Why is it worth investing in environmental protection?

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I asked a close colleague that question years ago. He answered in a flash: “Because it is cheaper.” Jared Diamond tells in his book “Collapse” that some oil companies have arrived at the same conclusion, and consider environmental investments that go beyond the demands of authorities to be nonetheless profitable. They have set themselves very strict guidelines even in developing countries such as Papua-New Guinea.

Kyoto protocol

Industries and politicians have been slow to accept environmental investments, because they are felt to be expensive to implement. One of the claims has been that living up to Kyoto protocol and cap and trade[1] would represent a huge challenge and put a brake on economic growth. It is worth remembering, however, that the same claim was made about reducing sulphur dioxide emissions, removal of lead from petrol, and waste water treatment. One may ask how enormous costs society would be paying today, if they had not been implemented from the 1960s.

Any activity which damages the environment cannot be profitable in the long run. The population of the German Democratic Republic with its sulphur-belching industries and smoky Trabant-cars was not better off than their counterparts in environment-sensitive Sweden. It is not at all obvious that some country in the forefront would suffer more than another state that tries to postpone changes and has finally to act in a hurry to avoid the inevitable. Thus, it seems likely the United States will ultimately suffer with its old-fashioned energy plants, car manufacturing and wasteful energy consumption. For a rapidly developing country like China it would be most economical to leap directly to the best available technologies rather than to have to modernize all the industrial factories again after ten years.

Development is never straightforward

Initially nearly all environmental costs have been claimed as being unreasonable. This is often based on linear predictions: all other things are thought to develop linearly and not deviate from the present trend. When Henry Ford doubled the wages of his workers in 1914, he was thought to be crazy. In fact, this helped to create a more prosperous working class which could afford to buy the mass-produced T-model Ford, and the car was sold in millions.

The environmental investments are intolerably expensive, if wrong investments are stubbornly made to the last minute, and finally the renovations have to be introduced virtually overnight. For example, this misery was seen in rebuilding the Eastern parts of Germany after reunification. To be able to deal with future, longer time periods are needed than the predictions of next quarter or next year.

In the Kyoto protocol, the sections on the reduction of carbon dioxide emissions and those on trading are separate issues. Trading is not an obligation, it is simply a possibility. Moreover, it is not a permanent solution; it is a possibility to allow a reasonable time to undertake renovations by starting investments where they are most cost-effective. If a factory could be economically used for another ten years before a planned major renovation is to be undertaken, it may be reasonable to buy emission quotas from another factory that is worse and needs to undergo a more thorough renovation immediately. This means that the immediate renovator will have access to more funds to improve their technology, and the firm buying time can better plan the renovations as a normal part of their modernization procedures. Then these environmental-friendly changes may actually cost nothing.

EU energy policies

One problem, especially prevalent in Europe, is the desire of bureaucrats to take the responsibility for technical solutions. This is probably not the most effective way of doing things. Only general aims should be delineated administratively. Entrepreneurs would then have the possibility of finding the most feasible ways of achieving the goals. Therefore cap and trade is fine but stating that climate change can be abated by adding a certain percentage of alcohol to traffic fuels is simply not going to achieve the goals the administrators pursue.

Costly to whom?

Another problem in environmental protection is that some of the costs of neglect are a burden to others. Removal of lead from petrol did cost something to the oil companies, but the health effects of lead in cities were probably much more important than was appreciated at the time. Lead caused a decrease in children’s intellectual development, and one may ask how much this would cost a country or even mankind as a whole. Abatement of greenhouse gases will also mean a reduction of fine particulate matter and other directly health-related emissions, and would save hundreds of thousands of unnecessary deaths.

External costs mean that a firm is making profit, but paying only some of the true costs; the rest of them are in fact being paid by outsiders. These external costs may be health costs that are born by the population or society; they can be eutrofication[2] costs of waterways causing harm to fishing or recreational activities, contamination of ground water forcing communities to change their raw water supplies, which can be very expensive. They may also cause harm to the natural environment, such as a motorway preventing movement of animals and causing fragmentation of their habitat. It may not be possible to measure such consequences in monetary terms, but with time, the whole environment will be impoverished.

External costs alone are a good reason why there should be environmental taxes. Society makes the polluter pay those costs that the polluter will not directly pay. If the society is wise, then it will invest those funds to improve the environment, because they are in fact the cost of environmental deterioration.

Consuming the capital

One often neglected viewpoint is that poor environmental protection leads to using up capital and not only profit. In other words, it leads to gradual impoverishment. Classical examples include deforestation and erosion of topsoil over decades or centuries. In both cases, man interrupts the natural cycles in such a way that resources are taken as a continuous stream but the resources are not returned to the cycle or the return is too slow. This can be seemingly profitable for decades, but at some point the exploitation cycle comes to an abrupt end.

Often the final end is preceded by occasional crises becoming worse and worse. An excellent example is the agriculture in the Midwest states of the United States. Large tracts of prairie were put under the plough in the beginning of 1900s. When the weather became exceptionally dry in the 1930s, winds blew off the topsoil, and almost no grain could be harvested for several years. Not only the winds, but also erosion by water can destroy gradually the topsoil. When forests are cut down and the areas are ploughed, there is no longer vegetation to hold the topsoil in place, and water will flush it away down to the sea.

In the long run, protecting the environment is cheaper than destroying it.

Notes and references

  1. Cap and trade means limits on emissions, but instead of reducing its own emissions at once a country or industries may buy emission quotas from another country or industries that are able to reduce emissions at a lower price.
  2. Eutrofication means too much nutrients e.g. in the lakes, causing harmful growth of algae and plants

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