I recently attended a presentation titled "Is there a Conflict between Economic Viability and Sustainable Resource Utilization?". It was a trial lecture for one of the PhD students in our department and left a lot of questions (including the title) unanswered.
Michael Higgins' wonderful blog Chocolate and Gold Coins has quite a few posts on an economist's view of resource utilization (two of them are here and here). Half Sigma is another blog with an economist's view of resource utilization. His views on recycling (here and here) and energy are opposed to mine.
In this post, I will try to answer the question "Is there a Conflict between Economic Viability and Sustainable Resource Utilization?", while trying to show that applying economic theory coupled with science, the economists might have to change their views. For more on how to reason economically go here (Link via Michael Higgins' post Teaching Economics to Everyone).
Economics analyzes the costs and the benefits of improving patterns of resource use. Economic theory has failed as it does not have a connection to the physical world - where the resources originate. It has followed a price system where the environment (atmosphere, hydrosphere and lithosphere) are free; thus markets prices will not reflect the true costs associated with producing/consuming a product. I agree with economists in that markets work, but one must make sure that the basis is correct.
Thermodynamics is a formal system or procedure to evaluate and understand the interaction of people, machines etc with the environment. In other words, it is a set of rules governing the behaviour of the natural world. Thus, thermodynamics would be the ideal basis for setting the value of materials.
Exergy, a thermodynamic quantity derived from the Second Law, is defined as energy quality or the ability to do work. It is important to remember that there is continuous exergy loss in society as a whole. Exergy of any material can be calculated by defining a constant reference environment (it composition, temperature and pressure). Exergy is thus a measure of the physical value of the material. This can be used as a basis for the economic value of a material.
VAT (Value Added Tax) can be modified to include an exergy cost (sum of exergy consumption from the environment and waste exergy released to the environment). Thus VAT can move from the purview of bureaucrats to that of scientists, where the tax is a measure of the physical value. This would automatically increase the costs of products that have harmful waste products and renewables would get a boost.
When the two pillars of economic theory, incentives matter and markets work, are allowed to function with the material value based on exergy - recycling and renewable energy sources would be viable. And, of course, gasoline prices would probably reach double digits!!!
Thus, there is no conflict in Economic Viability and Sustainable Resource Utilization, as long as economic value is linked to the physical value of a material.
1. It is worthwhile to note that with this tax Nuclear power would be one of the most expensive sources of energy.
2. The tax proposed here is not my idea . It was mentioned by Prof Jan Szargut during a panel discussion on the furture of exergy analysis at the ECOS 05 conference. Goran Wall also proposed this idea a couple of years ago.
3. Sunil, in his post on the economics of conservation, adds a different dimension to the debate. He presents a case for the conservation of natural habitats and the economic costs incurred when they are ignored.
4. Browsing though my mail from when I was on vacation, I noticed that the Scientific American September edition is a Special Issue - Crossroads for Planet Earth. I haven't read it yet.