in reality this is not true. I believe, therefore, that we have to correct the indicators. Martin Viehöver (Foundation for the Rights of Future Generations): We have discussed the three — ecological, economic and social — dimensions of sustainability. In Europe, and especially in Germany, there is a fierce debate on whether all these dimensions are equal, or whether one of them should have priority. I would be interested to learn whether there is a comparable discussion in the USA, and if so, whether you think that the ecological dimension should have a higher priority than the economic/financial or the social ones. Robert Repetto: The question is difficult to answer because of the high level of aggregation inherent in the concepts “economic”, “ecological” and “social”. Economists think in margins. The US economy is currently fairly strong, and many households have a great deal of money, which they spend in all kinds of ways without giving it too much thought. In a normative sense this has a lower priority than social problems. But there is also a wide range of different problems in the social domain. Some of these social problems have of course higher priority than others. The poverty rate, for example, is still unacceptably high in the USA; the number of homeless people is equally unacceptable, at least in my opinion; there are far too many people without health insurance; the quality of schools in inner cities is appalling, and the inner cities are appalling themselves, and so forth. In my opinion, these problems have a very high priority. Some ecological problems are also more urgent and acute than others. Therefore, we would have to go down a few notches in the aggregation level to give you a reasonable answer. Look at what is happening in the USA at the moment, and then try to infer priorities from the behaviour of the political institutions. You will probably conclude that our political institutions give low priority to social problems, because they are not doing anything about them. They seem to allocate quite a high priority to economic objectives, on the other hand. Environmental problems seem to enjoy a similarly high priority whilst global problems are mostly ignored. This is what would result from inferring conclusions on priorities. I hope this state of — inferred — priorities will change after the next elections. Peter Bartelmus: I remember when Robert Repetto and I were both at one of the first conferences on green accounting. Questioning the misleading indicators of the conventional accounts, Robert admonished the national

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accountants with a triple “Repent! Repent! Repent!” — to which I then replied “Experiment! Experiment! Experiment!” Maybe a new battle-cry is in order now: “Implement! Implement! Implement!”

References Landefeld, J.S. and S.L. Howell (1998). USA: Integrated economic and environmental accounting: Lessons from the IEESA, in: K. Uno and P. Bartelmus (eds), Environmental Accounting in Theory and Practice. Dordrecht, Boston and London: Kluwer Academic Publishers. Meyer, B. and P. Welfens (2001). Innovation-augmented ecological tax reform: Theory, modelsimulation and new policy implications, in: P.J.J. Welfens (ed.), Internalization of the Economy and Environmental Policy Options. Berlin and others: Springer. Nordhaus, W.D. and E.C. Kokkelenberg (eds) (1999). Nature’s Numbers: Expanding the National Economic Accounts to Include the Environment. Washington, D.C.: National Academic Press. US Bureau of Economic Analysis (BEA) (1994). Accounting for mineral resources: Issues and BEA’s initial estimates. Survey of Current Business, April. World Resources Institute (WRI) (1997). Does Environmental Protection Really Reduce Productivity Growth? We Need Unbiased Measures. Washington, D.C.: WRI.

Hansvolker Ziegler

How can sustainability become a measure of success in politics ? From my experience in dealing with science inside the German government the scientific community assembled in this book looks like waging a courageous but unequal battle against traditional and thus almost unconscious deep beliefs in science and politics. At its core are the “limits of the nineteenth-century paradigm” for the transition of the world (economic) system. The paradigm is about to regain the ruling status as “neoclassics” at the turn to the twenty-first century. Questioning its pervasive impact we face two challenges: “Unthink”, as Immanuel Wallerstein (1991) called it, the scientific perception of this transition as a linear catch-up modernisation process, modelled along some Western historical experiences. Make a different type of development “measurable” in a similarily reductionist mode as that of the ruling paradigm which provides politics with metaphors encapsulated in simple numbers. The task is well outlined not only in the “Rio”-related political papers from all sides of the political spectrum but also in the central outlook of the European Union for the new century, the famous 1993 Delors White Paper (Commission of the European Communities 1993) in its often forgotten final chapter “Thoughts on a new development model”: Current industrial consumption and production patterns cannot be extended to the entire world. To an increasing extent the economic growth figures reflect illusionary instead of real economic progress. Many traditional economic concepts lose their relevance to policy formulation in the future. The inadequate use of available resources — too little labour, too much use of environmental resources — is clearly not in line with the preferences of society as revealed through the democratic system. 167 P. Bartelmus (ed.), Unveiling Wealth, 167–170. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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However, if one looks at politics in practice, even those of the ruling red-green coalition, there still seems to be no other yardstick for measuring success other than the holy trinity of GDP growth, unemployment and stock market index (or is the rating of governments by Standard & Poor’s, etc. already more important?). Yet, everyone knows that these indicators only disguise paradoxes. People are losing faith that any increase in the first and last of the indicators will mysteriously brings about a reduction in the second. Nonetheless, they remain the instruments of explaining politics to the media and are thus setting the agenda in policy making. What conclusions can be drawn from this? Do all those concerned about sustainability have to invent and agree on an equally highly aggregated total indicator set in order to be powerful? Should they go for country rankings? Unfortunately, such objectives seem not only unattainable but in fact selfdefeating. The reason is, that the core of the discussion about sustainability is in learning to understand the world in its complexity rather than simplifying it. Is the conclusion, then, to abstain from quantification, from efforts to make developments measurable, and to tackle politics only with normative ethics? If treated as an all-encompassing alternative, this is surely wrong. But the basic idea of such an approach is about evoking visions of good life combined with concrete strategies of “first small steps, but in the right direction”: It is the combination of destroying false beliefs and, simultaneously, creating new facts, not only outside the “ruling quarters” and their buzzwords of “innovation” and “national competitiveness”, but penetrating them in an unsettling and constructive manner at the same time. This approach has different sides: The most simple one: a warning against data “graveyards”, i.e. recurrently compiled but largely unused statistics. This does not mean that existing data should not be used more effectively or in a different way. Researchers’ access to data remains a key issue. Proceed with utmost caution when aggregating data into integrated indicators or “systems”. “Newcomers” there are scrutinised like hell and squeezed for definitions. Traditional indicators like GDP and other growth figures “rule” despite their grave and even admitted inconsistencies, because paradigms and their metaphors do not win by better definitions, but by summing up the dissatisfaction with the condition humaine as a historical force aiming at better visions. Rather “count” easily understandable features of everyday life as symbols for the vision without claiming to encompass the full complexity and to form a new closed “system”.

H. Ziegler · How can sustainability become a measure of success in politics?

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Align the indicators with commonly welcome and socially controllable goals in order to measure “distance-to-target” by using the metaphors of “good life” which represent common sense consistency but do not claim a simple causal relationship. Consequently, the concerned scientists should avoid a “closed-shop” mentality, and not form a separate “community”, e.g. focused narrowly on the environment. Better to get interwoven into the whole range of “social reporting” and the “development” discussion . “Unnerving” others by uncovering wrong or overly reductionist questions and their quantified data base. This does not imply relenting in the efforts to detect the “real life” beyond traditional economic models and therefore to make qualitative questions measurable. On the contrary, the ambitious goal should be to guide all relevant disciplines and their empirical methods towards recognising what should actually be measured, rather than focusing on readily available figures. Engage in developing well thought-out operational concepts for new statistical experiments instead of just relying on old, “wrong” ones? The usual excuse of the single researcher, pressed to provide empirical evidence, that in isolation neither she nor he are able to alter the data situation does not exonerate our privileged and rich science community and its representative bodies from investing more of their power in organising critical masses for theory-led innovative endeavours in data mining. Create certainty about the direction in which science is going by aligning the topics to the major alternative, “modernisation” versus “sustainability”, as outlined in the Delors EU White Paper of 1993 or, in the terms of science research, “mode 1 versus mode 2” perception of science. Bring results home to policy makers by means of “scenarios” which help them to understand the options for decisions, through learning about the endogenous uncertainties of science, in order to remind them of their responsibility to act in the face of uncertainty as the centre-piece of political ethics. Debating the self-image of the dominant science and its clout on politics may be the most decisive prerequisite for success of the new paradigm of sustainability. Keynes (1936) describes the relation of science and politics convincingly, but also ironically, at the end of his “General Theory”: The power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas... Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from

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some academic scribbler of a few years back …soon or late, it is ideas, not vested interests, which are dangerous for good or evil. Thus, the battle of the paradigms is to be waged first inside science. There the debate is about how to achieve that the disciplines most powerful in providing political advice will experience the same reorientation towards long-term responsibility as the physics community learned with the bomb, since that time highlighted in the famous “Pugwash-movement”.

References Commission of the European Communities (1993). Growth, Competitiveness, Employment. The Challenges and Ways forward into the 21st Century (so-called Delors White Paper). Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan. Wallerstein, I. (1991). Unthinking Social Sciences: The Limits of Nineteenth-century Paradigms. Cambridge, UK: Polity Press.

Robert U. Ayres and Benjamin Warr54

Economic growth models and the role of physical resources

Background Conventional economic growth theory assumes that technological progress is exogenous and that resource consumption is a consequence, not a cause, of growth. This assumption is built into most, if not all of the large-scale models used for policy guidance by governments. The reality is more complex. A “growth engine” is a positive feedback loop, involving declining costs of inputs and increasing demand for outputs. The most important growth engine of the first industrial revolution was based on coal and steam power, affecting growth through rapidly declining fossil fuel and mechanical power costs, and their relationship with scale of production, on the one hand, and demand for end use products, on the other. The growth impetus due to fossil fuel discoveries and applications, and continued cost reductions, prevailed through the nineteenth and into the twentieth century, based on petroleum, internal combustion engines, and — most potent of all — electrification. The advent of cheap electricity in unlimited quantities has triggered the development of a whole range of new products and industries, including electric light, radio and television, moving pictures, and new materials such as aluminium and superalloys without which the aircraft and aerospace sectors could not exist. In effect, energy consumption within the economy is as much a driver of economic growth as it is a consequence of growth. The argument that energy is an intermediate input, while valid, is not conclusive. Though energy and other natural-resource-based commodities can be regarded as economic intermediates (insofar as they are produced by the application of capital and labour) this is no less true of capital. In fact, the skills and knowledge embodied in the labour force are also products of capital and labour. Of course, it can be argued that, while capital and labour stocks can be augmented in the future, current economic output is only dependent on the quantities of 171 P. Bartelmus (ed.), Unveiling Wealth, 171–188. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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these factors that currently exist. But the same statement holds for energy and physical resource flows. They are limited by past investment, both in supply and capacity for utilisation. Neither can be increased instantaneously beyond fixed limits. The point is that, to a naive observer, energy and material resources are factors of production as much as labour or capital.

Solow’s “trinity” Neoclassical economics, which is the creed taught in most universities and textbooks, depends heavily on three basic assumptions. Robert Solow has allegedly characterised them (tongue-in-cheek, one supposes) as “greed, rationality and equilibrium”. By “greed” he apparently means “purposeful behaviour”, which translates into profit maximisation (for firms) and utility maximisation (for individuals). By “rationality” he means that market actors understand their own preferences and those of others and make optimal decisions based on that understanding. It follows, incidentally, that the theory is timeless, and effectively static, because rationality presumes that each actor in the market can foresee all the future consequences of each choice and take them into account. This, of course, implies that there are no new possibilities being created as time goes on. By “equilibrium”, of course, Solow refers to the Walrasian theorem that a perfectly competitive free market will reach a Pareto-optimal state in which the supply and demand of every commodity is in balance and the market clears. Pareto-optimality is the situation where nobody can become better off by a trade unless another party is left worse off. It is analogous to the zero-sum game postulated by von Neumann and Morgenstern (1944). Needless to say, equilibrium in this sense is not the same as thermodynamic equilibrium. Over the course of decades it has been shown that weaker assumptions with regard to utility maximisation and rationality (e.g. “satisficing” instead of optimising) are sufficient to prove the main theorems, i.e. without losing the most important results of the simpler model. In effect, these developments may be said to have strengthened the standard neoclassical theory by showing that objections based on the unrealism of these two fundamental assumptions do not ipso facto invalidate the conclusions, even though some implications may not hold. On the other hand, the third assumption in Solow’s trinity (equilibrium) is a different matter. In the first place, it has not received nearly the same attention as the other two. Most economists, including Solow himself, believe that the economy really is close to a Walrasian equilibrium (e.g. Solow 1970). For

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this reason, perhaps, there has been virtually no effort to develop measures of “distance” from equilibrium. In the second place, to give up the equilibrium assumption would automatically invalidate the (implicit) assumption that static optimisation with perfect information is tantamount to dynamic optimisation. Yet they are not equivalent. This, in turn, invalidates the most popular tool of the modern theorists, namely “constrained optimisation” and so-called computable general equilibrium (CGE) models. We return to this point after a brief digression on neoclassical models.

Digression on neoclassical growth models A typical “small” economic forecasting model would consist of a single-sector forecasting component or macro-driver, and a multi-sector input-output (I-O) module with fixed (or even better, variable) coefficients to reflect the role of (changing) technologies. The macro-driver is usually an aggregate production function of the Cobb-Douglas form with two factors of production, capital K and labour L. Technological progress is normally introduced exogenously — under the rubric of “factor productivity” — as a multiplier increasing exponentially at an annual rate of the order of 1.5 per cent per annum. Older growth models simply extrapolated historical productivity growth rates. Sectoral detail was typically introduced by means of a quasi-static Leontief I-O module that allocated aggregate demand among individual sectors by means of a matrix of so-called technology coefficients. The matrix coefficients were often assumed to be constant (based on empirical relationships already several years old), though some models began to introduce time varying “dynamic” coefficients based on historical trends (e.g. Leontief, Carter and Petri 1977; Leontief and Duchin 1986). More recent models mostly incorporate two new features. To modify the essential arbitrariness of the fundamental assumption that factor productivity will continue at historical rates, the notion of “optimal growth” in general equilibrium has been promoted. The trick (borrowed from physics) is to introduce a Hamiltonian function of two or three variables — generally the discounted present value of future consumption — that must be maximised subject to as many constraints as required. Maximisation involves differentiation with respect to each of the independent variables. Since the number of variables is restricted if the model equations are to be soluble, the I-O structure must be fixed. Hence growth in general equilibrium models essentially means growth in quantitative output (GDP) without structural change,

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assuming the present I-O structure reflects an equilibrium state (where supply and demand are balanced in all sectors at constant prices). The implied condition of fixed structural relationships can be modified somewhat, assuming very smooth and gradual changes in some key sector and allowing the others to readjust. However, such models assume either constant technology or exogenous technological change in terms of productivity. They cannot predict, and hence cannot accommodate, radical innovations (whether technological or other) or rapid changes affecting one or a limited number of sectors, such as may be going on at the present time. The optimal growth paradigm is that the (discounted) utility of investment in capital for production in the future is balanced against the utility of current consumption. Mathematically, this involves some algebraic relationships between (assumed) discount rates, depreciation rates and marginal utilities of consumption, none of which are directly observable at the macro-scale. Considering the intrinsic technical difficulties, as well as their notorious lack of transparency, general equilibrium growth models have not been especially useful up to now. They are mainly helpful for analysing a narrow range of near-term policy alternatives where technological change can be neglected (such as implications of a change in the tax regime).

New approaches in growth theory To give up the assumption that the economy is always in, or very close to, Walrasian equilibrium essentially means giving up the established theory of economic growth. This theory attributes a small fraction of economic growth per capita to capital accumulation and the greater part to an exogenous residual known as “technical progress” (Solow 1957). As it happens, however, the established Solovian theory has been in trouble for some time, for other reasons. The theory makes two fundamental predictions that do not correspond to the observed facts. One is that the rate of growth of an economy will decline as the capital stock grows, due to declining marginal productivity of capital — a basic postulate of economics. The other prediction (known as “convergence”) is that poor countries will grow faster than rich ones. Recent observations do not confirm either of these predictions. Hence, there has been an explosion of so-called endogenous growth theories, based on reinterpretations of capital, weakening of the assumption of declining marginal productivity of capital and weakening or discarding of the related assumption of constant returns (e.g. Romer 1986, 1987, 1990; Lucas 1988; Aghion and Howitt 1992, 1998). There is a lot of interest among theorists in a phenomenon that is


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quite evident at the micro-scale, namely increasing returns to scale (as exemplified by network systems of all kinds). All of this literature is about models that retain the assumption of growth-in-equilibrium. But, as mentioned in the introductory section above, there is another sort of evidence that is not consistent with the standard growth theory, and that needs to be taken into account. Several identifiable engines of growth (i.e. positive feedback cycles) exist of which one of the most powerful, has been the continuously declining real price of physical resources, especially energy (and power) delivered at a point of use.55 The increasing availability of energy from fossil fuels has clearly played a fundamental role in growth since the first industrial revolution. Machines powered by fossil energy have gradually displaced animals, wind power, water power and human muscles, and thus made human workers vastly more productive than they would otherwise have been. The generic energy-power feedback cycle works as follows: cheaper energy and power, due to discoveries, economies of scale and technical progress (learning) in energy conversion, enable goods and services to be produced and delivered at lower cost. This is another way of saying that exergy flows56 are “productive”. Lower cost, in competitive markets, translates into lower prices for products and services. Thanks to the phenomenon known as price elasticity, lower prices encourage higher demand. Since demand for final goods and services necessarily corresponds to the sum of factor payments, most of which go back to labour as wages and salaries, it follows that wages of labour tend to increase as output rises.57 This, in turn, stimulates the further substitution of fossil energy and mechanical power for human (and animal) labour, resulting in further increases in scale and still lower costs. Figure V.1 shows the general version of this Salter cycle schematically. There is an obvious specialisation to emphasise the role of fossil fuels and other natural resources (stores of exergy). Based on both qualitative and quantitative evidence, the nature of the positive feedback relationships sketched above implies that physical resource flows have been, and still remain, a major factor of production. Indeed, including a resource flow proxy in the neoclassical production function seems to account for economic growth quite accurately, at least for limited time periods, and without any exogenous time-dependent term (Harmon and Joyce 1981; Kümmel 1982a,b, 1989; Cleveland et al. 1984; Kümmel et al. 1985; Kaufmann 1992; Beaudreau 1998; Cleveland, Kaufmann and Stern 1998; Kümmel, Lindenberger and Eichhorn 2000).58 More fundamentally, the question arises: why should capital services be treated as a factor of production while the role of energy (exergy) services — not to mention other environmental services — is widely ignored or

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minimised? The naive answer would seem to be that the two factors should be treated on a par. Yet, among many neoclassical economists, strong doubts remain. It appears that there are two reasons. The first and most important is theoretical: national accounts are set up to reflect payments to labour (wages, salaries) and capital owners (rents, royalties, interest, dividends). In fact, GNP is the sum of all such payments and NNP is the sum of all such payments to individuals. The second reason is the difficulty of demonstrating that natural resources are a significant driver of economic growth. If labour and capital are the only two factors, neoclassical theory implies that the productivity of a factor of production must be proportional to the share of that factor in the national income. This proposition is quite easy to prove in a hypothetical single-sector economy, consisting of a large number of producers manufacturing a good using only labour and capital services. (It is also taught in elementary economics texts). Moreover, the supposed link between factor payments and factor productivities gives the national accounts a fundamental role in production theory. This is intuitively very attractive. As it happens, labour gets the lion’s share of payments in the national accounts, around 70 per cent. Capital (defined as interest, dividends, rents and royalties) gets all of the rest. The figures vary slightly from year to year, but


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they have been relatively stable (in the USA) for the past century or more. Land rents are negligible. Payments for fossil fuels (even in “finished” form, including electric power) altogether amount to only a few per cent of the total GDP. It follows, according to the received theory, that energy is not a significant factor of production, or that it can be subsumed in capital, and can be safely ignored. However, there is a flaw in this too-facile argument. Suppose an unpaid factor exists. We might call the unpaid factor environmental services. Since there are no economic agents (persons or firms) who receive income in exchange for environmental services, there are no payments for such services in the national accounts. In the absence of such payments, it would seem to follow from the logic of the preceding two paragraphs that environmental services are not scarce or not economically productive. This implication pervades neoclassical economic theory. But it is patently nonsensical. The importance of environmental services to the production of economic goods and services is very difficult to quantify in monetary terms, but that is a separate issue. Even if such services could be valued very accurately, they still do not appear directly in the national accounts, and the hypothetical producers of economic goods would not have to pay for them, as such.59 There are some payments in the form of government expenditures for environmental protection, and private contributions to environmental organisations, but these payments return (mainly) to labour. Moreover, given the deteriorating state of the environment, it seems clear that the existing level of payments is considerably too low. By the same token, the destruction of unreplaced environmental capital should be reflected as a deduction from total capital stock for much the same reasons as investment in reproducible capital is regarded as additions to capital stock.60 Energy and material services extracted from the environment are not completely unpaid, of course. Some payments do go to landowners (counted as rents and royalties) and some go to owners of financial capital needed to build machines that dig mines, drill wells, and so forth. Other payments go to miners, oil riggers, and other workers in the extractive industries. Because of the small share of direct payments to natural resource owners in the real national accounts, and based on the above theory of income allocation, most economists have assumed that energy (or, more generally, physical resource inputs) cannot be important factors of production. Here again, there is evidence of under-payment, in the form of a variety of subsidies, either directly (e.g. as depletion allowances or subsidies to consumers), or indirectly as exemptions from paying the costs of environmental damage caused by their activities, or both.

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Quite apart from the question of under-pricing, the apparent inconsistency between very small factor payments directly attributable to physical resources — especially energy — and very high correlation between energy inputs and aggregate economic outputs, can be traced to an often forgotten simplification in the traditional theory of income allocation. In reality, the economy produces final products from a chain of intermediates, not directly from raw materials or, still less, from labour and capital. In the simple singlesector model used to “prove” the relationship between factor productivity and factor payments, this crucial fact is commonly neglected. Correcting for the omission of intermediates by introducing even a twosector or three-sector production process, changes the picture completely. In effect, downstream value-added stages act as productivity multipliers. Or, put another way, the primary sector can be considered as an independent economy, producing value from inputs of physical resources and small inputs of labour and capital. The secondary sector (or economy) imports processed materials from the first sector and uses more labour and capital to produce still higher value products, and so forth. Final consumers receive utility both from small direct inputs of labour and capital and also from value-added by labour, capital and processed exergy from prior stages in the production chain. This enables a factor, receiving a very small share of the national income directly, to contribute a much larger effective share of the value of aggregate production; in fact this factor would be much more productive than its share of overall labour and capital would seem to imply if the simple theory of income allocation were applicable (Ayres 2001). The second source of doubt, on the part of many growth theorists, about the importance of resource consumption as a growth driver arises from the fact that even a high degree of correlation does not necessarily imply causation. In other words, the fact that economic growth tends to be very closely correlated with energy consumption — a fact that is easily demonstrated — does not a priori mean that energy consumption is the cause of the growth. Indeed, most economic models assume the opposite: that economic growth is responsible for increasing energy consumption. It is also conceivable that both consumption and growth are simultaneously caused by some third factor. The direction of causality must evidently be determined by other more rigorous means.61 We argue however, primarily from first principles (see Figure V.1), that causality is not uni-directional, but bi-directional (i.e. mutual). This has strong implications for the structure of the production function.


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An alternative aggregate long-term production function It is now convenient to introduce an endogenous production function of the form:

where Y is GDP, measured in dollars, B is a measure of “raw” physical resource inputs (technically, exergy), f is the ratio of useful work U done by the economy as a whole to raw exergy input (defined below), and g is the ratio of economic output in value terms to work input. The exergy flow B is very nearly the same as the more traditional term E, which conventionally refers to energy. Since work appears in both numerator and denominator, its definition is not crucial except for purposes of interpretation. Note that there is no approximation involved in this formulation, except the tentative assumption that no other factors are involved (i.e. time independence). The expression (1) can be interpreted as a production function if (and only if) the product fg depends only upon three independent factors of production, viz. labour L, capital K and exergy consumption B. There are two additional conditions to be satisfied. One of them is the Euler condition for constant returns to scale, which means that Y must be a homogeneous first order function of the three independent variables, whence the product fg must be a homogeneous zeroth order function of the same three production factors. The other condition is that the marginal productivities of the three factors be nonnegative, at least over a long-term average.62 Ideally, we would like to express f and g in terms of L, K and B without introducing a time-dependent multiplier as Solow did. In practice this may turn out to be difficult. However, since f is easily interpreted in terms of exergy efficiency, we can reasonably hope that any time dependence that cannot be explained by the three variables, will have a straightforward physical interpretation (e.g. in terms of information technology). Incidentally, the famous E/GDP ratio, whose characteristic development over time is sometimes called the Kuznets curve, is essentially equivalent to B/Y, whence

It is often observed that, for many industrialising countries, the E/GDP (or B/Y) ratio appears to have an inverted-U shape, at least if B is restricted to commercial fuels. However, when the exergy embodied in minerals,

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agricultural biomass and non-commercial fuels (i.e. firewood and charcoal) are included, the supposedly characteristic inverted U-shape is much less pronounced, if it exists at all.63 Figure V.2 shows three versions of the curve. The top curve is the classical Kuznets curve, namely the ratio of fossil fuel exergy to GDP. The middle curve is the ratio of all fuels plus non-fuel exergy, except for agricultural phytomass, to GDP. The peak is much less pronounced. The third and lowest curve is the ratio of total exergy inputs, including agricultural phytomass, to GDP. There is no peak and no inverted U. The inverted U in the top curve apparently reflects the substitution of commercial fuels for noncommercial fuels (wood) during early stages of industrialisation.

Waste generated by the economy As noted above, f is defined as the ratio of useful work output U to exergy B embodied in all raw materials extracted from the environment. The exergy embodied in raw materials but not embodied in finished materials is, of course, lost as waste heat or waste materials (pollution), denoted W. In fact, it is convenient to introduce a waste term W as follows:

where both f and W can be regarded as functions of the three assumed factors of production, K, L, B. What can one say about the loss function W? At first glance, one would expect f to increase more or less monotonically over time as materials are processed and utilised more and more efficiently. This would imply that W/B declines over time. However, on reflection, f itself is not a pure measure of technical efficiency. On the contrary, W is a composite measure which also reflects the increasing mechanisation and electrification of the economy and the fact that converting fossil fuels into mechanical work (and other energy carriers such as gasoline and electric power) involves significant losses. The trends discussed in the foregoing paragraphs explain why the term f in equation (1) is not a pure measure of conversion efficiency, but rather a reflection of two opposing long-term trends, viz. increasing efficiency, on the one hand, and increasing demand for performing mechanical work (which includes all uses of electricity) vis à vis demand for heat alone, on the other hand. The exergy embodied in finished products can be estimated reasonably well if we assume that “finished materials” consists of all metals and other materials embodied in structures and machines (cement, asphalt, plastic,


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wood, paper, etc.) plus fuels consumed by households for heating and personal transportation. All other fuels and intermediate materials (e.g. chemicals) are consumed — and converted to waste — in the manufacturing process. The ratio f is plotted for two cases in Figure V.3. The upper curve reflects the case where total exergy inputs, including agricultural phytomass, are taken into account; the lower curve omits the phytomass. Evidently if the trend in f is fairly steadily upward throughout a long period (such as a century) it would seems reasonably safe to project this trend curve into the future for some decades.64


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The next challenge for theory is to explain f and g in terms of the three independent factors of production, K, L, B (excluding time), as far as possible. Typically both K and L increase over time, but K normally increases faster (if there is growth) and B increases faster still. However, thanks to technical progress GDP increases faster than any of the input factors, including B. Evidently the product fg must also be increasing in the long run (though short-term fluctuations are not excluded). This rules out any Cobb-Douglas type of production function or similar functional form unless the multiplier A is time-dependent, viz. A(t). This is because economic output Y is growing faster than any of the individual input factors (K, L, B), and therefore faster than any product of powers of the inputs with exponents adding up to unity. The “best” fit (for the Cobb-Douglas case) is actually obtained by choosing whence Y = AB, but even in this case A must be a function of and

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time. For purposes of illustration, Figure V.4 shows the familiar Cobb-Douglas function with exponents leaving an exponent of and for the exergy term B. Obviously economic growth far outstrips the growth of the traditional factors K and L. In this case, the technology residual A(t) can be fitted roughly for the entire period 1900–1998 by an exponential function of time (interpreted as a rate of technical progress) which is also plotted in Figure V.4. However, there are other functional forms combining the factors K, L, B that may provide better fits. As noted already, the simple form (1) can serve the purpose provided the argument(s) of fg are increasing ratios of the factor


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inputs, such as K/L or B/L. It happens that a suitable functional form (the socalled LINEX function) has been suggested (Kümmel 1982; Kümmel et al. 1985), namely

(Kümmel equates E and B). It can be verified without difficulty that this function satisfies the Euler condition for constant returns to scale. It can also be shown that the requirement of non-negative marginal productivities can be met.

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Results of using the LINEX production function for US data from 1900 to 1998 are shown in Figures V.5 and V.6 for the two exergy cases (including and excluding agricultural phytomass). In Figure V.7 the unexplained residuals, corresponding to technological progress, are plotted together. Evidently the LINEX function, excluding agricultural biomass, leaves the smallest residual. However, it is clear that technological progress is not endogenous in any of the three cases.65


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Conclusion In summary, I argue three theses. The first is that exergy is a major factor of production comparable in importance to labour and capital. The second is that the empirical work/exergy ratio f is an important measure of technical progress in the long run. Similarly, and third, the output/work ratio g can be regarded as a useful indicator of the extent to which the economy is “dematerialising” (if it is) or “informatising”66 in some sense. Third, it is possible that technical progress as traditionally defined can be approximated reasonably well by mathematical expressions involving ratios of capital, labour and exergy inputs. Much empirical and statistical work remains to be done to test these three theses, of course. This work is continuing.

References Aghion, P. and P. Howitt (1998). Endogenous Growth Theory. Cambridge, MA: The MIT Press. Aghion, P. and P. Howitt (1992). A model of growth through creative destruction. Econometrica 60(2), 323–351. Altenpohl, D. G. (ed.) (1985). Informatization: The growth of limits (Series: Report to the Groupe de Talloires). Düsseldorf, Germany: Aluminium Verlag. Ayres, R. U. (2001). The minimum complexity of endogenous growth models: The role of physical resource flows. Energy (forthcoming). Barnett, H. J. and C. Morse (1962). Scarcity and Growth: The Economics of Resource Scarcity. Baltimore MD: Johns Hopkins University Press. Beaudreau, B. C. (1998). Energy and organization: Growth and distribution reexamined (Series: Contributions in Economics and Economic History #193). Westwood, CT: Greenwood Press. Cleveland, C. J., R. Costanza, C. A. S. Hall and R. K. Kaufmann (1984). Energy and the US economy: A biophysical perspective. Science 255, 890–897. Cleveland, C. J., R. K. Kaufmann and D. I. Stern (1998). The aggregation of energy and materials in economic indicators of sustainability: Thermodynamic, biophysical and economic approaches. International Workshop on Advances in Energy Studies: Energy Flows in Ecology and Economy, Porto Venere, Italy. Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37, 424–438. Hannon, B. M. and J. Joyce (1981). Energy and technical progress. Energy 6, 187–195. Kaufmann, R. K. (1995). The economic multiplier of environmental life support: Can capital substitute for a degraded environment? Ecological Economics 12(1), 67–80. Kaufmann, R. K. (1992). A biophysical analysis of the energy/real GDP ratio: Implications for substitution and technical change. Ecological Economics 6, 33–56. Kümmel, R. (1989). Energy as a factor of production and entropy as a pollution indicator in macroeconomic modeling. Ecological Economics 1, 161–180.

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Kümmel, R. (1982a). Energy, environment and industrial growth, in: W. Eichhorn (ed.), Economic Theory of Natural Resources. Würzburg, Germany: Physica. Kümmel, R. (1982b). The impact of energy on industrial growth. Energy 7(2), 189–201. Kümmel, R., D. Lindenberger and W. Eichhorn (2000). The productive power of energy and economic evolution. Indian Journal of Applied Economics, Special Issue on Macro and Micro Economics (in press). Kümmel, R., W. Strassl, A. Gossner and W. Eichhorn (1985). Technical progress and energy dependent production functions. Journal of Economics 45(3), 285–311. Leontief, W. W. and F. Duchin (1986). The Future Impact of Automation on Workers. New York: Oxford University Press. Leontief, W., A. Carter and P. Petri (1977). Future of the World Economy. New York: Oxford University Press. Lucas, R, E., Jr. (1988). On the mechanics of economic development. Journal of Monetary Economics 22(1), 2–42. Mankiw, N.G. (1998). Principles of Macroeconomics. Fort Worth and others: The Dryden Press. Potter, N. and F.T. Christy, Jr. (1968). Trends in Natural Resource Commodities. Baltimore, MD: Johns Hopkins University Press. Romer, P.M. (1990). Endogenous technological change. Journal of Political Economy 98(5), 71–102. Romer, P. M. (1987). Growth based on increasing returns due to specialization. American Economic Review 77(2), 56–62. Romer, P. M. (1986). Increasing returns and long-run growth. Journal of Political Economy 94(5), 1002–1037. Sims, C. J. A. (1972). Money, income and causality. American Economic Review. Smith, H. (1969). The cumulative energy requirements of some final products of the chemical industry. Transactions of the World Energy Conference 18 (Section E). Solow, R.M. (1970). Foreword, in: E. Burmeister and A.R. Dobell (eds), Mathematical Theories of Economic Growth. New York: MacMillan. Solow, R. M. (1957). Technical change and the aggregate production function. Review of Economics and Statistics 39, 312–320. Solow, R.M. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics 70, 65–94. Stern, D. I. (1993). Energy use and economic growth in the USA: A multivariate approach. Energy Economics 15, 137–150. von Neumann, J. and O. Morgenstern (1944). Theory of Games and Economic Behavior. Princeton, NJ: Princeton University Press.

Wolfgang Sachs

Post-fossil development patterns in the North67

On the particular responsibility of the North The United Nations Framework Convention on Climate Change (FCCC) was signed in Rio de Janeiro in 1992. It provides a good starting point for assessing the responsibility of industrialised nations for environmental concerns and sustainable development in general. The Convention’s first principle reads as follows (Art. 3,1): The Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country Parties should take the lead in combating climate change and the adverse effects thereof. Developed countries are thus requested to take the lead in combating climate change. The FCCC text offers no explicit justification, but it is not difficult to identify four different reasons for this principle. First, industrialised countries are responsible for the bulk of carbon dioxide emissions accumulated in the past; about 83% of the rise in cumulative emissions since 1800 are caused by industrialised countries (Loske 1996). Second, in 1996 these countries were responsible for 61.5% (UNDP 1998, p. 202) of global carbon dioxide emissions. The fact that a dramatic rise in emissions is presently occurring in newly industrialising countries does not basically change this picture. Third, the adverse effects of global warming are going to be distributed unequally between North and South; those who cause the problem are — in relative terms — likely to be the winners, and those who have been the bystanders are likely to be the victims. Fourth, industrialised countries possess more capabilities for responding to climate change, at least with regard to financial resources and technical ingenuity. However, whether their capability for 189 P. Bartelmus (ed.), Unveiling Wealth, 189–204. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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adaptation includes the capability for institutional reform and cultural change as well, remains to be seen. The rest of the paper attempts to highlight patterns of development which could gradually transform Northern societies into low-emission countries. At the outset, a conceptual framework for assessing sustainability in the North is presented. Then, “resource productivity” is identified as the critical factor in the transition to sustainability. Finally, two wide-ranging strategies are sketched out which may take industrial countries into a post-fossil age.

The environmental space concept Anthropogenic climate change is part and parcel of the secular drift towards an unsustainable world. In turn, carbon-reducing energy strategies are one of the most important levers for creating a sustainable world (Reddy, Williams and Johannsen 1997). Against this background, it makes little sense to pursue climate change and sustainable development as separate concerns (Cohen et al. 1998). Instead, climate policy should be viewed as an integral part of the transition to sustainability. This nexus is most compelling for industrialised countries because, according to Agenda 21,“…the major cause of the continued deterioration of the global environment is the unsustainable pattern of consumption and production, particularly in industrialised countries…” (United Nations 1994, para. 4.3). Sustainable development is, however, not an operational concept. Rather — very much like peace or democracy — it is a guiding idea for the development of societies. As such, it contains two major aspirations, which have been foundational for the formation of the concept in the last twenty years. These are, first, that humanity should respect the finiteness of the biosphere and, second, that the recognition of global biophysical limits should not preclude the search for greater justice in the world. Both the concern for ecology and for equity are fundamental to the idea of sustainable development. The concept of environmental space is instrumental to integrating both concerns into one, possibly even quantitative, framework (Opschoor 1992; Buitenkamp, Venner and Wams 1992; Carley and Spapens 1998; Sachs et al. 1998). With regard to ecology, the environmental space concept builds on the industrial metabolism approach. This approach focuses on the flow of materials and energy in modern industrial society through the chain of extraction, production, consumption and disposal (Ayres and Simonis 1994; SchmidtBleek 1994; Fischer-Kowalski et al. 1997; Opschoor 1997). It argues that, on a general level, the pressure by the human economy on the environment

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depends on the level and pattern of these flows between the economy and the biosphere. Material flows are made up of two types: the raw materials or input side (including energy) and the waste-stream or the environmental-output side. Both types of flows are linked in the long run by the law of conservation of matter: the waste/emission stream will be approximately equal in scale to the material input flow. Within this conceptual framework, sustainability requires the overall level of resource flows to be reduced, in particular the flow of primary materials and energy on the input side. The globally available, multi-dimensional environmental space sets the limits for the scale of resource throughput through the economy. The size of this space is a function of the carrying capacities of ecosystems, the recuperative efficiency of natural resources and the availability of raw materials. Sustainability implies that humanity keeps the utilisation of nature within the (flexible) boundaries of global environmental space. Since some of these boundaries cannot be reliably identified beforehand, it is a matter of foresight and precaution to embark, even under uncertainty, upon a path of reducing resource volumes. With regard to equity, the environmental space concept addresses the enormous inequality in global resource use by postulating the parity principle for defining entitlements to the use of resources. This principle suggests that all human beings should have an equal right to the world’s resources, in particular to the global commons (Agarwal and Narain 1991; Grubb 1995). This rule need not necessarily be taken as a planning guideline for planetary redistribution. It can also be viewed as a regulative principle which should guide the self-reflexive conduct of societies. In a free adaptation of Kant’s categorical imperative, a society can only be called sustainable when the maxims underlying its conduct could in principle be followed by all others. Both the technological constraints and considerations of equity set the boundaries for the environmental space available to a particular country. Taking both constraints into account, industrial economies ought to reduce the level of resource flow they mobilise at present by a factor of ten within the coming 40–50 years (Schmidt-Bleek 1994; Factor 10 Club 1995; McLaren et al. 1997). This figure, to be sure, represents a very rough indicator, not applicable to all environmental dimensions and to every country. Nevertheless, Factor Ten as a normative concept suggests an order of magnitude for the changes required for the transition to sustainability — when normatively defined. Climate change may serve as an illustration (Sachs et al. 1998, p. 30). With a world population in 1994 of 5.8 billion and annual emissions of 29 billion tonnes, “equal rights to emission” would imply 5 tonnes of per capita. Reducing carbon dioxide emissions globally by 50-60% for stabilising the climate system would, at the given population level, entail a per-capita

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emission of 2.3 tonnes. Compare this to Germany’s per-capita emissions of nearly 12 tonnes in 1994. Meeting our target of 2.3 tonnes would involve cutting emissions by 80% by the year 2050. Assuming a world population of around 10 billion by 2050, adherence to the principles of ecology and equity would require bringing down fossil energy use by 90%, that is a factor of 10.

Resource productivity as the critical factor From this perspective, the objective of sustainability can be restated for industrialised countries as the capability of creating human welfare with an everdiminishing amount of natural resources. In contrast to an emission-centred environmental policy, what matters most for a resource-oriented environmental policy is the overall volume of material input, rather than the output of pollutants (Schmidt-Bleek 1994). After all, the average German consumes about 80 tonnes of energy carriers and materials annually, surpassed only by the average Dutch and US-American who uses an additional 3–7 tonnes (Adriaanse et al. 1997, p. 12). These megatonnes of materials and energy are presently being mobilised, at home or in distant countries, for the sake of maintaining the current supply of goods and services. It is these resource requirements which put pressure on biospherical sources and sinks, including the people connected to them. For a resource-oriented approach, not a clean but a lean economy is the implicit utopia of sustainability. Enhancing resource productivity is the art of making wealth and welfare creation increasingly less dependent on resource use. The concept of resource productivity merges two targets of the sustainability idea into one formula: it calls for a considerable reduction in resource use, while aiming at economic and social well-being at the same time. However, the concept offers at least two further lines of analysis and interpretation. First, attention could focus on improving the ratio of economic output to the input of natural resources in all sectors of society. Resource productivity serves thus as a conceptual instrument for analysing the relationship of natural inputs to other factors of production such as labour, technology, or capital and calls for rebalancing this relationship to minimise the amount of nature used. Second, the object could be to improve the ratio of overall satisfaction to material output (Nørgård 1995). In this case, resource productivity serves as a tool for analysing the relationship between quality of life and material goods and services, examining the productivity of material goods in terms of use value, welfare, beauty and meaning. Both approaches enhance resource productivity, and both aim at a dematerialisation of the economy. One concentrates on improving means and


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their allocation (efficiency in resources), the other focuses on improving results and their quality (sufficiency in resources). In other words, the efficiency-oriented approach aims at doing things right, whereas the quality/ welfare-oriented approach aims at doing the right things.

Decoupling economic output from resource flows Increasing resource productivity aims at reducing the volume of resource input per unit of economic output. This is to be attained through enhancing the ecological efficiency of technologies and organisational structures. On the horizon lies the hope of steering the economy onto a course where monetary economic growth as well as a certain degree of social security is maintained, while the overall level of resource flow decreases (Weizsäcker, Lovins and Lovins 1997). Such a strategy can build on an initial relative decrease in resource use, resulting from the transition of an industrial economy to its post-industrial state. During the last twenty years, leading OECD countries experienced only a slight increase in the absolute level of resource flows. At the same time, the resource intensity per unit of GNP in general showed a modest decline (Adriaanse et al. 1997). However, this process can hardly be expected to persist under conditions of conventional economic growth. Indeed in recent years, a certain relinking appears to be taking place (Opschoor 1997). In any event, full-scale dematerialisation in the order of magnitude of “Factor 10” would require a continuous decrease in absolute volumes of non-renewable resources, particularly energy. For this reason, only proactive change on many levels can bring about a dematerialisation of industrial economies. Ecointelligent production systems Modern systems of production still operate on the hidden assumption that nature “out there” will be forever abundant. This assumption is a legacy from the early nineteenth century when economic activity was minimal with respect to the annually renewed wealth of nature. Considering nature abundant, economists built theories which relied on increasing labour productivity for wealth creation, disregarding losses incurred by nature. Progress thus largely meant substituting natural-resource driven technology for labour, expanding labour productivity at the expense of resource productivity. In Germany labour productivity rose between 1960 and 1995 by a staggering 200%, while the productivity of energy use lagged behind with an increase of only 31% (Statistisches Bundesamt 1998). However, as the environmental crisis has

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revealed the scarcity of nature, the direction of technological progress is bound to change. Under these new historical conditions, technologies will have to be geared towards boosting resource efficiency rather than labour efficiency. Managerial excellence will necessarily include the ability to design products, services and production systems which create value with ever-less input of non-renewable and, in part, renewable resources. First of all, resource productivity calls for making different products. Each product constitutes a claim on resources, and products should thus be made so as to minimise resource content, utilise biodegradable materials, extend durability, and save inputs during use. For instance, ecoefficient innovation (Fussler 1996) reduced the volume of detergent needed for a given level of laundry output. Customers previously carried home bulky barrels of detergent, now the same service is offered in a small package. The second approach is to promote biodegradable products such as a credit card made out of plant starch and plant sugar. A third approach aims at increasing the longevity of products by making those parts interchangeable which wear out quickly or are subject to fashion. The modular office chair, for instance, consists of structural elements, including the mechanics of the seat, and visible elements such as cushions and cloth (Stahel 1994). Structural elements are built to maximise durability, the visible ones to maximise recyclability. Finally, durable consumption goods, in particular energy-driven machines for households, can be designed as lowinput machines. Energy-efficient cars or electric appliances are cases in point. With regard to production processes, the crucial step is to move from the nineteenth century conception of linear throughput, in which materials flow through the economy as if through a straight pipe, to a closed-loop economy. Such an economy feeds as many materials as possible back into the same or another production cycle. One way to close cycles is to fully utilise the entire throughput, thereby producing as little waste as possible (Pauli 1998). Examples abound. Juice makers may utilise lemon peels for perfume instead of throwing them away, chip manufacturers may reutilise waste water for the treatment of chemicals, power producers may co-generate electricity along with heat for industrial or residential purposes. In the same vein, ecological agriculture attempts to close the loops between plants and soil as well as between plant cultivation and animal raising. Among other things, such farming and forestry practices release less carbon from the soil. In the energy sector, full-use strategies may imply fuel-switching and new generation of smaller, but highly efficient power plants. Moreover, decarbonising energy production systems will eventually rely on the broad availability of photovoltaic modules, wind generators, and small hydropower and biomass conversion plants (LTI-Research Group 1998). This logic is carried even further with


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industrial clusters that are modelled after ecological food webs. Just as in an ecosystem waste produced by one species turns into food for another, so in an industrial cluster the waste products of one industry become the raw material for another. Such an arrangement is often referred to as “industrial ecology” (Tibbs 1992; Graedel, Graedel and Allenby 1995). From products to services

By conventional wisdom, business caters to the demand of consumers, offering products for ownership. The focus on ownership impedes, however, system-wide responsibility of the company for the entire life cycle of its products. As it is, throughput rather than optimal management of stocks is encouraged. Shifting the entrepreneurial focus from the sale of hardware to the sale of its services through leasing or renting would make the full utilisation of hardware, including maintenance and recycling, profitable. For example, Rank Xerox Inc. has moved from selling products to selling functions. Photocopy machines are not sold but leased, and the customer pays for the amount of copies required. Such an arrangement changes the strategic interest of the company. The firm now profits from managing its assets carefully through repair services, upgrading or remanufacturing. A comparable shift in entrepreneurial strategy is the transition from energy production to energy services (Enquete-Kommission 1994). Energy companies move into the business of demand-side management, selling consulting and managerial services for saving energy rather than focusing exclusively on the expansion of energy supply; they construct “nega-watt power stations” (Hennicke and Seifried 1996). A similar logic may hold for mobility infrastructures. Mobility service customers want easy access at low cost, not necessarily more cars and more roads. In the short run, mobility service enterprises would help to optimise the choice between different modes of transport; in the long run, they might promote efficient community design. Generally speaking, in an environmental service economy, money does not flow for adding as much hardware as possible to the world, but for providing a particular service to customers through the temporary use of a piece of hardware. As producers turn into providers, and consumers into users, the eco-efficient design, management and disposal of material assets may become part of the economic logic. Green Markets Some moves towards ecointelligent production and services are now economically profitable. However, for bringing economic rationality progressively in line with ecological rationality, a change in the macroeconomic framework

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is indispensable. As long as natural resources, including energy, are undervalued in relation to labour, there is the tendency to substitute the cheaper factor for the more expensive one. This tendency has stimulated labour-saving technical progress over decades. At the same time, natural resources were overexploited and eliminated jobs in the process. Therefore, the incentive structure offered by market prices needs to change for giving a boost to ecoefficiency in markets. Above all, this requires eliminating environmentally counter-productive subsidies. Hundreds of billions of dollars of tax revenue are annually diverted to promote inefficient and unproductive material and energy use. These include subsidies to fossil fuels, motorised transport or pesticides, as much as concessions for logging and water extraction (Roodman 1996). Reforming environmentally destructive incentives will reduce a major source of price distortions which tilt the playing field against the environment and the economy at the same time. Furthermore, shifting the tax base from labour to natural resources could begin to rectify the imbalance in factor prices (EEA 1996; Hammond et al. 1997). After all, long-term scarcity and limits to the environment’s absorptive capacity are strong reasons for artificially raising resource prices. As far as possible, the user of resources should pay the full costs to society, to the environment and to future generations. The introduction of a general tax on energy, and eventually also on materials, along with a reduction of direct and indirect levies on labour would bring down the demand for natural resources and increase the demand for labour. However, such a reform of the fiscal basis of the State would have to fulfil two conditions. First, it would have to be introduced progressively, for example at an annual rise of 5% over 15 years. For only an incremental rise over many years would allow enough time for redirecting investment decisions. Second, overall tax revenue should not grow; in particular, levies imposed on labour for social security could be decreased in compensation.

Decoupling quality of life from resource flows Overall resource productivity in society may also be enhanced through creating more, or a different, quality of life out of a given set of natural inputs. Such a perspective starts from the insight that, beyond a certain threshold, there is no clear link between the level of GNP and quality of life nor between the level of GNP and satisfaction (Linton 1998; UNDP 1998). Monetary income, at the individual as well as the collective levels, needs to be distinguished from quality of life which comprises both subjective and objective variables. On the


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subjective side, quality of life refers to personal satisfaction, which in part depends on shared narratives and cultural values. On the objective side, it refers to opportunity structures, which, next to purchasing power, may include access to nature, participation in community, availability of non-market goods, or public wealth. The discussion of sustainability indicators in this book showed the limits of unequivocally assessing non-economic aspects of sustainability such as needs and desires, habits and rules, institutions and world-views. At this point, the humanities, offering an interpretive approach (Rayner and Malone 1998), would have to join the research on resource productivity. No doubt, a full appreciation of resource productivity in the second, the qualitative sense calls for a debate on civilisational change, rather than for a debate on technological change. Such a debate moves to centre-stage if the search for ecological sustainability is to be linked to the search for social sustainability. The core questions are: does quality of life necessarily increase with a high level of resource flows? Is it possible to turn resource limits into new opportunities for quality of life? Such questions can hardly be avoided, because the efficiency-oriented strategy of enhancing resource productivity is likely to run into a dilemma. Efficiency-oriented strategies raise the prospects of enormous gains, but fail to account for the long-term effects of economic change. Numerous cases of resource saving at the micro-level do not automatically translate into savings at the macro-level. Paradoxically, it is often precisely the economic gains from improved technical efficiency that increase the rate of resource throughput. Cars, for instance, are considerably more fuel-efficient today than they were twenty years ago. However, the increase in car numbers, their size and power, and kilometres driven has since eaten up that gain. Similar examples abound. In fact, increased efficiency has been driving competition and growth for a long time, facilitating new rounds of expansion. Efficiency gains at the microlevel are likely to be offset by macro-level material (consumption) growth concomitant to economic growth. Indeed, the paradoxical situation that ecological efficiency rises at the micro-level, while the ecological efficiency of the economy as a whole diminishes, seems to be the prevailing pattern of economic development. The transition towards sustainability in industrial societies requires, therefore, a twin-track strategy. It is achieved through both an intelligent reinvention of means as well as a prudent moderation of ends. Such a conclusion is not astonishing within a co-evolutionary perspective (Norgaard 1994). In this perspective, socio-cultural forms evolve in interaction with technical forms, just as technical forms evolve in interaction with socio-cultural forms. The emergence of a low-input/high-quality technology may therefore go hand in

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hand with the emergence of a low-input/high-quality society—and the other way around. Intermediate speeds and distances

“Faster”, “further” and “more” are the main themes of fossil-powered progress. Trains, limousines and jets promise high speed, and railway lines, motorways and air-routes facilitate easy passage. Indeed, the assumption that higher speeds are always better than lower ones has prevailed until the present day. Correspondingly, it is commonly accepted that progress entails increasing permeability of space. However, mobility through space and time requires the mobilisation of nature. Fuels and vehicles, roads and runways, electricity and electronic equipment require gigantic flows of energy and materials. In fact, transport systems in the North are major sources — and the fastest growing at that — of carbon dioxide emissions. Yet, transport has turned out to be the most intractable issue of climate policy. The drift towards higher speed and large-scale interconnection is, efficiency gains notwithstanding, unlikely to be environmentally sustainable in the long run. Moreover this drift may not even enhance the quality of life. Transport is a good example for illustrating that growth in quantity may (after a certain point) have negative returns in quality (Hirsch 1976; Wachtel 1994). First, satisfaction depends on the level of expectation. Expectations, however, keep rising, in particular because they tend to be determined by the individual’s relative position in the social network. If more goods just serve to maintain the relative position, no satisfaction is gained. Most advantages of the car, for instance, are relative advantages; they may remain stable or even decline when car ownership spreads. Secondly, growth in quantity may actually undermine some of the more fundamental sources of satisfaction and quality of life, such as friendship, community participation, security or beauty. Again, it is obvious how the modern transport regime has contributed to weakening these sources of well-being. Third, growth in quantity breeds its own requirements, creating conditions of scarcity which induce further participation in growth on people. In a fully motorised society, for instance, the acquisition of one or more cars is often not a choice, but a sheer necessity (Sachs 1992). In sum, disillusionment is built into the process of mass motorisation. This shift in the emotional base of motorisation is an important ingredient in the search for environmentally sound ways of transport. Speed is also a critical factor in ecology. Even gains in fuel-efficiency will not cancel the basic law which governs the physics of speed: for acceleration growing amounts of energy are required to beat friction and air resistance. It is unlikely that a society which always moves in the fast lane can ever become


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sustainable (Plowden and Hillman 1996). Creating a resource-light economy would therefore imply designing cars and trains for reduced top-speed levels, giving rise to a new generation of vehicles, downsized in power and speed. For such cars, standards for security or aerodynamics would play a minor role. They could be of light, material-saving construction, comfortable in height and size, and innovative in engine design. Ecotechnology is lean technology in this sense; it combines sufficiency in performance levels with state-of the-art efficiency in all components. Likewise, geographical scale is a critical factor in ecology. Production and lifestyles, based on high volumes of long-distance transportation, carry an unsustainable load of energy and raw materials. For example, one pot of German yoghurt travels around 9,000 km before it reaches the consumer, taking into account the transport of all its component parts and ingredients (Böge 1993). For a low-input society the economy would have to evolve in a plurality of spaces, where regional sourcing and marketing co-exist with global sourcing and marketing. In any case, a Factor 10 environmental policy will focus on avoiding traffic, and not on optimising transport structures (Whitelegg 1993). Slower vehicles, fewer negotiable routes and higher monetary costs lead to fewer journeys and shorter distances, and hence less traffic. Transport-saving economic structures focus on shorter distances, thereby favouring regional density over long-distance connections. For reasons of both ecology and community well-being, strategies of regional sourcing and marketing appear to be particularly important for food, repair and human services. Moreover, solar power, which relies on the widespread but diffuse resource of sunlight, is best applied when many operators harvest small amounts of energy, transforming and consuming them at close distance. A similar logic holds for biomass-based technologies. Plant matter is widely available and heavy in weight; it is best obtained and processed in a decentralised fashion (Morris 1996). There is reason to believe that a resourcelight economy will be, at least in part, a regionalised economy. Wealth in time rather than goods In affluent societies, time rather than money is in scarce supply — at least among the middle classes. For some of these groups, the marginal utility of increased purchasing power is decreasing owing to the marginal utility of more leisure. In such a situation, the long-standing assumption that well-being increases with purchasing power, may lose validity. We can thus envisage a development path where having less money may be traded off against more free time. Such a path is likely to be environmentally beneficial and promises to increase the quality of life at the same time.

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However, in most industrial societies increases in economic productivity were for the most part converted into higher wages and/or increased production, and thus consumption of resources. Only a smaller part of productivity was converted into increased freedom from work. The rigidities of working time and income requirements have reinforced this pattern in most societies. For a long time regular work meant an eight-hour day, five-day week and a lifelong job (Sanne 1992). Despite all their freedom to consume, people rarely had the fundamental option of deciding how much time they wanted to spend on work and, correspondingly, how much they wanted to earn. As jobs usually come with a fixed income, the spending power they allow tends to determine the level of consumption. In the process, a “work-and-spend” cycle (Schor 1995) ensues where rising and still invariable incomes leave no other option, apart from saving, than to increase consumption. Simply put, the broad middle classes unlearn to ask how much money they should earn for their needs, and instead get used to pondering what needs they can afford by spending the money they earn. From this point of view, the lack of individual freedom of choice over working time emerges as a powerful incentive for the expansion of consumption in society. It is not unlikely, though, that, given the choice, a considerable number of people would prefer to work less for a lower income. In terms of well-being, gaining time can compensate for loss of income, opening room for pursuits outside the market sphere. Such lifestyle options could be stimulated by advancing the principle of sovereignty over one’s own time, notably the working time. Such a principle would not only be socially welcome for mitigating the employment crisis, but also ecologically for moderating consumer demand. In any case, “economic under-achievers” (Schor 1998) may ultimately be of crucial importance for the transition to a sustainable economy. These are people who choose to live below their economic possibilities, uninterested in mounting consumption, but eager to pursue their own projects in life. In addition, these under-achievers may give rise to a domain of reciprocity and civic life, whose qualities may in part compensate for a certain decline in the use of material goods. Selective consumption

With the rise of the consumer society in 19th century England, a redefinition of the meaning of human happiness took hold, which today is becoming questionable in environmental as well as social terms. The growing volume of objects for a myriad of needs makes sense only in the context of a world-view which sees happiness increase along with larger quantities of goods. However, sustainable consumption will not only have to change in


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pattern, but will also have to diminish in volume. For this reason, it is necessary to explore the relationship between quantity of consumption and quality of life. More specifically, it is essential to assess the room available to individuals to enhance their personal resource productivity — in other words, their ability to maintain/increase satisfaction with a lower input of resources. As it turns out, the promise of growing happiness with growing consumption is fraught with uncertainties. There is not much empirical evidence — beyond a certain threshold — of a correlation between increased consumption and well-being. Research into the psychology of happiness has not found, within nor between societies, that levels of satisfaction increase significantly with levels of wealth (Argyle 1987). After a certain minimum, the less well-todo are not unhappier than the rich.68 Moreover, in developed consumer societies, the consumer’s relationship with the product becomes often volatile and unclear (Schulze 1993). In fact, in a multi-option society people suffer less from a lack, but more from an excess of opportunities. While well-being is threatened by a shortage of means in poor societies, it is threatened by a confusion about goals in affluent societies. The proliferation of options makes it increasingly difficult to know what one wants, to decide what one does not want, and to cherish what one has. Many people feel overburdened and constantly under pressure. In the maelstrom of modern life they tend to lose their clarity of purpose and determination of will. Apart from giving rise to all kinds of personal problems, such a condition tends to undermine well-being in post-industrial societies. Furthermore, time may become a limiting factor for the enjoyment of good and services. Even the most valuable objects and the most interesting appointments unavoidably gnaw away at the most restricted of all resources: time. The number of possibilities for choosing among goods, services and events has exploded in affluent societies, but the day continues to have only 24 hours. Hectic and stress have become characteristics of everyday existence. Scarcity of time has begun to undermine the benefits of increasing quantities of goods and services. A closer look reveals the two dimensions of well-being: the material and the non-material (Scherhorn 1995). Acquiring and utilising certain objects or materials, e.g. buying food and eating a multi-course meal, will provide material satisfaction (of filling the stomach). Immaterial satisfaction, on the other hand, stems from the way in which we use the objects and materials. For example, enjoying Italian cooking and convivial company over dinner gives another dimension of pleasure. As with food, many objects achieve their full value only when put to use, enjoyed and cultivated. However, and this is the dilemma, obtaining immaterial satisfaction calls for attention, demands involvement and requires time. The conclusion is obvious. Having

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too many things makes time shrink for non-material pleasure. An overabundance of options can easily diminish full satisfaction. In other words, material and non-material satisfaction cannot be maximised simultaneously: there is a limit to material satisfaction beyond which overall satisfaction is bound to decrease. Selective consumption, however, allows the pursuit of quality. It is a strategy of personal conduct which, apart from saving resources, may become a key to well-being in post-industrial societies. In an age of exploding options, only self-reflective consumers will be able to maintain their identity. The ability to focus, which implies the ability of discarding, becomes an important ingredient in creating a richer life. Against this backdrop, consciously cultivating a lack of interest in excessive consumption may become a future-oriented attitude, for nature, for the world, and for oneself.


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Peter Bartelmus

Outlook: From paradigm to policy69 Part II advanced natural and produced capital maintenance and dematerialisation as the fundamental economic and ecological sustainability goals. These goals were derived from non-sustainabilities of economic activity, defined in operational terms as the limited availability of environmental assets and their services. In principle, there are three options in addressing the limits: Ignoring the limits — muddling through. Pushing the limits — searching for ecoefficiency. Complying with the limits — attaining sufficiency.

Ignoring the limits: Muddling through Many liberal economists seem to believe that muddling through, i.e. just reacting to the worst environmental symptoms when they occur, is preferable to heavy-handed governmental interference with individual decision making. As argued by the stalwart of market liberalism, The Economist,70 “high-minded principle and arrogance” are the reasons for government and pressure groups to frequently impose their visions — only to abandon them later as mistaken. Experimentation by markets, a particular form of muddling through, is seen as “a humbler way of going about things than by following the conceited blueprints of politicians, the hubris of monopolistic businessmen, or the arrogance of scientists”. In the environmental field, an intriguing attempt at justifying such laissezfaire was made by advancing the so-called Environmental Kuznets Curve (EKC).71 Figure V.8 depicts the inverted U-curve, suggesting that economic growth produces an automatic improvement in environmental quality. Growth is measured as national income per capita, and impact on environmental quality as emission of pollutants or other indicators such as total material requirement (TMR).72 The automaticity is explained by structural change (possibly towards a service-oriented and thus, also possibly, dematerialised economy) that comes with the transition from poverty to prosperity. The turning point varies between $3,000 and $35,428 of per-capita income in different studies and for different pollutants (Perrings 1998, p. 154). 205 P. Bartelmus (ed.), Unveiling Wealth, 205–212. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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It is important to examine such automaticity since this idea seems to underlie explicitly or implicitly many international proclamations on the necessity of economic growth for sustainable development, in particular in connection with and in follow-up to the 1992 Earth Summit.73 The EKC hypothesis seems to hold for the emission of a few pollutants, notably and SPM (Perrings 1998). Wherever it applies it might be a good idea for developing countries to “tunnel through” the EKC hypothesis (Munasinghe 1999), using the latest technologies and experiences with environmental management in rich nations (see Fig. V.8A). Most assessments conclude, however, that the evidence for EKCs is far from conclusive.74 The reasons are, among others, uncertainty about what really causes the EKC effect (notably the role of growth-induced policy responses), the use of emission data to measure change in environmental quality, and difficult-to-know and -measure long-term irreversibilities from current pollution patterns. My own assessment of material flow intensities (Bartelmus 1997, Figs 3 and 4) is presented in stylised form in Figure V.8B. At first sight the figure seems to confirm an EKC effect for newly industrialising (NICs) and industrialised countries, with less developed countries showing erratic movements. However, when taking absolute levels of TMR (rather than ratios of material intensities) into account, the EKC effect disappears as indicated by the dotted line in the figure. Considering further the politicised discussion of “pollution of poverty”, reflecting conditions of poor water, marginal housing, natural disasters, deforestation and desertification, on the one hand, and “pollution of affluence” from overconsumption, i.e. emission and waste, on the other hand, one would tend to reject the EKC hypothesis. This is illustrated in part C of Figure V.8. Relying on economic growth and/or price signals from markets does not seem to be a valid option: non-action looks indeed suspiciously like “passing the buck to future generations and other regions” (Rothman 1998, p. 191). The question is whether these generations and regions (whence to import sustainability) can or will accept the buck. If not, development could be replaced by “developments” such as poverty-induced riots, war over access to natural resources, eco-terrorism, surge in ecological refugees and other social strife (Bartelmus 1997, p. 340). Imports of economic and environmental sustainability would be offset in this case by social non-sustainabilities. Not relying on market forces does not mean foregoing them. The application of market (dis)incentives and other policy instruments is the topic of the following section which takes a more (pro)active look at tackling environmental limits.

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Tackling the limits: ecoefficiency, consistency and sufficiency As tempting as it may seem to liberal economists, leaving the solution of environmental concerns to unfettered markets could thus be a “foolhardy way” (Perrings 1995, p. 63) to learn about transgressions of environmental limits. A first step towards tackling dematerialisation and capital maintenance is to recast these notions in more strategic terms. Reducing the use of materials can be achieved by technologies which generate the same or even better “services” from physical outputs with less resource inputs. Such increase in resource productivity is the mirror image of a decrease in material intensity of production and consumption processes — the object of the Wuppertal Institute’s MIPS approach (Schmidt-Bleek 1994) to furthering ecoefficiency. A qualitative variant of this approach is the call for attaining consistency in the use of materials and energy flows. The purpose of consistency is to develop materials and energy flows which can be seamlessly incorporated into and absorbed by nature’s metabolism (Huber 1995). For policy purposes the question is to what extent environmentally sound innovation can be steered into a desirable direction, for instance by market incentives or disincentives. The answer is as usual: it depends. “Exogenous innovation” (Atkinson 2000) which comes out of the blue, typically in a Schumpeterian process of creative destruction, is by definition hardly subject to policy inducement. “Endogenous innovation”, on the other hand, can be triggered by governmental incentives for research and development which should aim at enhancing not only produced but also human, social and institutional capital. Incentives for particular economic sectors and activities are prone to social pressures, risking deviation from the original or proclaimed policy purpose. There seems to be an advantage in using disincentives to prod economic agents into internalising their environmental costs in their budgets. Facing effluent charges or fees for excessive uses of environmental assets, producers and consumers are likely to search for techniques which replace harmful production and consumption processes by environmentally benign ones. The idea is to combine competitive and fiscal pressures to meet environmental goals in a more efficient manner than by command-and-control strategies of remote bureaucracies. It is generally held, however, that technology alone cannot be the saviour: it needs to be reinforced by more or less voluntary restriction in consumption levels. As argued by Sachs in this book, ecoefficiency in production needs to be combined with sufficiency in final consumption. Otherwise, efficiency gains could be offset by increased consumption, made possible by the very same efficiency gains.


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So, how can we encourage or enforce changes in our consumptive lifestyles? Do we have to restrict consumer sovereignty to turn individuals into “model citizens” (Hansen and Schrader 1997)? Is it enough to stimulate insight into true values by providing information for reflection and selfcommitment (Reisch and Scherhorn 1999). The bottom line is how to influence individual behaviour without giving in to brainwashing through targeted education and moral suasion campaigns. Calls for “collective action”, “eco-detectives” and “stick-and-carrot strategies”75 are dangerously close to ecodictatorship. The good news is: liberal democracies and a vibrant civil society are well-equipped to watch out for overly zealous attempts at leading us into Utopia.

Reconciling the strategies: towards a social compact Note that, despite the ecological-economic dichotomy in sustainability notions, described by Bartelmus in part II, both strategies of enhancing resource productivity and prompting cost internalisation make use of market instruments for their implementation. This is however where agreement ends. Dematerialisation, on the one hand, focuses on material inputs, e.g by trading material certificates or charging user fees. Fiscal disincentives, on the other hand, deal with both resource depletion and environmental degradation, e.g. by means of targeted (costed) user fees, effluent charges or tradable pollution permits. More significantly, most environmental scientists believe that market instruments cannot do the job on their own. For instance, the Wuppertal Institute’s Factor 4 and 10 “guardrails” are to change the course of production and consumption by calling for a drastic reduction of material inputs. Curtailing consumer sovereignty through sufficiency criteria, guardrails or other safeguards is of course anathema to environmental (neoclassical) economists. They favour market incentives and disincentives which focus on individual preferences and knowledge about environmental innovation and damage avoidance. Environmentalists, on the other hand, believe that individual, self-concerned preferences are bad judges of environmental impacts, especially of public health effects and the erosion of aesthetic, cultural, educational or ethical values; individual preferences need to be superseded by collective judgement and decision making. How can we reconcile these apparently contradictory strategies? The answer is to combine them. An important first step toward reconciliation is to make vision visible by explicitly relating the set of social and environmental goals and norms to economic (market) activity. This could be done by

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specifying a normative framework within which economic activity could be played out. Such a framework turns the question of sustainability of economic growth into one of the “feasibility” of development (Bartelmus 1994, p. 73). In this manner a direct link can be established between economic sustainability of production and consumption, performed within the framework, and ecological and social sustainability of development, expressed by compliance with normative constraints. Unfortunately, standards and regulations are typically scattered, with an emission or critical-load standard here, and an environmental rule or law there. Targets of social sustainability such as an equitable distribution of income and wealth or other political and cultural sine qua nons are rarely ever specified in quantifiable terms. In an open and democratic nation, civil society and government are called upon to negotiate openly, and thus reveal, minimum or desirable standards of living, and maximum environmental and social constraints.76 A social compact between “shareholders”, benefiting from economic activity, and “stakeholders”, suffering from its environmental effects, might do the job of agreeing on how to attain sustainability. Far from a Rousseaunian contrat social which subsumes individual goals and aspirations to the “general will”, this could take the form of alliances between State, and civil society — possibly along the lines of the German Bündnis für Arbeit (Alliance for Work). Ideally, the result should be consensus and partnership in setting, implementing and monitoring sustainability targets and standards.

Global change and sustainable development Much of the above focused on the internalisation of environmental and social values and costs into individual decision making through national policies. Some of the more generic thoughts, especially with regard to comparative national sustainability assessments and strategies, should also apply at the international and global levels. In particular, there has been an extensive discussion of sustainable development and globalisation.77 It is however beyond this paper to fully review this topic. Suffice it to point out that the polarisation of economists and environmentalists reemerges in the globalisation context. On the one hand, “greens” are asked “to love trade”78; on the other hand, globalisation is considered to undermine all categories of economic, ecological and social sustainability. The arguments run the gamut of praising the parsimonious use of scarce environmental resources, prompted by increased international competition, to


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warnings about a new commercial imperialism of transnational corporations, at the expense of social, cultural and ecological concerns (Sachs 2000). International terrorism is probably the worst symptom of globalisation. The large-scale terroristic acts in the USA might well overwhelm the sustainability discussion and might also change the priorities of sustainability strategies. Money does not seem to draw a veil over sustainable development in this case. Huge expenditures for countering terrorism — even in times of economic downturn — reveal a new focus on security at the possible expense of social and environmental concerns: Climate a truly remote concern? Africa forgotten again? The forthcoming Johannesburg Summit faces the daunting task of not repeating the (financial) failure of Rio de Janeiro.

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References Atkinson, G. (2000). Technology and sustainable development, in: OECD (ed.), Frameworks to Measure Sustainable Development. Paris: OECD. Bartelmus, P. (2000). Economic growth, wealth and sustainable development, in: R. Kreibich and U.E. Simonis (eds), Global Change — Globaler Wandel. Berlin: Berlin Verlag, Arno Spitz GmbH. Bartelmus, P. (1997). Whither economics? From optimality to sustainability? Environment and Development Economics 2, 323–345. Bartelmus, P. (1994). Environment, Growth and Development — The Concepts and Strategies of Sustainability. London and New York: Routledge. Garrod, B. (1998). Are economic globalization and sustainable development compatible? Business Strategy and the role of the multinational enterprise. International Journal of Sustainable Development 1 (1), 43–62. Hansen, U. and U. Schrader (1997). A modern model of consumption for a sustainable society. Journal of Consumer Policy 20 (4), 443–468. Huber, J. (1995). Nachhaltige Entwicklung durch Suffizienz, Effizienz und Konsistenz, in: P. Fritz, J. Huber and H.W. Levi (eds), Nachhaltigkeit in naturwissenschaftlicher und sozialwissenschaftlicher Perspektive. Stuttgart: Hirzel. Kuznets, S. (1955). Economic growth and income inequality. American Economic Review 45, 1–28. Leisinger, K.M. (1998). Sustainable development at the turn of the century: perceptions and outlook. International Journal of Sustainable Development 1(1), 73–98. Munasinghe, M. (1999). Is environmental degradation an inevitable consequence of economic growth: Tunneling through the environmental Kuznets Curve. Ecological Economics 29 (1), 89–109. Perrings, C. (1995). Ecology, economics and ecological economics. Ambio 24 (1), 60–63. Perrings, C. (1998). Income, consumption and human development: environmental linkages, in: UNDP (ed.), Consumption for Human Development. New York: UNDP. Reisch, L.A. and G. Scherhorn (1999). Sustainable consumption, in: S.H. Dahiya (ed.), The Current State of Economic Science. Rohtak (India): Spellbound Publishers. Rothman, D.S. (1998). Environmental Kuznets curves — real progress or passing the buck? A case for consumption-based approaches. Ecological Economics 25,177–194. Sachs, W. (2000). Wie zukunftsfähig ist Globalisierung? Wuppertal Papers No. 99. Wuppertal Institute for Climate, Environment and Energy. Sandler, T. (1997). Global Challenges. Cambridge (UK): Cambridge University Press. Schmidt-Bleek, F. (1994). Wieviel Umwelt braucht der Mensch? MIPS, das Maß für ökologisches Wirtschaften. Berlin, Basel and Boston: Birkhäuser. United Nations (1997). Earth Summit +5. Programme for the Further Implementation of Agenda 21. New York: United Nations. United Nations (1994). Earth Summit. Agenda 21. The United Nations Programme of Action from Rio. New York: United Nations. World Commission on Environment and Development (WCED) (1987). Our Common Future. Oxford and New York: Oxford University Press.

Notes 1 Comments and suggestions by Stefan Bringezu and Philipp Schepelmann are gratefully acknowledged. 2 Of course, this purely pragmatic reduction of sustainability omits social, cultural and political constraints to economic development; the latter have been brought — shockingly so — to the fore by the recent terroristic events in the USA. One possibility of linking these concerns to economic performance in terms of a “feasibility space” for sustainable development is described in the last “Outlook” chapter. Brühl in part III also refers to the need for shifting the emphasis from the “ecological dimension to the social and economic aspects”. 3 For a more detailed overview of such “green” accounting, see Bartelmus (2001). 4 See for a discussion of other indicators from MFA, Bringezu in part IV. 5 The latest version of the draft “SEEA 2000” can be found on the website of the London Group ; see also the intervention by Schoer, below. 6 Later translated in a summary version as Greening the North (Sachs et al. 1998). 7 Information on tax revenue provided (as of 5 July 2000) by the Federal Statistical Office, Wiesbaden, Germany. 8 To be iteratively modified once new accounting results, indicating a changed environmental behaviour, become available. The advantage of such strategies lies in avoiding highly assumptive modelling by basing policy on actual accounting results. 9 As estimated by the German Federal Ministry of Finance: <www.bundesfinanzministerium. de/oeko/oekostpap.htm>. 10 Constributions and assistance in this pilot study by H.-P. Cornus (Bundesforschungsanstalt für Fischerei, Hamburg), Fichtner (Institut für Industriebetriebslehre und industrielle Produktion, Universität Karlsruhe), T. Lüllwitz (Bundesanstalt für Gewässerkunde, Koblenz) und W. Riege-Wcislo (Statistisches Bundesamt, Wiesbaden) are gratefully acknowledged. 11 The “net price” is defined as the net return per unit of the resource sold, with “net return” representing the total sales value minus all costs of resource exploration, development and extraction (see for a detailed formal presentation, Bartelmus 1998, pp. 305-307). 12 Cf. P. Bartelmus (1997, p. 331) and the case studies presented in Uno and Bartelmus (1998). 13 Editorial note: three per cent according to more recent calculations. 14 Examples are taken from the set of 42 indicators for Seattle (AtKisson et al. 1997). 15 AUDI car company, advertising campaign 1997. 16 Notably for developing international accounting standards which in turn are modelled after those of the USA. 17 Cf. the 1992 Rio Summit’s Agenda 21 for global sustainable development, which calls for social justice (and economic security for all countries), in addition to often-cited environmental protection. 18 This is what stirs fears of the economic worst-case scenario: a crash (Pohl 1999). 19 Brodbeck (1998) shows that not only the economy as a whole, but also individual companies follow non-mechanistic laws. Whilst Brodbeck studies the consequences of his thesis for economics, the author, on the other hand, sees his own views (of conventional business accounts being closer to fiction than to live reality) confirmed. 20 It is not very well known that Germany’s “father of the economic miracle”, Ludwig Erhard, himself had significant doubts about his model of prosperity. In his New Year’s greetings to the German President Theodor Heuss, at the end of 1956, he expressed his sincere misgivings: “...the desire for dignity is suffocated by the wish to attain self-esteem and recognition through material success. This is what the Economics Minister [Erhard is speaking about himself] is convinced of, what he cares deeply about, and he asks himself repeatedly

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whether his policies, which are intended to make people more prosperous, have not done damage to his soul. I suppose I don’t want to admit this quandary refuting it outwardly; but yet I have my doubts. You told me once, Mr. President, that the one or another of my thoughts seemed worth taking up in a public speech, and for further general inspiration. This is what I would like to ask of you now, that you make it clear to our nation how little human happiness, contentment and dignity have to do with the consumption of material goods and how the desire for, or rather the obsession with, material wealth must inevitably lead us astray...” This letter indicates Erhard’s own unveiling of his proclaimed “wealth for all”. Christoph Rinneberg of the Wiesbaden College for Higher Education discovered the letter in the Federal Archives of Koblenz; he is in possession of a facsimile of the hand-written original. The following observations are the result of years of practical work on sustainability in or with companies. They are the author’s personal views and not necessarily those of particular companies or associations. Other reasons are the low savings rate in the USA, as well as the employment-friendly monetary and financial policies of recent years. Ideally, these units should be converted into purchasing power parities, because of distortions from using official exchange rates. See Bartelmus in part II for a critique of the HDI and other compound indicators of sustainable development. MIPS, i.e. the Material Intensity Per Service unit, is the concept underlying our dematerialisation strategy. The purpose is to reduce the use of materials “from cradle to grave” in products, services and production processes, with a view to reducing potential environmental impacts (Schmidt-Bleek 1994). The Intergovernmental Panel on Climate Change (IPCC) sets out from “no-regret” options in the field of energy efficiency, with negative avoidance costs of 10 to 30 per cent of current energy consumption. Cf. IPCC, Working Group III, Second Assessment Report, May 31,1995. We could save up to 45 per cent of primary energy consumption (base year 1987) with available technologies (see Enquete Kommission 1994). The author would like to thank Helmut Schütz for his research and data handling, Peter Bartelmus for his thorough editing and Melanie Krause and Davoud Farahan for technical assistance. The network ConAccount (Coordination of national and regional material flow accounting for sustainability) provides a platform for information exchange on MFA (www. conaccount.net). An overview of the history and main methodological approaches of MFA is given in Bringezu (2000). In general, Factor 4 is seen as a step towards Factor 10; the former has been more related to energy productivity in industrial countries within the next 30 years and the latter more to materials productivity and the absolute reduction of primary resource requirements of industrial countries within the next half of the century. For a comprehensive list with special reference to European policies, see Bringezu (in prep.). Renewability refers to possibilities of regrowing or recycling a resource. Regeneration describes the reproduction of a resource (input) reproduced through reintegration of waste (output) materials into the economic process. Abiotic (non-regrowing) raw materials currently dominate the input structure of industrial economies. As a consequence, the share of abiotic resources which can be recycled is rather low. For instance, in 1996, only 26% of the domestic abiotic raw materials extraction in Germany was potentially recyclable for the same purpose. In addition, the production, use and waste management of biomass is to a large extent associated with linear materials and substance flows rather than cyclical ones that lead to regeneration. After the first approaches of Ayres and Kneese (1969), domestic MFA were established independently for Austria (Steurer 1992), Japan (Japanese Environmental Agency 1992) and Germany (Schütz and Bringezu 1993). Since the early 1990s the OECD applied a Pressure-State-Response (PSR) framework for its environmental indicators which in turn was based on the activities-impact-response Frame-

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work for the Development of Environment Statistics (FDES) of the United Nations (1984). As to the possible extension of the FDES into a Framework for Indicators of Sustainable Development (FISD) see Bartelmus (1994). For really meeting regeneration requirements, organic farming standards will have to be further developed to allow for (and even demand) the necessary use of organic waste, sewage and sewage sludge as fertiliser. Hidden flows (Adriaanse et al. 1997) or rucksack flows (Schmidt-Bleek et al. 1998; Bringezu, Stiller and Schmidt-Bleek 1996) comprise the primary resource requirement not entering the product itself; hidden flows of domestic primary production is equal to unused domestic extraction; hidden flows of imports comprise unused and used foreign extraction associated with the production and delivery of the imports. In studies before Adriaanse et al. (1997), TMR had been defined as TMI (Total Material Input) (Bringezu 1997). Cf. the assessment of Germany’s (non)sustainability by Bartelmus in part II. See e.g. the results of a detailed case study in the UK (Bringezu and Schütz 2001b). Calculated after Adriaanse et al. (1997). After Adriaanse et al. (1997) and Mäenpää and Juuittinen (1999), weighted average, calculation based on sum of TMR and sum of populations of all countries. This article presents a condensation of the emergy accounting approach. See for details on concepts and methods, as well as a summary of the literature, Odum (1996). University and Schools Club, Sydney, Australia. There are other procedures for estimating unit emergy values, including ten given in Odum (1996). For example, the Tennenbaum track-sum method calculates the emergy of a pathway by tracing and adding the emergy of each outside input through the system to reach the pathway one by one. A method from Murray Patterson, modified by Collins and Odum (2001), evaluates transformities as the eigenvalues from data in a matrix of transformities and energy transformation data. Others use the inverse property of energy use and transformity (Odum 2001). As mentioned, transformities measure the position in the universal hierarchy of energy, thus measuring fundamental properties of earth and cosmos. Maximum empower (emergy flow per unit time) updates the maximum power principle introduced by Alfred Lotka (1922,1925) as the fourth energy law. The maximum empower principle indicates that self-organisation selects designs by reinforcing network pathways that maximise empower. This is a clarification of the maximum power principle so as to recognise that each level in the natural energy hierarchy self-organises with the same principle at the same time. Previous books have more on use of symbols, mathematical equivalents, and their computer simulation (Odum 1971,1983,1996; Odum and Odum 2000). For details on the definitions and calculations, see Odum and Arding (1989). Initial capital requirements are averaged over the anticipated life of the structure-storage. The following evaluation of shrimp aquaculture and its foreign trade is summarised from Odum and Arding (1989). Issued by the US Bureau of Economic Analysis (1994). A probably easier-to-accede review is Landefeld and Howell (1998). Qualification could, for example, be determined by long-term membership in the fishing industry. Ignoring the difficult-to-measure loss of the “other services”; see Bartelmus, part II. Research supported by the Institute for Advanced Study, United Nations University, Tokyo, and the European Commission, Terra Project. The tendency of virtually all raw material and fuel costs to decline over time (lumber was the main exception) has been thoroughly documented, especially by economists at Resources For the Future (RFF) (Barnett and Morse 1962; Potter and Christy 1968; Smith 1969). The immediate conclusion from those empirical results was that scarcity was not a prospect and was unlikely to inhibit economic growth in the (then) foreseeable future. It is also very likely, however, that increasing availability and declining costs of energy (and other raw materials) has been a significant driver of past economic growth.

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56 Exergy is the correct thermodynamic term for “available energy” or “useful energy”, or energy capable of performing mechanical work. The distinction is theoretically important because energy is a conserved quantity (first law of thermodynamics). This means that energy is not used up in physical processes, merely transformed from available to less and less available forms. On the other hand, exergy is not conserved: it is used up. The directionality of this transformation is expressed as increasing entropy (second law of thermodynamics). 57 Marx believed (with some justification) that the gains would flow mainly to owners of capital rather than to workers. Political developments have changed the balance of power since Marx’s time. However, in either case, returns to energy or physical resources tend to decline as output grows. This can be interpreted as a declining real price. 58 For instance, for the years 1929 through 1969, one specification that gave good results without an exogenous term for technical progress was the choice of K and E as factors of production. In this case the best fit implied a capital share of only 0.031 and an energy share of 0.976 (which corresponds to very small increasing returns) (Hannon and Joyce 1981). Another formulation, involving K and electricity, El, yielded very different results, namely (R2 = 0.99464) a capital share of 0.990 with only a tiny share for electricity (ibid). Using factors K, L only — as Solow (1956) did in his path breaking (Nobel Prize winning) paper — but not including an exogenous technical progress factor (as he did) — the best fit (R2 = 0.99495) was obtained with a capital share of 0.234 and a labour share of 0.852. These add up to more than unity (1.086), which implies significantly increasing returns. Evidently one cannot rely on econometrics to ascertain the “best” formulation of a Cobb-Douglas (or any other) production function. 59 In a recently published economic textbook written by Harvard Professor Mankiw (1998) the income allocation theorem is “proved” and illustrated using the example of bakeries producing hypothetical bread from capital and labour, but without flour or fuel. Empty calories, indeed! 60 See Bartelmus, part II for an attempt at modifying the national accounts aggregates for the consumption of natural capital and corresponding costing of natural resource depletion and environmental degradation. 61 There are statistical approaches to addressing the causality issue. For instance, Granger and others have developed statistical tests that can provide some clues as to which is cause and which is effect (Granger 1969; Sims 1972). These tests have been applied to the present question (i.e. whether energy consumption is a cause or an effect of economic growth) by Stern (1993) and Kaufmann (1995). In brief, the conclusions depend upon whether energy is measured in terms of heat value of all fuels (in which case the direction of causation is ambiguous) or whether the energy aggregate is adjusted to reflect the quality (or, more accurately, the price or productivity) of each fuel in the mix. In the latter case the econometric evidence seems to confirm the qualitative conclusion that energy (exergy) consumption is a cause of growth. Both results are consistent with the notion of mutual causation. 62 The marginal productivities, logarithmic derivatives of output with respect to each of the factors, need not be constant in time. In fact they are unlikely to be constant. 63 The inverted-U curve has also been tested more generically for environmental impacts, albeit with mixed success: cf. Bartelmus in part II. 64 Empirical work is under way, and will shortly be published. 65 In future work we will show that the unexplained residual can be explained almost perfectly by introducing U (physical work) into the LINEX production function. 66 The term seems to have been introduced by Altenpohl (1985). 67 Based on a contribution to the IPCC-Expert Meeting on Development, Equity and Sustainability, Colombo, 27–29 April 1999. 68 Cf. Bartelmus in part II who, for these reasons, favours the assessment of symptoms of unhappiness. 69 This paper presents parts 3 and 4 (with slight modifications) of Bartelmus (2000). Permission to reproduce these parts by Berlin Verlag, Arno Spitz GmbH is gratefully acknowledged. 70 Of 11 September 1999, p. 16.

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71 Named after Kuznets’ (1955) similar assessment of a correlation between the level and distribution of income. 72 See parts II (Bartelmus) and IV (Bringezu) for the definition and interpretation of TMR as a measure of environmental impact. 73 Cf. the preparatory publication of the Brundtland Commission (WCED 1987), Principle 12 of the Rio Declaration (United Nations 1994), the outcomes of the follow-up conference “Earth Summit +5” (United Nations 1997) and the UN Secretary-General’s Millenium Report (<www.un.org/millenium/sg/report/summ.htm>, section III). A similar view of economic growth can be expected from the forthcoming (2002) Johannesburg Summit. 74 See notably a special edition of Ecological Economics 25 (2) (1998). 75 See for a concise review of these and other strategies of “sustainable consumption”, Reisch and Scherhorn (1999). 76 Focusing on key targets/constraints of this framework, sustainable development can be defined operationally as a “set of development programmes that meet targets of human needs satisfaction without violating long-term natural resource capacities and standards of environmental quality and social equity” (Bartelmus 1994, p. 73). 77 See e.g. Sandler (1997), Leisinger (1998), or Garrod (1998). 78 Cover page title of The Economist of 9–15 October 1999.

The authors Robert U. Ayres is Sandoz Professor Emeritus of the European Institute of Business Administration (INSEAD), Fontainebleau, France. Peter Bartelmus is Director of the Division for Material Flows and Structural Change at the Wuppertal Institute for Climate, Environment and Energy. He also teaches ecological economics at the Bergische Universität, University of Wuppertal, Germany. Gerhard Bosch is Head of the Division for Labour Markets at the Institute for Work and Technology (Institut für Arbeit und Technik, IAT) Gelsenkirchen, Germany. He is also professor of sociology at the Gerhard-Mercator University, Duisburg, Germany. Hartmut Bossel was Director of the Centre of Environmental Systems Research at the University of Kassel, Germany, until his retirement in 1997. Stefan Bringezu is Senior Fellow of the Wuppertal Institute for Climate, Environment and Energy, Division for Material Flows and Structural Change. Wolfgang Brühl was the former Chief Economist of the Hoechst Group. Arno Gahrmann is Head of the Industrial Engineering Course at the Hochschule Bremen (University of Applied Sciences), Germany. He also teaches finance and accountancy and is a member of the Urban Ecology Project at the German Federal Ministry for Education and Research.

The authors

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Peter Hennicke is Acting President of the Wuppertal Institute for Climate, Environment and Energy. Paul Klemmer is President of the Rhine-Westphalia Institute for Economic Research (RWI), Essen, Germany. Howard T. Odum is Graduate Research Professor Emeritus, Environmental Engineering Sciences, University of Florida, Gainesville, Florida, USA. Robert Repetto is Professor at the School of Forestry and Environmental Studies, Yale University, New Haven, Connecticut, USA. For many years he was Vice President of the World Resources Institute. Wolfgang Sachs is Senior Fellow at the Wuppertal Institute. Udo E. Simonis is Research Professor for environmental policy at the Social Science Research Centre, Berlin, Germany. He is also a member of the United Nations Committee for Development Policy. Klaus Töpfer is Executive Director of the United Nations Environment Programme (UNEP), Nairobi, Kenya. Benjamin Warr is Research Assistant at the Centre for the Management of Environmental Resources, INSEAD, Fontainbleau, France. Ernst-Ulrich von Weizsäcker is the Founding President of the Wuppertal Institute for Climate, Environment and Energy. He is now a Member of the German Federal Parliament. Hansvolker Ziegler is Deputy Director-General for environmental and socioeconomic research at the German Federal Ministry for Education and Research.

Index Agenda 21 190 Aggregation see valuation or weighting by weight Avoidance cost see environmental cost economy 104, 107 Brundtland Commission 9 Burden shifting 24, 31, 36, 128–129, 142–145, 207 Business accounting see corporate accounting California 109 Capital consumption 15–17, 22, 44, 177 depreciation see capital, consumption economic 60–61, 171–172 human 45, 92-93, 171–172 maintenance 15–17, 41, 96 see also sustainability, economic natural 15–16, 44, 61, 93, 98, 175–178 social 61, 93, 98 Carbon dioxide avoidance cost 107 emission 106–107, 129, 189, 191–192 Carrying capacity 10, 19 Chemical industry 73 China 124, 127 Chinese (ethnic) 61 Climate protection 107, 190 Co-evolution 96, 197

Company data 75–76 Conservation of matter 191 Consistency 208 Consumption level 200 selective 202 sustainable 200–201 Corporate accounting (environmental) 45–46, 64–65 Corporate reporting 74, 97 Cost 64, 70 internalisation see environmental cost, internalisation Cradle-to-grave analysis see life cycle analysis Data graveyards 168 Debt 95–96 environmental 17 Decoupling see delinkage Defensive expenditures 11, 19, 52, 67 Delinkage 24, 104–105, 123 Delors White Paper 167 Dematerialisation xii, 15–17, 106, 113–114, 127, 187, 209 see also sustainability, ecological and resource productivity Demiurge model 98 Denmark 87–88 Depletion of natural resources 33, 36, 157 Depreciation see capital consumption Detoxification 113 Developing countries 15, 104–105 Development 18 see also sustainable development Direct material input (DMI) 121 Diversity 69–70

Index

Earth Summit ix, 70, 211 Ecodictatorship 209 Ecoefficiency 113–114, 193–197 Ecological footprint 19 Ecological rucksack 13, 15, 103, 118, 121 Economic diversification index (EDI) 52 Economic equilibrium 172–174 Economic growth 171–178, 205–207 engines 175–176 optimal 173–174 physical 13, 112, 130 quality 104 sustainability 21–22, 130 Economic underachievers 200 Ecotax 5, 28 see also market, instruments Ecuador 137, 143–145 Education 83–85, 103 Efficiency 68–70 see also ecoefficiency and energy, efficiency Electricity 108, 109 Emergy 135–137 emdollar 136–137, 144–145 evaluation 138–139 indices 140, 142–143 Employment 68, 83–88, 98 externalities 150 models 78, 87 rate 85–88 sustainable 77 women 88, 92 Energy 105, 171, 175, 177–178 see also exergy and emergy efficiency 106, 194 embedded see emergy hierarchy 135 saving 105, 107 scenarios 105–107

221

system 137–140 Environmental accounting see system for integrated environmental and economic accounting Environmental capacities 16, 111–112 see also capital, natural Environmental cost 17, 26, 33, 36, 39–42, 44–45 internalisation 4, 23, 28, 44–45, 66, 208 see also full-cost pricing Environmental damage, measurement 28–29, 43–44, 66, 154 see also valuation Environmental impacts 110–111 potential 115, 120–122 Environmental indicators see indicators, environmental Environmental Kuznets curve (EKC) 179–180, 205–207 Environmental pressures 15 see also environmental impacts Environmental protection expenditure 33, 97, 177 Environmental space 15, 24, 190–191 Environmental statistics 18 Environmental sustainability index (ESI) 19–20 Environmentally-adjusted net capital formation (ECF) 22, 28, 32 Environmentally-adjusted net domestic product (EDP) 21, 26, 32, 39–40, 42, 46 Equity inter-generational 93, 95–96, 112 intra-generational 112 European Union (EU) 123–128, 130 Exergy 135, 175, 180–182, 187

222

Externalities 3–4, 70, 150 see also environmental cost and employment, externalities Factor 4/10 xi, 15–17, 24, 29–30, 59, 106, 113, 127, 191–192, 199 Federal Statistical Office, Germany 39–40, 43–44 Finland 90, 126 Fiscal (dis)incentives see market, instruments Fisheries 154, 160–162 Forestry 162–163 Fossil fuels see energy Framework Convention on Climate Change (FCCC) 189 Full-cost pricing xi, 4, 177–178, 196 Future generations 46 see also equity, inter-generational Gender empowerment measure (GEM) 89 Gender-related development index (GDI) 89 Genuine progress indicator (GPI) see index of sustainable economic welfare Germany 23–30, 33–36, 51, 78–89, 92, 107, 124, 163, 192–193 Global warming 189 Globalisation 3, 69, 128, 210–211 information 160 Government 151 interference 205 Green accounting see system for integrated environmental and economic accounting Green GDP see environmentallyadjusted net domestic product Green taxes see ecotax

Index

Greenhouse effect 61 Gross domestic product (GDP) 24–25 deficiencies 152, 168 Gross national product see national income Guardrails xii, 91, 96 see also factor 4/10 Happiness 10–11, 200–201 Hidden flows see ecological rucksack Human development index (HDI) 19–20, 25, 52, 89 Human settlements 4 Income 86–87 inequality 81, 83–84, 89, 210 Index of sustainable economic welfare (ISEW) 19–20, 24–25 Indicators 11, 31, 52, 55, 60, 77, 91–92, 94, 99, 103 Biesiot 57 consistency 121 economic 11, 150–152, 164–165, 168 environmental 11–12, 18, 51 guide-beam 59 poverty 52, 79, 89 social 11, 51, 78–79 sustainable development see sustainable development, indicators and sustainability, indicators sustainable employment 77–88 unemployment 79 Industrial ecology 195 Industrial revolution 171 Innovation 80–81, 208 see also technical progress Input-output analysis 29, 45, 173 Input-output table 31, 36, 116

Index

Institutions 92 Intangibles 64–65 International Organization for Standardization (ISO) 98 Japan 24, 51, 123–130 Johannesburg Summit 211 Labour see capital, human cost 68 productivity 193 Leisure 86, 199–200 Life cycle analysis 113–114, 195 Lifestyle 200, 209 see also leisure Limits environmental 131, 205 social 98, 210 Market economy 3, 10 instruments 28, 157, 196, 208–209 see also environmental cost, internalisation prices 3–4, 196, 207 Material flows 13, 109, 111, 149, 191, 194 accounts 13–14, 31, 110, 116–118, 122, 132 foreign trade 128–129 see also burden shifting indicators 24, 115–116, 118–119, 121–131 Material intensity 21 per service unit (MIPS) 103–104, 208 Merciless competition 69 Metabolism industrial 111, 190–191 society 111–114 sustainable 111–114, 126, 131

223

Micro-macro link 31, 46, 76 Mobility 195, 198 Modelling 45, 99, 159–160, 173–174 scenarios 29–30, 41, 131, 169 Moderation see sufficiency Monetarisation see valuation Muddling through 205 National accounts see system of national accounts National income 196 Natural resources see capital, natural Neoclassical economics 167, 172, 209 Net additions to stock (NAS) 122, 130–131 Net worth 64–65 Netherlands 81, 86–87 Normative framework 210 Pareto optimality 172 Parity principle (of natural resource use) 191 see also environmental space Pensions 67–68, 95 Poland 24, 124 Polarisation environmental-economic xii, 9–10, 14, 159, 209–210 social see income, inequality Policy integration 158–159 Polluter-pays principle 23, 30 Pollution affluence 206 poverty 206 control 112–113 Poverty see income, inequality Pressure-state-response framework see stress-response framework

224

Production factors 176–178 see also capital Production functions Cobb-Douglas 183–184 Linex 185–186 with exergy 179–180, 183–187 with natural resources 175 Productivity 150–152, 157 see also labour, productivity Profit 43, 64 maximisation 65–66 Property rights 155, 159, 161–162 Prosperity see wealth Public goods 151 Quality of life xi, 10, 18, 192–193, 196–202 indicators 51, 77, 87, 89 Recycling 194–195 Regeneration 114 Relinkage 193 Research and development, expenditures 80 Resource productivity 16, 122–124, 192, 197, 208 see also delinkage policies 132 Rio conference see Earth Summit Salter cycle 175 Scallop 154–155 Scarcity 10 Schopenhauer trap 53 Science 169–170 Seattle conference 162 indicators 57, 96–97 Security 211 Service economy 195 Shareholder value 74, 95, 98

Index

Shrimp mariculture 143–145 Social accounting 76 Social compact 210 Social justice 93 see also income, inequality Social security 84, 96 Stress-response framework 18, 118 Subsidies see market, instruments Sufficiency 107, 208–209 see also lifestyle Sustainability 46, 91, 94–95, 191 see also sustainable development, concept accounting see system for integrated environmental and economic accounting companies 65, 74–76, 95 dimensions 30, 42, 52, 73–74, 93, 97, 165 ecological 15, 21, 74, 93, 109–110, 114, 126, 191 economic 14–15, 21, 153 environmental see sustainability, ecological growth see economic growth, sustainability . import see burden shifting indicators 31–32, 52, 59–60, 75, 94–95, 118, 158, 168 see also sustainable development, indicators life 63, 70–71 policy see strategy social 42, 68, 73, 95, 165, 207, 210 see also employment, sustainable strategy 61, 190, 205 see also dematerialisation strong 17 weak 17, 28

Index

Sustainable development concept 9, 70, 94, 96, 190, 210 definition 12–13, 18, note 76 indicators 18–19, 30–31 see also sustainability, indicators Sustainable employment see employment, sustainable Sustainable national product 91–93, 153 Sustainable yield 161 Sweden 80–81, 87–88 System for integrated environmental and economic accounting (SEEA) 3–14, 26, 31, 43–46, 52, 76, 161, 165–166 Germany 26–28, 33–36 indicators 21–22, 32, 107 revision 23 satellite account 23, 158 USA 152–154, 157 use 32 valuation see valuation System of national accounts (SNA) 26, 152, 176–177 Systems analysis indicators 55–58 orientors 55–58, 96–97 viability 55–58 Technical progress 5, 21, 171, 173–174, 187 in production functions 184–186 labour saving 196 Technology, transfer 105 Terrorism 211 Thresholds see limits, environmental Throughput see material flows Time, scarcity 86, 201–202 see also leisure

225

Total material consumption (TMC) 122, 126–127 Total material requirement (TMR) 21, 24, 32, 118, 121, 125, 128–129, 192, 205 Traffic see transportation Transformation (solar) 136, 140 Transportation 66–67, 198–199 see also mobility Under-pricing see full-cost pricing Unemployment see employment Unhappiness, indicators 11, 60 United Kingdom 81, 87, 124, 128–129 USA 67–68, 80–87, 123–124, 126, 130, 144–145, 149, 151–155, 158, 162, 165 Valuation 17, 22–23, 28, 40–41, 66–67, 151, 154–155, 163–164 Veil, monetary 9–11, 32, 104, 109 Vulnerability 52 Walras see economic equilibrium Waste 149–150, 180 Water 5 Wealth 9–11, 44, 70–71, 108, 201 see also capital genuine xi, 105, 137 in time see leisure Weighting by weight 17, 22, 118–119 Well-being 199–202 see also happiness Work, flexibility 92 World Resources Institute 149 Wuppertal Institute 103, 149

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