Environmental costs of natural resource commodities : magnitude and incidence

The carrying capacity of our natural environment is an important unpriced input to production. A consensus is growing that users should pay for the environmental damage that they cause. Although most people can accept this policy in principle, many are concerned with magnitude and incidence of its associated costs and the disruptions that would be created during a transition period. Of particular concern is the burden that might be placed on the economics of developing countries. When the industrial world was developing, it was able to benefit from cheap natural-resource commodities. It is fair to expect countries that are trying to imitate this pattern to pay more? Unfortunately there are not reliable estimates of the effects of environmental protection costs on production, consumption, revenues, and foreign exchange. The author explores these issues for the energy and nonfuel-mineral markets, sectors responsible for much of the current industrial pollution. Using a model, the author, examines the consequences of the developing world adopting the environmental standards of the industrialized world. The author assumes: all producers incur clean-up costs; most adjustment is made through changes in prices and quantities, not through altered trade patterns; and the industrialized world increases its environmental expenditures by the same fraction as the developing world. The author finds that increased revenue resources will more than compensate the average developing country for the costs of pollution control, so no assistance or intervention would be required. This assumes, however, that capital markets are perfect, which is far from the case in many developing countries. These imperfections constitute the greatest obstacle to successful environmental regulation. Loans of subsidies from North to South should be considered. Developing country producers should be given access to credit dollars, prices of imported pollution-abatement equipment could be reduced, or aid could be tied to the installation and maintenance of environmental capital. The author finds that environmental protection costs are small. Compliance costs of roughly three percent of product prices lead to changes in export revenues of less than one percent. The principal reason for this result is that mineral commodity demand and supply are inelastic in the long run. As for the incidence of environmental costs, an environmental"tax"is on average progressive, because low-income countries are typically net exporters of mineral commodities, where as high-income countries are net importers.