INSTITUTIONAL
STRUCTURES AND
PROCESSES
32. We wish to use this opportunity to respond to the Committee's
request for our views on the recently published "aid memoire"
on Policy Appraisal and the Environment. These remarks should
be taken with the context that if the perverse incentives and
countervailing pressures on policy makers (such as spending limits
and regulatory capture) are not also addressed, no amount of guidance—however
simple and clear—will help. Similarly, a strategic perspective,
covering social and environmental impacts, as well as economic,
over a long-term time-horizon is necessary if sustainable development
is to result. In other words, transparency of decision making
must go beyond recording environmental implications.
33. The new "aide-memoire" is an improvement over
the previous guidance, particularly because it is clear and brief.
However there remain some issues of concern. First, it still implicitly
prefers economic valuation of costs and benefits. Because of the
limitations of valuation techniques, this necessarily devalues
environmental and social impacts, valuing impacts on the poor,
future generations or other species less, or not at all. We believe
that all values should be expressed and compared in a common political
framework, through citizen's juries, for example. If such an approach
was adopted, this would require consequential revision of the
Treasury's "Green Book".
34. Second, it does not require publication of environmental
appraisals—which would be a critical step in ensuring appropriate
accountability. Third it fails to recommend wider consultation
with environmental or social interests where possible impacts
are identified. This would help ensure effective participation
and thus acceptance of policy changes. Finally, it does not ensure
effective coverage of health issues related to environmental damage
and pollution. It is not clear whether these would be covered
by environmental appraisal or health appraisal, and it is thus
possible that they would be missed by both.
Appendix 1: Development of the ISEW
Since its original formulation, the ISEW methodology has
come under considerable scrutiny, and a number of criticisms have
been raised of particular aspects of the index. The updated UK
ISEW has taken these criticisms into account and made some important
methodological revisions to the original index. Full details of
these revisions, together with an account of their effects on
the index and a number of important sensitivity analyses, are
to be found in a report from the Centre for Environmental Strategy
at the University of Surrey (Jackson et al 1997, Sustainable
economic welfare in the UK 1950-96(. In the following paragraphs
the most important revisions are briefly described.
Income inequality In the original index, the adjustment
for income inequality was essentially ad hoc: an index
of inequality was constructed from time series Gini coefficients
by setting the 1950 coefficient equal to 100. Consumer expenditure
was then "weighted" by dividing the raw data by the
inequality index. In the updated index we have used a method specifically
developed for measuring the economic impact of distributional
inequality. The method determines a level "perfectly distributed"
income equivalent to each unequal distribution of income (Atkinson
1983). The two incomes are equivalent in the sense that both incomes
are deemed to deliver the same level of social welfare. The Atkinson
income is thus ideal for use as a basis for the Index of Sustainable
Economic Welfare. The revised method allows for an input to reflect
society's aversion or otherwise to income inequality. A factor
epsilon ranges from zero (reflecting absolute indifference to
income inequality) to infinity (reflecting complete aversion).
For the purposes of this revision we have used the rather low
figure of 0.8 suggested by studies of actual attitudes in the
UK. However, we are not entirely convinced that it is appropriate
to accept a judgment about social welfare inferred from existing
patterns of consumption. The acceptance of (or aversion to) income
inequality is an issue which legitimately ought to refer to a
social evaluation (for instance by surveys of public attitudes)
as well as to market behaviour, and such an evaluation is not
yet available for the UK. Sensitivity analyses demonstrate that
a slightly higher value of epsilon would considerably depress
the index, particularly over the last 15 years of the study during
which income inequality has reached "unprecedented"
levels (Goodman and Webb, 1994).
Long-term environmental damage A number of people
have criticised the original ISEW method of accounting for the
long-term environmental costs associated with fossil and nuclear
fuel consumption. A simple tax of 50 cents (in 1972 dollars) was
levied for every barrel of oil equivalent consumed by either fossil
fuels or nuclear power. As a post hoc justification, the
authors made comparison with certain estimates of the future costs
of climate change, showing that in some cases, their provision
was relatively conservative by comparison. The revised UK ISEW
explicitly uses cost estimates for long-term damage from global
warming, relating these directly to emissions of carbon. A marginal
social cost (in 1990) of around £11 per tonne of carbon emitted
has been derived from estimates by Fankhauser (1994). This cost
is then used as the basis for determining retrospective marginal
social costs which rise over the time period according to the
cumulative level of emissions from past activities. Applying these
marginal social costs to the actual emissions in each year has
provided a stream of annual contributions to future damages. Since
these future damages accumulate, year on year, the associated
costs are accumulated through the index. The ISEW research team
at the Centre for Environmental Strategy gave detailed consideration
to the view expressed by some critics that only the annual contributions
to future damages should be counted in each year. However, they
decided against this argument for a number of reasons, principally
because it is clear that, all other things being equal, paying
off the damages associated with a single year (say 1990) would
not reduce the present value of future welfare losses to zero.
The accumulated debt of the past would still represent a very
real loss to the future. The present value of that future loss
is the very least that an index of sustainable economic welfare
should measure.
Further revisions Several other refinements of the
methodology have been made. These include: re-basing the costs
of ozone depletion to consumption of CFCs in the UK, instead of
production; expanding the category formerly accounting for wetlands
loss to include other forms of natural habitat loss; smoothing
the year on year effects of certain financial factors which might
legitimately vary from year to year without adversely affecting
long-term economic welfare; and updating a number of columns for
which better data have been found.
Effect of the revisions The main effect of the revisions
we have undertaken has been to present a slightly less dramatic
picture of the change in welfare in the UK than was presented
in the first pilot index. The principal reason for this has been
the choice of a relatively low aversion to income inequality.
nevertheless, the picture presented by the revised index is not
different in kind from that revealed by the earlier version. Sustainable
economic welfare rose in the UK from about 1950 to around the
mid-1970s more or less in line with the rise in economic output.
It has declined considerably over the last 15 years of the study,
in spite of increasing growth in per capita GNP.
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