We are witnessing a global bubble economy of dot-cosmic proportions. We are destroying natural resources at an alarming rate, and robbing future
First the bad news: China’s economic boom could well lead to a global disaster. A human population of 1.3 billion and their 400 million cattle are weighing heavily on the land. Huge flocks of sheep and goats in the northwest are stripping the land of its protective vegetation, creating a dust bowl on a scale not seen before. Like many other countries, China is exceeding the carrying capacity of its ecosystem – over-ploughing its land, over-grazing its rangelands, over-cutting its forests, and over-pumping its aquifers. For years China grew its own grain, but now that self-sufficiency is in jeopardy.
No one knows when the growth in food production will fall behind that of demand, driving up prices, but it may be much closer than we think. The economic indicator most likely to signal serious trouble in the deteriorating relationship between the global economy and the earth’s ecosystem is grain prices. When the former Soviet Union unexpectedly turned to the world market in 1972 for roughly a tenth of its grain supply, following a weather-reduced harvest, world wheat prices climbed from US$1.90 to $4.89 a bushel. Bread prices soon rose too. Now China, the world’s most populous country, is likely to soon turn to world markets in a major way.
If China depletes its grain reserves and turns to the world grain market to cover its shortfall, now 40 million tons per year, it could destabilise world grain markets overnight. Turning to the world market means turning to the United States, presenting a potentially delicate geopolitical situation in which 1.3 billion Chinese consumers with a $100-billion trade surplus with the United States will be competing with American consumers for US grain.
If this leads to rising food prices in the United States, how will the government respond? In times past, it could have restricted exports, even imposing an export embargo. But today the United States has a stake in a politically stable China. With an economy growing at 7% to 8% a year, China is the engine that is powering not only the Asian economy but, to some degree, the world economy. For China, becoming dependent on other countries for food would end its history of food self-sufficiency, leaving it vulnerable to world market uncertainties. For Americans, rising food prices would be the first indication that the world has changed fundamentally and that they are being directly affected by the growing grain deficit in China. If it seems likely that rising food prices are being driven in part by crop-withering temperature rises, pressure will mount for the United States to reduce oil and coal use. For the world’s poor rising grain prices would be life threatening. A doubling of world grain prices today could impoverish more people in a shorter period of time than any event in history.
Business as usual – Plan A – is clearly not working. The good news is that there are solutions to the problems we are facing. I lay out a new approach – Plan B: an urgent reordering of priorities and a restructuring of the global economy in order to prevent that from happening.
Plan B starts with a stabilisation of the world’s population at about 7.5 billion. This is central to avoiding economic breakdown in countries with large projected population increases that are already over-consuming their natural capital assets. Some 36 countries, all in Europe except Japan, have essentially stabilised their populations. The challenge now is to create the economic and social conditions and to adopt the priorities that will lead to population stability in all remaining countries. The keys here are extending primary education to all children, providing vaccinations and basic health care, and offering reproductive health care and family-planning services in all countries.
Plan B’s second pillar is a shift from a carbon-based to a hydrogen-based energy economy to stabilise the climate. This is now technologically possible. Advances in wind turbine design and in solar-cell manufacturing, the availability of hydrogen generators, and the evolution of fuel cells provide the technologies needed to build a climate-benign hydrogen economy. Moving quickly from a carbon-based to a hydrogen-based energy economy depends on getting the price right and on incorporating the indirect costs of burning fossil fuels (damages to the environment and our health) into the market price.
Iceland is the first country to adopt a national plan to convert its carbon-based energy economy to one based on hydrogen. Denmark now gets 18% of its electricity from wind turbines and plans to increase this to 40% by 2030. Japan leads the world in electricity generation from solar cells. The Netherlands leads the industrial world in exploiting the bicycle as an alternative to the automobile. The Canadian province of Ontario is emerging as a leader in phasing out coal. It plans to replace its five coal-fired power plants with gas-fired plants, wind farms, and efficiency gains. This initiative calls for the first plant to close in 2005 and the last one in 2015. The resulting reduction in carbon emissions is equivalent to taking four million cars off the road.
Stabilising water tables forms Plan B’s third pillar and depends on quickly raising water productivity. It is difficult to overstate the urgency of this effort. Failure to stop the fall in water tables by systematically reducing water use will lead to the depletion of aquifers, an abrupt cutback in water supplies, and the risk of a precipitous drop in food production. By pioneering in drip-irrigation technology, Israel has become the world leader in the efficient use of agricultural water. This unusually labour-intensive irrigation practice, now being used to produce high value crops in many countries, is ideally suited where water is scarce and labour is abundant.
The stoppage of soil erosion is the final component of Plan B. We have no choice but to reduce the loss to the rate of new soil formation or below. The only alternative is a continuing decline in the inherent fertility of eroding soils and cropland abandonment. South Korea, with once denuded mountainsides and hills now covered with trees, has achieved a level of flood control, water storage, and hydrological stability that is a model for other countries. In the United States as well, farmers have reduced soil erosion by nearly 40% in less than two decades thanks to a combination of several programmes and practices.
Thus all the things we need to do to keep the bubble from bursting are now being done in at least a few countries. If these highly successful initiatives are adopted worldwide, and quickly, we can deflate the bubble before it bursts.
Can we implement Plan B fast enough? Yes. The world can restructure its economy quickly if it is convinced of the need to do so. In retrospect, the speed of the conversion from a peacetime to a wartime economy at the beginning of World War II was stunning. The US mobilisation helped lead Allied forces to victory in less than four years. One month after Pearl Harbour, President Roosevelt announced plans to produce 60,00 planes, 45,000 tanks, 20,000 antiaircraft guns, and six million tons of merchant shipping. The automobile industry went from producing nearly four million cars in 1941 to producing 24,000 tanks and 17,000 armoured cars in 1942 – but only 223,000 cars, and most of which were produced early in the year, before the conversion began. Essentially the auto industry was closed down from early 1942 through the end of 1944. In 1940, the United States produced some 4,000 aircraft. In 1942, it produced 48,000. By the end of the war, more than 5,000 ships were added to the 1,000 that made up the American merchant fleet in 1939.
Various other firms likewise converted. A sparkplug factory switched to producing machine guns; a manufacturer of stoves produced lifeboats; a merry-go-round factory made gun mounts; a toy company turned out compasses; a corset manufacturer produced grenade belts; and a pinball machine plant began to make armour-piercing shells.
This mobilisation of resources within a matter of months demonstrates that a country and, indeed, the world can restructure its economy quickly if it is convinced of the need to do so.
The key to restructuring the economy is the creation of an honest market, one that tells the ecological truth. The current market has three fundamental weaknesses: It does not incorporate the indirect costs of providing goods or services into prices. It does not value nature’s services properly. It does not respect the sustainable-yield thresholds of natural systems such as fisheries, forests, rangelands, and aquifers.
As the global economy has expanded and as technology has evolved, the indirect costs of some products have become far larger than the price fixed by the market. The price of a gallon of gasoline, for instance, includes the cost of production but not the expense of treating respiratory illnesses from breathing polluted air or the repair bill from acid rain damage. Nor does it cover the cost of rising global temperature, ice melting, more destructive storms, or the relocation of millions of refugees forced from their homes by sea-level rise.
If we have learned anything over the last few years, it is that accounting systems that do not tell the truth can be costly. Faulty corporate accounting systems that overstate income or leave costs off the books have driven some of the world’s largest corporations into bankruptcy, costing millions of people their lifetime savings, retirement incomes, and jobs.
Unfortunately, we also have a faulty economic accounting system at the global level, but with potentially far more serious consequences. Economic prosperity is achieved in part by running up ecological deficits, costs that do not show up on the books, but costs that someone will eventually pay. Some of the record economic prosperity of recent decades has come from consuming the earth’s productive assets and from destabilising its climate.
Another challenge in creating an honest market is to get it to value nature’s services. For example, after several weeks of flooding in the Yangtze River basin in 1998 inflicted $30 billion worth of damage, the Chinese government announced that it was banning all tree cutting in the basin. It justified the ban by saying that trees standing are worth three times as much as trees cut. Once we calculate all the costs of a product or service, we can incorporate them into market prices by restructuring taxes. If we can get the market to tell the truth, then we can avoid being blindsided by faulty accounting systems that lead to bankruptcy.
The next step is tax shifting: lowering income taxes while raising taxes on environmentally destructive activities in order to get the market to tell the truth. has been widely endorsed by economists. Tax shifting does not change the level of taxes, only their composition. The idea has been widely endorsed by economists as a manner of taxation that reflects the indirect costs to society of an economic activity. For example, among the activities taxed in Europe are carbon emission, emissions of heavy metals, and the generation of garbage (so-called landfill taxes). One of the better known changes was a four-year plan adopted in Germany in 1999 to shift taxes from labour to energy. By 2001, this had lowered fuel use by 5%. A tax on carbon emissions adopted in Finland in 1990 lowered emissions there 7% by 1998.
One of the newer taxes gaining in popularity is the so-called congestion tax. City governments are turning to a tax on vehicles entering the city, or at least the inner part of the city where traffic congestion is most serious. In London, where the average speed on an automobile was nine miles per hour – about the same as a horse-drawn carriage – a congestion tax was adopted in early 2003. The £5 (US$8) charge on all motorists driving into the center city between 7 a.m. and 6:30 p.m. immediately reduced the number of vehicles by 25%, permitting traffic to flow more freely while cutting pollution and noise.
Environmental tax shifting usually brings a double dividend. In reducing taxes on income, labour becomes less costly, creating additional jobs while protecting the environment. By lowering the air pollution from smoke stacks and tailpipes, it also reduces respiratory illnesses, such as asthma and emphysema, and healthcare costs – a triple dividend.
Some 2,500 economists, including eight Nobel Price winners in economies, have endorsed the concept of tax shifts. Former Harvard economics professor N. Gregory Mankiw, chairman of the Presidents Council Economic Advisers, wrote in Fortune magazine: ‘Cutting income taxes while increasing gasoline taxes would lead to more rapid economic growth, less traffic congestion, safer roads, and reduced risk of global warming-all without jeopardising long-term fiscal solvency. This may be the closest thing to a free lunch that economics has to offer.’ Mankiw could also have added that it would reduce the military expenditures associated with ensuring access to Middle Eastern oil.
The British neo-liberal magazine The Economist has recognised the advantage of environmental tax shifting and endorses it strongly: ‘On environmental grounds – never mind energy security – America taxes gasoline too lightly. Better than a one-off increase, a politically more feasible idea, and desirable in its own terms, would be a long-term plan to shift taxes from incomes to emissions of carbon.’ In Europe and the United States, polls indicate that at least 70% of voters support environmental tax reform once it is explained to them.
Each year the world’s taxpayers underwrite $700 billion of subsidies for environmentally destructive activities such as fossil fuel burning, over pumping aquifers, clear-cutting forests, and over-fishing. A 1997 Earth Council study, ‘Subsidising Unsustainable Development’, observes that ‘there is something unbelievable about the world spending hundreds of billions of dollars annually to subsidise its own destruction’.
Some countries are eliminating or reducing these climate-disrupting subsidies. Belgium, France and Japan have phased out all subsidies for coal. Germany reduced its coal subsidy from $5.4 billion in 1989 to $2.8 billion in 2002, meanwhile lowering its coal use by 46%. It plans to phase tem out entirely by 2010. China cut its coal subsidy from $750 million in 1993 to $240 million in 1995. More recently, it has imposed a tax on high sulphur coals. Together these two measures helped to reduce coal use in China by 5% between 1997 and 2001 while the economy was expanding by one third. The environmental tax shifting described earlier reduces taxes on wages and encourages investment in such activities as wind electric generation and recycling, thus simultaneously boosting employment and lessening environmental destruction. Eliminating environmentally destructive subsidies reduces both the burden on taxpayers and the destructive activities themselves.
Subsidies are not inherently bad. Many technologies and industries were born of government subsidies. Jet aircraft were developed with military R&D expenditures, leading to modern commercial airliners. The Internet was a result of publicly funded efforts to establish links between computers in government laboratories and research institutes. And the combination of the federal tax incentive and a robust state tax incentive in California gave birth to the modern wind power industry.
But just as there is a need for tax shifting, there is also a need for subsidy shifting. A world facing the prospect of economically disruptive climate change, for example, can no longer justify subsidies stimulating the burning of fossil fuels. Shifting these subsidies to the development of climate-benign energy sources such as wind power, solar power, and geothermal power is the key to stabilising the earth’s climate. Similarly, shifting subsidies from road construction to rail construction could increase mobility in many situations while reducing carbon emissions.
In a troubled world economy facing fiscal deficits at all levels of government, exploiting these tax and subsidy shifts with their double and triple dividends can help balance the books and save the environment. Tax and subsidy shifting promise both gains in economic efficiency and reductions in environmental destruction a win-win situation.
There is a growing sense among the more thoughtful political and opinion leaders worldwide that business as usual is no longer a viable option and that, unless we respond to the social and environmental issues that are undermining our future, we may not be able to avoid economic decline and social disintegration.
We have the wealth to achieve the above-mentioned goals. We can build an economy that does not destroy its natural support systems, a global community where the basis needs of all the earth’s people are satisfied, and a world that will allow us to think of ourselves as civilised. This is entirely doable. To paraphrase Franklin Roosevelt at another of those hinge points in history, let no one say it cannot be done. The choice is ours – yours and mine. We can stay with business as usual and preside over a global bubble economy that keeps expanding until it bursts, leading to economic decline. Or we can be the generation that stabilises population, eradicates poverty, and stabilises climate. Historians will record the choice but it is ours to make.
Adapted with permission from Lester R. Brown: ‘Plan B: Rescuing a Planet under Stress and a Civilization in Trouble’ (W.W. Norton & Company, ISBN 0 393 32523 7). A book that explains why it is time for a new plan to solve the world’s problems, and outlines its basic components. The book can be downloaded for free at: www.earth-policy.org.
Lester R. Brown is chairman of Earth Policy Institute, which provides information on environmentally friendly alternatives. He is also the founder and chairman of WorldWatch Institute, which conducts research on the environment as well as social and economic developments (www.worldwatch.org). He has written several books, including ‘Eco-Economy: Building an Economy for the Earth’.
