Decision-making under environmental uncertainty

E L S E V I E R Ecological Economics 15 (1995) 29-42

E C O L O G I C A L E C O N O M I C S

M e t h o d o l o g i c a l a n d I d e o l o g i c a l O p t i o n s

Decision-making under environmental uncertainty

S y l v i e F a u c h e u x a , . , G E r a l d i n e F r o g e r b

Universit~ de Versailles-St Quentin en Yvelines and Centre Economie-Espace-Environnement, Universitd de Paris I Panthdon-Sorbonne 90, rue de Tolbiac, 75634 Paris cedex 13, France

h Centre Economie-Espace-Environnement, Universit~ de Paris 1 Pantheon-Sorbonne, Paris, France

Received 7 June 1994; accepted 2 April 1995

Abstract

The paper 's main concern is with different decision-making models for environmental issues and with the hypotheses of rationality underlying such models. The hypothesis supported here is that most environmental problems are in a context of uncertainty, of irreversibility and of complexity. We shall explain why stressing the role of these elements implies a reversal of the traditional attitude towards decision-making. This presupposes a paradigm of economic rationality much broader that that of orthodox economics, called "procedural rationality". Our paper is in two parts. The first part concerns the limits of the stochastic environmental approaches based on the Bayesian decision theory and on a substantive rationality hypothesis. The second part concerns the decision-making analyses based upon a procedural rationality, as well as their ability to take account of the interactions between uncertainty, irreversibility and complexity.

Keywords : Decision theory; Environmental uncertainty; Complexity; Substantive and procedural rationality; Sustain- able development; Energy analysis

1. Introduct ion

In r ecen t works conce rn ing global c l imate change and the concep t of sus ta inab le deve lop- men t , t he re is cons ide r ab l e suppor t for the imple - m e n t a t i o n of a " p r e c a u t i o n a r y pr inc ip le" . Such a p r inc ip le impl ies the cu r r en t sa feguard o f envi- r o n m e n t a l r e sources agains t the po ten t i a l ly ca tas- t roph ic o u t c o m e s of some decisions. T h e s e decisions, which cu r ren t ly invoke the p r e c a u t i o n a r y pr inc ip le , a re such tha t the p robab i l i ty d i s t r ibu- t ion of fu tu re o u t c o m e s canno t be known with

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conf idence . Given tha t mos t of the e nv i ronme n ta l effects of economic act ivi t ies a re unknown and unknow a b le in advance , it would a p p e a r tha t a theory of dec i s ion -mak ing u n d e r unce r t a in ty might be useful.

T h e p a p e r ' s ma in conce rn is with dec is ion- making mode l s u n d e r unce r t a in ty for envi ron- men ta l issues and with the hypo theses of r a t iona l - ity under ly ing such dec i s ion -mak ing models . Ac- cord ing to S imon ' s asse r t ion (Simon, 1964,1972), a d is t inc t ion mus t be m a d e be tween the gene ra l not ion of ra t iona l i ty as an a d a p t a t i o n of avai lable means to ends, and the var ious theor ies and mode l s based on a ra t iona l i ty which is e i the r subs tant ive or p rocedura l . This t e rmino logy can

30 S. Faucheux, G. Froger / EcolcLgical Economics 15 (1995) 29-42

be used to distinguish between the rationality of a decision considered independently of the manner in which it is made (in the case of substantive rationality, the rationality hypothesis refers exclu- sively to the results of the choice) and the rationality of a decision in terms of the manner in which it is made (in the case of procedural rationality, the rationality hypothesis refers to the decision-making process itself).

The thesis supported here is that most environmental problems, such as the increase of the greenhouse effect, the reduction of the ozone layer or the loss of biodiversity, are in a context of uncertainty, of irreversibility and of complexity. It is the interaction between these three elements which constitutes an explosive mix for the decision-making in environmental economics.

We shall explain why stressing the role of uncertainty, irreversibility and complexity implies a reversal of the traditional attitude towards decision-making. This presupposes a paradigm of economic rationality much broader than that of orthodox economics, called "procedural rationality". Our paper is in two parts. The first part concerns the limits of the stochastic (probabilistic) environmental decision-making approaches relying on the Bayesian theory. Based upon a substantive rationality hypothesis, such an approach cannot really take into consideration environmental uncertainty. The second part concerns decision-making analyses based upon the hypothesis of procedural rationality, as well as their ability to take account of the interactions between uncertainty, irreversibility and complexity. We propose a potential application (e.g., the sustainability tree) using the hypothesis of procedural rationality to help the decision-making.

2. Environmental uncertainty and the limits of the Bayesian decis ion-making theory based upon a hypothesis of substantive rationality

Contrary to the opinion of some exponents of the Bayesian theory, such as De Finetti (1937) and Savage (1954), different modalities of uncertainty may require theories of decision-making based on different axioms [the same opinion is

expressed in Machina (1987)]. Traditional probability theories work rather well in the cases of weak uncertainty. Nonetheless, they do not seem really useful in cases of strong uncertainty and near ignorance, as that involved in many global environmental problems. Indeed, probability distributions are not fully reliable. Moreover, Bayesian analysis of the decision-making under uncertainty has almost nothing to say about the intertemporal environmental problems, as well as about the complexity. All these limits are due to one important assumption of the Bayesian theory, which is that the agents make decisions on the basis of a substantive rationality.

2.1. From weak to strong uncertainty: implications f o r the nature o f environmental uncertainty

According to a well-established tradition origi- nated by the classical contributions of Knight (1921) and Keynes (1921), there is a distinction between two kinds of uncertainty: a weak variety called "r isk" and a strong variety called "uncertainty". In particular, "risk refers to probability distributions based on a reliable classification of possible events and uncertainty refers to events whose probability distribution does not exist or is not fully definable for lack of reliable classification criteria" (Vercelli, 1991, p. 72).

Such a distinction is relevant for our purpose (see also Vercelli, 1994a). We can establish the following hierarchy: situations of certainty exist when a unique, wholly reliable probability distribution reduces to just one value. Weak uncertainty is defined by a unique probability distribution, additive and fully reliable. Strong uncertainty is described by a distribution of non-additive probabilities a n d / o r by a plurality of probability distributions which are not fully reliable. Near ignorance (Shakle, 1955,1969), the upper limiting case of strong uncertainty, exists when none of the conceivable probability distributions is reliable. Table 1 proposed by Froger and Zyla (1995) gives a typology of any kind of uncertainty according to two criteria that are probability distributions of events and their reliability, which is the most important one.

What attracts our attention is the strong uncer-

S. Faucheux, G. Froger /Ecological Economics 15 (1995) 29-42 31

Table 1 Modalities of uncertainty

imprecise

~'ell defined

low

ignorance

maximum

strong uncertainty

weak uncertainty

certainty

tainty and its upper limit (the near ignorance) because it is typical of all the interactions between the economic system and the environment. Near ignorance characterizes many global environmental problems (we don't know the environmental effects due to the progressive reduction of biodiversity). There is a great deal of uncertainty about the role that the natural environment plays in supporting economic activity and about the effects of economic activity on the environment.

Let us add that global environmental problems have no historical precedents. Since no observa- tions exist of the historical environmental effects of economic activities, there is no basis on which to identify their possible consequences or to con- struct probability distributions for those effects. This means that the information on which decisions are made is most often of a non-probabitis- tie kind.

For environmental issues, uncertainty is unknown and often unknowable ex ante; the decisions have both collective and individual components and they concern processes that may be irreversible (Chichilnisky and Heal, 1994). Follow- ing Krutilla (1967), changes in the natural environment caused by human activity may be irreversible. For example, buildings can be con- structed, later demolished and then recon- structed. However, once an exhaustible resource deposit has been depleted, or once the assimila- tive capacity is overshot, it is impossible to recre- ate these components of the natural environment. The combinations of environmental events with a

small likelihood of occurrence and a significant long-term impact are to be considered seriously.

Furthermore, the decisional problems become much more complex since the option set can change endogenously owing to the effects of past decisions, as well as through time as a conse- quence of the multidimensional interactions between the economic system and the environment. Therefore, it is difficult to forecast reliably environmental changes and their possible welfare sig- nificance that may be caused by the effects of economic activities (O'Connor et al., 1995).

Strong uncertainty, irreversibility and complexity are important in any discussion of sustainable development and they characterize global environmental problems. Is Bayesian theory applicable to any of these elements? Or is the application of such a theory limited?

2.2. Limits of probabilistic environmental dec&ion- making analysis based upon the Bayesian theory and consistent with a substantive rationality hypothesis

The orthodox decision theory in an environmental context employs the analytical tools and a specific theoretical language rooted in the paradigm of substantive rationality, in which the emphasis is placed on finding the best solutions through constrained optimization (Simon, 1982). In this framework, individual or collective rationality is identified with constrained maximization of an objective function and the agents are assumed to possess perfect information on which to base their decisions (or they act "as if" they may have perfect information at one stage), even when environmental issues are involved.

The Bayesian theory only applies to situations of weak uncertainty without considering both it- reversibility and complexity because of the substantive rationality hypothesis which is inherent in it (see also Froger and Munda, 1994).

Limits of substantive rationality for dealing with strong uncertainty

Existing decision theories, based on substantive rationality, are limited for dealing with envi-

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ronmenta l decision situations characterized by a high degree of uncertainty about nature, inci- dence a n d / o r timing of possible environmental costs, especially situations where the effects may be catastrophic for future generations.

Some authors (M~iler, 1989a,b; Asheim and Brekke, 1993) point out that we do not know the long-run consequences of interventions in the environment, nor do we know what value environmental systems may have for future generations. From these considerations, however, they fore- close the f ramework to that of individual decision-making under risk. The probability of occurrence for each possible outcome is specified: each possible action is associated with a known distribution of potential outcomes. The choices of an individual are analysed by assuming that he max- imises his preferences represented by a v o n Neu- mann-Morgenstern expected utility function.

In the simplest case, the individual is assumed to know the distribution of probability of the outcomes. The Bayesian theory and its develop- ments reduce the uncertainty situations to risk situations. Many authors have explicitly denied the distinction between different kinds of uncertainty from the point of view of the normative theory. Models of decision-making under uncertainty complying with the Bayesian theory sup- pose that agents make decisions "as if" they know the collection of future states of nature or the probabilities of occurrence for the future states. In fact, Bayesian theory modelizes choice by maximization of a unique criterion, which as- sumes listing exhaustively the consequences of all possible decisions and their corresponding probability (Von Neumann and Morgenstern, 1947; Savage, 1954).

Then in a relaxation of this assumption, it is assumed that initially the individual has a "sub- jective" estimate of probabilities that may differ from the objective ones, introducing the possibil- ity of learning following Bayesian decision rules. This means that the agents may, over time, learn more about the opportunity costs associated with use of the environment, for example, whether or not particular exploitation or damage is reversible. The necessity of being cautious in making decisions is then outlined 1

The intuitive meaningfulness of this result is not in question. But one has to doubt the ade- quacy of these approaches to the major problems involving environmental uncertainty. In such situations, representat ion of choices "as if" they in- volve expected utility maximisation amounts to imposing a form of representat ion of decision- making rationality primarily conceived for situations of certainty, and postulating it as equally applicable in situations of strong uncertainty.

Nonetheless, decision-making in face of any kind of uncertainty implies unavoidable ex-post mistakes whose consequences cannot be reliably evaluated in advance by stochastic analysis and may be virtually boundless. This is particularly accurate in cases of damage to ecological systems that is larger in spatial scale and more complex, which are both more harmful and more difficult to reverse because of the complexity and slower time of adaptation in these systems. It is argued by Loomes and Sugden (1982) that expected value analysis represents a restrictive notion of rationality which does not take account of the notion of "regret" . The absence of systematic ex-post mistakes, which is the distinctive feature of substantive rationality, is only plausible whenever the decision-maker faces a stationary stochastic process which has persisted long enough to allow the decision-maker to fully adjust to it (Lucas, 1986). The interactions between economic development and the natural environment are characterized by strong forms of irreversibility that are inconsis- tent with the stationary stochastic processes involved. The concept of probability does not apply because we are not dealing with a stationary state being discovered; ra ther the ecological-social-economic histories are being made-and-understood- in-time. The inter temporal flexibility preference is not taken into account by environmental approaches based on substantive rationality.

The representat ion of the decision process by an expected value analysis is unsatisfactory because the range and the distribution of future

i We have elsewhere analysed the links between the quasi- option value, the acquisition of information and the precautionary principle (Faucheux and Froger, 1994).

S. Fauchelvc, G. Froger / Ecological Economics 15 (1995) 29-42 33

environmental effects of economic activities are not known in advance ( a n d / o r are unknowable) and we do not act "as if" it is known (knowable). "This can be interpreted by saying that if it is known that an action may cause profound and irreversible environmental damage which perma- nently reduces the welfare of the future generations, with probability of such damage not known, then it is inequitable to act 'as if' the probability is known" (Perrings, 1991, p. 160). Let us add that it may be inequitable to act even if the probabilities are known because of the ethical judgments to the consequences and timing of the events (Howarth, 1994).

Limits of substantive rationality for dealing with complexity

Existing decision theories, based on substantive rationality, are consistent with the Laplacian view of science which considers all events as being predictable (our inability to predict is only due to the " imperfec t ion" of human knowledge). A contrasting view about the notion of complexity proposes that the " incompleteness" of human knowledge is not due only to our ignorance (lack of information), but stems also from inherent indeterminacies in social-ecological processes. In- determinacy should be considered as a significant feature of social life and action. Following O 'Connor (1990, 1994) the postulate of indeterminacy has two meanings: (1) radical or ontological indeterminacy means that one can never have, even in principle, a complete and true description of "wha t is" ( indeterminacy can be stated as a feature of a reality or of a situation); (2) t ime indeterminacy refers to the dimension of un- predactibility about the future. The postulate of indeterminacy is, at the core, a rejection of historical and ontological determinism: the question of a possible "comple te" specification or prediction of reality, as envisaged in the Laplacian view of science, never arises.

Stengers (1986, 1987) outlines this refusal of determinacy in terms of a distinction between a "compl ica ted" system as understood in the Laplacian perspective, and the notion of "complexity" where reference to an underlying determinism is excluded. A "simple" system is

as one where a description, allowing prediction, can be given in the determinate sense. A "complicated" system is regarded as ultimately determined in its behaviour, but where in practice we are unable to provide a description that captures this underlying determination due to limitations of our knowledge. The apparent indeterminacy of many situations is considered as a sort of "residual" signifying the " imperfect ion" of our knowledge. The ideal of scientific explanation remains, notwithstanding, to approach the same sort of determinacy. Complete predictability remains the unquestioned reference point.

The notion of "complexity" involves the aban- donment of this reference point of an underlying determination. Indeterminacy is not a "residual" in the sense of being a remediable " imperfect ion" of our knowledge. This so-called " imperfect ion" is actually a feature of the world, not an inade- quacy in our knowledge of it. In contrast with the Laplacian relationship s imple/complicated, the sense of the relationship s imple /complex is not to favour the possible extension of the "s imple" or deterministic mode of explanation, which no longer functions as the "parad igm" for all ex- planatory discourses. Rather it is only a certain type of knowledge that appears as possible only for certain situations and phenomena.

The global environmental problems underline the importance of openness and co-dependency of complex systems. Features of indeterminacy and lack of control have given a stimulus to a new and distinct concept of the role of science as an aid to decision-making. Funtowicz and Ravetz (1991) point out challenges for scientific practice:

The new issues have common features that distinguish them from traditional scientific problems. They are global in scale and long term in their impact. Data on their effect and even data for baselines of "undis turbed" systems are radi- cally inadequate. The phenomena being novel, complex, and variable are themselves not well understood. On the basis of such uncertain inputs, decisions must be made under conditions of some urgency (...) Typically, in such issues the facts are uncertain, value is in dispute, stakes high and decision urgent. In this way, it is "sof t" scientific information which serves as inputs to

34 S. Faucheux, G. Froger /Ecological Economics 15 (1995) 29-42

the "ha rd" policy decisions on many important environmental issues.

They envisage a scientific practice that accepts and makes explicit a multi-dimension argumenta- tive process as a "process of debate and dialogue operat ing continuously over all phases of a policy process" (p. 22).

This is what they call Post-Normal Science. So the conception of the scientific explanation and of what constitutes a good decision is being changed.

It may be argued that complexity/irreversibil i- ties of human-social-ecological histories are characterised by indeterminacy of the sort that the "probabil i ty" concept simply does not apply.

These considerations are relevant for environmental decision-making analysis. All things considered, for the environmental questions characterized by an analytical context where scientific knowledge is stable, or reversibility is possible, the decision can rely a priol4 on a rationality of a substantive nature. Indeed the decision-maker knows all the possible choices and states of nature at any date and all the consequences of actions as well as their utility and probability. It is acceptable only in cases of weak uncertainty when the relevant probability distributions are known and are stationary. Nevertheless, for current environmental problems such as global climate change characterized by strong uncertainty and great Jr- reversibility on the level of consequences as well as that of probabilities of occurrence, such a hypothesis seems to be too limited. I f indeterminacy is postulated, the concept of expected value is not applicable for description of the situation. This constitutes an important limit to the application of existing decision theories, based on substantive rationality and consistent with the Lapla- cian view of scientific explanation, regarding the t rea tment of uncertainty, irreversibility and more generally indeterminacy/complexity.

In this framework, a criterion of rationality, which must ' take into consideration that the choices of the present generation may influence, in an irreversible way, the options available to future generations, and which goes beyond the structures of the traditional economic criterion of substantive rationality, is required.

3. Decision-making models under uncertainty, it- reversibility, complexity: a procedural rationality framework

If we want to take account of the irreversibility in decision-making under environmental uncertainty (about the tastes of future generations as well as about the consequences of current actions), it is necessary to intervene in order to preserve a set of options at least as large as the present one. This may imply that the current generation leaves to future generations a chance of survival and a degree of liberty of choice not inferior to its own. Many authors have proven that it is rational to react to an increase in uncertainty by increasing the inter temporal flexibility of the decisional strategy (Vercelli, 1991,1994; Jones and Ostroy, 1984).

Though we do not have a rigorous normative theory of decision in the face of uncer ta in ty / indeterminacy under the hypothesis of irreversibility, we do have fragments of analysis which may help us to clarify some important issues such as that of the value of intertemporal flexibility. Some sort of procedural (rather than genuinely substantive) norm is necessary if a "decision rule" is to be formulated. We may have a discussion of the "appropr ia te" way of applying a "procedura l rationality" in situations where the decision stakes are high and uncertainties very large.

3.1. Characteristics of dec&ion-making based on procedural rationality

A straightforward "p rocedure" for an environmental decision-making context may be described in the following terms (it is this one that is inherent in the construction of the sustainability trees in Section 3.2):

Principle of subgoals The implementat ion of procedural rationality

may imply the replacement of a global non-measurable objective with intermediate objectives or intermediate subgoals whose achievement can be observed and measured. The Simonian principle of subgoals is particularly well-suited to situations in which the optimization problem data are not

S. Faucheux, G. Froger /Ecological Economics 15 (1995) 29-42 35

fully defined. Procedural rationality can be used to define sustainability subgoals on the basis of a global objective of sustainable development, which has proved to be impossible to measure directly. These subgoals can be ecological and economic and they may themselves be broken down into several intermediate subgoals, which may take the form of standards to be met.

So a first step is to recognise multiple "intermediate subgoals" that are irreducible and which must be considered simultaneously.

Some difficulties relate to the setting of norms and standards to ensure ecological sustainability and to provide for renewable resource use within limits of regenerat ion capacity. The determination of appropriate standards may seem largely a matter of scientific research. However, there are irreducible social and political dimensions as well. Scientific analyses are not sufficient to determine the ecological norms without ambiguity, because most environmental problems are characterised by a fluid and incomplete state of scientific knowledge, accompanied by the inherent unpre- dictabilities of complex systems. Moreover, even if the scientific basis were clearcut, there is no guarantee that norms proposed on that basis would always be socially acceptable. And it is obvious that without a strong social commitment , there is no way in which respect of principles of ecological sustainability can be assured. This is the reason why, ideally, the environmental standards ought to be arrived at through a public participation process involving a wide range of social interests. The decision process would thus conform to a sort of procedural rationality, taking place through an iterative process of trade-offs and compromises with the aim of ending up with a solution that is satisfactory in terms of economic, social, and ecological imperatives.

The satisficing principle Simon lays great emphasis on the method that

he defines as "satisfactory choices" rather than "optimal choices". The aim is not to "solve" the decision problem in an optimal manner, but ra ther to help to provide more insight into the nature of the conflicts. The decision-maker doesn' t choose the optimal solution, but arbitrates between the

different intermediate subgoals and chooses the solution that he feels to be the most satisfactory taking into account economic, social, ecological and other imperatives.

So a second step is to define a linear sequence, where at each stage the concern would be to identify a "satisfactory" course of action prior to considering the next policy in the sequence. Se- quential processes of decisions may be appropriate, dealing in a structured way with different dimensions of a decision-making situation. For the time being, we will illustrate the relevance of procedural rationality for decision-making in an environmental context.

3.2. A suggested application: the "sustainability trees"

The previous section explained how procedural rationality put forward the relevance of the concept of decision process. In this section we demonstrate how to implement sustainable development policies consistent with such a concept.

As we have seen above, the implementat ion of procedural rationality may imply the replacement of the global non-measurable objective: e.g., sustainable development with intermediate subgoals whose achievement can be observed and measured (see also Faucheux et al., 1995). We propose here a decision-making tool, based on such a rationality principle, to test the potentialities of sustainability for a nation. We have essentially restricted ourselves to economic and ecological subgoals 2, which will be broken down in both cases into intermediate subgoals in the form of standards or norms. We use a particular type of non-monetary evaluation (i.e., energy-based valuation techniques) to measure them. In the first point, we build a static decision tree where the energy indicators should be taken into consideration simultaneously (this corresponds to the first step in procedural rationality described above).

If we adopt a dynamic perspective for sustainable development, it is necessary to introduce the

2 For the moment we do not yet have social indicators of sustainability, so that much research is needed in this field.

36 S. Faucheux, G. Froger / Ecological Economics 15 (1995) 29-42

compensabili t ies given by external balances, technological progress and possibilities of substitution within natural capital and partially between natural capital and man-made capital. In a second point, we introduce these elements in the sustainability tree and we get a sequential and iterative decision-making process articulating energy indicators and other indicators (this corresponds to the second step in procedural rationality described above).

Thanks to the sustainability tree either in its static or dynamic version, we can know if a country may or not achieve the choosen sustainability standards. We can see that the sustainability tree must be interpreted as a methodological framework independently of the indicators chosen. We have selected energy indicators, but it could be possible to apply such a methodology with other environmental or economic indicators. Thus our proposit ion is only one possible way for illustrat- ing the procedural rationality as an aid for decision-making.

From the energy indicators to the static sustainability tree

Energy-based valuation methods enable the evaluation of a certain number of environmental intermediate subgoals (in physical terms), via s tandards or indicators (see Faucheux and Pillet, 1994). They afford the partial achievement of two of the subgoals of sustainable d e v e l o p m e n t - - namely, ecological and economic sustainability.

National EMergy Surplus: reproduction of natural resources intermediate subgoal. The eMergy valuation technique consisting of norming all natural resources by their "solar transformity" (Pillet, 1990) measures the environment 's contribution of resources throughout the entire e c o n o m y / e n - vi ronment interface.

National EMergy Surplus (NES), in a given period of time, is defined as the difference between the amount of eMergy produced with natural resources inside a country and the amount of eMergy consumed by this country. So, we have NES = P - C , with P representing the production of eMergy and C representing the consumption of eMergy.

We may note that, in this case, the National eMergy Surplus provides an environmental standard not to be exceeded with regard to consumption of natural resources. Ecological sustainable development requires NES > 0. A necessary con- dition to have NES > 0 is that extraction rates for all natural resources are never higher than renewal rates for natural resources (e.g., their re- constitution time). In other words, the consumption of renewable resources should not exceed their renewal rate and the extraction rates for exhaustible resources should allow the replacement of exhaustible resources by renewable ones. Thus NES measures the available margin for a potential increase in the extraction of resources. If NES < 0, this means that the consumption rate of natural resources is higher than the renewable rate of these resources, so that the economy is no more sustainable from an ecological point of view.

Generation of Minimal Entropy: the minimization of pollution intermediate subgoal. The entropy degree provides an environmental standard not to be exceeded with regard to carrying capacity. Indeed, ecologically sustainable development requires that waste emissions should be less than the assimilation capacity of the environment. Given the current state of knowledge, it would appear impossible to obtain a measurement of the biosphere 's absorption capacity. For this reason we recommend the use of another source of information, e.g., the minimum entropy generation compatible with achieving a given output or reproduction result with existing best technolo- gies (Nm).

Under these conditions we propose to define the entropy degree as the difference between actual entropy increase being produced and discharged into the natural environment ( N c) and the minimum en t ropy generation technologically possible (Nm). The greater the difference between Are and N m ( N e - N m ~ +o0), the less sustainable the development because the carrying capacity of the environment would be more read- ily overshot. Minimization of this difference (N~ - N m ~ 0) may then constitute a minimization of pollution intermediate subgoal.

S. Faucheux, G. Froger / Ecological Economics 15 (1995) 29-42 37

National Exergy Surplus: energy efficiency of the economic system intermediate subgoal. The Na- tional Exergy Surplus is an indicator of the energy efficency of an economic system. The exergy valuation procedure measures the energy according to its capacity to generate mechanical work which constitutes a measure of the quality of energy used by the economic process. Such an evaluation can be used to quantify what is quali- tatively referred to as energy deterioration (e.g., a given system's thermodynamic depletion).

We can define a National Exergy Surplus (NRS), in a given period of time, as the difference between the exergy value (free content) of the inputs available for production, and the amount of exergy dissipated in a production or consumption process (or national economic system as a whole).

Such an indicator (NRS) allows us to see if economic development can continue on an enlarged basis or not. If NRS < 0, it means that there is insufficient mechanical energy in the country to permit economic reproduction. Eco- nomic underdevelopment exists, which may well be present with NES > 0. In this case, development is sustainable as regards natural resources, but it is not sustainable from an economic standpoint. If NRS = 0 , everything depends on the initial state of the economy in question. If it has already reached a high state of maturity and if NES > 0, NRS = 0 indicates a stationary situation where only simple reproduction without accumu-

lation (growth) seems possible. If NRS > 0, the economic system produces a surplus which may be used to undertake "enlarged reproduction" (assuming that NES > 0 and [N e - Nm] is close to 0) so that development is sustainable.

In proposing intermediate subgoals defined using energy-based valuation procedures, we have reduced the interface between environment and economy to a dual movement: the extraction of natural resources from the biosphere and the discharge of pollution into the same biosphere. Although there can be no doubt that these two dimensions frame the essential relations between economy and environment, the existence of other dimensions of ecological sustainability should not be forgotten, such as space and biodiversity. The latter cannot be measured in physical terms using energy-based valuation procedures. Where these aspects of ecological sustainability are concerned, we are confronted again with the problem of the lack of homogeneous physical measurements, preventing aggregation at a macroeconomic level. This means that the intermediate subgoals we have suggested constitute merely necessary and not sufficient conditions for sustainability.

The static sustainability tree for a "closed" economy (see Fig. 1) may be built through the following energy indicators: NES, (Are - N m) and NRS. In a static perspective, the assessment of the ecological sustainability of an economic-environmental interface system derives directly from the simultaneous use of the various subgoals

Finitude, Unsustainability

~ Ecological ~ ~ i ( N e _Nm) ~_> + oo i increasing entropy I ~ 1 ~ _ ~ . ...... -I Unsustainability

~ustainable ~ ( N e - Nm)--> 0 ]

I I Unsustainability

Fig. 1. Sustainabi l i ty t ree for a " c losed" economy in static perspect ive .

38 S. Faucheux, G. Froger / Ecological Economics 15 (1995) 29-42

which are in sustainability tree no. 1. A nation without an open economy can experience sustainable development if: it produces an available eMergy surplus NES > 0; the quantity of entropy that it discharges tends towards the minimal quantity (N e - N m) ~ 0; and it produces an exergy surplus (NRS > 0);

If NES < 0 a n d / o r ( N e - N m ) ~ +oo a n d / o r NRS < 0, an economy has no means of finding again the potential sustainability path.

An articulation of energy and economic indicators: the "dynamic sustainability tree"

Analysis of the sustainability tree in a dynamic perspective gives sense to the concept of the decision process. Indeed the decision-maker can test different sustainable development policies because different paths of sustainable development are now possible through the introduction of possibilities of compensation given by the cx- ternal balances and through the technological

3 progress.

The integration of external balances in the sustainability tree. In order to assess ecological sustainability in the context of an open economy, we need to integrate external balances calculated in terms of both eMergy and exergy into the defini- tion of the intermediate subgoals outlined above. We can define: (EMEB) as the difference between exportations and importations of natural capital expressed in eMergy terms; (RENEB) as the difference between exportations and importations of energy resources (renewable or not) expressed in exergy terms. So, we can distinguish two kinds of indicators: the first are relative to a "closed" economy (e.g., NES and NRS defined above) and the second are relative to an open economy (e.g., AES and ARS, respectively).

Available EMergy Surplus (AES) is defined as the difference between the amount of eMergy available and the amount of eMergy consumed by

3 Some compensat ions are also possible through the elastic- ity of substitution between natural capital and manufactured capital (for the integration of this indicator in the dynamic sustainability tree, see Faucheux et al., 1994).

a open economy. So, we have AES = (P + I ) - (C + E), with P representing the production of eMergy, I the importations of eMergy from one or several countries toward the national economy, C the consumption of eMergy and E the exportations of eMergy from the national economy to other countries.

Available Exergy Surplus (ARS) is defined as the difference between the exergy value of the inputs available for production (stocks inside the economy and imported, flux of free energy inside the economy) and the amount of exergy dissipated in the economic process (production, consumption or exportations).

As we have seen before, the assessment of the ecological sustainability of an economy-environment interface system derives directly from the simultaneous use of the various subgoals which are in sustainability tree no. 1 (NES > 0; [ N ~ - N m] ~ 0; NRS > 0). It is the "most" direct way for a nation to have the opportunity to be sustainable. Nonetheless, in this version of the sustainability tree some compensations (coming from external exchanges) imply that a r, ation could find again a possible trajectory of sustainability even if the conditions described above in sustainability tree no. 1 are not fulfilled in a first step. This analysis corresponds to a temporal and iterative context for decision-making.

NES refers to a certain period of time: it can be negative at t = 0 (NES < 0) (or P < C). But if the national economy could import eMergy (EMEB < 0) (or I > E) through its importations of natural resources, the eMergy available (P + I ) can increase and exceed the consumption of eMergy (C + E) as soon as t = 1. So the national economy gets an eMergy surplus (ALES > 0) (or P + I > C + E) which may be a "weaker" criterion of ecological sustainability because the development of this national economy is at the expense of others (if one country exports natural resources towards the national economy, it can have NES > 0 and AES < 0, so that it no longer becomes sustainable). But if EMEB = 0 (or I = E), no compensation exists through importations, NES and AES (P + I < C + E) are still less than zero and the country arriving at this finitude threshold becomes unsustainable.

S. Fauchettr, G. Froger / Ecological Economics 15 (1995)29-42

t = 0 t = l t = 2 -- -- - ~Technological damages ] Unsustainability

39

AES is<0 ~ Unsustainability

I ~ 7 ' AES becomes >- 0 AES becomes < 0 (exploitation)

I Sustainable Development

ARS -> 0 (exploitation)

i ecllnologlcal ~ Increasing entropy Unsustainability J

NEB > ~ A ARS xportation ] ilme t~nvOelO~Ct Is 1.._ becomes > 0

Unsustainability

r ARS > 0 ~exoloitation/

d~nlages~'~-- I U . . . . . . inability

Fig. 2. Sus ta inab i l i ty t ree for an open e c o n o m y in a dynamic perspec t ive .

Now, if NES > 0, we can distinguish between three cases. In the first, if E M E B < 0, that is to say the country imports eMergy, then it can pursue a sustainable trajectory (AES > 0). In the second, if E M E B > 0 (or E - I > 0), that is to say the country exports eMergy, and if E M E B < NES (or E - I < P - C ) , then it can also pursue a sustainable trajectory because AE S is still > 0. In the third case, if E M E B > 0 (or E - I > 0) and E M E B > NES (or E - I >_ P - C), the country reduces its eMergy available so that AE S becomes negative (or E + C > P + I ) and unsustainabili ty is reached. 4

4 If a coun t ry expor ts more ene rgy than its surplus , it means tha t this coun t ry had to impor t by one way or a n o t h e r ene rgy at the expense of a n o t h e r country. In fact, this c rea tes a v ic ious circle of ecological unsus ta inabi l i ty . Th is count ry is m o r e and more far f rom the sus ta inab i l i ty path .

If N e - N m is inferior or close to zero, sustainability is possible to reach. If this difference is positive and significant, it means the actual en- t ropy discharged into the natural envi ronment is grea ter than the minimum entropy achieved with the best available technology. In this case, the count ry reaches an unsustainabili ty path and no compensa t ion is possible in the short term through external balances.

The reasoning concerning (NRS) is very simi- lar to the (NES). Thus compensa t ions are possible thanks to the external balances. 5

5 If N R S > 0, R E N E B > 0 and R E N E B > NRS, the country r educes its exergy avai lable so tha t A R S b e c o m e s nega t ive and unsus ta inab i l i ty is r e ached from an economic s tandpoin t . I f a coun t ry expor ts more exergy than its surplus , it means tha t this count ry had to impor t by one way or a n o t h e r exergy at the expense of ano the r country. In fact, th is c rea tes a v ic ious circle of economic u n d e r d e v e l o p m e n t .

40 S. l'~mchelcr, G. Froger / Ecological Economics 15 (1995) 29-42

The integration of technological progress in the sustainability tree. We can underline, for studying sustainability conditions, the importance of the hypothesis concerning the technological progress rate. In fact, this indicator, as well as changes in production methods and consumption patterns, may offer new possibilities for a country to reach a sustainable trajectory even if in a first step the previous energy indicators give "unsatisfactory" results. Such a reasoning is only possible in a dynamic perspective: the technological improve- ments to compensate a negative eMergy surplus, a bad entropy indicator and a negative exergy surplus, imply taking account of a temporal dimension in the decision process. In fact, the compensations between sustainable and unsustainable trajectories are not immediate and imply a sequential procedure which we have represented by sustainability tree no. 2.

Technological progress cannot only counteract shortages and depletion of natural resources, it can also enable a reduction in the consumption of natural resources through improved efficiency. It can therefore affect the results of NES and AES. If NES < 0 at a first step, the system may beget an eMergetic surplus (NES > 0) through a reduction of the consumption of natural resources given by bet ter use of resources or technological progress. In the same way, if NRS < 0, we have seen that development is not sustainable from an economic standpoint, but it may become sustainable through an improvement in the energy yield of the production system permit ted by technological progress. Similarly, technological progress contributes to the fight against pollution. Thus, the generation of effective entropy can be reduced by technological progress and may tend toward minimum entropy. Unfortunately, the technological progress may also induce environmental damage. In this case, the country will reach an unsustainable trajectory even if in a first step the previous indicators give satisfactory results. All these elements are integrated in the dynamic sustainability tree (Fig. 2).

As we can see from this tree, sustainability intermediate subgoals determined with the help of energy-based evaluation techniques are complementary with economic indicators of sustain-

ability. This tree describes a sequential process which gives possible trajectories of a possible sustainable development. In a first step (t = 0), we consider one global objective: i.e., the sustainable development which is broken into two subgoals--ecological , economic sustainability. These subgoals are broken into intermediate subgoals: i.e., NES and (N c - N m) for ecological sustainability, NRS for economic sustainability. In a second step (t = 1) the restrictions given by con- straints (NES > 0, N e - N m ~ 0, NRS > 0) can be qualified in function of the foreign exchange as we have seen above. In a third step (t = 2), these restrictions can also be qualified by using technological progress.

To decide what sustainable development policy to implement, a decision-maker is confronted with uncertainty, complexity and multidimensional criteria. This is why we suggest a decision process based on procedural rationality with the replacement of optimization by satisfycing. "Be- cause of uncertainties involved, pollution control policies should be seen as iterative search process based on satisfycing rather than optimizing principle" (Pearce and Turner, 1990, p 20). The sustainability tree, in its dynamic version, presents such a characterization: there exists no unique and no optimal path, but several paths, iterative and recursive, for the implementation of a sustainable development policy.

4. Conclusion

As we have seen above, environmental approaches based on Bayesian theory and on substantive rationality may address choice situations characterized by small scale, weak uncertainty and reversible threats. Nonetheless, the structural interactions between the economic system and the environment require the adoption of a more flexible form of decision-making models capable of dealing with global environmental problems. Nowadays it has become obvious that there is an urgent need to develop decision-making methods based on procedural rationality which aim at taking account of the triad of strong uncertainty,

S. Fatwheux, G. Froger /Ecological Economics 15 (1995) 29-42 41

irreversibility and complexity as that involved in sustainability issues.

In this paper we have presented some energy and economic indicators able to evaluate the sustainability conditions of a given nation. Some of these indicators have been articulated in two sustainability trees, one static and one dynamic. In order to complete these sustainability trees, a multicriteria procedure can also be developed. Such a procedure can take into consideration the case of non-complete achievement of standards, as well as a certain degree of compensation between different points of view (Munda, 1993; Faucheux et al., 1994). Multicriteria decision aid seems to be relevant because it can be used as a tool for framing the decisions, and then for assist- ing in negotiation, taking account of various con- flicting subgoals.

Acknowledgements

This research was primarily supported by the European Community (DG XII) through the pro- ject "Application of Non-Monetary Procedures of Economic Valuation for Managing a Sustainable Development" (CT 92-0084). We would like to thank G. Munda and M. O 'Connor for their helpful comments and suggestions. We also ac- knowledge E. Zyla and S. Lang for their help on an earlier version of this paper. Our special thanks to the anonymous referees for their comments. The authors are solely responsible for any re- maining errors.

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