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Chapter 1. Entering a New World: Getting the Price Right
The question facing governments is whether they can respond quickly enough to prevent threats from becoming catastrophes. The world has precious little experience in responding to aquifer depletion, rising temperatures, expanding deserts, melting polar ice caps, and a shrinking oil supply. These new trends will fully challenge the capacity of our political institutions and leadership. In times of crisis, societies sometimes have a Nero as a leader and sometimes a Churchill.
The central challenge, the key to building the new economy, is getting the market to tell the ecological truth. The dysfunctional global economy of today has been shaped by distorted market prices that do not incorporate environmental costs. Many of our environmental travails are the result of severe market distortions.
One of these distortions became abundantly clear in the summer of 1998 when China’s Yangtze River valley, home to 400 million people, was wracked by some of the worst flooding in history. The resulting damages of $30 billion exceeded the value of the country’s annual rice harvest. 34
After several weeks of flooding, the government in Beijing announced in mid-August a ban on tree cutting in the Yangtze River basin. It justified the ban by noting that trees standing are worth three times as much as trees cut. The flood control services provided by forests were three times as valuable as the lumber in the trees. In effect, the market price was off by a factor of three! With this analysis, no one could economically justify cutting trees in the basin. 35
A similar situation exists with gasoline. In the United States, the gasoline pump price was over $2 per gallon in mid-2005. But this reflects only the cost of pumping the oil, refining it into gasoline, and delivering the gas to service stations. It does not include the costs of tax subsidies to the oil industry, such as the oil depletion allowance; the subsidies for the extraction, production, and use of petroleum; the burgeoning military costs of protecting access to oil supplies; the health care costs for treating respiratory illnesses ranging from asthma to emphysema; and, most important, the costs of climate change. 36
If these costs, which in 1998 the International Center for Technology Assessment calculated at roughly $9 per gallon of gasoline burned in the United States, were added to the $2 cost of the gasoline itself, motorists would pay about $11 a gallon for gas at the pump. Filling a 20-gallon tank would cost $220. In reality, burning gasoline is very costly, but the market tells us it is cheap, leading to gross distortions in the structure of the economy. The challenge facing governments is to incorporate such costs into market prices by systematically calculating them and incorporating them as a tax on the product to make sure its price reflects the full costs to society. 37
If we have learned anything over the last few years, it is that accounting systems that do not tell the truth can be costly.
Faulty corporate accounting systems that leave costs off the books have driven some of the world’s largest corporations into bankruptcy, costing millions of people their lifetime savings, retirement incomes, and jobs. Distorted world market prices that do not incorporate major costs in the production of various products and the provision of services could be even costlier. They could lead to global bankruptcy and economic decline.
34. Munich Re, Topics Annual Review: Natural Catastrophes 2001 (Munich, Germany: 2002), pp. 16–17; value of China’s wheat and rice harvests from USDA, op. cit. note 12, using prices from IMF, International Financial Statistics, electronic database, at ifs.apdi.net/imf.
35. “Forestry Cuts Down on Logging,” China Daily, 26 May 1998; Erik Eckholm, “Chinese Leaders Vow to Mend Ecological Ways,” New York Times, 30 August 1998; Erik Eckholm, “China Admits Ecological Sins Played Role in Flood Disaster,” New York Times, 26 August 1998; Erik Eckholm, “Stunned by Floods, China Hastens Logging Curbs,” New York Times, 27 February 1998.
36. Gasoline prices from DOE, EIA, This Week in Petroleum (Washington, DC: various issues).
37. Andrew Kimbrell et al., The Real Price of Gasoline (Washington, DC: International Center for Technology Assessment, 1998), p. 39.
Copyright © 2006 Earth Policy Institute