Weak and strong sustainability indicators and regional environmental resources

Weak sustainability indicators often suffer from their unrealistic and inadequate assumption of substitutability between natural capital and man-made capital. Defining sustainable development in these terms is almost trivial; measurement problems as well as methodological and sociological issues may be considered as major flaws of operationalizing weak sustainability indicators. On the other hand, strong sustainability indicators rely on physical measures. This ecological economics approach concedes that the economy is embedded in matter and energy flows ultimately limited by solar energy input and the Earth's capability to produce renewable resources and to cope with emissions of all kinds. Drawing on the example of regional environmental resources, groundwater in Austria, some thoughts on strong regional sustainability indicators are presente individual discount rate applied to consumer goods or interest rates of alternative investments is probably much higher? However, the TEV is ± in theory ± divided between two crucial components (Pearce and Turner, 1990): TEV ˆ UV ‡NUV …1† Equation (1) subdivides the total economic value (TEV) into two elements which are both difficult to define and to measure. The use value (UV) of a natural resource is defined as the economic value of the resource derived by goods and services produced or directly consumed. The use value in this sense can be calculated by empirically testing the importance of the natural resource in the production function of firms, as well as in the utility function of private households. A production function of a firm thus can be enlarged by an argument explaining natural resources inputs (e.g. Q ˆ f …L;C;R†; where the output of the firm depends not only on the input of the `̀ classical'' factors of production (labor L, capital C); additionally natural resources (R) are included. The concept of use values of natural resources (UV) is not limited to direct economic benefits such as raw materials, consumption goods and scientific benefits. Preferences for the protection of the resource because of its economic function as fundamentals for recreation and sports are included as well. Usually cash values for productive and consumptive functions as well as preferences for recreation are derived by means of indirect valuation methods such as the production function approach, hedonic pricing and travel cost analysis. The basic assumption in all these approaches is that the demand for a complementary good (e.g. value added in the pharmaceutical industry, demand for apartments, number of visits to a recreation area) is directly correlated to environmental indicators like availability and quality of resources for industrial production, emissions in a certain neighborhood as well as beauty of and biodiversity in the recreation area. The second even more important element of the TEV is the non-use value (NUV) of a natural resource comprising all values which are derived besides the direct (anthropocentric) use of a resource. Typically the protection of species is considered mainly as a non-use value due to aesthetic or ethical values. NUVs can be divided into the wellknown components of existence, option, and bequest values. While option, and bequest values can be seen as premiums assuring the future existence of the resource for one's own future use or as a heritage to one's children, the existence value is given by preferences for protection of natural resources merely because they exist (based e.g. on altruistic or paternalistic motives). Non-use preferences are valued mostly by direct measurement methods such as the contingent valuation method (CVM) founded on welfare economics. Monetary measures for non-use values include compensating and equivalent compensation, operationalized by means of willingness-to-pay (WTP) or willingness-to-accept (WTA) bids in a hypothetical contingent market. As there are no markets on which non-use characteristics of natural resources are traded, the `̀ complementary'' good of these values is the consumer's sacrifice she feels in her wallet when purchasing a personally satisfying quality level of the natural resource. This directly connects to the problems of substitutability and methodological measurement problems discussed in detail below. Besides informational restrictions, fundamental uncertainties as well as problems of democratic public choice, this approach directly assumes the willingness to exchange natural goods for money and that cannot be presupposed as being a priori given with all respondents. Especially neoclassical environmental economics focuses on the so-called weak sustainability rule assuming total substitutability between natural capital and manmade capital. The weak sustainability rule has its roots in capital theory (Victor, 1991). The idea behind this is that mankind has a certain total capital stock at its disposal. This capital stock K consists of two components: K ˆ KN ‡KM …2† The total capital stock K is made up of K N (natural capital) and K M (man-made capital, manufactured capital). The first part (natural capital) is measured by the TEV discussed above. Man-made capital consists of all physical (machinery, infrastructure) and nonphysical (human capital) parts of the anthroposphere. An at least constant (nondecreasing) capital stock K is the indicator for a sustainable development. This weak sustainability rule presupposes that natural capital and man-made capital can be traded off against each another. As long as the `̀ worth'' of the capital, regardless of its composition, is non-decreasing over time, sustainability is achieved. Interestingly, empirical studies in this field mainly take the present capital stock as given, only considering that these entire capital stocks remain at least constant. There is nearly no consideration as to whether the actual capital stock may be too low to maintain (sustain) economic development in the future. [ 171 ] Michael Getzner Weak and strong sustainability indicators and regional environmental resources Environmental Management and Health 10/3 [1999] 170±176 Furthermore, assuming that a species only has one marketable service to offer, there would not be a reason to protect that species if this particular service can be provided by other (artificial) means. Equation (2) is an expression of the view that natural goods and services can, in principle, be supplied by man-made capital, that means that natural benefits can be artificially produced or that forgone or lost ecological benefits can be compensated by other means. Even if the natural capital depreciates, there is no danger for sustainability if, at the same time, man-made capital is being produced to compensate for these losses. The substitutability assumption according to this capital theory approach is a strictly anthropocentric one, and it is `̀ optimistic'' insofar that, even if the technological standard today does not allow a perfect substitution between natural and man-made capital, with increasing scarcity of natural resources approaching depletion, and higher prices, innovations will take place to compensate for these losses. This viewpoint is also partly incorporated in Daly's second sustainability criterion which states that non-renewable resources are allowed to be depleted when new technologies are financed to substitute these resources at the same time. Financing should take place by levying a kind of scarcity fee (Daly, 1992). The depreciation of natural capital in general can, as already mentioned, be compensated by an increase in man-made capital. It is not necessary to calculate the total economic value (TEV) or the total capital (K) to conclude whether an economy is on a sustainable development path. The only thing which has to be known is a measure for the depreciation of capital as well as the savings per period (usually one year). This leads to a measurement of sustainability by the `̀ savings rule'' which is an expression for the `̀ marginal sustainability'' of an economy. If the parameter Z is positive, the economy tends to a higher degree of sustainability: Z > 0 if S > … N ‡ M † …3† where N denotes the periodical depreciation (exploitation) of natural capital, while M is the depreciation of man-made capital. S denotes all savings of the economy (both in natural and man-made capital). If total savings are higher than total depreciation, the economy is on a sustainable development path because there are net savings which increase the total capital stock needed to produce goods and services (benefits for humans). In this sense, abstracting from rather difficult problems of measuring the depreciation of natural capital, calculating Z in equation (3) becomes almost trivial. Pearce and Atkinson (1993) have adopted this simple conclusion for their work on a number of national economies. Compensating for the different income levels, they found that those industrial countries (USA, Japan, Germany), which are consuming relatively as well as absolutely the highest level of resources (energy, raw materials etc.), are the ones facing a sustainable future while poor countries like Indonesia, Nigeria or Madagascar are consuming more of their capital than they add as savings to their capital[1]. This rather astonishing result shows on one hand that weak sustainability indicators like the savings rule according to (3) incorporate significant measurement problems, and on the other hand, that such an indicator seems to be not very helpful in discussing which economy is on a sustainable development path. Besides the fact that the substitutability assumption is at least doubtful, there are a number of problems associated with the monetary valuation of natural capital that is needed to compare natural capital and man-made assets. Section 3 concentrates on some crucial elements of monetary valuation of natural capital. 3. Environmental valuation and substitutability 3.1 Lexicographic preferences As mentioned above, the savings rule approach discussed in section 2 is an anthropocentric one with the aim to derive the `̀ worth'' of an asset[2], be it natural or manmade, by valuing the functions provided by this asset (valuation of assets in the `̀ cash economy'' according to Price, 1993). Even if it is assumed that all functions can be valued from this viewpoint, e.g. by asking people for their willingness-to-pay for the protection of species because they hold altruistic motives or feel moral satisfaction, the method of monetary valuation presupposes that people are prepared to trade natural goods for money. It is this trade-off people are willing to accept. But this approach leaves out preferences which cannot be stated by respondents in a monetary form. This is especially the case when respondents either are not able to make adequate deliberations on the subject, or when respondents refuse to value natural goods in monetary terms. Refusing to answer a valuation question can in many cases be explained by respondents' point of view that there are moral (ethical) obligations that cannot be valued because there is only `̀ right'' or `̀ wrong''. In this case, economists have spoken about lexicographic [ 172 ] Michael Getzner Weak and strong sustainability indicators and regional environmental resources Environmental Management and Health 10/3 [1999] 170±176 preferences (e.g. Hanley et. al., 1995; Spash and Hanley, 1995). These are preferences where a trade-off between the good for which these preferences are held and other goods is denied on (probably) ethical grounds. Where natural goods are concerned, many respondents (up to one quarter) hold preferences of that kind. This can be a serious flaw for the valuation approach which is founded on the neoclassical theory of exchange. Sustainability in its `̀ weak'' form is based on this willingness to exchange. Therefore, preferences in a lexicographic form, where there might be only one `̀ right'' or `̀ wrong'' development decision, which can be the case with biodiversity or landscape protection, do not fit into the model of substitutability of natural capital and man-made capital (money). 3.2 Consumer vs citizen An additional argument against `̀ weak'' sustainability indicators may be seen in the divergence of socio-economic roles of economic agents as `̀ consumers'' and `̀ citizens''. There is a lively debate in ecological economics and surrounding fields (e.g. institutional economics) concerning to what extent the individual choice may differ, depending on the `̀ viewpoint'' or `̀ role''. Sagoff (1988) started this discussion by stating that individuals are not only consumers acting according to their personal sacrifice when valuing natural goods. The monetary valuation operationalizing the `̀ weak'' sustainability approach is based on an individual utility function where the willingness to pay depends on the different `̀ utility'' levels obtained as consumer. By contrast, especially when dealing with public goods, economic agents do not only maximize their individual utility but act as citizens concerned for the better of society. Taking this divergence of roles into account, it becomes clear that a weak sustainability rule, based on market prices and consumer choices lacks the preferences of economic agents which they hold as citizens. With the `̀ weak'' criteria some preferences may not be included, and measuring only market values instead of values held by the `̀ civil society'' may pose serious dangers to a sustainable development. The latter values may only be captured by `̀ strong sustainability'' criteria especially due to their incommensurability. 3.3 Time, information and the precautionary principle Before discussing sustainability for a regional natural resources in more detail, a final point should be made regarding the informational constraints facing individual perceptions of natural values and future events. Theory concedes that ± ultimately ± in every market decision, risk and uncertainty are captured because fully informed agents incorporated the future in today's behavior. There are many problems with this assumption, e.g. it cannot be presupposed that economic agents value future events by a discount rate adequate in a societal perspective. `̀ Adequate'' in this context means that a distinction should be made between discount rates for trading off present versus future consumption and valuing the welfare of future generations. Furthermore, these discount rates may significantly differ from the rates at which ecological systems regenerate, not to speak of geological time scales. Strong sustainability indicators, only indirectly based on individual perceptions of future events[3], try to focus on longer time scales than weak indicators. Besides this time scale problem, informational constraints of individuals as well as risk neutral or risk loving individual behavior contrary to risk-averse social behavior should lead to more stringent strong sustainability frameworks. Gowdy and Olson (1994) ± making the connection between individual valuations and the knowledge science has accumulated ± write: `̀ Contingent valuations, even in theory, are no better than the information available to the most knowledgeable people. Knowledge of the intricacies of the rain forest environment [...] is almost nonexistent even among biologists specializing in that area'' (p. 169). And concluding: `̀ What sense does it make to set environmental policy on the basis of opinion surveys of an uninformed public?'' (p. 170). It cannot be assumed that economic agents in their individual market environment behave as if they follow the precautionary principle of environmental