Public, Not Business, Pays for Cleanup

THE Earth Summit in Rio de Janeiro proved the pessimists wrong. The conference did little damage to the world economy. The third world, which in general has a terrible environmental record, secured only modest sums of money from industrial nations, most of which have been aggressive in protecting their environments.

In fact, the meeting succeeded in some unexpected ways: It exposed the militant antigrowth agenda of the radical greens. It focused attention on the runaway cost of environmental controls that not only fail to meet their objectives, but block growth.

In reality, growth is inevitable. Over the next 40 years, world population will grow from 5.3 billion to 8.9 billion. To feed, clothe, and house this throng, the World Bank says food production must double, industrial production and energy output triple, "with even larger increases needed in developing countries."

Sustaining such rapid growth will require the world to invest its finite pool of capital as efficiently as possible. The bank warned, growth "brings with it the risk of appalling environmental damage," or the opportunity for "cleaner air and water, and the virtual elimination of acute poverty. Policy choices will make the difference."

In the United States the cost of environmental action has risen steadily. Two years ago, the Environmental Protection Agency estimated the cost of pollution control over the prior 20 years at $1.2 trillion and said the cost from 1990 to 2000 would be $1.6 trillion, all in 1990 dollars.

The bulk of the burden falls on business in the form of "mandated expenditures," an implicit corporate income taxes. That seems reasonable. Companies pollute. They should pay. John Beliese, a reader in Estes Park, Colo., has a typical view: "If business can get away with polluting the environment, it is simply avoiding some of its costs of production and imposing them on innocent third parties."

That argument is wrong. Companies typically pass along most of the cost of environmental controls in higher prices, lower wages, or smaller dividends. This means that "innocent third parties" already pay. But the cost is hidden. The public has no way to know how much it is paying to clean up the environment, or if benefits are in line with costs.

For many reasons, companies have not been able to pass on all the costs of complying with environmental laws. Since the early 1970s, mandated outlays have played a key role in cutting profits as a share of national income. Corporate cash flow accounts for about two thirds of total private saving and almost all wealth-producing investment. Lower cash flow means lower net investment, and lower net investment means slower growth.

Americans now pay twice for programs that often demand bigger outlays to stop smaller amounts of pollution. The first payment is in higher prices, lower wages, or smaller dividends. The second is in slower growth and a lower standard of living.

The World Bank contrasted two environmental strategies. "Market-based policies, which tax or charge polluters according to the amount of damage they do to the environment," it said, "offer policy makers greater flexibility than command-and-control policies [based on quantitative restrictions] and generally impose a smaller burden on the country's economy."

Market-based incentive policies, the bank said, are "especially promising for developing countries, which need to conserve the scarce administrative resources" that they would otherwise have to allocate to monitoring their environment under a quantitative strategy. Washington, take note. Most US environmental legislation uses a command-and-control approach.

The bank went on, "industrial countries must bear most of the costs of addressing global environmental problems, especially when the required investments are not in the narrow interests of developing countries.... Such arrangements have the potential to make all countries better off."

In the end, voters in the industrial North will decide how much to donate to the less fortunate developing South. One thing is clear: The richer the country, the less pollution it will have.

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