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Sustainable Consumption Through Economic Instruments
David Pearce
Professor of Environmental Economics
University College London
Director
Center for Social and Economic Research on the Global Environment

1 What Does Sustainable Consumption Mean?

Extensive confusion surrounds the concept of sustainable consumption. That confusion has partly arisen because of the loose wording of chapter 4 of Agenda 21 which speaks of sustainable consumption, sustainable consumption patterns, and lifestyle changes without defining them. The waters are furth er muddied by reference to the optimisation of resource use and the minimisation of waste without reference to the meaning of optimisation, or to any concept of cost.

To shed some light on the problem we first need to distinguish between consumption and the consumption of materials and energy, and the assimilitave capacity of the environment to deal with waste Consumption involves the use of goods and services to meet current wants. The extent to which materials, energy, and assimilative capacity - we subsequently use the term, resources to embrace all three - are used up in the act of consumption depends on the ration of resources use to production and consumption - the energy intensity of consumption - is an example of such a ratio.

The reason that the distinction is important is that consumption can rise while the ratio of resources to consumption can fall at the same time. The extent to which total resource use rises then depends on whether the ratio falls faster than the level of consumption rises.

For the most part, the thrust of Agenda 21 is that the world needs to raise consumption whilst reducing resource use 1).But some people have wrongly concluded that what is needed is a reduction in consumption. We need to understand why this is not just a misinterpretation, but a serious mistake which, if acted upon, would make the populations of the developing world significantly worse off.

1.2 Reducing Consumption

First, reducing consumption can only come about either (a) by raising the fraction of income that is saved for future consumption (investment), or (b) by reducing incomes generally. The savings fraction is open to manipulation by governments through the taxation system or through control of the incentives to save (e.g. interest rates). Control of the overall rate of change of income in the economy (economic growth) is not by and large under the control of governments, although there is undoubted scope for lowering economic growth over the short term through sheer mismanagement.

Would either path contribute to an improvement of the well-being of the developing world? If savings are increased, some of the increase could be diverted to foreign aid. That would be transfer of income from North to South, and there are good reasons for supposing that such additional transfers are justified. If incomes are reduced in the North, this does nothing for the South, and is very likely to make them worse off. This is because the lost dollar of consumption in the North does not magically reappear in the South. Nor generating it in the North simply means it is not generated at all. Moreover, in so far as some of the consumption in the North spill over into demand for the products of the South, the South is worse off since it loses a market. Sacrificing economic growth, then, means making both the North and the South worse off - this can hardly be the intention of those who advocate sustainable consumption.

1.3 Reducing Resource Consumption

There are good reasons to reduce resource consumption by reducing the ration of resource use to consumption. But we again need to be clear that making those changes in the ratio will automatically improve the well-being of the South.

Suppose, for example, the North reduces its ratio of energy use to consumption, as it has done for a very long time in fact. Clearly, this conserves exhaustible energy resources for a longer period than would otherwise be the case. But 1 tonne of oil not consumed now by the North does not become 1 tonne of oil that can be consumed by the South. Simply making a resource available does not confer on anyone the power to consume it. That power only comes about through the generation of income, and that means economic growth. Put another way, then, if the North conserves one tonne of oil it does nothing for the economic growth prospects of the South. The only exception to this rule is if we believe that the future growth prospects of the South are going to be constrained by the absence of resources. That is possible, but not very likely, at least as far as the supply of materials and energy is concerned. Growth prospects have far more to do with the pursuit of sensible domestic policies and careful development aid.

There is a legitimate sense in which conservation of resources by the North will help the South. Its increasingly apparent that the really scarce resources are not materials and energy, but the receiving capacities of our environments. These are damaged through the use of materials and energy, as exemplified by ozone layer depletion, global warming, ocean pollution etc. Since the world shares these global common resources damage done by their consumption is shared by everyone, North and South alike. Indeed, there is evidence to suggest that the South will suffer disproportionately more from some types of global environmental damage. Table 1 shows the results of work on global warming damage in my own Centre (Fankhauser [1993]).

Even if it is the North that suffers significantly from global environmental damage, the South would still lose since the North would be highly likely to divert resources away from aid towards mitigating the damage of the North.

Finally, reducing resource consumption will of course reduce the environmental impacts in the North itself. Such improvements are unlikely to have a significant effect on the environments or real incomes of the South, but they clearly have their own justification. That is, it makes sense for the North to reduce resource use out of the Norths sheer self interest.

1.4 Changing Consumption Patterns

Agenda 21 speaks interchangeably of changing consumption and changing consumption patterns (2). But the two are quite different. Consumption can change without the pattern - the product composition of demand - changing, and the pattern can change without the overall level of consumption changing. If out interest is in reducing resource consumption, as we argued above it should be, then changing consumption patterns away from resource intensive products to less resource intensive products will help achieve the desired effect. From a policy standpoint, however, the kinds of measures that need to be adopted will be the same. They will be characterised by measures that penalise high resource intensive activities and which therefore make other less resource intensive activities more attractive.

1.5 Some Conclusions on Sustainable Consumption

Care needs to be taken when interpreting the loose wording of Agenda 21. If it is interpreted as an old-fashioned call for less economic growth in the North, then it is a mischievous and irresponsible interpretation. Sacrificing economic growth will do nothing to improve the well-being of the South. It is far more likely to make things worse.

Nor do we have any guarantee that reducing growth of consumption in the North would be any more sustainable than current levels. By fostering unemployment and social unrest it could easily be less sustainable. The evidence for that is fairly obvious from the recent experience of recession.

Making consumption sustainable involves far more complex policies than Agenda 21 contemplates. It involves not just the decoupling of consumption and resource consumption, but the re-investment of rents from the exploitation of natural resources. Space forbids that we address this issue here - see Pearce and Atkinson [1993], Pearce, Atkinson and Dubourg [1993].

2 Using Economic Instruments to Secure Sustainable Resource Consumption

2.1 The Policy Wedge

Once the meaning of sustainable consumption is established, the task of addressing how it can be achieved becomes clearer. The role of any policy has to be to drive a wedge between consumption and resource consumption in the manner illustrated in Figure 1. It so happens that economic instrument have superior attributes that make them more suitable for this task than conventional environmental policies based on command and control approaches. An economic instrument operates by charging a price for the use of environmental resources. This price might be introduced as a direct tax - a carbon tax for example - or it might be introduced more indirectly through a tradeable pollution permit or resource that my be used to a set limit. Quotas up to that limit are then issued and resource users - fishermen, say - can bid for the quotas. The price of the quotas in the market place is then very similar to an environmental tax - it is the price to be paid for using up a scarce resource.

Such economic instruments work to achieve sustainable resource consumption in two ways. First, they encourage reductions in the ratio of resource use to product output. Second, because some of the cost is passed on to consumers, they encourage consumers to switch consumption from resource intensive products to less resource intensive products. In the language of Agenda 21 they achieve both reduced materials consumption and changes in consumption patterns.

Note that one can use traditional environmental policy to drive a wedge between resource consumption and consumption. Any environmental regulation, for example, makes the use of the environment more expensive. Regulations are not costless. So long as the regulations are obeyed, then we can also expect resource consumption to be reduced and consumption patterns to change.

2.2 The Superiority of Economic Instruments While 'command and control' can help achieve the desired outcome of sustainable consumption, it is well known that economic instruments are a superior means of achieving this end (Pearce, Markandya and Barbier [1989]. Briefly, this superiority lies in:

(a) cost efficiency: economic instruments tend to involve industry in much lower compliance costs than command and control instruments. This is because they give industry much greater flexibility in the means of compliance. For example, command and control often takes the form of technology-based standards ('best available technology' -BAT) which leaves industry no option (Tietenberg [1991], Pearce and Brisson [1994]). Note that cost efficiency is not just a matter of resource allocation. Industry is more likely to resist high cost environmental measures. Hence environmental objectives may be better achieved by persuading industry that economic instruments are to their advantage;

(b) dynamic incentives; economic instruments contribute to the continuing search for better and better technology to reduce resource use. This isbecause the price incentive remains as long as pollution damaige remains;

(c) revenue raising: in recent years the role of environmental taxes as revenue raisers has become increasingly important. Economists have long argued that taxes on effort and enterprise are innefficient and act as a 'drag' on the economy. Indirect taxes -taxes on consumption - are much preferred. People can then decide whether to pay the tax or not by deciding whether to consume the product or not. Environmental taxes are indirect taxes and can serve two functions: making it easier to cut other distortionary taxes and helping to reduce resource consumption at the same time. More recently still, it is recognised that environmental taxes can serve a 'double function' of reducing resource consumption and helping to stimulate employment by using the revenues to reduce payroll taxes. This is indeed one of the central arguments in the European Community's White Paper on growth and employment (CEC [1993]) (3).

2.3 Economic Instruments in Action

If economic instruments are so attractive, why are they not commonplace? The first thing to say is that they are more widespread than might perhaps be thought. Table 2 shows the range of instruments already in place in OECD countries A large number of countries use economic instruments in one form or the other. However, increases since 1987 have been fairly modest and they are concentrated in a few countries basically Scandinavia and the USA. Why is their such slow progress ?

The reasons are several.

First, there is a very long legacy of command and control measures, often dating back to the very first public health legislation. Changing a regulatory philosophy that has been in place often for more than 100 years is not easy. There is a substantial in built inertia to the system.

Second, industry is unquestionably suspicious of economic instruments and does not trust government. A pollution tax introduced today becomes a general revenue raising tax tomorrow. The way to resolve this problem is to introduce economic instruments so that they provide 'up front' incentives for industry to cooperate. It is clear, for example, that both President Clinton's 'BTU tax' and the European Commission's carbon/energy tax were badly handled from the standpoint of presentation and packaging. The disadvantages were seized upon by the lobbyists and the advantages were stressed solely in terms of the environment, not the chances of reduced taxation elsewhere in the system. Moreover, to overcome the fear that environmental taxes will be used for general revenue raising purposes, environmentalists would be well advised to begin thinking of using tax revenues to provide industry with immediate benefits, ea. through capital investment allowances.

Third, a further reason for distrust is that industry has a well rehearsed lobby that understands regulatory system in place. It knows who to lobby and how. It can, in the economist's language, 'capture' the regulators. Industry also knows where it is with a regulation: it can accommodate it and help mould the process. Dealing with environmental taxes and traceable permits is more difficult. The source of the measure is invariably the Ministry of Finance, not the Environment Ministry. Regulatory capture is more complex under market based instruments.

Fourth, there is an extensive lack of knowledge about economic instruments in government and in the civil service. This partly reflects ignorance of environmental economics generally, a result not just of the poor training of civil servants but also of the failure of the economics profession to establish the subject of environmental economics in a number of countries. That, mercifully, is changing, but there is a long way to go. It is no accident that the countries making the greatest progress on economic instruments are those with the best trained civil servants the USA and the Scandinavian countries in particular.

2.4 Towards Sustainable Consumption Through Market Based Instruments

This discussion suggests strongly that the goal of sustainable consumption requires an action plan which is far more aggressive than anything seen so far. The components of that plan must be:

(a) a recognition that establishing a regime of economic instruments is only part, albeit an important part, of what is needed:

(b) an appreciation that the other components are themselves seriously underresearched and ill appreciated. They include, for example, substantial changes in policy measures which distort economic activity in favour of environmental degradation, whether it is the Common Agricultural Policy of the European Community, the damaging effects of the European Regional Development Fund, the presence of massive energy and water subsidies the world over

(c) the re investment of resource rents into building up new stocks of natural capital and, just as important, human capital in the form of education and training;

(d) changes to the way we measure economic progress, as called for in Agenda 21, but with an understanding that simply recording a 'green' measure of economic progress will do little to alter people's behaviour (Pearce et al. [1993]):

(e) firm pursuit of economic instruments coupled with the design of packages of measures that overcome industry's in built resistance to 'new taxes'.

Above all, if a combination of measures like this does not succeed, we should be clear that nothing else will. Those who call for changing lifestyles as a voluntary measure of social change may well have political correctness on their side. They do not have political realism.

(1) Thus, para 4.9 of Ch.4 of Agenda 21 calls for consideration of how economies can grow and prosper while reducing the the use of enregy and materials.

(2) It also speaks illogically of very high consumption patterns. A pattern cannot be high or low.

(3) Thus, if the twin challenges of unemployment/environmental pollution is to be addressed, a trade off can be envisaged between lower labour costs and higher pollution charges. One particular concrete Commission proposal which is entirely consistent with long term structural change concerns the carbon/energy tax; external costs related to energy use are being tackled, while the substantial revenue (1%+ of GDP) can be used a first step to accommodate high wage costs borne by employers': Section 10.2.

Paper prepared for the Government of Norway
Symposium on Sustainable Consumption, Oslo, 19-20 January 1994.