What is Sustainable consumption?
Consumption patterns have been growing rapidly because of population growth combined with the rise of a culture of consumerism. In this blog, we explain Sustainable consumption patterns in 2019.
It is estimated that there will be 9 billion people in 2050, which represents a huge increase in the number of consumers. Globalization and increasing economic power are giving more and more of these consumers access to an increasing number of products and services.
A significant amount of GDP is accounted for by consumer spending on goods and services. However, the resources needed to support these global consumption patterns are putting unsustainable pressures on the Earth’s ecosystems and on human social systems and well-being.
Several tools and indices have emerged to measure and track the state of the world’s ecosystems. The Ecological Footprint, for example, measures how much land and water area a human population requires to produce the resources it consumes and to absorb its wastes, using available technology.
This technique can be used to calculate the footprint of an individual, a city, a business, a nation, or the whole planet. Today, humanity uses the equivalent of 1.5 planet Earth to provide the resources we use and to absorb our waste.
The problem obviously is that we don’t have two planet Earths, we only have one. But with that one planet, if we change our lifestyles and consumption patterns we can free up the resources needed to support humanity.
As the WWF Living Planet Index Report states, ‘there are many effective ways to change course. While technological developments will continue to play an important role in addressing the sustainability challenge, much of what needs to be done is already known, and solutions are available today.’
Consumers are increasingly concerned with the negative effects that products they consume have on their health and on the environment, as well as the impact of the production process on the environment.
As a result, sustainable consumption policies and initiatives are broadening to take into account the effects of processes as well as products, and the provision of services as well as goods. The need for policies that foster sustainable consumption has been recognized as a priority at the international level.
According to the UN, over 80% of the world’s fisheries are in jeopardy of collapse due to over-fishing. Restrictions are not working because fish are accessible to everyone, and it is difficult to prevent fishermen from taking all the fish they want.
In this situation everyone races to catch as many fish as possible, reaping all the benefits of this natural resource but paying none of the costs. In the long run, when fish are caught faster than they can reproduce, this will result in no more fish for anyone.
A ‘commons’ is a geographical area not owned by any private person or legal entity, and any natural resources contained in a commons thereby belong to everyone. These natural resources include the things that we inherit – such as nature, air, and water.
Often, people will misuse or overuse resources that are freely available, making them increasingly scarce. This is referred to as the ‘tragedy of the commons.’
Some of the debates raise the question of whether these common assets which are already being bought and sold in the market – such as trees, water, and fish – are being responsibly managed on behalf of the general public who are the ‘owners’ of these assets.
Tradable permits are one option for protecting the commons. The European Union defines these as ‘an economic policy instrument under which rights to discharge pollution or exploit resources can be exchanged through either a free or a controlled permit-market.’
Once it was determined how many fish could be caught without depleting the fish population, this number was divided up into quotas and given to companies. Companies own the quotas and are allowed to sell or trade them.
The result is that they are treated with the same respect as any other valuable asset. Today, approximately 80% of fish stocks are at or near target levels of sustainable harvest and the total allowable catch for some fish species has even increased.
Another example is from the island of Bali in Indonesia. Rice farmers have been coordinating their use of scarce water for centuries through social networks built around ‘water temples,’ where they meet to discuss water allocation issues. Modern analysis shows that the way they allocate water is close to ideal.
However, in the 1960s the government decided to intervene, bypassing the temples and hiring hydrologists to install modern water systems and introduce heavy pesticides. The result was a disaster, so much so that in the end the government let the farmers return to their original system.
The commons does not just refer to environmental systems. Knowledge and culture created by society are also part of the commons.
Some companies are exploiting traditional knowledge, for example in relation to medicinal and agricultural plants, and creating products for which they are awarded exclusive rights under patent laws (this practice is known as bio-piracy).
A company deals with costs and services that have a value set by the market in the normal course of business.
For example, if a company needs to clean up a polluted site, the cost is processed through the traditional accounting system. However, the company’s activities also give rise to external costs, known as externalities, which relate to the effects that the company’s activities have on the environment and on people.
For example, if a company releases untreated water into a nearby river, this has a detrimental effect on both the ecosystem of the river and those communities that rely on the river to survive.
In most cases, these costs (cleaning up the river, helping the people) are currently absorbed by society as a whole, instead of by the company that damaged the environment.
In contrast, an externality can also be positive. For example, if a landowner chooses not to develop his or her land and in doing so preserves a local water source for an aquifer, the landowner usually won’t get any economic benefit from the decision, but society does.
Externalities are important to consider because the costs or benefits to the company are often different from the costs or benefits to society as a whole.
For example, if the cost of polluting is not borne by the polluters, then they will feel no economic motivation to reduce their discharge of waste.
If the price of water is set below the true cost to society of using this resource, this will produce incentives to use excessive amounts of water.
Because these costs and benefits are paid by society as a whole, private economic actors (individuals and corporations) cannot make appropriate and correct calculations about whether it makes economic sense to go ahead with an activity.
In this sense, externalities are often considered a form of market failure, since the amount of activity carried out by private parties in a free market will result in inefficient use of resources.
Economists are interested in externalities as a market failure for theoretical reasons (e.g., because they can help us to understand how markets work in different societies) and practical reasons (e.g., because market failures justify the intervention of government through legislation, regulations, and other tools that work through the market).
Accounting for externalities is not an easy task because in many cases the extent of the impact is either unknown or difficult to measure. Even when it can be identified, there are significant challenges related to measuring and quantifying the impact on society and the environment.
The most efficient solutions have been to work with private companies and individuals to internalize externalities through mechanisms such as taxes and compliance costs.
There is a growing realization that one way to reverse the trend of environmental decline and protect many of our common resources on Earth is to use market forces. The idea is that certain unsustainable behaviors of firms or individuals are caused by a lack of economic incentives to pursue sustainable behavior.
For example, landowners who have a wetland or an endangered species on their land may be providing a service to society by choosing not to develop their land, but in the process are losing the financial opportunity associated with developing that land.
In response to this, market-based instruments (MBIs) are being created to provide financial incentives aimed at protecting the environment by altering market prices, setting limits on resource use, improving the way a market works, and creating a new market where one previously didn’t exist.
In the case of the landowners, they can collect payments or ‘credits’ from the conservation of the land, and can then sell these credits to developers who are looking to offset the harm they have caused to the environment.
About US$3.4 billion of regulated biodiversity offset transactions currently occur per year, a number which could grow to US$10 billion by 2020.
Although not all MBIs fit neatly into a single type, there are broadly three types: price-based, quantity-based, and market friction.
1. Price-based instruments work by changing the prices of goods and services to reflect their relative impact on the environment by either adding or removing a tax or fee. The advantage of these mechanisms is that a company knows how much it will cost to comply, but the overall environmental outcome can be uncertain. These can take several forms:
Taxes not only generate the revenue needed to mitigate the negative impacts, but also raise the price of the good or service in question, thereby decreasing the demand. This can be in the form of charges, fees, or user charges.
Subsidies in the form of a payment or tax concession can help encourage changes in behavior that reduce pollution. For example, a subsidy could be offered for the purchase of clean technology in order to achieve a reduction in overall pollution levels.
Charges can be imposed to encourage companies or individuals to change behavior. For example, by charging a volume- or weight-based fee to dispose of garbage, companies can be encouraged to minimize the total waste they produce.
Deposit-refund systems include schemes where a buyer pays an upfront charge in addition to the price of the product, which is then refunded when the product is returned.
One common example of this is the beverage container deposit scheme, which is usually introduced to encourage the return of drink containers for recycling.
2. Quantity-based instruments involve creating markets for the right to undertake an activity that has a negative environmental impact, such as discharging pollutants into a river or the air or for the right to have access to a scarce resource, such as water.
These are used when there is a measurable target that needs to be achieved. As opposed to the price-based instruments, these provide certainty regarding the environmental outcome, but not for the cost to industry of achieving that outcome.
Tradable permits (cap-and-trade) involve determining the amount of pollution that can be released, or how much of a resource can be sustainably used, and then issuing permits for that amount. Organizations can only pollute as much as the permits they own allow.
If they put in place mechanisms that allow them to cut their pollution significantly, they can sell unused credits to other companies that perhaps have not been able to cut their pollution.
Quota management is a way to protect natural resources such as fisheries. Once the total amount of fish available to catch is determined, quotas are then given to fishers.
One fisherman from the Alaskan halibut fishing industry said about the quotas put in place in that industry, ‘Most fishermen will now support cuts in quotas because they feel guaranteed that in the future when the stocks recover, they would be the ones to benefit.’
Offsets are conservation actions designed to compensate for unavoidable impacts on the environment. For example, clearing native vegetation for development can be offset by protecting another ecologically equivalent area of vegetation.
These are usually only appropriate when the participant has first taken all available measures to avoid and minimize harm.
3. Market friction instruments aim to influence how existing markets work in order to improve environmental outcomes.
One example of this is through product differentiation in the form of certification schemes and eco-labels. Putting these products enables consumer preferences to be expressed through markets.
For example, the FSC label allows customers to choose products that are made of wood from sustainable forests, thus increasing the incentives for companies to produce such products.
There are many potential advantages of MBIs. They can be more cost-effective for delivering environmental outcomes than regulations or other traditional methods and often give better results.
They provide flexibility for participants to choose how they will reach goals and to reduce pollution beyond targets.
In that way they can act as a more positive influencer, leading to more long-term and self-sustaining solutions. However, markets themselves do not allow us to solve all problems. Markets are very complex and it can be difficult to predict the outcomes of certain initiatives.
For this reason, different types of MBIs are currently being tested around the world, especially around carbon and increasingly around biodiversity and conservation.
Economic progress is usually measured by gross domestic product (GDP). This represents the total dollar value of all goods and services produced over a specific time period.
Although this can give a pretty good indication of the size of the economy, it does not include a number of factors that determine the wellbeing of people. As author Paul Hawken puts it, ‘We have an economy where we steal the future, sell it in the present, and call it GDP.’
There are also several problems with how GDP itself is measured. For example, GDP focuses on short-term economic activities rather than on developments in the assets of natural, economic, and social capital, which are more important from a long-term, sustainability perspective.
Both the ‘beneficial’ activities that cause pollution and the costly activities necessary to clean up the pollution are counted toward a country’s GDP. Cutting down trees and selling timber boosts GDP, but the loss of forests does nothing to decrease it.
Studies often show that as GDP goes up, other measures are leveling off and even declining.
For example, the New Economic Foundation’s Happy Planet Index – which ranks a nation’s progress based on the number of the Earth’s resources its inhabitants use and the length and happiness of people’s lives – found that high levels of consumption do not necessarily guarantee happiness.
As Herman Daly, one of the founders of Ecological Economics, puts it, ‘economic growth may already be making us poorer rather than richer.’ In response, several alternatives have been presented which look at economic, environmental, and social wellbeing. These include:
Green Net National Product. GDP less the costs of degradation and depletion of natural resources.
Genuine Progress Indicator/Index of Sustainable Economic Welfare (GPI). Personal consumption expenditures plus the value of ‘unpaid’ work, capital services, and education less the costs of inequality, crime, pollution, loss of leisure, unemployment, and natural capital depletion.
Regional Quality of Development Index. Attempts to identify and connect the components of development quality based on environmental sustainability, promotion of rights, and quality of life.
Wellbeing Index (WBI). Goes beyond GPI; this index also incorporates measures of civil freedom, security, biodiversity, health, justice, and self-sufficiency.
Human Development Index (HDI). Averages three indices reflecting a country’s achievements in health and longevity (life expectancy at birth), education (adult literacy and school enrolment), and living standard.
Several countries have moved to explore these alternatives to GDP. According to the Center of Bhutan Studies, ‘GDP is heavily biased towards increased production and consumption, regardless of the necessity or desirability of such outputs, at the expense of other more holistic criteria . . . Indicators determine policies.
The almost universal use of GDP-based indicators to measure progress has helped justify policies around the world that are based on rapid material progress at the expense of environmental preservation, cultures, and community cohesion.’ Bhutan came up with ‘gross national happiness’ (GNH).
The idea is that a country should not sacrifice elements important to people’s happiness to gain material development, so GNH focuses on not just flows of money but also access to health care, free time with family, conservation of natural resources, and other non-economic factors.
A new economic model
The conventional neoclassical economic model is based on perpetual growth and is seen as the way to achieving wellbeing. The news media have been full of articles describing how it took just a few days for governments to abandon decades of economic doctrine to try to rescue the financial system.
Why shouldn’t it take as long to introduce a plan for a new, more relevant economic model?
In October 2008 UNEP and leading economists launched the Green Economy Initiative, which ‘will encourage and enable economic, planning, finance, labor, environment, and other policy-makers to support increased investments in environmental assets and green production while ensuring a fair and just transition towards a green economy.’
The ambitious plan calls on world leaders to promote a massive redirection of investment away from the speculation that has caused the bursting ‘financial and housing bubbles’ and into job-creating programs to restore the natural systems that underpin the world economy.
Its mission is to communicate a global plan for a green industrial revolution to be supported by strong and convincing evidence of income generated, decent jobs created, and poverty reduced through investing in a new generation of assets including ecosystems (or environmental infrastructure), clean;
and efficient technology, renewable energy, biodiversity-based products and services (such as organic foods), chemical and waste management and mitigation technologies, and green cities with ecologically friendly buildings, construction, and transport systems. All this could create millions of green jobs.
Valuing future generations
If valuing current generations and their environmental needs weren’t difficult enough, policymakers also have to contend with how to value future generations. The question then arises – how much should be reserved for the needs of the future when making decisions that affect us today?
In calculating the costs of greenhouse gas reductions one needs to see how these compare to the benefits of the reduced risk of climate change many decades, even centuries, into the future. Should a dollar spent today to prevent climate change weigh equally against a dollar in benefits 100 years from now?
This is where discount rates come in. They are increasingly important and used in cost-benefit analysis and long-range environmental planning. The decision of which rate to choose can have serious implications; higher discount rates make investments less attractive, while lower discount rates make them appear more attractive.
The regulatory framework within which companies operate is extensive and complex. As governments become increasingly conscious of environmental concerns and the public demand action, companies are faced with a growing number of regulations that they must comply with.
The situation becomes even more complex for companies that conduct business across borders where regulations can differ from one jurisdiction to the next, often significantly.
Enforcement of these different mechanisms varies depending on the nature and location of the regulation. Many have their own dispute-settlement mechanisms.
The European Commission is exploring plans to take environmental offenses to criminal courts. Infringers could face jail time for dumping toxic waste or illegally trading endangered species, for example.
The US EPA has also launched an environmental crimes fugitive website to assist law enforcement agencies and the general public in finding fugitives who have violated environmental laws. At the international level, the International Court of Justice is one mechanism that can be used. However, often the most effective is public and political pressure.
Economics is also the study of how people choose to use resources. Scientists agree that drastic action is needed to save the planet and, if we are serious about doing that, we need to reshape the way that we use these resources.
The good news is that economists are starting to explore opportunities to do just that by creating mechanisms that assist organizations in internalizing these costs so that buyers and sellers can make decisions based on complete information about products and services; as well as understanding the broader social and environmental consequences of the consumption of these products and services.
Why is it important?
Because the world is changing. The context in which organizations are doing business is rapidly changing. Where before the USA, Europe, and Japan were the leading economies, today there are many other players in the world, including developing and emerging markets.
This is creating a more complex business environment with increased risks, but also increased opportunities for business.
Ecosystem services. Nature provides many freely available benefits such as erosion control, climate regulation, and pollination, not to mention freshwater, forests, and wetlands.
Ignoring the environmental impacts associated with economic growth will result in these resources becoming more costly for business.
Understanding regulatory and market-based instruments. Many problems in sustainability, such as externalities, represent market failure where the production or use of a good or service by the free market is not efficient. The mechanisms being put in place to address these market failures will directly affect businesses.
A better understanding of the full cost of business and society's decisions. The costs of activities are not always borne by the parties directly involved, which often results in consumers demanding more of a particular good or service than they would if they had to pay a price that included the full costs.
Increased regulations and standards. Organizations will be faced with an increase in regulations and standards that they will have to comply with from the local to the global level.
The key concepts
Economics is about understanding the incentives in place to pursue unsustainable behavior and in particular how to change these to support more sustainable behavior. It is also about understanding the wider environment in which business operates and how this is changing.