0.12 Natural capital & Sustainable development introduction  (Page 7/12)

There is much evidence for this. Little imagination is required to see that measures that reduce the environmental damages of non-environmental policies are both good ecology and good economics. And we cannot stress enough that in poor countries policies that help to overcome poverty are also both good economics and good ecology .

A second , not unrelated, reason for policy failures that damage ecological and environmental values has been a persistent lack of understanding of the role of the market and the role of prices in resource conservation, and in ecological protection. An unusually high proportion of policy failures are traceable to short-sighted government subsidy programs that deeply underprice water, soils, forest, and energy resources. Perfect example – Public lands in U.S. West are, in some states, more than 50% owned by the U.S. Government. Government has historically charged extremely low prices for grazing leases. What do you get? Cow-burnt pastures from over-grazing. The government has been a very poor steward of publically-owned lands.

Everywhere, governments and even firms persist in under-estimating the role of market prices in resource conservation or in resource allocation generally. Few in government understand that good economics is good ecology. And the reverse is also true.

But it is not only government that fails to understand the market. Consider for example, another recent United States example outside of the environmental area: pricing of Internet access. A few years ago, America Online adopted a pricing mechanism that involved a flat fee for Internet service: this amounted to a zero price for overuse of scarce Internet access. So, the price of incremental use of the service became unrelated to intensity of use by the subscriber. And the managers were actually surprised when the scheme resulted in catastrophic collapse from overuse.

Consider two policy failures that result from deep underpricing of two vital natural resources – tropical forests and energy. Later we will focus more generally on forests, energy, water and fisheries.

Quite apart from the effects of poverty, policy failures in forestry have been especially destructive to ecological and economic goals in dozens of tropical countries. Brazil’s government long provided heavy subsidies to ranching and other activities that encroached heavily on the Amazon rainforest. Thousands of square miles of the Amazon was deforested for two decades. When pastureland replaced the rainforest there were several unintended effects. Few understood that one of these was that the converted pastureland would support cattle for less than five years. Why? Another unanticipated effect of subsidized cattle ranching was that it destroyed rainforest occupations that provided more jobs than were created by subsidized ranching operations. Nevertheless, the Brazilian government made deforestation as cheap as possible. Government policies provided new ranches with fifteen-year tax holidays, tax subsidies, exemptions from export taxes and import duties, and loans with interest substantially below market rates. In Brazil, although a typical subsidized investment in cattle ranching yielded a loss to the economy equivalent to 55% of the initial investment, heavy government subsidies allowed private ranchers to earn a positive return equivalent to 250% of their investment, while the forest was relentlessly destroyed. This was environmental and economic disaster , like ethanol from corn in the U.S.