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Crossroads on Global Infrastructure

Massive Global Infrastructure Projects Could Prevent Achievement of a Sustainable Economy While Undermining Life Support Systems of the Earth

by Brent Blackwelder

BlackwelderPlans by the world’s most powerful countries are well underway to spend trillions of dollars for new mega-infrastructure projects to rejuvenate the global economy. The hope of the G-20 nations, the World Bank, China, and other powerful actors is that the infusion of several trillion dollars for infrastructure will boost the growth of GDP by 2.1% over current trends by 2018 and rescue a “sluggish” global economy.

The new feature of this approach to infrastructure involves expanded use of public money (taxes, pension funds, and aid) to offset the risks involved in huge projects. The approach also relies heavily on public-private partnerships, where the issue of accountability and failed projects has been a serious concern.

Those seeking a sustainable, true-cost, steady state economy should be alarmed at the new approach to global infrastructure because trillions of dollars spent on mega-projects in the energy, transportation, agriculture, and water sectors could put a sustainable, true cost economy further out of reach. Reviews of completed projects in these sectors have raised questions about corruption, cost overruns, fiscal accountability, human rights abuse, and the alarming destruction of natural resources.

Who are the Major Players?

The primary mover of a global infrastructure plan has been the G-20 nations (see here for the list of member countries). Afraid of being marginalized by the G-20, the World Bank has jumped into the scramble. In October of 2014, the World Bank launched a new Global Infrastructure Facility to reclaim the leadership on global infrastructure from the G-20. Just before the G-20 Summit last November, the World Bank and the IMF, along with seven multilateral development banks, issued a press release announcing their intention to provide $130 billion annually for infrastructure financing.

In 2014, China launched the Asian Infrastructure Investment Bank with 21 Asian countries as founding members, along with $100 billion in capital.

The Crossroads

A momentous choice is before us. On the one hand, the G-20, the World Bank, and other international lending institutions want more mega-highway projects, more centralized electric power plants and electricity grids, more mega-dams and gigantic irrigation schemes with huge water transfers, and the like.

On the other hand, an entirely new approach to infrastructure is possible. An approach that, for example, eschews big central electric power plants and relies more and more on decentralized wind and solar investments and avoids the horrendous mistakes made in the past in transportation, energy, water, and agriculture. Those interested in a true cost, steady state economy should advocate change in the massive new infrastructure lending so as to support projects that enable society to stay within the carrying capacity of planet earth. Such projects could lead the way toward a different type of global economy as they shift away from the business-as-usual approach in energy, transportation, water, and agriculture.

We know the impact of too many of these schemes is the destruction of ecosystems and undermining of the life support systems of the earth. They are pushed by the economic or finance ministries that have little understanding of the limits to growth, the significance of biodiversity, and the functioning of ecosystems that make life on earth possible. Environmental ministries are likely to have little influence in the choice of mega-projects.

There is not enough time to present the infrastructure investment choices in energy, agriculture, water, and transportation that would be made in a steady state economy, so I will mention a couple of examples in the transportation sector.

Freight Trucks - futureatlas dot com

We need infrastructure projects that don’t rely on highways at the expense of public transportation and rail. Photo Credit: futureatlas.com

Consider the unsustainability of the US transportation system that has focused almost entirely on highways to the neglect of passenger and freight rail and public transportation. The US is a poor transportation model for the world. Even with state and federal gasoline taxes, the revenues are insufficient to halt the massive deterioration of road and bridge networks, to say nothing of billions of dollars of backlog in deferred maintenance. The United States let passenger railroads go to hell and allowed the movement of more and more freight by trucks rather than trains (which are three to four times more energy efficient than trucks). This proved to be the wrong infrastructure choice.

Decades ago, some US bankers were questioning the viability of maintaining the infrastructure to support sprawling suburbs. A Bank of America report likened the servicing of sprawling suburbs to the nightmare that a military commander would face in trying to keep a 1,000-mile-long battlefront line supplied with food and ammunition.

Take a look, for example, at transportation required to supply our food. One study in Germany focused on a container of yogurt on a grocery store shelf where all of the ingredients were available locally, but in this case had traveled over 1,000 kilometers to reach the distribution center. A greater emphasis on local food production could result in dramatically reduced “food miles” and utilize a much smaller transportation network–an affordable network that could be maintained.

We are at a critical moment where two approaches to infrastructure are diverging. The infrastructure path of a true cost economy can lead to smaller-scale, smarter infrastructure and a healthier earth. The proposed path of the G-20 and World Bank, on the other hand, will replicate and intensify numerous unsustainable projects and cause human civilization to exceed the carrying capacity of the earth. Scientists point out that we are already consuming about one-and-a-half planets’ worth of resources. Infrastructure choices need to be made to alleviate rather than exacerbate this situation.

Note: For more information see the report by Nancy Alexander, “The Emerging Multi-Polar World Order: Its Unprecedented Consensus on a New Model for Financing Infrastructure Investment and Development,” Heinrich Böll Foundation.

Remembering Robert Goodland

by Brent Blackwelder and Herman Daly

Robert Goodland, a true friend of CASSE and the Daly News, passed away shortly after Christmas. Brent Blackwelder and Herman Daly herein describe the exemplary life and contributions of their friend and colleague. Robert’s life story will inspire all who care about the environment and social justice.

Robert Goodland

Robert Goodland (1939 – 2013)

Robert Goodland was the first ecologist hired by the World Bank and worked hard for thirty years to improve that institution’s environmental and human rights practices. Robert also wrote more than twenty books on environmental and social issues and many more monographs. The Library of Congress lists more than forty of his titles. He was the first winner of the World Conservation Union’s Harold Jefferson Coolidge medal for lifetime achievement in the conservation of nature. In contrast to colleagues who avoided controversy, Robert pressed to work on the most challenging of environmental and social issues. He saw that his job at the World Bank necessitated his being a vigorous “sparring partner,” providing constructive criticism and sparking improvement. He was known as the “conscience” of the World Bank, a role in which he sought the views of environmental leaders around the world.

Robert earned a bachelor’s degree in biology from McGill University in 1960. For his master’s degree, he researched tropical ecology in a remote part of Guyana with no roads or electricity. The Canadian Government awarded him a scholarship for PhD research on ecosystems in Brazil.

Robert became a professor in 1974 at the University of Brasilia, where he established a program to teach tropical ecology and environmental assessment. Then he moved to the Instituto Nacional de Pesquiasas da Amazonia in Manaus, where he designed Brazil’s first graduate course in applied tropical ecology. Its key case study was the trans-Amazonian highway. That led Robert to co-author with his friend and mentor Howard Irwin the book Amazon Jungle: Green Hell to Red Desert. It attracted much favorable review, and became viewed as a seminal work in the birth of the international environmental movement.

From 1975 through 1978, Robert served as a consultant for World Bank projects. He designed environmental and social programs to mitigate damages being caused by the Itaipu project, then the world’s biggest hydroelectric project. He also worked on addressing environmental issues and the welfare of Orang Asli forest dwellers for the first time in Malaysia’s national development planning. Separately, he was recruited by the New York Botanical Garden to help establish what became the Cary Center for Ecosystem Studies to complement the Cary Arboretum in Millbrook, New York.

In 1978, Robert was recruited to become the first full-time ecologist at the World Bank in Washington, D.C. He was initially assigned to the task of screening every single proposed World Bank project, and selecting for scrutiny those with the largest potential impacts, for which he would draft recommendations. But project designers resisted implementing his recommendations.

As a remedy, Robert took a lead role in drafting environmental and social policies for the World Bank Group, notably covering Environmental Assessment (now Operational Policy 4.01), Indigenous Peoples (Operational Policy 4.10), Natural Habitats (Operational Policy 4.04), and Physical Cultural Resources (Operational Policy 4.11).

In 1979, Robert joined an early mission for the World Bank’s Polonoroeste project in the northwestern part of the Amazon rainforest. Vulnerable ethnic minorities were a key issue in the design of the project, and Robert protected Amerindians by incorporating elements of the then-draft policy on indigenous peoples. So Robert’s focus on policies involved not just drafting text, but also testing its implementation. Even harder work was to persuade one committee after another to approve the adoption of the policies. To foster their implementation, Robert arranged for numerous workshops, conferences, training programs, colloquia, lectures, and guidance materials. Distinguished specialists and a variety of stakeholders were involved in internal World Bank events and activities as well as external ones.

The policies and guidance materials pioneered by Robert essentially served as environmental and social standards for many countries that lacked appropriate regulatory frameworks to provide such standards. Other development banks and aid agencies became interested in adapting them for their own purposes. Robert pressed for those banks and agencies to coordinate among themselves and with the World Bank Group and others, using methods that have continued functioning to this day. Commercial banks became interested too, and Robert worked with a group of bankers called the “Gnomes of Zürich,” and with others in London and New York. He also organized workshops for major engineering and consulting firms that would have to comply with the policies.

The World Bank established a Projects Policy Department, and Robert served as Senior Environmental Affairs Officer from 1983 through mid-1987. Then the Bank created the Environment Department, and Robert became Division Chief for Latin America. He recruited specialists including George Ledec, now Lead Ecologist in the Bank’s Africa Region, and Maritta Koch-Weser, who went on to become President of IUCN. Next came a role for Robert in the Central Environment Department, where he recruited ecological economist Herman Daly.

Robert’s work on indigenous peoples led the institution to hire a cadre of anthropologists. They took up the issue of preventing forced resettlement, and mitigating its adverse impacts when it did occur. Robert also worked to complete the “Environmental Assessment Sourcebook,” which became a crucial worldwide reference on various aspects of environmental assessment. As a capstone to Robert’s work on the principles of environmental and social assessment, he served a term as president of the International Association of Impact Assessment in 1994-1995.

Robert developed ways to bolster his policy initiatives with sectoral work. This included stopping the World Bank Group from financing projects involving tobacco and asbestos. It also included avoiding the most destructive types of agricultural and forestry projects, such as those featuring transmigration, logging, and ranching in tropical forests, as well as land colonization. When internal resistance arose within the World Bank Group, Robert and his colleagues got their work published for a worldwide audience in the 1984 book Environmental Management of Tropical Agriculture. Later, after he analyzed the impacts of some of the world’s largest hydroelectricity projects, he played a key role in the establishment of the World Commission on Dams in 1997, led by Achim Steiner (who later became the head of IUCN and then of UNEP).

In the 1990s, when Robert had become Lead Environmental Advisor at the World Bank, he sought practical ways for the institution to “walk the talk” that it delivered externally, by improving its own environmental and social performance. So he volunteered to chair the Staff Association’s environmental working group. He motivated the Bank’s facilities management to commission an independent audit of their environmental and social performance. The world-renowned energy expert Amory Lovins led the audit. Based on its results, Robert successfully pressed senior management to offer staff incentives for using public transit and bicycles for commuting. He also helped implement coordinated internal sustainability programs.

Robert wanted project proponents to be held accountable to people adversely impacted by development projects. So he helped advance the work of the World Bank’s Inspection Panel, and he was shortlisted to become the first Compliance Advisor/Ombudsman in the International Finance Corporation. He also tried for many years to get the International Monetary Fund to do something about the adverse social impacts of its operations, which tend to have much broader reach than do most projects financed by the World Bank Group.

Robert cooperated with Salah El Serafy , Herman Daly, and Roefie Hueting to develop a series of conferences throughout the 1980s on “Greening the UN System of National Accounts.” Robert also worked with Herman and Salah in addressing their concerns over the draft 1992 “World Development Report” on development and the environment. Because the draft was rather bland, they developed a parallel, but more forceful publication entitled “Environmentally Sustainable Economic Development: Building on Brundtland.” They managed to get this published by UNESCO even before the “World Development Report” came out.

Robert obtained major grant funding from the government of Canada to help the government of Indonesia develop its environmental ministry, under the stewardship of Emil Salim. After Robert’s official retirement from the World Bank in 2001, Emil was appointed to head the independent Extractive Industries Review at the World Bank Group. Emil recruited Robert to play a key role, and they recommended various ways to replace fossil fuels with renewable energy sources. Also after Robert’s official retirement, he served as a senior fellow at the World Resources Institute, where he co-authored a report on human rights. In retirement he worked all over the world as a consultant, often pro bono, in protection of the environment and indigenous peoples. He once remarked that in retirement he was doing much the same things as when in the World Bank, but the difference was that now the people he worked for were more appreciative.

Robert also continued to build on his previous work that had gotten the World Bank to agree in 2001 that development finance should no longer fund large-scale livestock projects. He co-authored with Jeff Anhang a 2009 article entitled “Livestock and Climate Change,” which assessed how replacing some livestock products — and reforesting land thereby freed from livestock and feed production — could be the only pragmatic way to stop climate change before it might be too late. This work became widely cited by many prominent sources, including Bill Gates and Paul McCartney’s Meat Free Monday campaign. Robert was invited by the UN Food and Agriculture Organization to speak about this work in Rome and Berlin, and also invited to deliver a keynote speech to the Chinese Academy of Social Sciences in Beijing. To develop further awareness, Robert worked to launch a website called “Chomping Climate Change,” and worldwide interest in this work seems likely to grow well into the future.

In the1980s Robert married Jonmin. Their son Arthur is studying for his PhD in renewable energy at Leeds, England. Robert enjoyed mountain trekking and had recently completed his favorite trek in Nepal, with Jonmin and Arthur, when he died, December 28, 2013.

 

Insanity Reigns at the World Bank

by Brent Blackwelder

BlackwelderThe finance ministers of the world convened in Washington for the annual meeting of the World Bank. Their goal: high risk/high reward mega-infrastructure projects (big dams, power plants, pipelines, grids, etc.). The two big questions: aren’t there better approaches to infrastructure today? And won’t the ministers’ plans put a sustainable economy further out of reach? The happy answer to the first question is “yes,” but “yes” is also the sad answer to the second question.

The World Bank’s plan to build such gigantic projects contradicts its stated objective to end poverty. This plan resurrects nightmarish approaches that have increased poverty, disempowered women, devastated life-sustaining ecosystems, and created massive debt burdens.

That is why International Rivers, Amazon Watch, and many other groups gathered outside the World Bank on October 12th to protest the plan for high risk/high reward projects and promote “Power 4 People.” In a true-cost economy the objective for infrastructure would be low risk/high reward projects. Such an economy would avoid casino-style investments and embrace infrastructure that leapfrogs the costly, destructive, and outdated approaches favored by the World Bank.

Despite serious mining and health issues, construction of cell phone infrastructure has been more environmentally sound than the old standard of installing high-cost telephone lines in remote areas. Today over 400 million people have cell phones but lack access to electricity. Taking a cue from the cell phone revolution, there’s an opportunity to construct a low risk/high reward energy infrastructure consisting of dispersed solar and wind projects. These renewable technologies can reduce the need for long and expensive transmission lines, and they don’t require water to generate electricity. Furthermore, with the cost of rooftop panels having rapidly dropped, solar energy has clear cost advantages for supplying electricity to rural communities.

In Africa about 600 million people lack access to electricity, and most are unlikely to be served by the dams and coal power plants proposed by the world powers because the transmission lines from central power stations would cost too much. That’s why the International Energy Agency reports that 70% of the world’s un-electrified areas are best served through mini-grids or off-grid solutions.

The advantages of a dispersed energy infrastructure include ability to reach the poor, reduced cost, less risk, and fewer socially and environmentally harmful impacts. Bangladesh, where something like 35,000 rooftop solar systems are being installed each month, is demonstrating these advantages.

The release of Bruce Rich’s book, Foreclosing the Future, comes at a critical moment, for it provides an insightful, well-written history of the World Bank’s inability Bank to learn from its past failures. Rich exposes the shocking first year of Jim Yong Kim’s term as Bank President, even though Kim came to the job with knowledge of the harmful impacts of past Bank projects.

Solar array at a Gambian hospital

This solar array at a Gambian hospital demonstrates a better way to generate electricity (photo credit: Daltoris).

In September of 2012 Kim extolled the work of the Bank’s International Finance Corporation (IFC) in South Africa where only three weeks earlier, the worst massacre since the apartheid era occurred as 34 workers on strike were shot to death at the IFC-supported Marikana platinum mine.  On his Africa trip Kim lauded the Bank’s $3 billion loan to South Africa for the dirty Medupi coal project, the fourth largest new coal plant in the world with annual greenhouse gas emissions greater than 100 of the world’s countries.

Kim also promoted the gigantic Inga III dam in the Democratic Republic of the Congo (DRC), even though the Inga I and II dams have been operating for decades with poor results for the citizens of the DRC. 85% of the electricity from these two previous World Bank projects has flowed to the mining industry. At the same time, less than 10% of the population has access to electricity.

The good news is that promising, low risk solutions are available to construct a sustainable energy infrastructure, achieve humanitarian goals, and move the world toward a true-cost economy. But the clear message is to forget about the G-20, the World Bank, the Chinese, the U.S. export-import banks, and the finance ministers to support these solutions.

Power politics drives the decisions of these power players. Big construction companies scheme with governmental ministries to develop larger and larger projects where lots of money can be skimmed. Under such corrupting conditions, the risk that mega projects could have disastrous consequences for life-support systems on earth doesn’t seem to matter to the people in charge.

The ecological concerns of proposed infrastructure projects are substantial. Sediments from the Congo River have created a 300,000 square-kilometer fan on the floor of the Atlantic Ocean. The high sediment load and oxygen content produce huge amounts of phytoplankton — phytoplankton that sequesters carbon and is a key factor in enabling the Atlantic Ocean to act as a carbon sink. The Inga III dam would damage the sediment fan. Do we want finance ministers ignorantly proposing plans to interrupt the crucial climate-regulating dynamics of the lower Congo River with a mega-dam project?

Hopefully the finance ministers heard our answer of “no” on October 12th, but now is not the time for self-satisfied silence. In fact, it’s a good time to continue protesting the insane ideas emanating from the World Bank and promoting alternatives from organizations that value people and places above profits.

The Daly-Correa Tax: Background and Explanation

by Herman Daly

Under the heading, “Oil nations asked to consider carbon tax on exports,” John Vidal writes in The Guardian:

The Ecuadorean president, Rafael Correa, proposed a carbon tax at a summit of Arab and South American countries in October in Peru which included the heads of state and energy ministers of nine of Opec’s 12 countries. The Guardian understands the proposal was taken seriously and not dismissed out of hand. The idea was first mooted in 2001 by former World Bank senior economist Herman Daly — leading it to be dubbed the “Daly-Correa tax” — and will be further discussed by Opec countries at the UN climate talks which open on Monday in Doha.

Whether or not it will be discussed at Doha, I think it is worthwhile to explain the idea as it was presented to an OPEC Conference in Vienna in 2001. It elicited little interest on that occasion, but in 2007 was in large part adopted by President Rafael Correa of Ecuador, after being presented to him and his minister of planning, Fander Falconi, by ecological economist Professor Joan Martinez-Alier. Below is the relevant part of my speech at the OPEC conference.*

How might OPEC fit into the emerging vision of sustainable development? Permit me to speculate.

Sources of petroleum throughput derive from private or public (national) property; sinks are in an open access regime and treated as a free good. Therefore, rents are collected on source scarcity, but not on sink scarcity. Different countries or jurisdictions collect scarcity rents in different ways. In the U.S., for example, Alaska has a social collection and sharing of source rents, institutionalized in the Alaska Permanent Fund whose annual earnings are distributed equally to all citizens of Alaska. Other states in the U.S. allow private ownership of sources and private appropriation of source rents.

New institutions are being designed to take the sink function out of the open access regime and recognize its scarcity (Kyoto). Tradable rights to emit carbon dioxide, requiring first the collective fixing of scale and distribution of total emission rights, are actively being discussed. Ownership of the new scarce asset (emission rights) could be distributed in the first instance to the state, which would then redistribute the asset by gift or auctioned lease.

Ideally sink capacity would be defined as a separate asset with its own market. This would require a big change in institutions. Assuming it were done, the source and sink markets for petroleum throughput, though separate, would be highly interdependent. Sink limits would certainly reduce the demand for the source, and vice versa. The distribution of total scarcity rent on the petroleum throughput between source and sink functions would seem to be determined by the relative scarcity of these two functions, even with separate markets. Alternatively, sink scarcity rent could also be captured by a monopoly on the source side, or source scarcity rent could also be captured by a monopoly on the sink side.

To give an analogy, municipal governments, in charging for water, frequently price the source function (water supply) separately from the sink function (sewerage), thus charging different prices for inflow and outflow services related to the same throughput of water. In deciding their water usage, consumers take both prices into account. To them it is as if there were one price for water, the sum of the input and output charges. Likewise the petroleum throughput charge would be the sum of the price of a barrel of crude oil input from the source and the price of carbon dioxide output to the sink from burning a barrel of petroleum. One could consolidate the two charges and levy them at either end, since they are but two ends of the same throughput. This would be a matter of convenience. Since depletion of sources is a much more spatially concentrated activity than pollution of sinks, it would seem that the advantage lies with levying the total source and sink charge at the source end. This is especially so since the sink has traditionally been treated as an open access free good, and changing that requires larger institutional rearrangements than would a sink-based surcharge on the source price. OPEC, given sufficient monopoly power over the source, would be well positioned to function as an efficient collector of sink rents for the world community.

Could it also serve as a global fiduciary for ethically distributing those rents in the interests of sustainable development, especially for the poor? OPEC, assuming it could increase its degree of monopoly of the source, may be in a position to preempt the function of the failing Kyoto accord by incorporating sink rents (and even externalities) into prices at the source end of the petroleum throughput.

Of course OPEC does not have a monopoly on petroleum, much less on fossil fuels. It does not, even indirectly, control non-petroleum sources of carbon dioxide. So it would be easy to overestimate OPEC’s monopoly power, and the scheme suggested here does require an increase in its monopoly power. However, modern mass consumption nations such as the U.S. apparently do not have the discipline to internalize either externalities or scarcity rents into the price of petroleum. Exclusion of developing countries from the Kyoto accord, while understandable on grounds of historical fairness, undermines the prospects for accomplishing the goal of the treaty, namely limitation of global greenhouse gas emissions to a sustainable level. OPEC, assuming it had sufficient monopoly power, might be able to provide this discipline for both North and South.

The South, as well as the North, would have to face the discipline of higher petroleum prices in the name of efficiency, but would, in the name of fairness receive a disproportionate share of the sink rents. There would be a net flow of sink rents from North to South. The size of those rents would depend on OPEC’s degree of monopoly power. The distribution of the rents would be in large part decided by OPEC — a large ethical responsibility which many would be unwilling to cede to OPEC, and which OPEC itself may not want. The obvious alternative to such a global fiduciary authority, however, has already failed. The inability to reach an agreement on international distribution of carbon dioxide emission rights was the rock on which Kyoto foundered. It is hard to see how such an agreement could be reached, either as a first step toward emissions trading, or as a fixed non-tradable allocation.

It is in OPEC’s self-interest to preempt the emergence of a separate market for sink capacity, which could surely lower source demand and prices. While this gives OPEC a motivation, it also calls into question the legitimacy of the motivation as pure monopolistic exploitation. A legitimating compromise, as indicated above, would be for OPEC to behave as a self-interested monopolist on the source side, but as a global fiduciary on the sink side — that is, as an efficient collector and ethical distributor of scarcity rents from pricing the sink function. OPEC countries own petroleum deposits, but not the atmosphere. OPEC has a right to its source rents, but no exclusive right to sink rents. However, it may well have the power to charge and redistribute sink rents as a global fiduciary — exactly what Kyoto wants to do, but lacks the power to do. In addition to effecting this transfer, the expanded role of OPEC as global fiduciary might increase the willingness of other petroleum producers (e.g., Norway) to join OPEC, thus increasing its monopoly power and ability to function as here envisioned. In addition, the fiduciary role might provide ethical reasons for OPEC members to adhere to the cartel, when tempted by short-term profit opportunities to cheat.

Actually the existing OPEC Development Fund is already a step in this direction. Expansion of this fund into a global fiduciary institution for collecting and distributing sink rents, as well as the existing source rent contributions generously made by OPEC countries, is what is envisaged in this suggestion.

Just how total rents are determined and divided between source scarcity and sink scarcity is a technical problem that economists have not tackled because they have not framed the problem this way. Economists have focused on capturing source rents through property rights, and then internalizing the external sink costs of pollution through taxes. Only recently has there emerged a theoretical discussion of property rights in atmospheric sink capacity — whether these should be public or private, the extent to which trade in such rights should be allowed, and so on. As an initial rule of thumb we might assume that, since the sink side is now the more limiting function, it should be accorded half or more of the total throughput scarcity rents. In other words, sink rents should be at least as much as source rents.

Sink rents would go to an expanded OPEC Development Fund dedicated entirely to global sustainable development in poor countries (especially investments in renewable energy and energy efficiency). Source rents would continue to accrue to the country that owns the deposits, and presumably be devoted to national sustainable development. The focus here is on a new public service function for OPEC of efficiently collecting and ethically distributing sink rents in the interest of global sustainable development. Where Kyoto has failed, OPEC might succeed as a stronger power base on which to build the fiduciary role — a power base that sidesteps the inability of nations to agree on the distribution of carbon dioxide emission rights among themselves.

Although any exercise of monopoly power is frequently lamented by economists, the early American economist John Ise had a different view in the case of natural resources: “Preposterous as it may seem at first blush, it is probably true that, even if all the timber in the United States, or all the oil, or gas, or anthracite, were owned by an absolute monopoly, entirely free of public control, prices to consumers would be fixed lower than the long-run interests of the public would justify.” Ise was referring only to the source function. The emerging scarcity of the sinks adds strength to his view. The reasonableness of Ise’s view is enhanced when we remember that for a market to reflect the true price, all interested parties must be allowed to bid. In the case of natural resources the largest interested party, future generations, cannot bid. Neither can our fellow non-human creatures, with whom we also share God’s creation, now and in the future, bid in markets to preserve their habitats. Therefore resource prices are almost certainly going to be too low, and anything that would raise the price, including monopoly, can claim some justification. Nor did Ise believe that the resource monopolist had a right to keep the entire rent, even though the rent should be charged in the interest of the future.

The measurement of the two different rents presents conceptual problems. The source rents are in the nature of user cost — the opportunity cost of non-availability in the future of a non-renewable resource used up today. Assuming that atmospheric absorptive capacity is a renewable resource, the sink rent would be the price of the previously free service when the supply of that service is limited to a sustainable level. If we assume separate markets in both source and sink functions we would theoretically have a market price determined for each function. Since the functions are related as the two ends of the same throughput, the source and sink markets would be quite closely interdependent. The separate markets could be competitive or monopolistic, and differing market power would largely determine the division of total throughput rent between the source and sink functions. For example, if, following a Kyoto agreement, the total supply of sink permits were to be determined by a global monopoly, that monopoly would be in a stronger position to capture total throughput rent on petroleum than would a weak cartel that controls the source. OPEC is surely aware of this.

What might the WTO and the World Bank think of such a suggestion? Since these two institutions are well represented at this conference, this question is more than just rhetorical. So far the WTO and the World Bank have been dedicated to the ideology of globalization — free trade, free capital mobility, and maximum cheapness of resources in the interest of GDP growth for the world as a whole, including mass-consumption societies. In their view maximum competition among oil-exporting countries resulting in a low price for petroleum is the goal. Trickle down from growth for the rich will, it is hoped, someday reach the poor. I suspect the free-trading globalizers consider themselves morally superior to the OPEC monopolists. But which alternative is worse:

  1. Price- and standards-lowering competition in the interest of maximizing mass consumption by oil-importing countries by minimizing the internalization of environmental and social costs with consequent destruction of the atmosphere, and ruination of local self-reliance by a cheap-energy transport subsidy to the forces of global economic integration, or
  2. Monopoly restraints on the global overuse of both a basic resource and a basic life-support service of the environment, with automatic protection of local production and self-reliance provided by higher (full-cost) energy and transport prices, and with sink rents redistributed to the poor?

Monopoly restraint results not only in conservation and reduced pollution, but also in a price incentive to develop new petroleum-saving, and sink-enhancing, technologies, as well as renewable energy substitutes. Unfortunately there would also be an incentive to use non-petroleum fossil fuels such as coal, which would be a very negative effect from the point of view of controlling carbon dioxide. Independent national legislation limiting emissions from coal (and natural gas) may well be a necessary complement.

Ideally most of us would prefer a genuine international agreement to limit fossil fuel throughput, rather than a monopoly-based restriction imposed as a discipline by a minority of countries only on petroleum. But the Western high consumers, especially the U.S. as resoundingly reconfirmed in its recent election, have conclusively demonstrated their inability to accept any restrictions that might reduce their GDP growth rates, even in the likely event that GDP growth has itself become uneconomic. The conceptual clarity and moral resources are simply lacking in the leadership of these countries. Perhaps the leadership reflects the citizenry. But perhaps not. The global corporate “growth forever” ideology is pushed by the corporate-owned media, and rehearsed by corporate-financed candidates in quadrennial television-dominated elections.

A lack of moral clarity and leadership in the mass-consumption societies does not necessarily imply the presence of these virtues in the OPEC countries. Do there exist sufficient clarity, morality, restraint, and leadership in the OPEC countries to undertake this fiduciary function of being an efficient collector and an ethical distributor of sink scarcity rents? As argued above, there is surely an element of self-interest for OPEC, but to gain general support OPEC would have to take on a fiduciary trusteeship role that would go far beyond its interests as a profit-maximizing cartel. But a strong moral position might be just what OPEC needs to gain the legitimacy necessary to increase and solidify its power as a cartel. Could such a plan, put forward by OPEC, provide a stronger power base for the goals that Kyoto tried and failed to institutionalize? Might the WTO and World Bank recognize that sustainable development is a more basic value than free trade, and lend their support? I do not know. Maybe the whole idea is just a utopian speculation. But given the post-Kyoto state of disarray and the paucity of policy suggestions, I do believe that it is worth initiating a discussion of this possibility.

If sustainability is to be more than an empty word we have to evolve mechanisms for constraining throughput flows within environmental source and sink capacities. Petroleum is the logical place to begin. And OPEC is the major institution in a position to influence the global throughput of petroleum.

* “Sustainable Development and OPEC,” Chapter 15 in Herman E. Daly, Ecological Economics and Sustainable Development, Edward Elgar Publishers, Cheltenham, UK, 2007.

Occupy the G-8

by Brent Blackwelder

This is the text of an address delivered by Brent Blackwelder to the Occupy Movement, in Frederick, Maryland, May 18, 2012 on the occasion of the annual meeting of the G-8 at Camp David.

Terrible economic times are facing billions of people worldwide. Where are the jobs? Roughly half of new college graduates in the U.S. cannot find work. Who’s getting all the money? The gap is widening between the one percent and the 99 percent.

At the same time, the world’s oceans are being devastated by overfishing, forests are being obliterated, mountains are being blown apart to get at the coal, and rivers around the world are being dammed, diverted, and drained of their water. A quarter of the species on the planet are headed toward extinction. Compounding these effects, the earth’s climate is being destabilized by emissions of greenhouse gases.

Driving this fiasco are casino economics, cheater economics, and futureless economics. It’s not a pretty picture. Why can’t we do better? What can we do about it? Are the powerful leaders of the G-8 nations gathered here going to provide the solutions?

If the past record of the G-8 is any guide, promises will be made, the World Bank will be assigned the role of savior, but monetary pledges won’t be fulfilled, and nothing major will happen to shift the status quo.

I propose to you today a bold paradigm shift in our economy — away from the futureless economics, away from the casino economics, and away from the cheater economics that run the global economy. We need an economics for the earth, its people, and all the life on this planet.

I suggest that the Occupy Movement could bring about an economic paradigm shift by adopting the steady state economy as its macroeconomic policy goal. That means an economy with stabilized levels of production and consumption, which means stabilizing population and per-person consumption. It means an economy that operates within the carrying capacity of the Earth and does not threaten present and future generations with its overbearing, bloating size.

Cheater Economics, Casino Economics, Futureless Economics

The global economy treats natural resources as if the Earth were a business in a liquidation sale. The global economic system of today is undermining the life-support systems of our planet.

One major shortcoming of capitalism is that it does not reveal the real ecological costs of commercial products. Furthermore, today’s capitalism allows corporations to externalize the damaging health and environmental costs of their activities. Today’s capitalism also tolerates massive taxpayer handouts to highly polluting corporations.

In the Casino Economy billions in profits are made without providing any goods or services — they are made with complex financial instruments sometimes referred to as derivatives. Complex financial instruments enable the avoidance of taxes. The financial sector in today’s U.S. economy is now about three times as large as the manufacturing sector.

In the aftermath of the big bank bailouts and the passage of the Dodd-Frank law to curtail high-risk lending, JP Morgan Chase recently announced a loss of $2 billion from its risky trading (now the bank says it’s over $3 billion). Hand-in-hand with cheater economics, many huge corporations put their profits in offshore tax havens and escape paying an estimated $100 billion to the U.S. Treasury.

In current economic practice, corporations are evaluated on their quarterly returns. There is little long-range thinking. Mainstream economists tell us 100 years from now is not worth worrying about. (One dollar a century from now is only worth pennies today.)  But such thinking runs counter to the values of most people. Parents are concerned about what kind of world their children and grandchildren will live in.

Futureless economics, casino economics, and cheater economics have no place in a steady state economy. But here are some examples of the damage they cause in the current economic sectors of energy extraction, agriculture, mining, and forestry.

1) Fossil fuels. Extractive industries are going to the most remote and riskiest places, such as the Arctic Ocean, to obtain oil. Uncleanable spills will be the inevitable result. Some of the most biologically diverse regions, such as the tropical rainforests, are being decimated by oil drilling. Oil and gas companies are extracting the dirtiest of fuels, such as tar sands in Alberta, Canada. Coal companies are using techniques like mountain-top removal to get at the coal in West Virginia. In the process they are creating a Martian landscape by obliterating the forested green mountains and destroying the entire hydrologic cycle.

Most extractive industries enjoy substantial handouts from governments. The U.S. is set to provide $110 billion over the next decade to the oil and coal industries. That’s right — some of the world’s richest companies enjoy taxpayer handouts, and some do not even pay income tax.

The health and environmental costs of oil extraction in places like Nigeria over the last 50 years are huge, but oil and gas companies like Shell have not cleaned up the more than 5,000 spills that have wrecked fisheries, polluted drinking water, and harmed the health of local people who have borne the brunt of the contamination.

2) Agricultural lands. Powerful agribusiness giants like Monsanto are trying to patent all seeds and control agriculture from top to bottom. Major meat companies like Smithfield operate gigantic animal factory slums that cause serious water pollution and load the air with noxious fumes that harm people’s health and displace local family farms.  As with fossil fuels, governments subsidize the polluters. Time Magazine showed that some of the biggest animal factory farms receive all sorts of handouts from state and local governments.

3) Forests: the world’s forests are rapidly being destroyed. The U.S. has set a horrible example going back to the 1800s when, for example, the state of Michigan was almost totally deforested. Instead of creating sustainable logging operations for the state, the timber industry abandoned Michigan and kept moving west. After seeing some of the horrendous logging along the West Coast, President Franklin Roosevelt said, “I hope the bastards who did this are roasting in Hell.”

The U.S. Forest Service is notorious for providing “below cost timber” sales in our National Forests. Corruption and bribery characterize logging operations around the world.

Friends of the Earth England and Friends of the Earth Ghana combined efforts to show that lumber in Ghana was being extracted, but taxes were not being paid on the real volume of timber being cut.

4) Minerals. Leonardo DiCaprio’s film Blood Diamond illustrates a typical problem with mining operations that seek gold, copper, diamonds, and other minerals. The use of cyanide to extract gold causes major pollution all over the world. The mining lobby in the U.S. has been so strong that the 1872 Mining Law and its subsidies have not been changed. The “pollute-and-run” practices of the past continue today on steroids.  As with oil, coal, and gas extraction, the damages to health, crops, and the air, land, and water are externalized on the public.

Elements of an Economics for the Earth: A Steady State Economy

There is no magic formula that can move the world to a sustainable, steady state economy. However, by pursuing any of the following actions, countries and localities can move in the right direction and set the stage for a paradigm shift to occur.

1) Get rid of polluter subsidies.  Give subsidies only to clean energy; no more subsidies for fossil fuels, agribusiness, and the like. About half the states exempt pesticides from their sales tax. Senator Sanders (I-VT) and Congressman Ellison (D-MN) have introduced legislation to eliminate all subsidies to the fossil fuel industry — a measure that would save $110 billion over the next decade.

2) Shift to a clean-energy basis for the global economy. It is technically feasible to run the global economy on a carbon-free and nuclear-free basis. Amory Lovins has a new eloquent description of his plan. Arjun Makhijani in Carbon Free, Nuclear Free provides another. California physicists Jacobson and Delucchi offer a slightly different plan in Scientific American (Nov, 2009) as does Lester Brown in World on the Edge.

3) Adopt the measures proposed by Senator Levin on tax dodging. Senator Levin (D-Michigan) is chairman of the Senate’s Permanent Investigation Subcommittee and has exposed a wide range of scandalous tax-dodging activities by corporations in American that deprive the Treasury of over $100 billion annually. A miniscule tax on global financial transactions and on currency transactions would yield hundreds of billions, while forcing players in the casino economy to pay at least something.

4) Change the indicators. The gross domestic product (GDP) is taken as a measure of society’s well-being, but in reality it measures how fast a nation is converting its natural resources into waste. It fails to account for the depletion of natural resources. Some states, including Maryland, have adopted the genuine progress indicator. And Bhutan has adopted Gross National Happiness as a better measure of well-being.

5) Restructure jobs. Adopting a four-day workweek can help reduce unemployment, spread the work, and provide time for people to spend with their families. The clean energy strategies described above would provide vastly more jobs per dollar than the fossil fuel industry. These jobs can materialize from dispersed renewable energy projects while our energy dollars remain in the community.

6. Support local investing. Michael Shuman’s new book Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street provides evidence that local investment does better than Wall Street stock purchases. The book presents a variety of examples of opportunities for investing in local businesses, local banks, and local exchanges. About two dozen studies have shown that such local spending and investments can provide several times as many jobs compared to investments in nationwide business. For example, for every $100 spent in a national book chain about $13 would remain in the local economy, whereas with $100 spent at a local bookstore, about $45 would remain.

Is a steady state economy just an idle utopian dream? Tim Jackson’s report, Prosperity Without Growth, prepared for the UK Sustainable Development Commission, provides a detailed discussion that makes a convincing case. Canadian economist Peter Victor has shown how the transition to a new economy can be accomplished in such a way that per capita income increases, unemployment declines, and poverty decreases.

In a world where propaganda and big money have undermined governance and the media, the Occupy Movement has a vital role to play by confronting decision makers, protesting polluting corporations, calling for an economic paradigm shift, and giving visibility to the paths for a healthier future.

Growth, Debt, and the World Bank

by Herman Daly

Herman DalyWhen I was in graduate school in economics in the early 1960s we were taught that capital was the limiting factor in growth and development. Just inject capital into the economy and it would grow. As the economy grew, you could then re-invest the growth increment as new capital and make it grow exponentially. Eventually the economy would be rich. Originally, to get things started, capital came from savings, from confiscation, or from foreign aid or investment, but later out of the national growth increment itself. Capital embodied technology, the source of its power. Capital was magic stuff, but scarce. It all seemed convincing at the time.

Many years later when I worked for the World Bank it was evident that capital was no longer the limiting factor, if indeed it ever had been. Trillions of dollars of capital was circling the globe looking for projects in which to become invested so it could grow. The World Bank understood that the limiting factor was what they called “bankable projects” — concrete investments that could embody abstract financial capital and make its value grow at an acceptable rate, usually ten percent per annum or more, doubling every seven years. Since there were not enough bankable projects to absorb the available financial capital the WB decided to stimulate the creation of such projects with “country development teams” set up in the borrowing countries, but with WB technical assistance. No doubt many such projects were useful, but it was still hard to grow at ten percent without involuntarily displacing people, or running down natural capital and counting it as income, both of which were done on a grand scale. And the loans had to be repaid. Of course they did get repaid, frequently not out of the earnings of the projects which were often disappointing, but out of the general tax revenues of the borrowing governments. Lending to sovereign governments with the ability to tax greatly increases the likelihood of being repaid — and perhaps encourages a bit of laxity in approving projects.

Where did all this excess financial capital come from? Not from savings (China excepted), but from new money and easy credit generated by our fractional reserve banking system, amplified by increased leverage in the purchase of stocks. Recipients of new money bid resources away from existing uses by offering a higher price. If there are unemployed resources and if the new uses are profitable then the temporary rise in prices is offset by new production — by growth. But resource and environmental scarcity, along with a shortage of bankable projects, put the brakes on this growth, and resulted in too much financial capital trying to become incarnate in too few bankable projects.

So the WB had to figure out why its projects yielded low returns. The answer sketched above was ideologically unacceptable because it hinted at ecological limits to growth. A more acceptable answer soon became clear to WB economists — micro level projects could not be productive in a macro environment of irrational and inefficient government policy. The solution was to restructure the macro economies by “structural adjustment” — free trade, export-led growth, balanced budgets, strict control of inflation, elimination of social subsidies, deregulation, suspension of labor and environmental protection laws — the so-called Washington Consensus. How to convince borrowing countries to make these painful “structural adjustments” at the macro level to create the environment in which WB financed projects would be productive? The answer was, conveniently, a new form of lending, structural adjustment loans, to encourage or bribe the policy reforms stipulated by the term “structural adjustment.” An added reason for structural adjustment, or “policy lending,” was to move lots of dollars quickly to countries like Mexico to ease their balance of payments difficulty in repaying loans they had received from private US banks. Also, policy loans, now about half of WB lending, require no lengthy and expensive project planning and supervision the way project loans do. The money moves quickly. The WB definition of efficiency became, it seemed, “moving the maximum amount of money with the minimum amount of thought.”

Why, one might ask, would a country borrow money at interest to make policy changes that it could make on its own without any loans, if it thought the policies were good ones? Maybe they did not really favor the policies, and therefore needed a bribe to do what was in their own best interests. Maybe the goal of the current borrowing government was simply to get the new loan, splash the money around among friends and relatives, and leave the next government to pay it back with interest.

Such thoughts got little attention at the WB which was haunted by the specter of an impending “negative payments flow,” that is, repayments of old loans plus interest greater than the volume of new loans. Would the WB eventually shrink and disappear as unnecessary? A horrible thought for any bureaucracy! But the alternative to a negative payments flow for the WB is ever-increasing debt for the borrowing countries. Of course the WB did not claim to be in the business of increasing the debt of poor countries. Rather it was fostering growth by injecting capital and increasing the debtor countries’ capacity to absorb capital from outside. So what if the debt grew, as long as GDP was growing. The assumption was that the real sector could grow as fast as the financial sector — that physical wealth could grow as fast as monetary debt.

The main goal of the WB is to make loans, to push the money out the door, to be a money pump. If financial capital were really the limiting factor countries would line up with good projects and the WB would ration capital among countries. But financial capital is superabundant and good projects are scarce, so the WB had to actively push the money. To speed up the pump they send country development teams out to invent projects; if the projects fail, then they invent structural adjustment loans to induce a more favorable macro environment; if structural adjustment loans are treated as bribes by corrupt borrowing governments, the WB does not complain too much for fear of slowing the money pump and incurring a “negative payments flow.”

If capital is no longer the magic limiting factor whose presence unleashes economic growth, then what is it?

“Capital,” says Frederick Soddy,”merely means unearned income divided by the rate of interest and multiplied by 100” (Cartesian Economics, p. 27). He further explains that, “Although it may comfort the lender to think that his wealth still exists somewhere in the form of “capital,” it has been or is being used up by the borrower either in consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues…”

In other words capital in the financial sense is the future expected net revenue from a project divided by the rate of interest and multiplied by 100. Rather than magic stuff it is an indent, a lien, on the future real production of the economy — in a word it is a debt to be repaid, or alternatively, and perhaps preferably, to not be repaid but kept as the source of interest payments far into the future.

Of course debt is incurred in exchange for real resources to be used now, which as Soddy says cannot be used again in the future. But if the financed project can extract more resources employing more labor in the future to increase the total revenue of society, then the debt can be paid off with interest, and with some of the extra revenue left over as profit. But this requires an increased throughput of matter and energy, and increased labor — in other words it requires physical growth of the economy. Such growth in yesterday’s empty-world economy was reasonable — in today’s full-world economy it is not. It is now generally recognized that there is too much debt worldwide, both public and private. The reason so much debt was incurred is that we have had absurdly unrealistic expectations about growth. We never expected that growth itself would begin to cost us more than it was worth, making us poorer, not richer. But it did. And the only solution our economists, bankers, and politicians have come up with is more of the same! Could we not at least take a short time-out to discuss the idea of a steady-state economy?

A Shift in the Burden of Proof

by Herman Daly

Preface for Sustainable Welfare In The Asia-Pacific: Studies Using the Genuine Progress Indicator, by Philip Lawn and Matthew Clarke, 2008

It is no small thing to shift the burden of proof. Yet that is what Lawn and Clarke, and their colleagues, have done in this remarkable study. The presumption in the “empty world” has been that growth in GDP is “economic” in the sense that it increases benefits faster than costs, as well as in the sense that this thing we call the economy is getting physically bigger. It was not previously considered necessary to distinguish the two meanings of “economic” growth. Lawn and Clarke have shown that in a large part of today’s “full world” growth in GDP often costs more than it is worth at the margin, and thus should be called “uneconomic” growth. (In this book’s language uneconomic growth occurs after a threshold at which the Genuine Progress Indicator (GPI) levels off or declines while GDP keeps on increasing). Advocates of GDP growth, who generally point to Asia as their best success story, heretofore were never asked to prove that such growth was in truth economic. Now, after the theoretical demonstration that uneconomic growth in the macroeconomy is quite possible, followed by the empirical demonstration that it is in fact often the case, the burden of proof in policy arguments must shift from the shoulders of growth critics to the shoulders of growth advocates. This is quite an accomplishment and needs to be strongly claimed and emphasized.

For many years I have worked with ideas that are used in this book — steady state economy, Index of Sustainable Economic Welfare, contradictions between comparative advantage and international capital mobility, and others. It is a pleasure to see these ideas not only applied, but sharpened and polished as well. Although I have very little knowledge of Asia, I cannot resist recounting one relevant episode out of my limited experience. Around 1992 I was part of a World Bank mission to Thailand. This was at the end of a decade in which Thailand’s GDP had doubled. Now doubling is a big change, and ten years was within the easy memory of most adult Thais. In conversations I began to ask people how much their lives had been improved over that decade. Many said that life had been better ten years ago. I suggested that maybe life always feels better when you are ten years younger. They assured me that they had corrected for that! Some thought things were a little better, but the suggestion that life might be twice as good was considered laughable by all. This experience led me to suggest to my bosses at the World Bank that we finance a study — a scientific survey asking people how much life had improved over the decade in which GDP doubled, and to give the main reasons for their answer. History had given us a unique experiment, and we should take advantage of it and learn something. My proposal was turned down, I think because the World Bank, the prime pusher of growth, was worried that it might learn an “inconvenient truth.” In 1992 the burden of proof was on me. Now, with Lawn and Clarke to appeal to I think the burden of proof will be on the World Bank.

The study I had proposed to the World Bank was to look at what is now called “self-evaluated happiness,” whereas Lawn and Clarke look at a more objective index of welfare, the GPI. Studies of self-evaluated happiness have now come into fashion, and generally support the same conclusions that Lawn and Clarke reach on the basis of more objective data. The finding is that self-evaluated happiness rises with absolute income up to a threshold beyond which increases in absolute income do not increase happiness. The emphasis in these studies is on psychological phenomena of satiation and relative position with its self-canceling effects, rather than biophysical phenomena of rising external costs imposed by a full world. The two approaches are not in conflict but in fact are quite complementary. The fact that they yield broadly similar conclusions regarding the futility of growth to increase welfare beyond a threshold is a devastatingly important point worthy of intense study and reflection. But beware; we may have to conclude that growth is becoming uneconomic and that we need a new principle and new policies by which to organize our separate national commonwealths and their international federation. That is a very big problem. Thanks to Lawn and Clarke for suggesting many specific policies rooted in a clear analysis of that very big problem.