Sustainability, Jobs and Welfare

Sustainability, Jobs and Welfare

Richard J. Jones

Senior Research Officer, WELMERC*

and

Lynn Mainwaring

Research Associate, WELMERC*

Abstract

The paper considers different conceptions of sustainability, distinguishing between those with a narrow economic and environmental focus and those that accommodate a wider range of social indicators. It then identifies links between these notions of sustainability and the labour market. Narrower sustainability concepts imply a potential trade-off between sustainability and current-generation interests. From that perspective, the first link is the possibility of easing or sidestepping the trade-off by allowing environmental taxes to substitute for distortionary labour (income) taxes. The second is to consider whether environmental regulation destroys or creates jobs. The broader socio-economic conception of sustainability makes more sense, we argue, if the central policy aim is to promote ‘happiness’ (as opposed to GNP). This opens a third channel to the labour market in that job satisfaction is a major component of happiness. The implications of our analysis for Welsh Assembly Government policy making are stressed throughout.

*The Welsh Economy Labour Market Evaluation and Research Centre, University of

Wales Swansea

Sustainability, Jobs and Welfare

1.Introduction

‘Sustainability’ is a word widely used by politicians and the media and it has become part of the day-to-day discourse of ordinary people. As such, it is a vague and elusive concept, often used in contradictory ways. Even when refined by experts in specific disciplines, it has meanings which are not obviously consistent with one another. Sustainability may imply something quite different to an ecologist and an economist. In this paper we take a sharply defined economics conception of sustainability as a starting point and then consider how broader, and perhaps more practical, conceptions may be developed from that. Broadening the idea of sustainability will allow us to identify three points of contact with labour-market issues.

The first of these is the implicit tax effect of environmental intervention by government. An intervention can have a positive or a negative effect on public finances. A non-fossil-fuel subsidy uses up public funds whereas a carbon tax generates revenues. Government expenditures have to be paid for, and a major source of revenues is the labour market (notably via income tax), one of the biggest tax bases available to the government (Smith, 1998). However, the issue here is more than a matter of revenue substitution since any environmental intervention which raises the cost of living (e.g., via higher fuel prices) has a further effect on the labour market. The consequences are complex and far from intuitive.

The second point is conceptually more straightforward: is there a jobs-environment trade-off? Environmental investments are at the expense of other investments and could, potentially, reduce conventional (i.e., GNP) growth. On the other hand, activities which are environmentally restrained could be more labour-intensive than unregulated activities. The answer to this question has to come largely through empirical investigation. The reference to ‘conventional’ growth hints at the third point. As is now widely known, there is considerable dissatisfaction with the use of GNP as a measure of social welfare. This is manifest in the proliferation of alternative welfare measures and in the recent growth of interest among economists in the concept of ‘happiness’ (Frey, 2003). Happiness, or ‘satisfaction with life in general’ has many components, not the least of which for many is job satisfaction. It is worth considering, therefore, whether the conventional focus on the environment-growth (or environment-consumption) trade-off is not misplaced. If there is no environment-happiness trade-off then the set of feasible political interventions becomes much wider.

These three issues may appear conceptual, if not theoretical, but they are highly relevant to a proper evaluation of the sustainability agenda. They are of potential relevance to Wales because of the Welsh Assembly Government’s constitutionally embedded sustainability obligation. Their immediate practical relevance is less clear, partly because the processes and procedures for carrying out that obligation are still being developed and partly because the present legislative powers of the Assembly Government are too weak to permit the use of instruments that are suggested by the theory. Where relevant, and where possible, we shall try to draw out the implications of the discussion for the Welsh economy and Welsh policy-making.

2.The Economic Conception of Sustainability

The conventional economics approach to sustainability is framed in terms of a non-declining level of per-capita consumption (C) or utility (U) over time (implicitly, all future time). Since utility may depend on things other than per-capita consumption, the conditions for a non-declining-U path are generally stricter than those for non-declining C. The Hartwick-Solow (Hartwick, 1977, 1978) model sets out the conditions for non-declining C in the context of the standard Solow (1956) growth model. In the original Solow model, the two factors of production are capital and labour. In the Hartwick-Solow version, these are replaced by capital, K, and natural resources, N. K can be thought of as the sum of all manufactured capital (i.e., physical capital assets) and human capital (i.e., knowledge, skills and technology), while N is often thought of as ‘natural capital’ in that it provides valuable services for free.

Because N is scarce, its exploitation provides its owners with rents (as in the case of land, for example). Rents which would be generated in a perfectly competitive economy in which the market rate of interest is equal to the social discount rate are known as Hotelling rents (Hotelling, 1931). (An interest rate higher than the social discount rate effectively means that the market is giving insufficient weight to the welfare of future generations.) Hotelling rents are effectively those which would arise from a socially-efficient exploitation of natural resources over time. In the absence of population change and technical progress, sustainability requires that the equivalent of the Hotelling rents from the exploitation of N are invested, in their entirety, in new K-formation. Then provided there is sufficient substitutability in the production function,1 the decline in N is exactly compensated for by the accumulation of K so as to maintain a constant level of Q - I (output less investment in K). Since C = Q - I, this yields a non-declining-C path. If population is rising (at some exogenously given rate), investment needs to exceed the Hotelling rents, implying a lower level of sustainable C; if technology is improving at some exogenous rate, a higher level of C can be sustained with lower I. Note that the model does not presuppose that resource rents are actually at the Hotelling level (nor therefore, that the market rate of interest is equal to the social discount rate). It merely requires that investment be equal to the Hotelling rents.

If utility is a function of C, only, then the conditions for non-declining U are the same. A more realistic assumption would be that utility is a function of consumption and the condition of the natural environment: U = U(C, N). In that case, a constant consumption path will imply a declining utility path in the face of depleting N. Again the issue here is one of substitutability. If C and N are sufficiently substitutable, non-declining U can be sustained if C grows sufficiently over time to compensate for the fall in N. Since a rising C means investing more than the Hotelling rents, the conditions for non-declining U are more stringent than those for non-declining C.

The basic message of this analysis is that a sustainable, though not necessarily comfortable (C and/or U might be very low), path is possible given sufficient substitutability in the production and, possibly, utility functions. This has led economists to distinguish two sustainability criteria:

Weak sustainability. This is basically the Hartwick-Solow criterion, but it can be simplified at the expense of approximation. If K and N are sufficiently substitutable then the aggregate quantity of capital matters more than the composition of capital. Indeed, if K and N are perfect substitutes then only the aggregate quantity matters. In that case an economy - considered as a closed system - is sustainable if it can maintain a non-negative level of net investment (or net savings) (Pearce and Atkinson, 1993).

Strong sustainability. In the other limiting case, K and N are perfect complements and any loss of N cannot be compensated for by net investment in K. In that case consumption cannot be indefinitely sustainable. This degree of complementarity is implausible. However, what is plausible is that there is a subset of N, so-called ‘critical’ natural capital NC, which is essential to any form of economic organisation. That is, once N falls below NC the economy (gradually?) collapses. Whereas the Hartwick-Solow criterion envisages N converging to zero as K accumulates, in the present case sustainability would require that N converges to no lower than NC. Strong sustainability therefore requires that there be no incursions into critical natural capital.

It is likely that most ecological economists are persuaded by the Strong view. It seems fairly clear that there are certain natural ‘life-support’ systems that cannot meaningfully be substituted for (e.g., Erlich and Mooney, 1983). What is less clear is the relationship between NC and N. If, say, N were homogeneous then NC would refer to some minimum quantity of N. But if N consisted of various components some of which bore complementary relationships with one another (as they surely do), then some parts of N might be exploitable with impunity but others would be critical in themselves or, perhaps, critical beyond some threshold.

3.Socio-economic Conceptions of Sustainability

The economics conception is well-focused – perhaps too much so. It is concerned with trade-offs between the environment, considered as natural capital, and what could crudely be thought of as marketable goods. A more social perspective would substitute for the utility function a welfare function that gave weight not only to private consumption and the state of the natural environment but also to community welfare, jobs, culture, language, etc. Sufficient substitutability within this welfare function would permit sustainability trade-offs. Thus welfare, so defined, could be sustained over time in the face of a deteriorating environment if there were a compensating increase in, say, the number of jobs. This, in principle, is not a problem for a Weak criterion since positive net savings can be used for any substitutable investment: a deteriorating environment would be tolerable if other things were growing fast enough to compensate. But even on the Weak criterion, the notion that jobs for the current generation can be bought at the expense of the environmental conditions of future generations raises the much broader issue of inter-generational versus intra-generational equity. This socio-economic conception puts fairness within the current generation on the same footing as fairness between generations. (The Hartwick-Solow model is concerned exclusively with inter-generational fairness.)

When it comes to the Strong criterion this approach is problematic because critical natural capital cannot be substituted for. Thus gains in jobs, culture, etc., at the expense of critical capital are not sustainable. But the reverse may also be true if current jobs are regarded as ‘critical’. Clearly, the more components of the welfare function that are regarded as critical, the harder it is to achieve sustainability. More generally, where there is some degree of complementarity between the objectives of sustainability, the trade-offs have to be investigated and evaluated.

4.Sustainability Obligations of the Welsh Assembly

The Welsh Assembly Government (WAG) has a duty under section 121 of the Government of Wales act to “make a scheme setting out how it proposes, in the exercise of its functions, to promote sustainable development”. It is also required to report annually on its proposals and their implementation. Its obligations under the act are ambiguous. The Second WAG Report on Sustainable Development (WAG, 2002a) emphasises sustainability awareness, sharing best practice, disseminating knowledge, seeking compacts, integrating sustainability principles into project evaluation, establishing indicators, and reporting progress. Specific policy commitments are tentative and consist mainly of the preparation of and consultation on strategies for energy, transport, economy, waste and planning. However, an actual policy instrument that differentiates Wales from UK/EU is difficult to find.

Not only is it difficult to find but it is difficult to envisage given the existing powers of the NAW for the following reasons:

i)Environmental restrictions that were significantly in excess of those in England could be economically damaging if the costs fell on the private sector or skilled workers; and

ii)Efficient controls are market-based: taxes, subsidies or tradable property rights (Tietenberg, 1990). Taxes are out: the National Assembly does not have tax-varying powers.2 Tradable rights are probably unviable given the size of the economy. Subsidies are possible but will have to compete with other budget claims. For now, though, this is the most available route to sustainability above UK norms. An example, not mentioned in the Second Report, might be agriculture. Tir Gofal could, in principle, account for a greater proportion of agricultural support than the counterpart agri-environment schemes in England. Additional subsidy support could also work for waste management, renewables, energy-saving, transport, etc.

The WAG’s choice of sustainability indicators (WAG, 2002b) covers employment, education, crime, housing and the Welsh language as well as more obviously environmental qualities. It is implicit that the Assembly has adopted a socio-economic conception of sustainability. From a political perspective this has the attraction of allowing failures in some respects to be balanced by successes in others, as in the case of a Weak indicator where the components of net investment are substitutable. It also allows politicians to act in the traditional manner of promoting jobs at the expense of the environment – in those cases where a trade-off might exist.

In some respects (greenhouse gases, biodiversity, etc), Wales is part of the global/sub-global commons: Welsh people affect and are affected by what happens in the rest of the world. Domestic (i.e., Welsh) natural capital can be protected to some degree by domestic production controls (e.g., on emissions) but it will still suffer imported pollution over which National Assembly has little direct control. Habitats in Wales may, for example, suffer from global warming. Conversely, ‘dirty’ production processes located in Wales may export the bulk of the emissions to other countries (as with acid rain from power stations). Alternatively, dirty processes may move abroad to escape regulation but we continue to consume their products. The fundamental problem of common property is that each ‘commoner’ has little incentive to act for the common good (Hardin, 1968). Rather, each has an incentive to free-ride on the efforts of others. (In the global environmental context, this is admirably illustrated by the difficulties in getting an agreement to curb greenhouse gases.) If Welsh policy is motivated by free-riding on global efforts, discretionary instruments will focus on maximising benefits that are internal to Wales. If policy is motivated, or tempered, by global fairness, the emphasis would have to shift away from production controls to consumption controls; ie, ensuring that Wales uses up its ‘fair’ share of global resources. This is the justification for the ‘ecological footprint’ approach to the national/regional contribution to global sustainability.3

Despite the fact that the ecological footprint is one of WAG’s sustainability indicators, it is likely that the Assembly Government would regard its wider obligations as being catered for by UK participation in EU agreements and by UK/EU participation in global agreements. Beyond that, actions are likely to be token or symbolic or focus on ‘moral’ incentives. Consumption controls, which would be central to a ‘global’ sustainability strategy, are almost certain to conflict with WAG objectives to raise Welsh GDP to UK/EU norms (WAG, 2000c). Given that, the thrust of the Welsh sustainability agenda is likely to be measurable improvements within Wales.

To maintain focus in the following sections (5 - 7), we interpret a sustainability policy as one which helps to maintain or enhance natural capital within Wales. (Whether such capital is truly ‘critical’ or not is impossible to say.) In other words, sustainability is environmentally oriented and there is a potential cost in terms of other objectives foregone. This is a narrower approach than follows from the socio-economic conception, but it has the advantage of clarity. We shall return to a broader perspective in section 8.

5.The Porter-Linde Thesis

The neoclassical sustainability criteria discussed above are resource-based. The theory does not, in its simplest form, assume the existence of market failures – except those of an inter-generational nature (the inability of future generations to express and exercise their preferences). The theory is concerned simply with the distribution of resources over time to ensure non-declining C or U. That being so, the purpose of a sustainability policy is to restrain the current generation’s claim on resources by ensuring sufficient investment for the future. Sustainability implies redistribution of welfare from the present to succeeding generations.

On the other hand, conventional pollution-control theory recognises pollution as a negative externality (Baumol and Oates, 1975). Long ago, Alfred Pigou (1920) showed, in a static context, that an appropriate (in modern jargon, ‘Pigouvian’) tax on the level of emissions would correct the externality and that the resulting gain to society in general would exceed the private costs of implementation borne by the polluters and their consumers. An optimal corrective policy may therefore increase the welfare of the present generation and (assuming that the pollution is not merely shifted forward in time) protect natural capital for future generations. Of course, as with greenhouse gases, the externality may impinge more on future generations and require a sacrifice of the present generation to control it. Aside from such long-lived pollutants, however, pollution control offers the prospect of a multi-generational ‘win-win’ outcome. But this depends on the policy being optimal or sufficiently near optimal that the benefits of externality correction exceed the costs of implementation – assuming that there are such costs. It is the essence of the Porter-Linde thesis that, provided environmental controls are efficiently framed, such costs will typically be zero or even negative.