The Sustainable Home Blog

Fantasy Economics

I’m an architect and engineer by training, so when I began to write seriously about sustainability, I had no idea that the storyline would begin with a discussion of economic theory. Yet when one asks the question of what is sustainable or not sustainable relative to housing you are very quickly tossed into the stormy seas of “growth” and “limits”, and the conflict between neo-classical and ecological economics.

“Future generations are always free to make themselves miserable or content with whatever we give them. We do not owe the future their happiness, but we do owe them an intact resource base.”
Dr. Herman Daly

“Macroeconomic theory in our text books conveniently behaves as if the ecosystem does not exist all the while consuming products and services from the ecosystem which fuels economic growth.”
Mark Anielski

“Despite evidence that the ecology does in fact exhibit constraints in accordance with the laws of physics, we continue down a ruinous path too afraid, paralysed, or unable to acknowledge the truth since such a revelation would put in question all we have pursued since the Industrial
Revolution. This would mean that the pursuit of increased wealth and prosperity by current generations will impose a high price on future generations.”
Mark Anielski

In a perfect Adam Smith world, markets are supposed to efficiently set prices based on relative supply and demand. In the real world, a host of other factors can effect price. Federal and local governments add sales and other taxes. Governments impose tariffs and import duties. Cartels increase and decrease supply to achieve political or financial objectives. Central banks increase the money supply, improving “liquidity” while fostering monetary and price inflation.

However, prices for many goods also reflect a fantasy economics that assumes an infinite supply of non-renewable raw materials and zero costs associated with the consumption and disposal of goods. For example, the economic activity associated with an asbestos plant and economic activity to clean up the resulting super-fund site are both counted as positive contributions to our GNP.

Crude oil is another great example. Non renewable resources like oil follow a bell shaped supply curve. During the easy to find and extract “up” side of bell curve, supply out-strips demand and prices are low. In most minds supply and reserves are thought to infinite and no thought is given to conservation. Think of Hummers, NASCAR, and SUV’s as the symbols for this side of bell curve. Indirect costs like pollution, suburban sprawl, energy insecurity, and climate change are NOT factored into the price, but are paid none the less through higher healthcare costs, lower productivity, taxes, military adventures, and “natural” disasters.

As we reach the top of the bell curve as in the case of oil today, demand is approaching the limits of supply and prices have increased rapidly. According to the IEA, supply reached an all time production in May of 2006 of 86.11-million barrels per day in July 2006 and in 2007 the price of crude oil has increased by about 70% to over $95 per barrel as we draw down the developed world’s stockpiles. And yet even these prices do not reflect the true costs of depleting this non-renewable resource.

As we roll over the top of the oil production bell curve sometime around 2010, supply will decline and at some point after conservation and replacement technologies fail to close the gap, a painful path of “demand destruction” will become our only option to balance the supply-demand equation. The economic recession caused by this demand destruction will be just another hidden cost of the economic fantasy of “unlimited” non-renewable resources.

What does all this have to do with “The Sustainable Home Blog”? Is this just a self-indulgent rant, rambling for the sake rambling? The reason I keep returning to the topics of economic theory and peak oil is that they everything to do with limits and reason for sustainable building.

The green building movement is already big business and we may have reached a tipping point in 2007, where more than 50% of the key decision makers in the business world of building have reached the conclusion that the movement has legs and that a decades long bull market for all things green is an opportunity worth pursuing. What is the source of this apparent demand for these new green products and buildings? Is it global warming, rising energy costs, insurance claims from sick building syndrome, or the urge to “do good”? I think it’s all of these reasons and more, but “going green” is still more fashion than necessity, and collectively, it has not entered our consciousness that there are limits to growth in a closed ecosystem and that our current path of “development” threatens our very survival.

That’s all about to change. The ecosystem has been sending us warning signals (the effects of air and water pollution, species loss, climate change, etc.) for decades, but because these signals didn’t have a direct individual impact on the majority of world’s inhabitants, we have continued on a path of unsustainable global development modeled after the American standard of living and consumption. As we push up against the geological limits of peak oil(~2010), peak natural gas(~2015), peak coal(~2025), and peak uranium(~2025), the cheap energy that’s been driving development since the beginning of the industrial revolution will will no longer be either cheap or abundant and we will come face to face with our own unsustainable reality. No combination of known technologies will even come close to filling the gap left by these declining non-renewable energy sources and it will take decades for us to recognize the natural limits to growth of our ecosystem and transition to a steady-state and sustainable economy.

As we enter this period of sustained crisis, it will quickly become evident that the only reasonable standard for building design will be a standard of net zero energy consumption.  Because we lack information, initially this will be part science and part intuition based on on passive heating and cooling lessons from the past.  Eventually we will come to know the embodied energy of every building material and make many decisions based on the EROIE (energy return on investment of the energy embodied) of building products like insulation, low-e glazing, PV panels, and wind turbines.   Houses will become smaller and change shape as energy trumps fashion and becomes the primary design factor.  A whole new industry will emerge to help homeowners convert over 100-million thinly insulated, poorly constructed homes into some semblance of energy efficiency.  Pattern’s of development and zoning laws will change as the age of automobile comes to a close.  Populations will shift and migrate as the end of cheap air-conditioning makes living in many parts of the country less desirable.   Home landscaping will change from ornamental to edible, and grey water irrigation will become commonplace as the energy costs to move and purify water change our attitudes about this precious natural resource.   Local materials will dominate construction and the age of imported italian granite countertops will come to an end.

We might look back and call this the sustainable society revolution.  A revolution where in we deconstruct, modify, and replace much of what we thought and built during the industrial revolution.  In a very real sense, its already started and we’re just seeing the first signs.


”…the world’s richest 20 per cent of the population consume 86 per cent of its goods and services, over half its energy and nearly half its meat and fish.”

Given how few buildings architects actually design in this country compared with the EU for example, I’m not sure how relevant the profession is to the topic of sustainability.  However, I was curious enough to see what might be the official AIA word on the subject.  I found this posting on the internet from the AIA Committee on the Environment.

 “The linked domains of sustainability are environmental (natural patterns and flows), economic (financial patterns and equity), and social (human, cultural, and spiritual). Sustainable design is a collaborative process that involves thinking ecologically—studying systems, relationships, and interactions—in order to design in ways that remove rather than contribute stress from systems. The sustainable design process holistically and creatively connects land use and design at the regional level and addresses community design and mobility; site ecology and water use; place-based energy generation, performance, and security; materials and construction; light and air; bioclimatic design; and issues of long life and loose fit. True sustainable design is beautiful, humane, socially appropriate, and restorative.”

My first reaction to this lengthy, rambling definition was huh???!!! what the %$#@ does that mean?  No wonder I hear quotes like “If it’s not beautiful, it’s not sustainable” from celebrity architects.  Definitions like that, however well meaning are a license to do just about anything.  So I thought maybe one of the leading schools of architecture would be more helpful and provide a definition with some substance.  I found this posting on the Carnegie Mellon School of Architecture’s site.

“Sustainable design is a collective process whereby the built environment achieves new levels of ecological balance through new and retrofit construction, towards the long term viability and humanization of architecture. Focusing on environmental context, sustainable design merges the natural, minimum resource conditioning solutions of the past (daylight, solar heat and natural ventilation) with the innovative technologies of the present, into an integrated “intelligent” system that supports individual control with expert negotiation for resource consciousness. Sustainable design rediscovers the social, environmental and technical values of pedestrian, mixed use communities, fully using existing infrastructures, including “main streets” and small town planning principles, and recapturing indoor-outdoor relationships. Sustainable design avoids the further thinning out of land use, the dislocated placement of buildings and functions. Sustainable design introduces benign, non-polluting materials and assemblies with lower embodied and operating energy requirements, and higher durability and recyclability. Finally, sustainable design offers architecture of long term value through ‘forgiving’ and modifiable building systems, life-cycle instead of least-cost investments, and timeless delight and craftsmanship.”

 Again, a long, rambling definition full of academic architectural jargon like “timeless delight”.  Is this representative of the sustainable mind candy being fed to the future building designers of america?  What about limits?  What about carrying capacity?  What about the huge energy drain, climate impact, and unsustainable ecological footprint of our existing building stock?  Where is the call to action?

Looking for answers, I found the following on the Presidio School of Management’s “Sustainability Dictionary” website.  Apparently in the academic world there are three different flavors or “criteria” of sustainability.

Social Criteria:

• Socially desirable
• Culturally acceptable
• Psychologically nurturing

Financial Criteria:

• Economically sustainable
• Technologically feasible
• Operationally viable

Environmental Criteria:

• Environmentally Robust
• Generationally Sensitive
• Capable of continuous learning

Although I can sympathize with architectural profession’s emphasis on social criteria such as beauty and “timeless delight”, I don’t think it serves a world facing climate change and a looming carrying capacity crisis brought on by the “peak” production and supply of oil, gas, and coal.  The AIA and Carnegie Mellon definitions allude to “environmental criteria”, but only in vague terms.  What is needed is a sustainable building standard that addresses the very real limits to carrying capacity and our obligations to future generations.  Unfortunately, LEEDS, Energy Star, or any other “green” standard falls far short of meeting such a standard.

In 1987 the U.N. World Commission on the Environment and Development [commonly known as the Brundtland Commission] set the table for the what has been a 20 year debate on the meaning of sustainability.  The classic and oft quoted definition from the commission is:

“Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”


This definition is not far removed from the “seventh generation” philosophy of the Native American Iroquois Confederacy,  a philosophy that put forth that chiefs should consider the effects of their actions and decisions seven generations into the future.  However, as often as I’ve seen the commission’s definition quoted, I rarely see anyone expound on what the commission meant by their simple, elegant definition.

Digging into the actual report I found that even 20 years ago the commission was deeply concerned about the impact development and population growth was having on the world’s carrying capacity with respect to several important environmental criteria.

• Global Warming
• Ozone Depletion
• Species Loss
• Desertification
• Deforestation
• Air, water, and soil pollution

In making it’s case for sustainable development, the commission’s report would define carrying capacity as:

“The population that can be supported indefinitely by an ecosystem
without destroying that ecosystem”

Although not generally part of our awareness, it is no secret that various regions and country’s of the world compete for carrying capacity and the so called developed world imports a large portion of it’s own carry capacity at the expense of other country’s and peoples. The commissions report states that:

“The Earth is one but the world is not.
We all depend on one biosphere for sustaining our lives.
Yet each community, each country, strives for survival and prosperity with little regard for its impact on others.
Some consume the Earth’s resources at a rate that would leave little for future generations. Others, many more in number, consume far too little and live with the prospect of hunger, squalor, disease, and early death.”

Carrying capacity is not just a function of population.  The actual population that can be supported by the earth’s ecosystem is also a function of the average standard of living or level of consumption of that population.  Lower consumption levels allow the support of a larger population, and conversely higher consumption levels will support proportionally less population.

Today we find ourselves in a world of 6.6 billion people in which the world’s richest 20 per cent of the population consume 86 per cent of its goods and services, over half its energy and nearly half its meat and fish.   Another 1.4 billion people in China and India (nearly 5 times the population of the U.S) are rapidly growing their economies and as they begin to approach the developed world’s level of consumption and energy density, their rising demands on the earth’s carrying capacity is driving up energy, commodity, and food costs around the world.  As the world’s collective economic growth rapidly depletes non-renewable resources such as oil, gas, and coal we will soon be faced with a carry capacity crisis in a post peak world in which countries desperately complete for resources in a limited ecosystem.  The commission’s report predicted this condition twenty years ago when it stated that:

“The ultimate limits to global development are perhaps determined by the availability of energy resources and by the biosphere’s capacity to absorb the by-products of energy use.  These energy limits may be approached far sooner than the limits imposed by other material resources. First, there are the supply problems: the depletion of oil reserves, the high cost and environmental impact of coal mining, and the hazards of nuclear technology. Second, there are emission problems, most notably acid pollution and carbon dioxide build up leading to global warming.”

 Many informed people in and out of government are painfully aware of this impending carrying capacity train wreck.  Unfortunately,  it is the nature of governments to only respond to an immediate crisis.  Another problem, one that the Brundtland Commission omitted from their report, is our almost religious belief in economic growth.  Even modest rates of growth mathematically become exponential, so that in the context of a closed ecological system, “sustainable growth” and “sustainable development” are eventually rendered oxymorons.  In order to survive, at some point in time we will have to respect our planet’s limits in terms of carrying capacity.  This will mean the acceptance of limits to our population size and to our levels of consumption and waste, and the transition to a steady-state economy.

The following definition of steady-state economics is from the Encyclopedia of Earth.

The phrase “steady state economy” originated from ecological economics, most notably the work of Herman Daly, but its roots are in classical economics, most notably the “stationary state” by economist John Stuart Mill. The steady-state economy is often discussed in the context of economic growth and the impacts of economic growth on ecological integrity, environmental protection, and economic sustainability. Therefore, use of the phrase “steady-state economy” requires a clear definition of economic growth.

Economic growth is an increase in the production and consumption of goods and services. For distinct economic or political units, economic growth is generally indicated by increasing gross domestic product (GDP). Economic growth entails increasing population times per capita consumption, higher throughput of materials and energy, and a growing ecological footprint.

Theoretically and temporarily, a steady state economy may have a growing population with declining per capita consumption, or vice versa, but neither of these scenarios are sustainable in the long run. Therefore, “steady state economy” connotes constant populations of people (and, therefore, “stocks” of labor) and constant stocks of capital. It also has a constant rate of throughput; i.e., energy and materials used to produce goods and services.

 The “growing ecological footprint” of economic growth only becomes problematic as we begin to push up against the limits to carrying capacity.  This can occur locally in an “island” economy or globally as we are beginning to experience today.  Getting back to architecture and the massive ecological footprint of our building stock, our homes are but a subset of years of unsustainable development that are pushing the limits of carrying capacity.  This is especially true when we consider the energy consumption and climate impact of both residential and commercial buildings.  My personal definition of sustainable building design is:

Sustainable building design meets the needs of the present without compromising the ability of future generations to meet their own needs for shelter. In order for our built environment to be supported indefinitely by the earth’s ecosystem without destroying that ecosystem, sustainable building design must be based on a net zero energy standard.  A net zero energy standard, in no way constrains designers from creating buildings that are socially desirable, culturally acceptable, and psychologically nurturing. 

“Green or environmental accounting describes an effort to incorporate environmental benefits and costs into economic decision making.” - Gernot Wagner

If you didn’t think economic and accounting theory were important in our lives, consider this.

Much of what enters our national model energy codes is a some point filtered through a cost benefit analysis (CBA). CBA’s are subject to the principle of “lies, damn lies, and statistics”, in that much like statistics their end product is subject to underlying assumptions like the future cost of energy and discount rates (see CBA Failings). For example, the requirements for insulation levels in our codes is decided by cost benefit analysis which mysteriously always results in requirements that correspond to the exact thickness fiberglass batt that can fit into a 2×4 or 2×6 wall cavity or a 2×10 ceiling cavity.

Green, environmental, or social accounting would add in other factors to a CBA such as:

• the cost of air pollution
• the cost of climate change due to greenhouse gas emissions
• the benefit of insuring energy supply security

This would give us a “sustainable” Green CBA methodology that would transform our code requirements.

The EU and even China has already started moving in this direction, but the politics of vested interests have blocked progress in the U.S. Back in 1993 the Bureau of Economic Analysis, the official bookkeeper of the U.S. economy, did began working on a green accounting system called Integrated Environmental and Economic Accounts. However, the initial results released in 1994 showed that GDP numbers were overstating the impact of mining companies to our nation’s economic wealth. Mining companies didn’t like those results, and it didn’t take long for Capitol Hill to react. Alan Mollohan, a Democratic House Representative from West Virginia’s coal country, sponsored an amendment to the 1995 Appropriations Bill that stopped the Bureau of Economic Analysis from working on revising the GDP and that’s where things stand today.

You can imagine Owen Corning’s response to the application of a Green CBA approach to our current insulation requirements. Consider for a moment the effect a carbon tax would have on the our national requirements for insulation. I’ll use Sweden as a model. In an effort to account for the environmental costs of fossils fuels, in 1991 Sweden enacted a carbon tax of $100 per ton (raised to $150 in 1997) CO2 emitted. If the U.S. were to enact a $100/tCO2 carbon tax it would increase the current cost of natural gas by about 75% and current cost of coal fired electricity by about 70%.

Since the basis for code requirements for insulation are primarily driven by energy costs, if the social and environmental costs of energy were included in a “green” CBA analysis, insulation requirements would increase by the order of 70%.

… more on Sustainable Economics

“To understand what sustainable economics is, and why it would be superior to conventional economics, we need to start with a brief recap of conventional economics. I’ll need to go through a number of definitions and distinctions, but this is far more than an academic exercise. The conventional economics concepts I’ll be describing provide the basis on which those in power all over the world (which to some degree includes most of us in the rich industrialized countries) justify the destruction of the Earth. It would be hard to find a more pervasive, pernicious and powerful evil than the seemingly innocent concepts that currently rule our economic lives. Let me be more precise, it is not so much the concepts on their own - they have served an historically useful role. The real evil is the continued dominant use of these concepts long after they have become seriously outdated and destructive. This is indeed the belly of the beast, and until we can replace these concepts with a more Earth-friendly approach, our prospects are grim.” - Robert Gilman