Earth’s balance sheet

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mans nilsson

How much do environmental issues really cost us every year? Is it possible that the environmental damage arising from the production and consumption of goods and services in our society is so costly that in some cases it offsets the welfare gains from the very same production and consumption? These are some of the questions that the Approach to Constructing an Earth Audit report, prepared by the Stockholm Environment Institute, Sweden, tries to answer.

Today, the gains from economic development and growth are usually highly visible. But economic development brings with it some depressing side-effects: pollution of air and waters, destruction of natural habitats, and long-term environmental risks among others. An earth audit essentially compares the welfare gains of economic development to the welfare losses that result from the same development. By getting a better view of the ups and downs of development, it is easier to see what kind of investments we should make and what will leave society worse or better off.

Estimating environmental costs
Unwanted side-effects of economic activities, both production and consumption, are quantified as environmental costs. The earth audit collects information on the physical pressures arising from economic development, such as cutting down our forests, polluting air and water, converting coastal landscapes to cities and depleting our mineral resources. Three methods of translating the data available into economic estimates are currently in vogue:

• production- or direct market-based methods which simply measure the loss of productivity in money terms through people being sick, crops growing more slowly, harvests of fish declining and so on;

• revealed preferences which looks into how people react and what they pay for, thereby giving an indication of how environmental degradation affects them; for instance, if house prices go down when a new waste-dump is installed nearby, the fall in the price represents part of the cost from the environment damage incurred;

• contingent valuation or willingness-to-pay/accept which involves an analyst making a survey and actually asking people how much they value the environmental quality or problem in money terms.

An example from Europe
Environmental costs have been calculated for Sweden and for UK from 1970 to 1990 for a number of environmental issues. Let us consider the case of air pollution which is one of the most serious environmental problems, whose impacts can be seen in all industrialised countries today. It causes substantial damage to both ecological and social systems.

The selection of emissions to represent air pollution in this example covers the major problematic air pollutants in industrialised countries: sulphur dioxide (so2), nitrogen oxides (nox), particulate matter (pm), carbon monoxide (co) and volatile organic compounds (vocs). The concept of critical loads can be used for counting the costs. The critical load is the level of deposition below which ecosystems can take up the pressure without suffering any harmful impacts; in other words, it is a measure of the inherent capacity to assimilate the pollutant without long-term damage.

To translate the environmental impacts to economic terms, a shadow-cost approach is used. This means that costs are derived by multiplying a unit cost estimate by emission volumes. The estimate reflects the average damage from air pollution over the years. This is a simplification since it can be expected that marginal damages and hence marginal costs are constantly changing.

The shadow costs include domestic as well as external damages arising from domestic emissions ( see table: Costs of air pollution) .

In the cost estimates, the impact of air pollution on agriculture, human health, buildings and forests has been accounted for. In the last 20 years, however, in both Sweden and uk , the damages from air pollution has come down largely due to effective reductions in so2 emissions, whereas emission levels of the other pollutants have been relatively stable. If we look at the costs of reducing air pollution, they are not as high as the costs we suffer from it. This could help in the ultimate aim of lessening the expenditure society as a whole incurs from arming itself against air pollution. People will be healthier, buildings will erode more slowly, crops will grow faster.

Costs of air pollution
Shadow cost estimates for various air pullutants in 1990
Air pollutant Sweden UK
Sulphur dioxide 4.635 4.005
Nitrogen oxides 2.279 1.968
Particulate matter 16.11 13.92
Carbon monoxide 589 589
Volatile organic
3.584 3.594
(Costs in US dollars per tonne of polluntants)
Source: Stockholm Environment Institute

While we have a slightly positive trend with regard to air pollution, in other problem areas such as greenhouse gas emissions and land conversion, costs are going up. Hopefully, the earth audit will help decision-makers to see this, make the effort where it pays off to do so, and make priorities between different needs.

Mans Nilsson is the author of the Approach to Constructing an Earth Audit report prepared by the Stockholm Environment Institute, Sweden