Environmental Audit CommitteeWritten evidence submitted by Colin Green, Flood Hazard Research Centre, Middlesex University
The Flood Hazard Research Centre at Middlesex University is an interdisciplinary research centre focused on the policy aspects of water management in the transition to sustainable water management. It has been part of numerous EC research projects in the past (eg SWITCH on sustainable urban water management; CONHAZ on the costs of natural hazards). Current EC FP7 projects include: WeSenseIT (a citizen’s observatory for water); EPIWATER (the use of economic instruments for water management) and STAR-FLOOD (governance and flood risk management). We have also prepared reports for the OECD (the barriers against and incentives for the adoption of green water infrastructure) and the UN Water Decade (on green water infrastructure). Colin Green is Professor of Water Economics.
Introduction
Humanity has to live on this planet for the indefinite future. It is a fossil planet, the only new resources that there will ever be are solar and gravitational energy; everything else, the chemical elements, is already here. Some of those resources are already scarce as identified in the reports of the US Geological Survey. In the short term, we have the advantage of the inheritance of the equivalent of thousands of earths: the complex carbon compounds, created over millennia through biological and botanical processes driven by solar energy, compressed by geological action, and left for use as chemical feedstocks or for fossil fuels. But in the longer term, we have to do more with less; we have to make change to a green economy. We have to do this in the face of change, most obviously climate change. But climate change simply requires us to make the changes we will have to make anyway: at some point, oil, gas and coal will be more valuable as chemical feedstocks than for energy production.
Doing more with less raises the obvious questions of:
More “what”?
Less “what”?
How do we do it?
The more “what” question is, following the Stiglitz Commission, being answered in terms of “well-being” and the less “what” questions in terms of the sustainable uses of resources, and the valuation of environmental services. A technical problem here is that to the extent to which a proportion of the current well-being is unpriced, and another proportion of the resources used to produce that well-being is also unpriced, the prices of all marketed goods and consumption are distorted. Given that without the environment, there is no economy, the relationship between the economy and the environment being as the leaf to the tree, we have to be cautious in using the leaf to value the tree.
The practical problem is the “how” question: how can we greatly improve the efficiency with which we deliver well-being within the capacity of the planet. The ultimate limits on the “how” question are set by the laws of physics, chemistry and ecology. For example, Liebig’s Law states that crop yields are determined by the least available of the essential plant nutrients. We can approach nearer and nearer to these limits but they cannot be breached. What can be achieved at any one time is then set by the state of technology; for instance, the energy required to produce nitrogen fertilisers has, over the last one hundred years, fallen until, with the technology processes currently available, it is close to the technological limit.
But, fortunately, actual practice typically falls well below what is technically obtainable at a given state of technological knowledge. For example, Envirowise reported that industry and commerce could reduce water consumption per £ output by 30% whilst increasing profitability. There are multiple reasons why resources are not currently being used efficiently, these reasons have been identified by such researchers as Simon, Rees, Stiglitz and Coase. That we are not currently on the technological frontier offers immediate scope for acting to improve efficiency.
Questions
Seeking sustainable development raises new questions on top of those old questions, questions to which we still have inadequate answers. Three of those old questions are:
How does development occur?
How does change more generally occur and how can it be induced?
What is capital?
Development
For the past 150 years, a concern of UK governments has been the UK’s relative economic decline and hence the desirability of increasing relative economic growth. Success has not been notable. If we have not been successful in developing a strategy for economic growth, we start in a poor position to develop a strategy for sustainable development.
Change
Development is a specific form of change; other key processes of change are adaptation, learning, innovation, and changing the behaviour of consumers and others. Understanding the processes through which and by which change occurs and can be induced is critical. The other side of the problem is to understand why changes has not or does not occur.
Capital
An increasing range of things (eg natural capital, social capital) are now termed “capital” in order to both stress their importance and to emphasise that they need to be used wisely. But the use of the term “capital” implies both commonalities that may not exist and a degree of substitution between forms of “capital” that may not be possible. “Money capital” produces a return income, interest, that does not reduce the capital sum. Taking a higher income than the true interest on the capital depletes the capital but it can also be replenished by diverting income into savings. Conversely, it has been argued that social capital is produced by being used and that use of social capital is neither a form of income nor a drain on capital. What we mean by capital and whether the different things we call capital are substitutes, complements or antagonists are all open questions.
What is to be done in the short run?
Indicators
The value of any indicator is what you can do from them; the analytical meaning of the indicator either or both in prospective or retrospective terms. The value of an indicator is indicating what will work or what will not work, and has or has not worked: they need to be action orientated. In turn, whilst numbers are succinct means of summarising understanding, it is that understanding which gives meaning to the numbers. Since it is the understanding that matters, it is better to be roughly right rather than precisely wrong and, equally, to avoid adopting an indicator simply because the statistics are readily available.
For analytical purposes, indicators have to be comparative; able to identify changes over time, relative to other countries, and in consequence of different courses of action. This often means that it must be possible to look at disaggregated figures or to drill down from the aggregated figures. It is little use having figures for the “chemical industry” SIC when there are 148,000 chemical compounds registered for use in the EU and many of those compounds are precursors for other chemical compounds. Piecemeal statistics may then be much more useful than grand aggregates; for example, the statistics on water usage in different parts of the textile industry produced by the Envirowise programme are much more useful than the grand SIC averages of water usage per unit output produced by the German national office of statistics. Perhaps the greatest value of aggregate data is to identify where it is most useful to have more detailed data: where investment in better data will produce the biggest gains.
It may be useful to reflect upon what statistics we seek in attempting to analysis how a shock such as a flood or drought propagates through an economy and how an economy may then recover from that shock: how resilience may be promoted. The old statistical data, notably GDP, is of little use partly because it is too highly aggregated both in area and also in sectors. Similarly, input-output tables never lived up to their promise because, again, they are too aggregated but also because they describe a state when the problem is to understand the dynamics. “Old” data that is useful include household expenditure breakdowns and the IMF data on the breakdown of revenue for governmental units in different countries.
But it is the “new” statistical data, that which has only recently started to be compiled, that is most relevant. We are starting to get data specifically on SMEs (which constitute roughly half economic activity). In the UK, and a few other countries, statistical estimates (based upon rather a lot of assumptions) have started to become available on net physical assets. Recently, the UK trialled the development of statistics on household wealth and assets. In terms of the effects of a flood, this starts to provide a basis for examining how a household can recover from a flood, what savings and other resources it has available and hence which households will recover most rapidly and by what means. But as the OECD data shows, the forms, and hence liquidity, of savings varies widely between different countries.
More generally, we need to be clear whether we are measuring inputs, outputs or efficiency; the ratio of one or more outputs to one or more inputs.
The really difficult things are those that appear simultaneously be both output measures and to contribute to efficiency. For example, social capital is frequently considered to both contribute to efficiency and to be a contributor to well-being, an output measure. These things often also involve the junction of utilitarian questions and moral issues. For example, if people are asked what are their values, the response, after a long pause, is normally in terms of those principles that they consider either do or should govern their actions; what are the moral, ethical or religious principles that should be adopted. The latter in particular are also frequently specified in terms of social relationships; from “my family” through to democracy or justice. Here, there are a whole series of intertwined concepts that are difficult to define, let alone measure (eg trust, legitimacy, justice). As the term “relationships” implies, it often appears that what is at issue is a dynamic rather than a state: it is, however, easier to report, in statistical terms, a state rather than a dynamic.
Actions
Statistics are useful in so far as they are action orientated. A practical problem is then decisions about actions can depend upon time series data so statistics can need to start to be collected before there is a clear need for that data. But initial driver for collecting statistics is what actions might be taken on the basis of that information. In doing more with less, the obvious starting point is to drive out existing inefficiencies, to get closer to the current technological frontier. For example, England has been said to be twenty years behind Germany in terms of sustainable urban water management. Similarly, the 2030 Water Resources Group argue that a large part of the growth they predict in water requirements in India and China can be met by driving out inefficiencies. Whilst they provide no evidence to support their argument, what other evidence is available means that their argument is not unreasonable.
Once the current technological frontier is approached, the problem is to push the technological frontier outwards until it reaches the limits imposed by the laws of physics, chemistry and ecology.
The immediate problem is therefore to drive out inefficiencies. This requires both identifying where and how large are these inefficiencies, and more especially why they occur and what in turn can be done about them. This implies that it is here attention should be focused in terms of indicators.
14 June 2013