The Natural Wealth of Nations
by David Malin Roodman
review by John Kenney
It is obvious that current industrial capitalist markets are out of control. Business firms rarely consider social and environmental costs when producing goods and servicesthe majority of decisions made are exclusively based on financial considerations. Failing to associate externalities, such as social and environmental costs, in economic accounting creates unnecessary waste, pollution and environmental destruction. The question that now lies at hand is how do we begin reforming our accounting practices to include social and environmental costs into the equation.
Concrete and effective solutions to reverse current production practices, the driving forces behind them and the negative impacts that arise, are limited. However, David Malin Roodman’s book entitled “The Natural Wealth of Nations” provides a comprehensive read that outlines a means to restructure our free market economies to discourage businesses from being obtrusive to the natural environments. “The Natural Wealth of Nations” is a policy- orientated book that situates the place of government within free market economies and how they influence business practices and environmental problems. A review and outline is provided of several market based policy tools that government could utilize to reverse destruction by “harnessing the market for the environment”. Clearly, the title of this book is a play on Adam Smith’s infamous work “The Wealth of Nations”, a piece of work that provided a foundation to modern economic thinking and thus our current environmental disarray. In contrast, Roodman believes that word “natural” must be included, as it is too often excluded from the definition of wealth, and provides a framework on how to include it.
The intent of this book is to provide a basis to restructure capitalist markets; exploring markets characteristics, their benefits and failures, and how to use certain political mechanisms to make this planet healthier. Roodman first informs readers of how governments around the world are rewarding environmentally harmful businesses via tax breaks and other financial mechanisms. Then a theoretical background to the principles of a green tax shift- to tax polluting activities and subsidize environmentally beneficial industries- and the potential role of market mechanisms to green the economy, are presented. Finally, he contextualizes the political acceptance/opposition surrounding his alternative ideas on governmental intervention in free markets and presents a means to overcome opposition. Let us now explore each part of the book in greater detail.
1.The Price of Paying the Polluter
In the first part, Roodman explores the consequences of existing government financial support for unsustainable natural resource management and environmentally destructive industries. Evidence suggests that governmental funds injected into markets are environmentally destructive in turn create social and economic inefficiencies (pg. 36).
Given the Earth’s state of ecological jeopardy, it is important to question why annual global government expenditures subsidizing environmentally harmful activities are estimated to be over $650 billion, (pg. 24). Roodman argues that subsidizing mining, logging and other environmentally intensive activities have few true benefits to society and therefore support would be better spent in alternative sectors of the economy. It is difficult to accurately evaluate the costs and benefits of a subsidy. In effort to correct ambiguities, Roodman recommends that subsidies should be more efficient, more visible to the public, more cost effective and specific to who receives them. “Hiding costs from users ultimately wastes water, energy, land, money and people’s time…”(pg.96). Building on this argument, monies directed to environmentally destructive activities should be re-invested to areas of the economy that would produce real social benefits with little cost to the environment-such reducing poverty and increasing health care capacities. The difficulty of restructuring markets is the resistance and political clout of resource intensive industries that have traditionally benefited from fiscal support from government; fiscal reform to harness market strengths to protect the environment will be met by great political resistance and risk.
2. New Directions
In the second section, Roodman opens his policy “tool-box” of market-based mechanisms. There is potential to encourage a transfer of market dependencies from polluting to non-polluting activities with a green tax/subsidy shift. He proposes a fiscal reform that would see minimal spending on environmentally harmful activities, thoughtful spending to protect the environment, promote taxes from resource windfalls and environmental damage, in turn allowing for tax cuts directly imposed on the general population and sustainable businesses. The reform process should be approached using a three-step analysis framework. First, policy-makers must assess the need for a subsidy/taxation and will the policy tool achieve its purpose. Second, it is essential to assess the potential success and failures associated with government intervention within free-markets and the associated environmental impacts. Finally, Roodman suggests that there is need to assess the time frame in which a subsidy or taxation program should remain in existence; once it achieves or fails to meet its purpose (pg. 98). Although, Roodman recognizes the necessity of assessing government fiscal policies, I find his analytical framework to be too simplistic. There is no discussion on multi-stakeholder consultations, the role of alternative policy mechanisms that may be better suited for achieving the objective (for example command and control regulation), the impacts of removing environmentally harmful subsidies that many communities are economically dependent upon (issues of fairness) during the policy development process. Nor does he provide a review process to assess the success or failure of the government’s hand in a free market.
This section, not only provides a comprehensive theoretical argument based on Pigouvian ideas of environmental taxation (pg. 148), numerous real-life examples that demonstrate the potentials of harnessing the market for natural wealth creation are detailed. A particular argument that caught my attention surrounds the re-allocation of monies raised from environmentally destructive activities to relieve direct taxation on citizens. Using statistical evidence, Roodman suggests industrial countries could generate an additional $2000-2500 per capita in revenue by taxing pollution and resource use, while direct taxation on citizens would fall by a similar amount (p.166-167). In theory, this appears to be an excellent idea- increasing the populations’ individual disposable income while lowering environmental footprints. However, if the economic reform presented is to be as effective in protecting the environment as claimed, economies will become less environmentally degrading and ultimately limit taxation revenues. Thus, one must question the appropriateness of this means to address problems since the primary supporting argument (other than environmental protection) is limited by its own effectiveness. In other words, you cannot generate revenue from taxing a polluting activity if no one is polluting. On the hand, if you were still capable of generating the predicted revenue, would this not mean that the purpose of the fiscal reform failed?
3. From Theory to Practice
Part three discusses the political issues of a market reorganization to harness the market for environmental protection. Roodman recognizes that issues of fairness, political acceptability and economic implications surrounding his alternative views on the roles of government in free markets must be considered. To debate traditional economic thinkers “the Natural Wealth of Nations”, provides exquisite examples of how effective a slight tweaking of fiscal policy can protect the environment, promote social well being and contribute to economic diversification. Demonstrating the true benefits alternative of fiscal reform is seen in a global comparison of gasoline taxation; comparing the price of gas between the United States and Italy. The USA is home to the lowest gas taxes in the world, thus the price of gasoline per liter is extremely low. In contrast Italy taxes gas at a much higher rate, thus gasoline prices per liter are much more than the USA. Excluding variables such as population density and public transportation infrastructures- it is clear that the price of gas greatly influences driving habits- including frequency and fleet efficiency standards. In the USA, we see a larger fleet of vehicles with a higher consumption rates for example the popularity of SUVs. In comparison, the high price of gas encourages many Italians to drive smaller, more fuel-efficient vehicles and/or seek alternative modes of transport, (p. 173). Taxation influences price and ultimately an individual’s willingness to pay for a good or service; in turn influencing consumer demands upon manufactures. As illustrated by this example of gasoline taxation rates and driving habits, policy-makers have the capability to mitigate environmental impacts via taxation or subsidy reform.
However, a politician’s capability is limited by scores of political factors, as discussed by Roodman. “The hard part is not figuring out what reform should look like”(pg.224), rather the challenge for advocates in environmentally sensitive fiscal reform lies in making alternative ideas a reality, (pg. 225). Typically opponents of fiscal reform hold a great deal of political power in the decision making process, influencing votes, campaign money and political corruption, (pg. 225). The political road ahead will be one of obstacles and opposition, however this is a road not impossible to travel, (p.225). Although, “the Natural Wealth of Nations” briefly discusses selected successes of reform through political cooperation, the process of reform will be unique to individual jurisdictions; therefore these examples provide no more than a guide for reform. Market reform is possible to encourage sustainable economic activities, what advocates need now, is a greater political acceptance for this alternative fiscal thinking.
Highlights
“The Natural Wealth of Nations”, provides a great deal of empirical evidence of the successes and failures of restructuring economic markets to include costs of environmental impacts. Roodman identifies that decisions made by individuals and firms are greatly influenced by financial costs and benefits, not environmental considerations, (pg.19). Recognizing this, he is able to confirm with statistics and real-life examples of how market policy instruments are effective to green the economy, contribute economic wealth, while contributing to high standards of environmental quality. I found this optimism to be uplifting and thought provoking.
Another feature of this book that I enjoyed was its solution-based approach. One can easily question whether or not environmental fiscal reform is a suitable tool to make economies sustainable. However, one cannot debate the fact that Roodman provides an acceptable method, in terms of current political contexts, to “clean up” the economy by financially discouraging environmentally destructive activities. I find this approach effective; too often environmentalists identify ecological and social problems that arise from industrial capitalism, yet provide unfeasible and romantic solutions to save the world from its predicted collapse. In contrast, Roodman’s “the Natural Wealth of Nations” does.
Lowlights
Although, the book provides a wealth of information on ideas of tax shifts and the redistribution of subsidies from government these ideas are not new to environmental economics. Environmental economics, since its birth as a discipline, has pushed for principles of full-cost accounting through tax shifts and subsidy reform. My other personal lowlight stems from Roodman’s realistic perspectives on current political environments. In particular his views on the complexity of our current global markets and the strong forces that drive them appear to be almost impermeable.
He mentions that governments are a driving force behind the structure of markets, however their ability to make dramatically altering policy is limited, (pg. 20). More so, he believes that, “Creating an environmentally sustainable economy will take nothing less than an eco-industrial revolution- a sweeping and complex event that defies government planning”(pg. 20). This is problematic as the entire book advocates for a greater role for government- one that would encourage a restructuring of fiscal policy to promote sustainability. In other words, he contradicts the purpose and much of the optimism of the book, with this one sentence. Is the goal of this book to not encourage the creation of sustainable markets? Not, tell people that the task put forth is near impossible.
Additionally, none of his ideas appear to have enough clout to create an eco-industrial revolution.
Market Reform and Climate Change Policy
My primary focus of study is climate change policy and issues of economic competitiveness; thus I found this book to be very interesting and related to research interests’. It is evident that much of Canada’s lethargy in developing and implementing effective climate change policy is rooted in our domestic economic competitiveness concerns. However, Roodman’s description and analysis of policy tools such as the taxation of dirty enterprises and subsidy redirections, shows that it is possible to have both economic stability, while improving environmental and social well-being. Applying these policy instruments, have been discussed in many climate change policy negotiations within Canada and even appear minimally in Canada’s Climate Change Plan (2002), yet application has been limited.
Many environmentalist and NGOs in Canada have advocated reforms such as those presented. One example of a fiscal tool (subsidy) that is part of Canada’s Climate Change Plan (2002) is the Wind Power Price Incentive (WPPI). WPPI is a 15-year, $260 million incentive program to support the construction of 1000 MW of wind energy capacity by 2007. The incentive program is available for qualifying participants for the first ten years of production by providing long-term secured revenue. This incentive program has been designed to encourage further investments in wind energy projects in all regions of Canada, (NRCan, 2002). Some, leaders within the wind industry believe that Canada could possibly generate 100 000 MW of electricity from wind sources (Hornung, 2003). This would push Canada beyond its Kyoto targets by some 40 MT, solely by means of wind. While a plausible scenario, it seems unlikely that Canada will generate these amounts of electricity from wind resources, as it would be politically and economically unfeasible. However, many wind proponents have suggested that, at a minimum, wind energy production in Canada will greatly aid in the achievement of Kyoto targets if a capacity exists to generate 10 000 MW by 2010 (CWEA, 2001). Meeting this target would abate 15 to 25 million tonnes of GHG emissions annually; equivalent to meeting 6-10 percent of Canada Kyoto targets or removing 7.5 million cars from the road (CWEA, 2000). To do this it is clear that the Government of Canada would have to enhance current policy for wind beyond WPPI or at least increase the finances to the program- build on Roodman’s ideas of fiscal reform. I would suggest that we will likely see an increase to WPPI as wind energy is proving to be an economically and competitive source of energy. It is evident that Roodman’s ideas of reform can be successful if pursued correctly within the political arena, hopefully we will see this from the wind power industry.
Conclusion
Although, “the Natural Wealth of Nations” brings little new to the study of environmental policy design and processes, it is a valuable read. It provides numerous examples of success through a reader friendly breakdown of the economics behind “harnessing the market for the environment”. I would recommend this book to individuals who are interested in environmental politics and creating a sustainable economy.
Bibliography
Canadian Wind Energy Association. Wind Vision for Canada, 10 000 MW by 2010 (10x0): Recommendations for Achieving Canada’s Wind Energy Potential. www.canwea.ca. 2001. Government of Canada. Climate Change Plan For Canada. Government of Canada. 2002.
Hornung, Robert. Wind Energy In Canada: Status and Challenges. CanWEA- Pollution Probe Workshop, October 2003.
Roodman, David. The Natural Wealth of Nations- Harnessing the Market for the Environment. The Worldwatch Environmental Alert Series. (W.W. Norton & Company, New York- London)1998.
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