0.12 Natural capital & Sustainable development introduction  (Page 8/12)

Most tropical countries including Indonesia, Philippines, and many African nations have charged very low fees for cutting timber on government land. Virtually all impose inadequate timber royalties too low to encourage conservation. Thailand’s forestry policies were so wanton that its rainforest has all but disappeared. The same can be said for the Ivory Coast and Gabon in Africa.

Energy pricing provides an altogether frightful history of policy failure leading to unsustainable development. In such oil-rich countries as Nigeria, Indonesia, Iran, Venezuela, and oil poor nations such as Pakistan and Bolivia, domestic use of energy has been kept artificially cheap for several reasons:

1) the widespread view that these subsidies protect the poor, and

2) as a misguided stimulus.

This has had multiple adverse effects on ecology and on the economy . First, these subsidies encourage altogether excessive wasteful domestic consumption of gas and diesels, thereby reducing the country’s petroleum and gas reserves and its export earning potential. As a result Indonesia, an original OPEC member is now a net-oil importer. Second, underpricing of energy artificially promotes the use of auto transport , adding materially to urban congestion and air pollution (India, Pakistan and Mexico City). Third , artificially cheap energy promotes industry that was ill suited to the needs. With very cheap energy, firms and consumers have little incentive to adopt energy-saving technologies. Thus, on several counts, underpricing of energy contributed to environmental degradation, as well as very sizable economic losses.

Indonesia’s kerosene policy furnishes an instructive but sobering example. For decades the government heavily subsidized the consumption of kerosene and other fuels. This subsidy was truly perverse, ranking with the U.S. subsidies to biofuels made from corn. The ethanol subsidy (tax credit) is actually intended to reduce carbon emission. But in fact, it increased carbon emissions by 5 million tons per year in the U.S. The Indonesian kerosene subsidy was actually thought to be justified as a way of both reducing environmental degradation, and especially to aid poor rural dwellers, who used kerosene for cooking . Heavily subsidized kerosene prices were seen as a disincentive to the cutting of fuel wood which was denuding mountain slopes and causing major soil erosion on Java; Indonesia’s most densely populated island. This was a totally misplaced subsidy. Careful research has shown that rural families used kerosene predominantly for lighting , not for cooking. In any case, only 50,000 acres of forestland was protected each year by the subsidy, at a cost of almost U.S. $200,000 a year per acre . Replanting programs, in contrast, cost only $1,000 per acre. The government could have saved 95% of the subsidy by replanting programs. Moreover, 80% of kerosene turned out to be consumed by the relatively wealthy, not the poor. And, another example of how careful one must be in dealing with economic policy issues: the low price of kerosene made it necessary to subsidize diesel fuel as well. Why? Because the two fuels can, to an extent, be substituted in truck engines. Kerosene is used in diesel engines, however, cause even more pollution there than diesel in diesel engines greater environmental damage. The multiple costs of this policy finally led the government to sharply reduce its subsidy on kerosene.