Political Economy of the Environment

An Interdisciplinary Approach

Simon Dietz, Jonathan Michie, Christine Oughton

• Publisher: Taylor & Francis
• Year: 2011
• eBook ISBN: 9781136823978
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book is the culmination of several years work by a group of academics, policy-makers and other professionals looking to understand how alternative economic thinking – and indeed thinking from quite different social-scientific disciplines – could enhance the mainstream economic approach to environmental and natural-resource problems. Of the editors, Dietz comes from the mainstream economics tradition, while Michie and Oughton draw explicitly on institutional and evolutionary economics. The various authors represent a range of disciplinary backgrounds and approaches. This book draws on the strengths of each and all of these approaches to analyse environmental issues and what can be done to tackle these through corporate and public policy.

The book argues that the need for an inter-disciplinary approach. Two themes which emerge repeatedly throughout the book are the need for an interdisciplinary theory of technological change, and the need for a similarly interdisciplinary approach to the study of human behaviour and how it influences both production and consumption choices. The two themes are of course related. Resolving environmental questions requires an understanding of their nature, of their causes and, to the extent that they are anthropogenic, of how to change human behaviour. These fundamental issues are the focus of the four chapters that form Part 1 of this volume. The remainder of the volume develops them in more detail.

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1 Environmental Challenges of the Twenty-first Century and the need for Interdisciplinary Political Economy

Simon Dietz, Jonathan Michie and Christine Oughton

In 2008, the Organisation for Economic Cooperation and Development (OECD) published the latest in its regular series of audits of the state of the environment, taking a global perspective and looking out to 2030 (OECD 2008). Noting that progress had been made on, for example, pollution from industrial sources (in OECD member states at least) and emissions of ozone-depleting substances, the OECD nevertheless flashed a ‘red-light’ warning on several environmental issues, including climate change, biodiversity loss and water scarcity. In many ways its findings are reminiscent of earlier reports, such as the World Bank’s well-known assessment of the relationship between economic development and environmental degradation published nearly 20 years ago (World Bank 1992). In it, the Bank observed that while some environmental problems such as access to adequate sanitation appeared to improve monotonically with economic development, and others such as urban air quality appeared to improve only after a certain level of economic development had been attained, still others such as greenhouse gas emissions worsened monotonically with rising per capita incomes.¹ Thus, while some environmental problems seemed to be largely a symptom of poverty, there was little prospect that the world could grow out of this third category of problems, or at least not without an unprecedented societal response.

Both reports observe that what we might call twenty-first century environmental problems – namely those such as climate change and biodiversity loss that show no signs of being ‘decoupled’ from economic development – are of a particularly intractable nature. What marks them out is, roughly speaking, interconnectedness – they are complex and usually global in nature, and their impacts may only become apparent over long time frames. Climate change is a clear example. A ‘carbon footprint’ is embodied in almost all of the goods and services transacted in the modern economy, thanks in large part to the burning of fossil fuels for energy.² Once emitted, greenhouse gases mix in the atmosphere and, through a highly complex and uncertain process, eventually cause changes to climate that are distant in time and (partly) in space from the emitter. To solve the problem by mitigation (i.e. reducing greenhouse gas emissions), it would further appear from the evidence that a broad portfolio of measures is needed, as the sheer magnitude of emissions reductions that are considered necessary ultimately overwhelms the economies of scale associated with any one currently practicable measure (e.g. Enkvist et al. 2007). That is, there does not appear to be a ‘silver bullet’, and action will be required on many fronts, including to deploy renewable energy technologies, carbon capture and storage technology, to improve energy efficiency at home and in businesses, and to reduce deforestation.

As their respective prefixes would suggest, interconnectedness is a powerful reason why an interdisciplinary approach to the political economy of the environment is essential. First, however, a note is in order on what we mean by ‘political economy’, which is one of those elusive terms in the social sciences, meaning different things to different people. Political economy was of course the precursor to economics – i.e. political economy was economics – the former term being gradually replaced by the latter towards the end of the nineteenth century, due to a preference for the scientific connotations of ‘economics’ (Groenewegen 2008). By the mid twentieth century, a diversity of meanings had sprung up, which continues to this day. For some, like Groenewegen (2008), political economy remains a synonym for economics. For others, political economy represents the body of work, building on the Virginia and Chicago Schools, which analyses the functioning of democratic political institutions using economic tools, based around notions of rational choice (Besley 2006). For still others, political economy also means the study of how political institutions interact with the economy, but there is more of an emphasis on an interdisciplinary approach, admitting a wider range of questions and methods. This last interpretation is in the spirit of the Routledge Studies in Contemporary Political Economy series in which this volume appears, and it is the spirit in which we intend the term to be used.

Returning to the importance of interdisciplinarity, Neil Adger and colleagues make the case in a recent paper for a ‘thick’ analysis of environmental decision making (Adger et al. 2003). They observe that successful environmental decisions are likely to be underpinned by four necessary conditions: effectiveness, efficiency, equity and legitimacy. These four conditions are necessary, because, to choose an obvious example, an ostensibly efficient policy such as a carbon tax may founder due to perceived inequities in who pays (e.g. Goulder and Parry 2008). The problem is that the various social sciences place their emphasis and concentrate their insights on subsets of the four criteria. Economics, for example, focuses on efficiency, but has relatively little to say on equity and still less on legitimacy. Conversely political science focuses on legitimacy, but has less to say on efficiency. It follows that insights from many disciplines are required for successful environmental decisions.

Yet we would argue that the need for interdisciplinarity is in fact greater than this, for what Adger and colleagues do not take issue with are the problems faced by disciplinary analyses even where they are conventionally strong. In most cases, these problems are not new, but they are amplified by environmental problems characterised by strong interconnectedness. In their various ways, all of the essays collected in this volume make this point. Two themes which emerge repeatedly are the need for an interdisciplinary theory of technological change, and the need for a similarly interdisciplinary approach to the study of human behaviour and how it influences both production and consumption choices. The two themes are of course related.

The seeds for this volume were sown by a group of academics, policy makers and other professionals looking to understand how alternative economic thinking and indeed thinking from quite different social-scientific disciplines could enhance the mainstream economic approach to environmental and natural-resource problems. Of the editors, Dietz comes from the mainstream tradition, while Michie and Oughton draw explicitly on institutional and evolutionary economics. The various authors represent a range of disciplinary backgrounds and approaches. We see it as vital to draw on the strengths of each and all of these approaches, and we have worked collaboratively to try to create an interdisciplinary practice whereby researchers genuinely listen to and seek to learn from the insights of other disciplines.

In 2004, this group formed the Heterodox Economics for Environment and Development (HEED) Network, which organised seminars and set up electronic discussion boards and mailing lists. HEED also formed the basis for an interdisciplinary course on ‘Environmental Economics and Policy’, taught at Birkbeck College, part of the University of London. The course moved in time with its creators and is now hosted by the University of Oxford. Some of the contributions to this volume formed lectures as part of the Birkbeck course, but opportunities to include other contributions have emerged in the process of editing, and these have greatly enriched the volume overall. It is hoped that the volume will be of interest to a wide range of readers from across the social sciences and indeed the sciences. Most of its chapters are expositional, and as such the volume is likely to be of most value to students of environmental studies, both at the advanced undergraduate and postgraduate level, and to the interested non-specialist.

1 Foundations

Any scientific enquiry proceeds by questions and their resolution (Kuhn 1962). Resolving environmental questions requires an understanding of their nature, of their causes and, to the extent that they are anthropogenic, of how to change human behaviour. These fundamental issues are the focus of the four chapters that form Part 1 of this volume. The remainder of the volume develops them in more detail.

David Hendry’s chapter, ‘Climate change: lessons for our future from the distant past’, starts by considering the nature of scientific evidence and its reliability, noting that for various epistemological reasons, science is often dogged by uncertainty. Despite this, advances in science and understanding have proceeded throughout history via the accumulation of theoretical and empirical evidence: not all questions have been resolved, but significant advances have been made in our understanding. In this chapter Hendry argues that analysis of our distant past (some 500 million years ago to the present day) provides valuable lessons for understanding and dealing with climate change today.

The argument for looking at the very long run (now with respect to economic, rather than geological, history) has also been underlined by the recent financial crisis. As Reinhardt and Rogoff (2008, p. 1) note:

The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets. With a few notable exceptions, cross country empirical studies on financial crises typically begin in 1980 and are limited in several other important respects. Yet an event that is rare in a three decade span may not be all that rare when placed in a broader context.

A point that is reinforced by congressional evidence from Alan Greenspan, former Chairman of the US Federal Reserve (Greenspan 2008, pp. 2–4):

What went wrong with global economic policies that had worked so effectively for nearly four decades? … A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria.

Hendry’s chapter starts by reviewing the theoretical evidence on natural and anthropogenic causes of climate change. This lays the foundation for a detailed discussion of evidence on the extinctions of major species over the past 500 million years and the role of climate change in them. Hendry’s evaluation of the (very) long-run evidence shows that: (i) all major extinctions appear to be due to climate change, though the causes differ; and (ii) long-run changes in CO₂ and methane concentrations are correlated with temperature and climate change.

However, as Hendry is acutely aware, correlation is not the same as causation and so this leaves open the question of the role of human activity and pollution in climate change. In Section 6 of the chapter Hendry provides an account of why we can be sure that human activity is responsible. Of course, we cannot be so sure about how much temperatures will rise in the future and what the precise effects will be. Hence, there are arguments for a precautionary approach, as Hendry suggests: ‘if you are unsure whether a basket covered with a cloth really has a solid base, be concerned about putting all your eggs in it.’

On this point, neoclassical economists and ecologists have tended to differ; indeed Wam (2010, p. 677) argues that the precautionary principle (‘in the absence of scientific consensus the burden of proof falls on those taking the actions’) divides ecologists and economists, because the latter tend to focus exclusively on monetary valuations of harm. Expected utility theory is used by neoclassical economists to model risk and in this approach devastating events are treated in a probabilistic fashion. Calculations are more complex when costs and benefits occur in the future due to changes in the value of money over time, but such calculations can be made once an appropriate discount rate has been assumed, provided the probability distributions upon which they are based are known and stable. This assumption about known and stable probabilities also underpins real options theory, which is the extension of neoclassical analysis to irreversible investments.

Hendry provides a critical analysis of the relevance of this general approach in the case of uncertain catastrophic events and argues that factors such as ‘deep’ uncertainty, the possibility of ‘mean shifts’ in the underlying probability distribution, and tipping effects all undermine the very calculations upon which inter-temporal evaluation relies. In addition, people’s actual perceptions of, and attitudes to, risk are often at odds with those assumed by standard economic theory, with the consequence that ‘behaviour may be rather different from that predicted by conventional economic analysis, absent an all knowing self-maximizer operating devoid of the social context, but facing potentially huge global externalities’. These points are picked up in the subsequent chapters by Michie and Oughton, Dawney and Shah, and Barker.

Chapter 3 by Michie and Oughton focuses on firms’ behaviour and how this has been modelled using economic, managerial, institutional and evolutionary theories. Many of the social costs caused by environmental damage are the by-product of firms’ economic activity. As firms are the target of numerous policy actions designed to limit environmental damage, it is important to have a clear understanding of firms’ behaviour in order to predict their response to policy. This chapter explores the implications of three limitations of the standard theory of the firm: (i) the (lack of) analysis of the decision-making process and managerial discretion; (ii) the assumption of instrumental rationality; and (iii) the determinants and role of innovation and technological change. In recent years the literature on these topics has grown, providing greater understanding of firms’ behaviour within a systems context and implications for the design and implementation of environmental policy.

The standard economic theory of the firm rests on the assumption of instrumental rationality (that agents have a clearly defined objective, for example, profit maximisation, and know how to achieve it) and generally focuses on price (or quantity) competition in a static equilibrium framework, assuming well-behaved cost and demand functions. Under these circumstances, firms’ behaviour is reduced to calculus and, faced with the same circumstances, all firms take the same decision, so that they can be represented by a single, stylised firm (Kirman 1992). However, the strategic decision-making process is not considered in a meaningful way; firms are assumed to behave like automata and respond to price and cost signals in an identical fashion. There is no scope for managerial discretion, instead a unique equilibrium position is guaranteed/imposed courtesy of a U-shaped cost curve. Well-behaved cost curves also allow theoretical determination of the effect of taxes and subsidies on price, output and profitability.

This approach contrasts markedly with the managerial approach, whereby firms compete using price and a range of other variables including product and process innovation, organisational strategy, investment and marketing. Within the managerial literature (Nelson 1991) strategy is not confined to optimising over a single choice variable but is a more complex process that involves organising and renewing the resources of the firm to meet a range of objectives that matter alongside profit. Moreover, the possibility of increasing returns to scale makes it difficult to predict a firm’s response to market-based policy instruments, thus complicating policy implementation. Increasing returns may also have the effect of creating lock-in to an inefficient technology, as it becomes difficult for a new technology to become established unless and until demand reaches minimum efficient scale of production.

Michie and Oughton explore the limitations of instrumental rationality using a game theoretic approach under different time horizons. Here, it is shown that alternative models of rationality and strategic behaviour provide more profitable outcomes for firms and society than instrumental rationality. This analysis suggests a wider range of policy instruments, including not only taxes and subsidies, but also institutional and voluntary arrangements that may be catalysed or that may evolve to govern the commons.

The penultimate section of the chapter focuses on innovation and examines the relationship between environmental outcomes, for example, lower carbon emissions, and corporate performance, including profitability. The neoclassical approach to modelling innovation, where it is possible to identify an optimal level of investment in R&D based on instrumental rationality and optimisation, is contrasted with the ‘systems of innovation’ approach, where innovation is determined by the interaction of interconnected institution...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• Notes on contributors
• Acknowledgements
• 1. Environmental challenges of the twenty- first century and the need for interdisciplinary political economy
• Part I: Foundations
• Part II: Innovation
• Part III: Sustainability
• Index