Is environmental damage visible in a market economy?

Climate change is the most severe environmental problem possible, and the international community is struggling with the necessity of avoiding the damage, Anni Huhtala writes.

Tykkylunta Hyvinkäällä. Kuva: Tero Laakso (rajattu, CC BY 2.0)Photo: Tero Laakso (cropped, CC BY 2.0)

Now that economic growth has taken the world by surprise, Finns and other pessimists are worried that it won’t last for long. Or should we rejoice at all when gross domestic product grows?

I’m looking forward to seeing people start to worry about the negative effects of economic growth. That’s when the debate begins on the GDP not correlating with well-being.

Of course, it is not possible to read directly from the accounting systems of national economies what kinds of environmental problems economic recovery creates. Economic outputs are measured in terms of money, and there’s no market price for environmental damage. From a well-being point of view, damage would be negative added value or output.

But it would be wrong to say that environmental problems aren’t visible in the economy, even if indicators were insufficient.

Climate change is the most severe environmental problem possible, and the international community is struggling with the necessity of avoiding environmental damage.

Scientists say that when climate changes, there will be extreme weather events more often. Of course, we need to separate changes in weather from changes in climate, but they give us a hint of the changing world to which we need to adjust. Economies adjust with people.
At the turn of the year, we saw how the growing precipitation came down as snow in Kainuu region in the north-eastern Finland. At most, there were over double the number of employees normally working for the local electricity company trying to fix electricity lines damaged by heavy loads of snow.

It is also believed that the disastrous wildfires in California last fall were caused by old, damaged power lines, which ignited forest in sweltering heat in the northern part of the state, which had been suffering from drought for many years.

People in different corners of the world are now worrying about who will compensate them for the damage. Initially, the electricity companies will have to foot the bill. Over time, people who use energy will pay the price in higher transmission charges and other payments. But electricity companies themselves must be incentivised to take care of their basic infrastructure so that their business is not based on consumers always paying the bill. That’s why companies have to be regulated.

The root cause of environmental problems – carbon dioxide emissions – should also be regulated. As long as emissions do not carry a price tag, decisions made in the market are based on distorted information.

And these distortions can’t be directly seen in the accounts of national economies. Then those who have time and money to gather better information usually prevail in the economy.

Institutional investors have started to abandon companies that make their profit using fossil fuels.

It would be fair for ordinary consumers if they could trust in the price tag a product has in a store. Then they wouldn’t have to guess who, eventually, will pay for the environmental damage from the product.