For inclusive growth, Pakistan must account for environmental costs
According to IQAir, an international air quality technology company, Lahore recently ranked top in the list of most polluted cities in the world. The hazard of air pollution has steadily grown across most Pakistani urban conurbations, including once pristine Islamabad. While national accounts include growth in vehicles, power production, and consumption of fossil fuels, the resultant air pollution and shortened life expectancy through asthma, bronchial infections, strokes, and heart problems remain hidden.
The adverse impact on public health is just one of the many injurious consequences of economic growth and urbanization that policy makers need to address through systematically embedding the cost of ecological disturbances in measuring progress. In this regard, the work by economists Willian Nordhaus and James Tobin is seminal. In their essay, ‘Is Growth Obsolete’ they introduced the concept Measure of Economic Welfare (MEW), which attempts to capture the many sources of utility or disutility that are not associated with market transactions or measured by the market value of goods and services. For example, national income accounts shown as Gross National Product (GNP) or Net National Product (NNP), largely ignore the impact of pollution and other unpriced social costs associated with production and consumption of market goods and services.
MEW was one of the first attempts at developing environmental accounting in what was increasingly evident as a shortcoming of national accounting of economic performance. Nordhaus and Tobin state in their 1972 paper, “...we have not charged automobile users and electricity consumers for their pollution of the skies, or farmers and housewives for the pollution of lakes by the runoff of fertilizers and detergents. In that degree our national product series have overestimated the advance of welfare… There are other serious consequences of treating as free things which are not really free. This practice gives the wrong signals for the directions of economic growth. The producers of automobiles and of electricity should be given incentives to develop and to utilize “cleaner” technologies. The consumers of automobiles and electricity should pay in higher prices for the pollution they cause, or for the higher costs of low-pollution processes.”
While national accounts include growth in vehicles, power production, and consumption of fossil fuels, the resultant air pollution and shortened life expectancy through asthma, bronchial infections, strokes, and heart problems remain hidden.
In the absence of markets autonomously pricing in the negative externalities of growth, governments need to enforce pricing mechanisms so that consumers pay for such social costs. This in turn incentivizes consumers to shift consumption patterns that lessen environmental depredation. Non-intervention by the state for such negative externalities effectively serves to provide a subsidy for overproduction and consumption of the goods that would have otherwise moved toward efficient technologies and less wasteful exploitation of natural endowments. The pioneering work by Nordhaus and other economists on concepts like MEW, and later, Dynamic Integrated Model of Climate and the Economy (DICE) led to estimation of the global “social cost of carbon” that spurred the adoption of measures such as carbon tax in the Kyoto Protocol to reduce greenhouse emissions globally.
Following many years of neglect, and having suffered the ignominy of having one of its cities listed recently as having the worst air quality among major cities in the world, the present government has shown commitment to address the severe environmental dilapidation Pakistan is suffering. In order to mitigate these adverse effects, the government has launched the Ecosystem Restoration Initiative (ESRI) for facilitating the transition toward environmentally resilient Pakistan by mainstreaming adaptation and mitigation through ecologically targeted initiatives, which include afforestation, biodiversity conservation, and enhancing policy environment.
A “Clean-Green Cities Index” (CGPI) has been initiated in 20 cities to trigger a shift toward improved waste management and sanitation. While the CPGI operates at the municipal level, the natural extension of the CPGI initiative would be for the government to migrate it upwards to the provincial and federal levels. It should devise a sustainable development index that accounts for standard economic growth factors as well as negative externalities like increased air pollution, depredation resulting from rapid population growth, and other unsustainable social costs. The accounting of welfare cost in monetary terms should be used to model policies relating to energy production and consumption as well as in the sanctioning of state funded infrastructure programs such as highways and mass transport schemes. Its inclusion could have helped persuade policy makers in Lahore to carefully weigh the price of losing tree cover due to an aggressive plan to build underpasses and overpasses.
The environment, like all economic goods, is scarce and subject to rational choices people make. Affixing costs to air pollution such that policymakers recognize for any project as well as in devising mechanisms for consumers to pay for it, is likely to result in the introduction of measures like mandatory vehicular fitness and emissions testing, switching to better quality Euro 5-compliant fuel, and a shift away from reliance on fossil fuels. Accounting for environmental costs is likely to provide the incentive to people and policymakers to make the right choices toward ensuring inclusive growth.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.