‘Those who pay for the dam are not the beneficiaries, and those who benefit are not the ones who pay.’ Below, a presentation by Probe International executive director Patricia Adams at a conference (“The Environment: Critical Issues of the 21st Century”) held Sept. 25-27 at the Riley Institute, a policy research think tank at Furman University in Greenville, South Carolina.

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Thank you so much for the honour of speaking here on this important question: Can we ensure environmental accountability in the global economy? The answer, I would argue, is: “Yes, if we internalize externalities.”

If we internalize what, you ask?

Economists love the concept of externalities and, it turns out, so do environmentalists. Here’s what it is. In theoretical terms, an externality is the side-effect of an activity that does not accrue to the parties undertaking it, but falls on others. Externalities can be either positive, when an external benefit is generated, or negative, when an external cost is generated from a market transaction.

Pollution by a firm in the course of its production, which causes nuisance or harm to others, is a classic negative externality. Harvesting by one fishing company that depletes the stock of available fish for another company would be another. Now, when a polluter or resource user doesn’t have to pay for the costs it foists on other members of society, we will get more of that activity than we otherwise would.

So, that is the theory, but what does this mean in practice? It means that large dams like China’s Three Gorges project get built, despite the profound environmental harm they cause. As eminent Chinese scholars who oppose Three Gorges put it: “Those who pay for the dam are not the beneficiaries, and those who benefit are not the ones who pay.”

Indeed, I would argue that large dams like Three Gorges can only be built if their costs are externalized. Let’s take the case of Three Gorges to illustrate just how externalities work, and how internalizing them could help save the environment.

Because of China’s state secrecy and an official ban on public criticism of the Three Gorges dam, we don’t have perfect information on the costs of Three Gorges, but we have been able to gather enough to know that the costs are high and climbing.

As some of you may know, close to two million people are being forced to move because of the dam. They are being forced to resettle and reconstruct their homes, livelihoods, temples and communities in order to clear the path for the dam’s reservoir.

In no case are the resettlement funds adequate to compensate for the true losses that these people will face. In many cases, those funds have been embezzled by corrupt officials, and many of the migrants have been left to fend for themselves.

Like the millions of Chinese citizens who have been forcibly resettled by dams in the past 50 years, we expect Three Gorges migrants to be similarly condemned to chronic impoverishment and, as Chinese scholars predict, to social chaos well into this century.

The reservoir is dangerously contaminated by untreated industrial and domestic sewage. And the flooding of former cities and myriad dump sites containing, for example, radioactive and anthrax residues, now so threatens human settlements along the reservoir that they are scrambling to find new sources of water.

Fish and waterfowl, such as the Chinese sturgeon, Yangtze dolphin and Siberian crane, are now threatened because they can no longer migrate, feed, nest and spawn along the river and its floodplains following their old patterns.

Meanwhile, the dam has triggered dangerous new landslides and increased seismic activity in an area already prone to geological disasters. The dam is close to two major fault lines, putting the densely populated settlements along the river at risk not only of earthquakes and tsunamis but, in the worst of all worlds, of catastrophic dam failure.

Numerous other unanticipated costs, such as additional flooding of Chongqing because the slope of the reservoir wasn’t recognized in feasibility studies, also continue to add up.

While the Three Gorges state corporation manages to foist the real costs of Three Gorges onto migrants, onto the riverside populations, onto wildlife and onto municipal authorities along the river, it has also needed to commandeer unwilling investors and consumers to pay for the boondoggle.

All financiers of the Three Gorges dam have been either state agencies or private investors backed by state guarantees. Foreign financiers, with access to taxpayer-backed funds, have aggressively financed their countries’ contractors and equipment suppliers to Three Gorges (with the exception of the United States, I might add).

Chinese finance has come from an array of State Development Bank bonds and country-wide electricity surcharges from which no electricity customer is exempt. No matter what, the deep pockets of involuntary taxpayers and ratepayers have provided the financing needed to build the dam.

Well, you may think, maybe it is worth incurring these costs and risks because the benefits of Three Gorges are so huge. It is going to provide badly needed power and reduce greenhouse gas emissions, help protect millions against the relentless flooding of the Yangtze, and facilitate navigation of ocean-going ships all the way to Chongqing, isn’t it?

Unfortunately, the answer is “no,” not reliably or cost-effectively.

Even at current gas prices (and using the official estimates of Three Gorges’ cost), the cost of Three Gorges power is still higher than the cost of power from readily available high-efficiency gas turbines and cogeneration facilities, which produce no sulphur dioxide, and cut nitrous-oxide and carbon-dioxide emissions by 90 per cent and 60 per cent respectively.

Dollar for dollar, an investment in gas-fired, combined-cycle cogeneration plants would displace at least as much coal as Three Gorges ever could, and would provide more affordable and reliable power to the people.

Meanwhile, the much-touted flood-control benefit turns out to have been nothing more than propaganda. Internal and confidential state documents that were leaked to us confirm that, according to the best analysis done by Qinghua University scholars, the dam will not control Yangtze floods, and the officials know it. But, the leaked documents warn, “never, ever let the public know this.”

As for navigation, the feasibility of the experimental shiplift is now in question, and the lock system is so slow that it has become more of a bottleneck than a conduit. Meanwhile, the smaller ships and boats that once plied the Yangtze carrying their cargo have now been banned from this “superhighway” that the Yangtze has been deemed.

How could such a distortion of the true costs and benefits be engineered so grotesquely and with such far-reaching and dreadful consequences?

Without market discipline, without a free press and free speech, without professional liability for decisions that put lives and property at risk of contamination, flooding and catastrophic dam failure, without an informed public that is free to scrutinize lawmakers and their decisions and throw them out of office at the ballot box, without the rule of law that gives citizens the right to protect themselves from harm, governments will be able to externalize the true costs of decisions onto the citizenry with impunity, and to justify those decisions with feasibility studies and environmental assessments that are nothing more than propaganda.

I would argue that large dams, like many environmentally risky endeavours, can only proceed if the environmental destroyers receive statutory permission to destroy the environment, if they receive immunity from liability, if they receive subsidies to compensate for the financial risks of their activity, and if they have a regulatory regime that protects their rate of return.

The hydro-dam industry is a particularly good example of how this distortion in incentives occurs. Without the host of subsidies, immunities and market protection that I have described, there would be very few large hydro dams in the world. Big dams are simply too financially and environmentally costly for the private sector to invest in. Only the state, with its deep pockets and law-making powers, can externalize those costs onto citizens.

But those costs, though uncounted and unrecognized, are nevertheless real, and they undermine the well-being of the citizenry and have an insidious effect on the Chinese economy and environment. Give citizens the tools to force the beneficiaries to internalize the costs and compensate the victims, and I think you will find that economies and environments will thrive together.

I know that many see the globalization of China’s economy and the desire of its massive population to pursue profits and raise their standard of living as one of the gravest threats to the global environment today. I don’t. I see Chinese citizens, rather, as the world’s largest group of front-line defenders of the global environment.

Remember, for global environmental threats, there will be local victims who feel the consequences first and most painfully. Give them the right to know, and give them the legal and political tools, and the security to exercise their rights and to hold accountable those who would destroy their environment, and cost-benefit accounting will start to be honest and to reflect reality. Truly costly investments will be eschewed and sustainable investments favoured. The global environment will be well protected, and the global economy will thrive.