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Public debt and environmental credit: Is there a similarity?

Public debt and environmental credit: Is there a similarity?

Public debt versus environmental debt: Is there any similarity?

Public debt versus environmental debt: Is there any similarity?

Public debt and environmental debt: Are there any similarities?&nbsp

New Delhi: Any generation has a tendency to use resources in excess to meet their material needs. This leaves little for future generations to fulfill their needs. Overexploitation can lead both to the depletion and degradation natural resources as well as environmental pollution (e.g. overexploitation of groundwater, deforestation, land degradation and water pollution).

If each generation is bounded by a strict constraint of using natural resources and ‘environmental space’, there is possibility of achieving ‘sustainable development’. These constraints need to be assessed at national, sub-national and local level keeping in mind the present ‘state of environment and natural resources’. Environmental regulators are required to enforce environmental constraints at all levels. Given the ‘environmental space’ available for each generation, if the present generation cannot control environmental pollution and/or overexploit natural resources it will have spill-over effects on future generations in terms of ‘environmental debt’. Society will be responsible for the scarcity of natural resource and clean environment. The society as a whole will bear the brunt of the effects of pollution and scarcity of natural resource.

Therefore, protection of environment and conservation of natural resources can be seen as collective self-protection (or self-insurance), as compared to adoption of averting behaviour (point of use purification) by individuals – private (individual) self-protection (or private self-insurance). Collective self-protection may be more cost-effective than individual self-protection if the available remedial actions (point-of-use purification) are expensive. It is not possible to increase the environmental space by increasing the efficiency of natural resource use (e.g., water conservation, land conservation). Water use efficiency, controlling pollutions (e.g. abating pollutions), conservation and conservation of natural resources (e.g. water conservation, land conservation), and enterprising innovations, investments in technological breakthroughs (e.g. replacing fossil fuels with renewable energy). It is not possible to avoid environmental pollution completely. Some environmental damages (e.g. loss of species) are irreversible. 

If the government’s expenditure exceeds the public resources available, it is considered a fiscal or revenue deficit in public finance. The government’s public debt will increase if there are years of deficits, net of repayments. If the burden of servicing public credit (interest and principal payments liabilities) is significantly higher than current revenue generation, it leaves little to spend on public goods. If the government’s expenditure on public goods or services exceeds the current generation’s resources, it could lead to public debt. Future generations could be responsible for paying the costs of servicing the public credit by contributing more to the public resources that are used to provide public goods and services. Inadequate provisions of public goods and services may lead to the problem of ‘elite capture’ and private financing (provisions) of public goods. The poorest people suffer the most because they can’t afford to purchase public/ merit goods (e.g., education and health, safe drinking waters, sanitation). Achieving inter-generational equity in public finance is comparable to the concept of ‘Sustainable Development’ in environmental economics.

The government can adopt rule-based public finance management (PFM), which helps to maintain fiscal discipline by controlling revenue, fiscal deficits in short-run and public borrowing in the long-term. Since the early 2000s, India has had fiscal prudence through the adoption of Fiscal Responsibility and Budget Management Acts at both the national and sub-national levels. Adoption of rule-based environmental management can also help achieve sustainable development.  

Fiscal space could be expanded, but not environmental space. This is based on increasing the tax base (as measured from the size of the economy and the growth of the economy) and revenue (tax buoyancy). Tax buoyancy is dependent on economic growth and tax compliance. The carrying capacity of an ecosystem and environment is limited, which means that environmental space is also limited. Limitations in the ability to regenerate the environment and ecosystem can lead to environmental pollution and disruptions of ecosystem services. Natural Resources Accounting (NRA) could also measure the limit of carrying capacity of the environment (or the environmental space). The integration of NRA and National Income Accounting (NIA), could allow us to measure the true progress in our wellbeing. An assessment of the environment available for a generation may be possible based on local conditions. A bottom up approach may be helpful. Environmental debt, like public debt, could also be estimated based on the accumulation of pollution loads in an environment (e.g. water environment, air environment and land environment) over time. 

Government resorts to public debt management when there is high public debt. This involves increasing revenues and controlling expenditures. If less environmental space is available, we have to protect it by limiting the exploitation of natural resources, and controlling pollution. Conservation of natural resources (e.g. reducing, recycling, and reusing wastewater) and investments in the environment’s regeneration capacity could help to reduce environmental space.      

An environmental accounting could help us understand the current state of environmental debt by allowing us to quantify the depletion and degradation in natural resources and the environment. It could be possible to link the physical accounting with economic activities, and underlying environmental management practices, to identify necessary interventions to protect our environment. Environmental regulations and market-based instruments to limit environmental space exploitation may both help to reduce environmental impact. Water efficiency standards may be mandatory for all water fittings. This could help reduce water consumption. Limiting polluting inputs in production could also help reduce pollution loads. This could include replacing phosphate in detergents with zeolite to reduce the threat of foam and other froth in our rivers.      

There are many economic actors involved. Therefore, social mobilization is important. The goal could be achieved by involving existing institutions such as Pollution Control Boards, Universities/ Colleges in environmental evaluation and Comptroller Auditor of India in environmental auditoring.                  

The environment is a major concern today. It makes sense to consider the environmental debt owed to us by our ancestors, and the burden we are passing on. Environment is both an input for production and a sink for pollutants. In addition, various ecosystem services help our production systems. Multiple functions of the environment, and ecosystems, help us to maintain our wellbeing. There is need for periodic assessment of ‘state of the environment and natural resources’ in a comprehensive manner to identify the gap between availability and utilisation of environmental space. NRA of water resources, land and forests could help to assess the ‘environmental debt’. We need to reorient production and consumption systems in order to reduce carbon emissions and reduce our water footprints. Sustainable development could be achieved using a rule-based approach to environmental space utilisation and reducing pollution loads, as in the PFM FRBM Act.   

Sacchidananda Mokherjee is a guest author. All views are my own.

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