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Why global sustainability terms could help

But how could standard terms help to foster sustainability? Why do or should parties include them in their individual contracts? Different theoretical perspectives suggest various reasons.

Economic mechanism design

Economic theory treats sustainability as an ‘allocation problem’ (Wiesmeth 2012: 3). Environmental problems are negative externalities (Tietenberg & Lewis 2011: 16) which the market fails to coordinate properly (Keohane & Olmstead 2007: 66). Most natural resources, like fisheries, clean air or rain forests, face a ‘tragedy of the commons’ (Hardin 1968). Their use or exploitation results in private gains, whereas their costs are public, like pollution or the disappearance of species. This situation could be modelled as a prisoner’s dilemma (Dawes 1973; Luce & Raiffa 1957: 95), because individual strategic advantages for each single user prevent a mutually efficient solution. Classic economic answers are to increase private costs by publicly taxing, or imposing fines for, the use of natural resources. But is the ‘tragic necessity of Leviathan’ (Ophuls 1973: 229) in the form of a strong public state really the solution? Even if the tax calculates the externalities of supply production (Pigou 1920) or the demand of public goods (Lindahl 1919), it requires a constant inflow of information and centralized governance power. A global economy lacks both.

Modern information economics believes in the spontaneous ordering forces of the market for the accumulation of knowledge and social coordination (Hayek 1945). The ‘problem of social cost’ is resolvable privately if transaction costs are low (Coase 1960). Market actors are expected to negotiate and bargain on externalities like, for example, factory smoke. Prerequisites are tradable commodities and the means to fix the trade-off, that is, property rights and contracts. Assigning property rights will privatize the commons, thereby guiding incentives to achieve an ‘internalization of externalities’ (Demsetz 1967: 348). In that sense ‘private property rights in wildlife’ (Smith 1981) should settle the sustainability problem. Apart from practical difficulties with property rights in resources like fluid air and the unbalanced distributive effects, the assumption of low or even zero transaction costs is pure fiction. But the resulting credo of ‘law and economics’ (Cooter & Ulen 2007: 97) is real: regulations should reduce transaction costs to allow efficient private bargaining.

Using property rights or public taxes seems to work like the ‘carrot and stick’ approach. Unless they are coerced or given a strong incentive, ‘rational selfinterested individuals will not act to achieve their common or group interests’ (Olson 1965: 2). Is there no other possible ‘logic of collective action’? An alternative solution is ‘governing the commons’ (Ostrom 1990) autonomously. ‘Natural or man-made resource systems’ could be managed as ‘common pool resources’ (Ostrom 1990: 30). Private self-governance of commons enables a new ‘sustainability of social-ecological systems’ (Ostrom 2009). Even if ‘global public goods’ (Kaul et al. 1999) overburden common resource systems, its ‘design principles’ (Ostrom 1990: 180) could guide GST selfgovernance: ‘clear boundaries’, ‘congruent rules’, ‘collective-choice arenas’, ‘monitoring’, ‘graduated sanctions’, ‘conflict-resolution mechanisms’, ‘judicial recognition’ and ‘ nested units’ .

Both private options - property rights and common resource systems - require contracts. And both models face severe free-riding and information problems. Both need to design costly decentralized contract mechanisms. Such ‘mechanism design’ needs institutional support to avoid moral hazard and adverse selection (Hurwicz & Reiter 2006; Myerson 2008). The simple contractual bargaining solution (Coase 1960) transforms itself into a complex economic contract theory under real-world conditions (Bolton & Dewatripont 2005). Standard terms provide an institutional mechanism to reduce transaction costs significantly. Global Sustainability Terms could shape a contractual mechanism to enable sustainable bargaining solutions and common resource systems with low levels of information. Apart from saving transaction costs, a common GST structure also reduces moral hazard incentives and information failures.

Within the rising ‘ecological’ (Costanza 1991) or ‘green economics’ (Scott Cato 2009), the idea of Global Sustainability Terms fits even better. Classical ‘environmental economics’ (Kolstad 2010; Tietenberg & Lewis 2011) links ‘markets and the environment’ by discussing possibilities to overcome ‘market failures in the environmental realm’ (Keohane & Olmstead 2007: 65). Instead, ‘ecological economics’ demands a more radical change of perspective from individuals to the global ecosystem (Costanza et al. 1997). The conventional economic paradigm of self-interested utility-maximizing is transformed into a ‘thinking in systems’ (Meadows 2009). The idea is not to correct market failures or to ‘nudge’ (Thaler & Sunstein 2008) some individual actors towards sustainability. Ecological economics aims to reconstitute market structures ecologically. For that endeavour, contract remains, as well, one core mechanism and GSTs help to shape its character.

 
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