THE EQUITY PRINCIPLE

Distribution of costs and benefits

CBA is about total costs and benefits, and does not deal with who gets the benefits and who suffers the costs. As long as the sum of the benefits outweighs the sum of the costs, even if a small group of people get the benefits and a whole community suffers the costs, the society as a whole is assumed to be better off: 'we are not only comparing apples and oranges, as is often the case in CBAs, but also dealing with situations where quot;applesquot; are taken away from one group of people to provide quot;orangesquot; to another group' (W Fisher quoted in Corner House 1999).

The theory behind CBA says that a change is an improvement if the winners can fully compensate the losers and still be better off themselves. In reality, the winners seldom compensate the losers. It is sometimes argued that although the distribution of benefits and costs may be unfair in particular instances, it will all balance out in the end. But the tendency in our society is for winners to frequently win and for losers to usually lose - so that poor people are the ones who tend to suffer the costs of haz­ardous, dirty or unwelcome developments (see chapter 4). CBA hides these distributional consequences and appears neutral when in fact a certain section of the community is benefiting while other sections are losing.

Although CBA is based on a principle of compensation, economists generally don't ask people how much they would require as compensa­tion for environmental losses because there is no limit to how much they might require. Rather, they ask how much people are willing to pay to avoid these losses, a different question altogether which elicits a different answer, governed by how much that person can afford.

Reinforcing existing inequities

CBA and national accounting do not discriminate between needs and wants, between luxury items and necessities. All are converted to numbers and treated the same. In fact, luxury items are accorded higher values than necessities because wealthy people are willing to pay more for them. Naturally, a person's willingness to pay will be limited by their income, assets and ability to borrow. It will also be shaped by his or her perceptions of monetary value; for example, $1000 is a huge amount to someone living on $3 a day in a poor country. Within any community, people's willingness to pay will be dependent on their incomes.

Because a person's willingness to pay depends on their financial security and income level, any survey of willingness to pay is likely to be distorted, giving greater weight to the values of those with the highest incomes who are able to pay much more for what they value. In this way the time saved by a wealthy executive when an airport is sited close to the city is valued highly but the cost of the added noise generated by the airport in a depressed neighbourhood with low property values may be worth little.

CBAs reflect and reinforce existing inequities within society. For example, siting a dirty industry in an already dirty area will be less costly than siting it in a low-pollution area - because the costs of pollution, if measured in terms of decline in property values, will be lower. Similarly, siting the polluting industry in an area that has depressed property values for other reasons - but is nevertheless unpolluted - will also be less costly, according to willingness to pay surveys or hedonic pricing, than siting it in an affluent area; again, the poor are disadvantaged.

In 1992, New Scientist reported on a leaked World Bank memo which argued that it was better policy to pollute areas where poor people lived.

Although Summers later claimed that his memo was a joke, it is unlikely his fellow economists at the World Bank would have appreci­ated his black humour. The reality is that cost benefit analysis and envi­ronmental pricing do reinforce the tendency for environmental burdens to be imposed on those who are poor and who already live in degraded neighbourhoods (see chapter 4).

A few years later a group of economists led by British economist and CBA expert David Pearce calculated the costs of global warming. Using willingness to pay, they found that the value of lives in poor countries was $100 000 and the value of lives in wealthy countries was $1.5 million. Naturally, many people were outraged at this discrepancy, which high­lighted the inequities involved in willingness to pay methods (cited in Raghavan 1995).

Another equity issue in terms of willingness-to-pay surveys is the question of which populations are surveyed. It will make a difference to the outcome if the survey is limited to local populations or includes broader populations who know less and care less about the environment in question. But is it fair that people living outside an area should deter­mine the environmental quality within it? Alternatively, should local people be able to decide to destroy a unique feature of their environ­ment, something that is part of the greater human heritage, without input from others?

The uses of proxies are similarly iniquitous. For example, the use of wage premiums paid to those who work in hazardous environments as a proxy for what that risk to health is worth assumes that everyone has the same preferences as the workers, 'who do not have many choices or who are exceptional risk-seekers' (Kelman 1994: 142).

Discounting future generations

In terms of environmental costs, the higher the discount rate that is used, the greater is the bias towards the present and against the future. The further the costs extend into the future, the less they will be worth in today's values - but future generations will still have to put up with them. An extreme example is the storage of radioactive waste, which can be radioactive for hundreds of thousands of years into the future. Environmental and health problems arising from this radioactive waste hundreds of years hence would be worth almost nothing in today's values

Because costs that are more than 30 years away become almost value­less using discounting at normal rates, long-term environmental costs such as resource depletion may be effectively ignored: 'Except at very low discount rates, a tree that takes 40 years to grow would have a very low value today to show against its costs' (ESD Working Group Chairs 1992: 14). Discounting therefore discriminates against future generations.

Economist David Pearce and his colleagues (1989) put forward the following reasons for discounting:

• Money obtained now can be invested and earn interest.

• People tend to be impatient.

• The person might die before he or she gets the money.

• One cannot be sure of getting the money in the future.

• People in the future will probably be better off so money will not be worth as much then.

While discounting money may make sense, discounting environmental values seems to be an example of what economists Herman Daly and John Cobb (1989: ch 7) call 'misplaced concreteness': in other words, getting mixed up between the measure (in this case, money) and the real world (the environment), and assuming that the real world behaves as the measure does.

In reality, an area of environmental significance is likely to increase in value as areas like it become scarce and our knowledge about ecosystems increases. Such areas are also likely to become more valuable as popula­tions increase, and especially if leisure time increases. Discount rates based on individual private preferences are inappropriate for societal decisions regarding environmental protection because, as we saw earlier, people treat private consumption decisions differently from political decisions about what is good for society.

The idea that someone would like to consume now rather than in the future is also not applicable to public goods, which can be enjoyed now and in the future; only consumption that uses up the environment, such as logging or pollution, fits the discounting model. Society gets the bene­fits of environmental preservation, and therefore the risk of one person dying before he or she gets the benefits is meaningless.

Discounting is also applied to human health impacts in a similarly inappropriate way. Future cancer cases are discounted so that 100 cancer cases in 20 years are equivalent to 26 cancers today (using a 7 per cent discount rate) (Ackerman amp; Heinzerling 2004: 196-7). 'At a discount rate of 5 per cent, one death next year counts for more than a billion deaths in five hundred years' (Shrader-Frechette 2002: 168). This clearly favours benefits today very heavily against future deaths, which become in the calculation almost worthless. Daly and Cobb (1989: 153-4) declare:

The prize for nonsensical discounting must go to those who discount future fatalities to their 'equivalent' present value... one is left with the suspicion that the motivation underlying the whole ludicrous calculation is simply to convert a 'very large number' into a very small number under the cover of numerological darkness.

Not only are future lives discounted, but some CBAs also discount future years of an individual life. In the USA economists use life years rather than lives as a measure of benefit or cost. In this measure a 65-year-old is worth less than a 20-year-old because they have less life years left, unless that 20-year-old already has a life-shortening disease. On top of this, the Office of Management and Budget (OMB) discounts future life years so that the 75th year of a child living now would be worth only a few days when discounted to present value, and a child who is killed at the age of a five loses only 14 present-value years of life. In this way the OMB cal­culated that the benefits of a regulation for child restraints that would have saved 36-50 children aged three years old amounted to 'a present value of only 25 to 35 children, each with a present value life expectancy of only about fourteen years' (Ackerman amp; Heinzerling 2004: 196-7).