Sharing Resources with the Future

For many years there have been two approaches to the formulation of materials policy, one associated with the traditional thinking of resource economists and the other with that of conservationists. An important purpose of this book is to develop a unifying conceptual structure to join together these two approaches.

In the past, national policy has followed the assumption that the more we extract and use our natural resources, the faster we build up the economy. The larger the volume of materials we process, so the idea has gone, the richer and more secure we become. Instead of letting our mineral resources lie fallow in the ground, they should be turned into productive assets, benefiting future generations as well as our own. For example, for two centuries the United States favored mineral extraction on its national lands, codifying the practice in the 1872 mining law. The extraction of minerals, including energy minerals, was encouraged by depletion allowances and other tax preferences; energy consumption was encouraged by a promotional price system that gave volume discounts for larger consumption. The ostensible cost of energy and materials was reduced by ignoring the environmental costs associated with extracting and processing them.

By materials we mean here the basic raw materials of the economy—minerals, metals, and nonfood fibers. In 1972 the United States consumed 290 million tons of forest products, 140 million tons of metals (mostly iron), 1.9 billion tons of fuel minerals, and 2.1 billion tons of nonmetallic, nonfuel materials (mostly stone, sand, and gravel).

The consumption of materials has doubled every thirty-five years since 1870. This is bound to change, for we cannot go through many more doubling periods. Much of the growth in materials consumption is driven by population growth, and historically the growth in consumption of materials has been about 0.3 percent greater than the growth in population. Thus, some of the increase in materials consumption is likely to melt away automatically and painlessly as population levels off. And some of the growth will be attenuated, however painfully, if we move into an era of sharply higher costs for both energy and materials.

Whatever changes take place, our historical experience remains built into our economic structure, and our economy still favors extraction and use over conservation. Perhaps the most basic question of materials policy formulation is this: After two centuries of favoring materials extraction, should we now take active steps toward a more conservative materials policy, and if so, how?

By what standards do we judge the best, or optimal, balance between depletion and conservation of materials, between disposal and recycling, durability and original cost, maintenance and new production? These questions lead directly to another, How should we account for the very long-run costs which may be associated with materials depletion and waste generation?

Efficiency criterion. The market itself provides a standard of sorts in that it defines a balance between depletion and conservation, recycling and disposal, and durability and initial cost. Market forces lead to a certain flow of material through the economy, extending from extraction to discharge into the environment (or material throughput). In the exploitative view, the extraction of virgin materials is an engine of economic growth and development, so that extraction should be encouraged beyond what the market would do by itself. Opposing this view is the belief that markets do not provide adequately for the future, so that provision for the future, in the form of conservation, should be encouraged beyond what the market would do by itself. It is interesting that both the exploitative and conservationist views are largely justified in terms of benefit to the future, yet they recommend opposite materials policies.

Generally, economists have taken a more neutral view. The market is indeed flawed, they agree, but if the flaws were corrected, there would be no need for a national materials policy; the market would provide the right balance between depletion and conservation, disposal and durability, and so forth. In this view, recycling is neither good nor bad in itself; it is the correction of market failures that is important. If the market failures cannot be corrected, or if upon examination they turn out not to be failures at all but "distortions" to bend market allocations toward worthy and intended policy goals, then the market can still be used as a standard to measure by. By this view, we estimate what the market would do in the absence of distortions, calculate the gaps by examining what the market is actually doing, and choose materials policy goals on the basis of closing these gaps. To follow this prescription is to act under the efficiency criterion. This criterion, which can be used as a basis for materials policy, says that material flows should be arranged as if they were operating in a perfect market.

There are four causes of market inefficiencies that are important for our purposes and that manifest themselves in imbalance between prices and marginal costs. These are (1) monopoly pricing power; (2) the market system's inability to include environmental and disposal costs in product prices; (3) distortions in the federal tax system; and (4) price systems, such as freight pricing, which discriminate among products on the basis of what the traffic will bear.

Correction of the last three market inefficiencies would lead to more recycling and less material throughput. Is this enough? Is the efficiency criterion sufficient as a basis for a materials policy? Would even perfect markets provide adequately for the future?

Intertemporal fairness. Markets can be expected to allocate resources more or less efficiently relative to a given distribution of wealth or market power (a hypothetical ideal market would actually achieve efficiency). But markets cannot be expected to solve the problem of what is a fair or equitable distribution of wealth, either among different people at a point in time (intratemporally) or among different generations (intertemporally). The questions of depletion and generation of long-lived wastes are fundamentally questions of equitable distribution of burdens across generations. The problem of a fair intertemporal distribution arises because the material resource base is potentially long lived, as are some wastes (the plutonium waste generated by reactors has a half-life of 24,500 years). Thus the same materials must be shared among many generations.

It is sometimes assumed that future generations will be better off than the present one, even taking into account future burdens from long-lived wastes and depleted resource stocks. The assumption is usually derived from extrapolations of past trends in capital formation and other economic aggregates. In the past it was often assumed that increases in knowledge were always net benefits and that capital accumulation was always a homogeneous good thing. Under such assumptions, with knowledge and capital growing, the only intertemporal welfare problem is how much saving the present generation should do and how fast the future should be made better off. Under the assumption that the future is going to be better off no matter what, the question of intertemporal equity is not a pressing matter.

However, the costs of long-lived material wastes or material resource depletion are not certainties or even mathematical expectations. The burdens associated with resource use that we are placing upon the future are largely risk burdens. With respect to both material wastes and depletion, the equity question is, What is a fair distribution of risk to impose upon the future? For many long-lived wastes, we have exceedingly little idea of the intertemporal distribution of risk. And in order to judge the distribution of a depletion burden, we would first have to forecast the strengths of each of the price determinants of the major material resources. Clearly this is a very difficult thing to do and involves a great deal of uncertainty in the assessment of risk.

While technology is ultimately the only way of renewing "nonrenewable" material resources, it adds to the legacy of risk to be bequeathed to the next generation. Technological solutions are not inevitable. As the flows of nonrenewable resources become larger for the United States and increasingly so for other countries, our dependence on technological fixes becomes greater. The power of technology itself becomes greater, with uncalculated and perhaps unmanageable side effects. Thus, the burden as we use up oil is the risk burden that we will not come up a substitute technology in time. Alvin Weinberg has called one alternative, nuclear power, a Faustian bargain. More generally, the present is in the process of imposing many Faustian lotteries upon the future. Our legacy to the future is not homogeneous and is not composed entirely of benefits. Intertemporal equity emerges as an important problem because there is no easy way to add up the costs and risks along with the benefits and no way to guarantee that the future is going to be better than the present.

Two means of achieving direct price effects are of considerable importance. The first is the severance tax; this is simply a tax on virgin material extracted from the ground or environment. It may be based either upon the dollar value of the material extracted (ad valorem) or upon the weight or quantity of the material extracted (specific). Severance taxes increase the nominal scarcity of virgin materials, from the point of view of users and consumers. Severance taxes also slow down the rate of extraction, buying time to develop substitutes and increasing their payoff. In the past the severance tax has been levied principally at the state level, but here the tax is considered at the national level as an instrument of intertemporal fairness.

The second means of achieving direct price effects, other than resource reservations, is the percentage depletion allowance. As will be seen later, this provision is almost a mirror image of a severance tax and is nearly equivalent to a subsidy per unit of material extracted. Not only is it the best known provision favoring mineral industries and a direct price effect, but in addition its close relationship with the severance tax makes it instructive for our purposes. Percentage depletion allowances began in 1926 and have grown over the years largely in ignorance of their long-run effects. It appears, but it is by no means clear, that the short-run effects of percentage depletion allowances are not highly disruptive but the long-run effects may be substantial; the same may be true of the severance tax. In the long run, measures such as percentage depletion allowances and severance taxes affect the renewability of the resource base, especially when we think of technological change as a method of renewing nonrenewable resources.

Keeping the resource base intact. The problem of intertemporal fairness becomes greatly simplified when the resource base is kept essentially intact over time. Suppose, for example, that as we are forced to use less rich ores, say 0.5 instead of 1 percent copper ore, technology progresses, allowing the cost of copper per unit extracted (including the environmental costs) to remain constant. Then it is a matter of indifference which generation one is born into, at least with respect to the copper resource. Copper is being managed on a "sustainable yield" basis. In such a case, at least with respect to the materials base, there would be a world of equals between generations. It might be an attractive goal, as a matter of intertemporal fairness, to keep the resource base essentially intact, but it is not a goal that markets can be expected to achieve automatically, even if they were perfected.

Conservationists have long held it an important goal to keep the resource base essentially intact from generation to generation. And when the resource base appears threatened, as it now does with respect to fossil fuels, preservation of this base becomes an important goal for society as a whole. Economists will recognize this goal as a macroeconomic one, and the severance tax, in this context, as a macroeconomic policy instrument. Economists often recommend macroeconomic policies on employment, inflation, interest rates, and the balance of payments. These policies are designed to establish a context within which market forces can interact on their own to the advantage of society at large.

In the past, economists have not included preservation of the resource base in their list of macroeconomic goals needing explicit policy measures. They have relied on the invisible hand of the market to match new technology against depletion, much as, before the Depression, they counted on the invisible hand to eliminate unemployment. But now, as material flows are becoming enormously larger, lead times shorter, and the environmental and technological effects more pervasive, it is time to make preservation of the resource base an explicit policy issue.