5.1 What is sustainability?
One of the reasons for the significant number of alternative approaches to measuring sustainability is that, beyond the basic idea of sustainability, there is no common understanding of what it actually entails in practice. As Anand and Sen (2000) put it, 'economic sustainability is often seen as a matter of intergenerational equity but the specification of what is to be sustained is not always straightforward'.
This naturally leads us to the question of what is sustainability?
Sustainable development began to gain wide acceptance as an important societal goal following the Brundtland Report, Our Common Future. The Brundtland Report established a conceptual basis for sustainable development and produced what has become the most widely recognised definition of sustainable development: 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs' (WCED 1987).
But how can we interpret this definition? One interpretation, which is consistent with Treasury's wellbeing framework, is that sustainability requires that at least the current level of wellbeing per capita be maintained for future generations. In this regard, sustainability can be seen as requiring the per capita stock of capital, or the productive base for wellbeing, bequeathed to the next generation to be as least as large as the stock the current generation itself has inherited (Arrow et al 2004, Dasgupta 2007a).
This gives us a clear link between the concept of current wellbeing and sustainability. The wellbeing of a generation is determined by the productive base or 'stock' of resources inherited from previous generations and the choices that generation makes. The stock of resources inherited by a generation influences the set of opportunities available to them.
The choices made by a generation will dictate the quantity and quality of the stock of resources available, or 'bequeathed', to future generations. In some instances, choices made by a generation that raise their wellbeing will necessarily expend a particular component of the stock of resources. For example, the consumption of non-renewable resources by one generation will reduce the quantity of non renewable resources bequeathed to subsequent generations. In other instances, the choices made by a generation that raise their level of wellbeing may result in an increase in the endowment of resources bequeathed to future generations. Human capital, such as education, is one example. A reduction in the endowment of a particular component of the stock does not necessarily lead to a reduction in the wellbeing of future generations if, for example, the use of that component of capital is converted into another form of capital (such as reinvesting the proceeds from the exploitation of natural resources into human capital) or where technological advancements increase the range of opportunities available in the future.
An economy's productive base includes all capital relevant for the determination of wellbeing. An economy's productive base therefore includes not only its capital assets (stocks of manufactured and human capital) but also its natural capital (stock of environmental capital) and its institutions (stock of social capital). These are often referred to as the three pillars of sustainability - economic, environmental and social capital. The productive base, therefore, refers to the quantity and quality of all the tangible and intangible economic, social, human and environmental resources available to a generation. This stock of resources comprises a multitude of tangible and intangible elements that are interrelated and, not surprisingly, difficult to define and measure.
The challenge for each generation is making choices about the use of the stock of resources without knowing what knowledge and technological advancements will be available to future generations. Whether an economy is sustainable or not therefore is a question of whether the economy's productive base is being maintained or enhanced, or alternatively is contracting (Dasgupta 2007a).
5.2 Why output based measures will not do
Since sustainability relates to the change in an economy's productive base, it is easy to see why GDP and related measures, (such as HDI, green GDP, and GPI) are insufficient for assessing sustainability. For example, green GDP measures only what can be consumed in a period. But for sustainability we are interested in comprehensive investment - the difference between comprehensive production and consumption (Stiglitz et al 2009). To put it another way, instead of measuring current consumption, ideally what we require is a measure of over (or under) consumption - how much we draw down (or add to) our productive base in generating current wellbeing.
Therefore, while it is possible that an economy's productive base could grow along with GDP, it is also possible for an economy's productive base to shrink while GDP grows. One example of this is the exploitation of natural resources to fund current consumption. While the increased consumption will lead to higher GDP, where natural resources are not replaced with another form of capital of equal value, the productive base available to future generations may be eroded. Of course, the productive base available to future generations includes advances in knowledge and technology, which may compensate fully (or more than fully) for the depletion of at least some natural resources. However, if the economy's productive base is shrinking, at some point GDP would decline. The problem is that this could take some time, and possibly be recognised only when it is too late.
5.3 How can we measure sustainability?
There are two ways to use the stock based approach to measure sustainability. One version, consistent with Adjusted Net Savings, is to try to convert all stocks, economic, environmental and social into a monetary equivalent. This approach implicitly assumes that different forms of capital are substitutable or shadow prices can be correctly estimated. The second approach examines variations in each stock separately, with the degree of substitutability a matter for judgment, but with the main focus on ensuring that a particular stock does not fall below a critical threshold. At the extreme, sustainability is achieved where the specific stock does not decline at all, which of course implies complete non substitutability. The Ecological Footprint is an example of such a measure.
From a policymaking perspective, it is important to recognise the complex inter relationships between economic, environmental and social capital, and ensure policy is directed towards social optimal use.
Measures that attempt to convert stocks into a monetary equivalent would appear to show the most promise in this regard. However, such measures are often criticized because of the implicit assumption of substitutability between different forms of capital (weak sustainability). It is without doubt that capital assets will differ in their ability to be substituted with one another, and there are some forms of (natural) capital we cannot replace. At one level, we could expect the price of each type of capital good to appropriately reflect its scarcity, but this is only the case for well functioning markets. For many natural resources, markets do not function well; in many cases they do not exist. As such, in order to be able to convert stocks into a monetary equivalent, we need to calculate shadow prices, which reflect the value of an asset to society - that is the increase in social wellbeing if an additional unit of the asset was made available to the economy (Dasgupta 2007a and 2007b). Ideally, these shadow prices would reflect the scarcity of an asset, where a vital asset is becoming scarce its shadow price would rise sharply, and all else being equal, it will become more difficult to replace it with another as
set and hold wealth constant. By estimating shadow prices, policy makers are better equipped to consider the trade offs between the various stocks that make up an economy's productive base.
While measures that convert stocks into a monetary equivalent show promise, as noted by Dasgupta (2007b), estimating shadow prices poses significant problems. Current measures are crude at best, and it is widely acknowledged that more work needs to be done. One significant problem is that for many stocks, particularly environmental and social capital, placing a monetary value on them is very difficult. Stiglitz et al (2009) recognised this and recommended that a monetary index of sustainability be complemented by a limited set of physical indicators to monitor the environment - particularly in the case of irreversible or discontinuous alterations. Such an approach seems entirely sensible as we determine better ways to value the environment.
The Australian Government's 2010 Intergenerational Report was one attempt to do this. The previous two Intergenerational Reports focused on fiscal sustainability, whereas the 2010 Report expanded the concept of sustainability to consider the environment. This report presented a range of indicators including threatened and extinct species and estimated vegetation cover. This was a first step but a lot more needs to be done before we can say it has been done well.