1. Economy-Environment Linkages at the Macro-Economic Scale(This section is based on the material presented in "Chapter 1: Ecological-Economic Underpinnings of Industrial Transformation" by Cutler Celeveland et al. in the Research Approaches to Support the Industrial Transformation Science Plan (1999), available at http://www.vu.nl/ivm/research/ihdp-it)

The economic process is sustained by a flow of energy, materials, and ecosystem services from the environment. As materials and energy are transformed in production and consumption processes, waste heat and materials ultimately are released to the environment. Production and consumption can, therefore, deplete resources on the one hand, and degrade ecosystem services on the other. Understanding the driving forces behind these energy and materials fluxes and their environmental impacts is a central concern of Industrial Transformation research. This section provides an overview of the basic principles and research that characterise this area of study, emphasising the analysis of energy and material flows that connect production and consumption to the environment.

1.1. The Integration of Economics and Ecology
The integration of ecology and economics is important for Industrial Transformation research, because each is concerned with the stocks, flows, and transformations of energy and materials - albeit in different forms - in the environment and the economy. The most ambitious attempt at such integration is ecological economics (Costanza, 1991). Ecological economics represents a commitment among natural and social scientists and practitioners to develop a new understanding of the way in which different living systems interact with one another, and to draw lessons from this for both analysis and policy (Costanza et al., 1997).

Ecological economics includes some aspects of neo-classical environmental economics, traditional ecology and ecological impact studies, and several other disciplinary perspectives as components, but it also encourages completely new, hopefully more integrated, ways of thinking about the linkages between ecological and economic systems. The analysis of energy and material flows is a central tenet in ecological economics, and thus work in this area has direct relevance for Industrial Transformation research.

1.2. The Role of Energy and Materials in Economic Production
There is a substantial body of work that incorporates thermodynamics, the conservation of matter/energy, and other biophysical principles in models of economic growth. For reviews of this work, see Martinez-Alier (1987), Cleveland (1987), Krishnan et al. (1995), van den Bergh (1996), and Costanza et al. (1997). Recent analyses of energy and material flows are rooted in the work of a number of economists, ecologists, and physicists. Economists such as Boulding (1966) and Georgescu-Roegen (1971) demonstrated the environmental and economic implications of the mass and energy balance principles. Ecologists such as Lotka (1922) and Odum (Odum and Pinkerton, 1955; Odum, 1971) identified the importance of energy in the structure and evolutionary dynamics of ecological and economic systems. And physicists such as Prigogine (Nicolis and Prigogine, 1977; Prigogine and Stengers, 1984) worked out the far-from-equilibrium thermodynamics of living systems.

The principle of conservation of mass and energy has formed the basis for a number of important contributions. The assumption was first made explicit in the context of a general equilibrium model by Ayres and Kneese (1969) and subsequently by Mäler (1974), but it also is a feature of a series of linear models (Cumberland 1966, Victor 1972, Lipnowski 1976, Geogescu-Roegen 1977). All reflect the assumption that a closed physical system must satisfy the conservation of mass condition, and hence that economic growth necessarily increases both the extraction of environmental resources and the volume of waste deposited in the
environment. One of the principal findings of this work is that growth is subject to the biophysical limits of the transformation of energy and materials and limits to the assimilative capacity of the environment (see, for example, Ayres and Miller, 1980).

Perrings (1986) develops a variant of the von Neumann-Leontief-Sraffa neo-Ricardian general equilibrium model in the context of a jointly determined economy-
environment system subject to a conservation of mass constraint. The model demonstrates that the conservation of mass contradicts the free disposal, free gifts, and non-innovation assumptions of such models, as an expanding economy causes continuous disequilibrating change in the environment. Ruth (1995) develops a stylised inter-temporal, multi-sector optimisation model that traces material cycles and energy flows in the ecosystem. All economic processes are governed by thermodynamic laws, and endogenous technical change moves each process asymptotically closer to its thermodynamic limit. Mass and energy balances trace flows of waste heat and waste materials across the economy-environment boundary. The results indicate upper limits for energy savings in light of endogenous technical change and time lags in the availability of improved technologies.

A notable contribution is that of Georgescu-Roegen (1971), who dealt with the implications of the entropy law and the second law of thermodynamics for economic analysis. Georgescu-Roegen described the important difference between primary factors of production (energy and materials) and the agents (capital and labour) that transform those materials into goods and services. The agents are produced and sustained by a flow of energy and materials which enter the production process as high quality, low entropy inputs and ultimately exit as low quality, high entropy wastes. This restricts the degree to which the agents of production (capital and labour) can substitute for depleted or lower quality stocks and flows of energy and material inputs from the environment (Cleveland et al., 1984; Ayres and Nair, 1984; Costanza and Daly, 1992).

Thermodynamics can inform us about ultimate limits. There are irreducible thermodynamic minimum amounts of energy and materials required to produce a unit of output that technical change cannot alter. In sectors that are largely concerned with processing and/or fabricating materials, technical change is subject to diminishing returns as it approaches these thermodynamic minimums (Ayres, 1978). Ruth (1995) uses equilibrium and non-equilibrium thermodynamics to describe the materials-energy-information relationship in the biosphere and in economic systems. In addition to illuminating the boundaries for material and energy conversions in economic systems, thermodynamic assessments of material and energy flows, particularly in the case of effluents, can provide information about depletion and degradation that are not reflected in market price.

What are the implications of thermodynamics and the entropy law for materials recycling? Georgescu-Roegen (1981) argued that materials are dissipated in use just as energy is, so complete recycling is impossible. He elevated this observation to a Fourth Law of Thermodynamics - or Law of Matter Entropy - describing the degradation of the organisational state of matter. The bottom line for Georgescu-Roegen is that due to material dissipation and the generally declining quality of resource utilisation, materials in the end may become more crucial than energy. However, Georgescu's Fourth Law has been criticised by a number of analysts in both economics and the physical sciences (see Cleveland and Ruth, 1997, for a review).
 

2. The Relevance of Economic Incentives and Markets (This section is based on the material presented in "Chapter 2: Incentive Structures for Industrial Transformation" by Harmen Verbruggen and Onno Kuik in the Research Approaches to Support the Industrial Transformation Science Plan (1999), available at http://www.vu.nl/ivm/research/ihdp-it)

Environmental and ecological economists alike, and many others, consider the very low costs of energy, materials, and ecosystem services as the major cause of their overexploitation. These commodities and services are "underpriced". Reasons behind this apparent underpricing are commonly identified as market and institutional failures. The full costs of energy, materials, and ecosystem services are now borne not only by the direct consumer but also by others, such as by governments that pay the health care costs of patients who suffer lung disease because of pollution from the burning of fossil fuels.

The non-optimality of present incentive structures forms the heart of the study of environmental economics. Therefore environmental economics can and should play an important role in the study of Industrial Transformation. This section presents an overview of a number of the most important concepts and ideas in environmental economics and explores some relatively new research directions that could support the overall research into Industrial Transformation.

2.1. Market Failures
A market failure is said to be present when the private costs of an activity differ from its social costs. Cast in terms of market failure, the underlying cause of many forms of environmental pollution and natural resource degradation is the fact that environmental resources often have ill-defined property rights (Bromley, 1991). Economic theory suggests that if environmental goods had non-attenuated rights bestowed on them, and if transaction costs were not too high, voluntary exchange (trade) between different users of a resource would result in so-called Pareto-optimality (Coase, 1960). Why, then, are property rights on environmental resources often so ill-defined? One major explanation is that many environmental resources have been abundantly available until recently, so there was no scarcity and hence no need for the establishment of a property regime. Now that many environmental resources have become scarce, it takes time to develop an efficient property regime. The speed at which this regime can develop is hampered by those who benefit from the present status quo. The economic answer to the question of property rights is that the costs of establishing and enforcing non-attenuated rights (Non-attentuated rights can be defined as 1) exclusive, 2) transferable, 3) enforced, and 4) in no way inconsistent with the marginal conditions for Pareto optimality.) to the resource would exceed any conceivable gains from trade. The high costs of establishing such rights is caused by the physical properties of the resource, i.e., by the high costs (or impossibility) of implementing technological devices that guarantee the owner exclusive use of the resource (Randall, 1983).

Industrial Transformation has a long-term planning horizon. A market failure associated with this long-term planning horizon is that private costs do not account for costs accruing to future generations. In terms of property rights structures, this points to a lack of rights for future generations, implying a 'missing market' for transactions between present and future generations.

Market failures with respect to environmental problems therefore have two "faces": one has to do with prices, since market failures signal the "wrong" prices to producers and consumers, thereby driving a wedge between private and social costs; the other has to do with the underlying (incomplete) structure of property rights. Both "faces" provide points of departure for corrective action by governments: 1) to change prices by charges/subsidies, and 2) to create property rights, e.g., in the context of emission (reduction) trading programmes.

As opposed to market failures as a cause of environmental problems, institutional failures point to misconceived types of government action that exacerbate the problems rather than reduce them. Government actions that lead to institutional failure can be found in such diverse areas as the tax system, subsidies, rules of legal tenure, competition policy, and energy and transport infrastructure. Ruijgrok and Oosterhuis (1997) estimated that the total subsidies for fossil fuels in Western Europe in 1990-1995 (USD 10.2 billion per year) was more than twice as high as total subsidies for energy conservation and the development of renewable energy (USD 4.3 billion per year). Myers and Kent (1998) present numerous examples of so-called perverse subsidies worldwide.
 

3. The Relevance of Technology and Management (This section is based on the material presented in "Chapter 3: The Role of Companies in Industrial Transformation" by Jacqueline Cramer et al. in the Research Approaches to Support the Industrial Transformation Science Plan (1999), available at http://www.vu.nl/ivm/research/ihdp-it)

Technologies can be used to reduce environmental pressure either by preventing the occurrence of waste, pollution, and/or degradation or by dealing with the undesired environmental consequences of particular processes after pollution has occurred, e.g., through the application of end-of-pipe technologies. In many countries, attention primarily focussed on the application of curative technologies up to the end of the 1980s (Cramer et al., 1990). Since the end of the 1980s interest in preventive technology has gradually increased. First, this approach focussed on preventive measures to improve production processes. In the course of the 1990s this approach was broadened in the direction of the whole product chain and local networks of companies.

A variety of approaches have been adopted to improve the environmental performance of processes and products in a preventive manner. The main approaches are:

• pollution prevention (focussing on preventing waste and emissions caused by production processes);
• life cycle management (focussing on the incorporation of environmental considerations in product development from cradle to grave); and
• industrial symbiosis (focussing on the exchange of waste streams, water, and energy in a cascade fashion between local networks of companies).

With regard to more far-reaching environmental improvements, a distinction must be made between strategic and radical environmental improvements.

Strategic environmental improvements focus on a redesign of existing products or processes within the strategic planning horizon of a particular company. This approach clearly differs from the incremental approach. A first difference is that the analysis does not focus on products currently produced by the company, but rather on those to be sold in 5 to 15 years' time. Moreover, the orientation is not so much related to the environmental issues currently at stake, but instead to the major environmental bottlenecks of tomorrow. Finally, the environmental improvements are incorporated in the strategic planning process of the company. Therefore management involvement in this process is a prerequisite. Companies have made first attempts to implement these strategic environmental improvements (see
Fussler and James, 1996; Von Weizsäcker, Lovins and Lovins, 1996; Cramer, 1998).

Radical environmental improvements exceed the strategic planning horizon of the company and focus on a rethinking of the product in an even more fundamental way. Such improvements can lead to a radical change in the existing product, or to fulfilling the function of the product in another way. Examples of the latter improvements are the substitution of meat by novel protein foods produced through biotechnological techniques, or the replacement of physical transportation by emerging information technologies. This approach is very innovative and not often put into practice. An exception in this respect is the recent Dutch 'DTO (Sustainable Technological Development) Programme'. The central question raised in the programme was how societal needs (e.g., housing, transportation of people and goods, clothing, food, recreation) can be fulfilled by 2040 while taking into account the required eco-efficiency gains (DTO, 1998). Although the DTO programme focussed on technological achievements, it also analysed impacts on the culture and the structure of society.
 

4. The Relevance of Consumers Choice (This section is based on the material presented in "Chapter 4: Transformation of Unsustainable Consumer Behaviours and Consumer Policies" by Charles Vlek, Lucia Reisch and Gerhard Scherhorn in the Research Approaches to Support the Industrial Transformation Science Plan (1999), available at http://www.vu.nl/ivm/research/ihdp-it.)

For many years, consumer behaviour and consumer policy have been the subject of numerous textbooks, teaching courses, scientific journals, and research conferences. Only in the past decade, however, has there been an increased scholarly interest in the causes and consequences of the ever-growing and wider-spreading material consumption patterns. This section emphasises the interdependencies between consumers and producers in free-market economies, the 'commons dilemma' inherent in many consumption-production domains, and the importance of well-designed, theory-based policy strategies to achieve sustainable
consumption patterns. The latter should serve people's basic needs and values should improve and safeguard international and intergenerational equity, and keep the total environmental impact of satisfying these needs and values within nature's carrying capacity.

Consumer behaviour is strongly embedded economically and socially, so that transformations towards sustainable consumption cannot rely on the household level alone. A 'sufficiency' strategy on the part of consumers is the natural counterpart of 'eco-technology' on the part of producers. Clarifying 'sufficiency' requires studies of human values and quality-of-life. In countries where a decent material standard of living has not yet been reached, the economic component of sustainability obviously is stronger economic than the environmental component. For example, in LDCs sustainable consumption has different implications as it is the very basic human needs that have to be sustained and that reign everyday life. Such countries, however, may profit from the environmental lessons learned by highly industrialised nations (leapfrogging technologies and consumption patterns). This calls for studies about environmentally-friendly economic development.

4.1. Research on Consumption and the Environment
Almost in parallel with the emerging interest in human consumption and production processes, there have been special developments in relevant scientific research that characterise the 1990s. Environmental scientists and policy makers have increasingly realised that environmental effects have sources in social, organisational, and personal behaviour determinants. Thus an effects-oriented, physical and technical science perspective on environmental problems must be supplemented with a source-oriented social and behavioural science perspective. Similarly, it is recognised that consumers' behaviour cannot very well be separated from producers' behaviour, and that the behaviour of consumer policy-makers is involved as well. Also, considering social and behavioural causes in relation to environmental effects necessitates another definition of consumption and an integrative research approach involving raw materials, energy, products, and services (see Noorman and Schoot Uiterkamp, 1998). A classical definition of consumption as the "orientation, choice, purchasing, and discarding" behaviour of consumers is too restrictive. Instead, Stern et al. (1997) propose the following definition: "Consumption consists of human and human-induced transformations of materials and energy. Consumption is environmentally important to the extent that it makes materials or energy less available for future use, moves a biophysical system toward a different state or, through its effects on those systems, threatens human health, welfare or other things people value."

Heiskanen and Pantzar (1997), reviewing recent consumer-behaviour research, argue that modern consumer research has not yet focussed on the really important issues of sustainability, and that research on sustainable consumption requires a transdisciplinary approach. In the same journal, Hansen and Schrader (1997) criticise economic theory for its restricted 'doctrine of consumer sovereignty' and they claim, "it is neither possible nor ethically justifiable to make purchase decisions according to the individual maximisation of utility only". Beckmann et al. (1998) acknowledge that "the usual separation between consumers and producers is futile in understanding the complexity and dynamics of today's market exchange processes." Reisch (1998) follows Gardner and Stern (1996) in stating: "The most environmentally significant choices are not those that households make, such as to purchase and then use consumer technologies, but the purchase and use choices of organisations and organisational choices about how technologies that affect the environment are designed, produced, distributed and marketed."

These authors and others agree that the separation of consumers and producers for research purposes is rather artificial and therefore less fruitful for understanding the causal processes and for designing effective strategies for the management of sustainability problems.

4.2. Driving Forces of Unsustainability
Recent research on consumption has highlighted what are thought to be the main driving factors of consumption. For example, Schor (1998) claims that luxury, 'good taste', and exclusiveness are the main driving forces of consumption, whereby social comparisons (between rich and less well-to-do citizens) constitute powerful stimulating mechanisms. Aarts et al. (1995) mention the strong social pressure to produce inherent to industrial market regimes, and the constantly rising productivity of labour as a result of competition; the fact that economic growth also aims to create, or at least maintain, sufficient job opportunities; and the boosting effect on consumption of the state hierarchy in industrial market regimes.Ehrlich and Holdren (1971) introduced a simple formula to estimate the total environmental impact of a particular society. The present version of this equation is I = P x A x T, or environmental impact (I) equals the product of population size (P), the degree of affluence per person (A) and the environmental damage from the technology used (T) to produce one unit of affluence. By "affluence" the authors mean high levels of consumption, but there are perhaps ways to achieve high standards of living without increasing carbon emissions and consuming more materials. The formula suggests substitutability of the components: total environmental impact might remain constant under considerable population growth as long as average personal affluence and/or the technical impact per unit of affluence is/are reduced. Dietz and Rosa (1997) argue that the Technology component incorporates more than was originally suggested, i.e., cultural, social, technical, and infrastructural factors together determining how much environmental impact an economic activity is bringing about.

Goodland et al. (1994) have examined the potential for change in the three areas covered by the IPAT formula. Like Corson (1994), these authors generally arrive at a number of policy priorities which are different in character for high-income and low-income nations in the world. Goodland et al. (1994) conclude: "Technological change and population stabilisation cannot suffice to move the world towards an environmentally sustainable future. Instead a reduction in per capita consumption in high-income nations and a decrease in environmental throughput are required". It could be argued, however, that it is not consumption per se that is the issue, but what is consumed.

If we search for the socio-behavioural causes of population growth, increasing affluence and technology with an increasing impact on the environment, we soon hit upon two other driving forces of unsustainable development: 'institutions' as vehicles for constituting and governing human societies, and 'culture' as the conglomerate of socially shared beliefs, values, and attitudes. In a wider perspective therefore, unsustainability may be seen as driven by Technological, Economic Demographic, Institutional, and Cultural developments in industrial society. This set of five general driving forces has been labelled as the TEDIC-complex (Vlek, 1995) (In Dutch 'te dik', pronounced similarly as 'TEDIC' means 'too big' or 'too fat'. In a slightly different wording and order, the five driving forces have also been distinguished by Stern (1992).). One thing to note about the TEDIC-complex is that from left to right in this formulation we seem to be dealing with driving forces going from "easy to change" to "hard to change" or from "considered as modifiable" to "considered as given".

Unsustainability is not a linear function of developments in T, E, D, I and C. These driving forces are characteristics of a complex socio-economic system in which capital, labour, and raw materials are being used for the production of goods and services to meet the needs and desires of growing numbers of consuming individuals, groups, and organisations. To understand this complex metabolism of society vis-à-vis the natural environment, it is necessary to appreciate the interwovenness of household consumption and industrial production. Consumers and producers need each other for different reasons and both parties need some government regulation for which the government needs them, again for different reasons. The relationships among consumers, producers, and governments are expressed in flows of money, products, labour, taxes, and subsidies. Main system functions for consumers are feeding, clothing, housing, education, recreation, and transportation. Main functions for producers are energy provision, industrial production, agriculture and stockbreeding, product distribution, and commerce. Inputs from outside the socio-economic system are formed by various environmental resources such as energy, raw materials, and land area. External outputs or derivatives occur in the form of various kinds of waste material, as well as transport.

In view of the above "model", instead of talking about consumer (or household) metabolism and producer (or industrial) metabolism, we should in fact consider the entire lifecycle of any material, product, or service as it goes along producers and consumers. Considering the entire production-consumption cycle for environmentally-costly or resource-demanding goods and services also makes the researcher aware of the fact that changes in consumption patterns inevitably will go along with changes in production patterns, and vice versa. Consumers do not exist in vacuum, nor do producers. Considering the entire production-consumption cycle also means that deliberate changes in one part of the system can have implications for developments in other components. Not much research seems to have been conducted on substitution hierarchies of human activities, goals, and values. Such research is important for getting to know what would happen and what people would accept if producers and/or consumers were put under societal pressure to move towards sustainable development.