Putting a Price Tag on Nature
by Stan Hirst
Our Elder-in-chief, David Suzuki, is well-known for his strong views on modern economics. His statements through the popular media that conventional economics is a form of brain damage have ruffled many a feather and elicited vitriolic retorts from the financial media. David’s main objection to the “dismal science” is that, when faced with the necessity of having to address the loss of natural ecosystem services (such as the hydrologic cycle, the activities of soil microorganisms or the fertilization of flowering plants by insects) economists invariably take a short cut and lump all these diverse and very heterogeneous functions and components into just one variable – externalities.
Externalities, in economic lingo, are factors whose benefits and costs are not reflected in the market price of goods and services. David’s concern is that relegation to that category virtually guarantees that little further notice will be taken of nature’s diverse benefits in project and policy evaluations and decisions. Most externalities are components or processes that do not have a market value in the typical sense – they aren’t traded and paid for in the market place. Nobody pays a swarm of bees to pollinate a fruit orchard, nor does anybody hand over a cheque to a few billion soil microorganisms to turn old vegetables and lawn clippings into useful compost.
However, that doesn’t necessarily mean those processes are then excluded from all further reckoning. For example, apiarists are paid in fruit-growing regions to transport their hives of bees to orchards to carry out seasonal pollination; the owner of the land holding the dumped organic matter can tend the resulting compost and place it in bags to sell at profit at garden shops. The processes may be external to the economic balance sheet, but the products need not be.
There doesn’t appear to be anything inherently anti-environment in the science of economics (it is a science by the way – it was first defined in 1803 by Jean-Baptiste Say as “the study of production, distribution and consumption of wealth”). The doyens of modern economic theory like Milton Friedman and Paul Samuelson treat natural resources like any other, and their textbooks, used by millions, apply all the normal economic principles to environmental components like forests, polluted air and fisheries. However, the natural resources they use as examples, like fish and forest products, are typical market commodities, i.e. they are traded back and forth in commercial markets, and prices can be readily set by the buyers and sellers.
Some big names in modern economic theory actually stand out as being very cognisant of environmental issues. The late Kenneth Boulding is credited with energizing the field of environmental economics in the 1960s with his essay ‘The Economics of the Coming Spaceship Earth’. He described the open economy of the past with its seemingly unlimited resources as “reckless, exploitative and characteristic of open societies (like cowboys!)” and contrasted it with the closed economy of the impending future where “Earth will become a single spaceship without unlimited reservoirs of anything, either for extraction or for pollution, and in which man must find his place in a cyclical ecological system”.
Perhaps the economist who has invoked environmental concerns to shake the economic foundations more than anyone else is Herman Daly. At one time the senior environmental economist at the World Bank, he made news in 1994 when he resigned to protest the Bank’s unwieldy bureaucracy and antiquated policies. Daly identified a problem for economics much bigger than the issue of externalities – the spectre of unlimited growth. He worked extensively in northeastern Brazil, a region beset by a burgeoning human population and a seriously depleted natural resource base. He also read the books of his contemporaries, the environmentalists Rachel Carson and Paul Ehrlich, and it was obvious to Daly that, like a human population, when the economy grows, it does so at the expense of the ecosystems that sustain it. For him, the realistic way of viewing the economy then was as a subset of the overall ecosystem, which implied that the economy must have some optimal scale relative to the larger system which should not be exceeded if serious consequences were to be avoided.
Another of Daly’s contemporaries, Robert Costanza, moved the focus to the interface between ecological and economic systems. This then led to the need to estimate the market value of natural goods and services which are not traded in the marketplace – things like natural habitats and processes such as reduction of airborne pollutants. A plethora of methods to estimate the economic value of natural capital and processes has evolved over the years – things like mathematical modelling, calculating how much the market would pay to avoid losing a particular natural resource, etc. In 1997 Costanza and his colleagues caused a stir with their published estimate of the value of the entire biosphere (between 16 and 64 trillion dollars; the international GNP at that time totalled about 18 trillion dollars). A recent David Suzuki Foundation study of the economic values of water supply, air filtration, flood and erosion control, wildlife habitat and agricultural pollinators, carbon storage and other benefits provided by natural and managed ecosystems in the 5.6-million-hectare Peace River watershed in British Columbia gave a conservative estimate of $7.9 to $8.6 billion per year.
Estimating the economic value of natural capital and ecological processes seems a logical step in the quest for long-term global sustainability, but it may have serious pitfalls. The British journalist George Monbiot contends that pricing natural capital results in gobbledygook because the values of such disparate resources are really non-commensurable. Not only are apples being compared to oranges, apples are being compared to every other conceivable money-making commodity. Monbiot’s even bigger objection to putting a price on nature is that, rather then protecting the natural world from the depredations of the economy, the approach harnesses the natural world to the very economic growth that has been destroying it all along! The processes that in the past have been so damaging – commodification, economic growth, financialisation, abstraction – can hardly be expected to now protect the living planet.
Personally, I don’t see the issue as having anything to do with the science of economics at all. In my experience it has more to do with the single-minded attitudes and actions of [some] proponents of development, [some] market-oriented economists who support those developments for the sake of personal monetary gain, and [some] politicians who seek the seemingly easy way to electorate approval. The same phenomenon can be seen in the medical field (new expensive pharmaceuticals touted by professionals) and in the food sciences (genetically modified crops as the way to bigger profits).
The natural environment has enormous economic and health benefits for the world and its inhabitants, but individuals and corporations are driven to make a profit. No profit derives from leaving anything undisturbed, because a developer or corporation must “add value” in order to sell. This incentive is what is so destructive. Destruction of natural ecosystems converts to dollars, so the true value of nature is ignored. Overcoming this perverse incentive is the true economic challenge of the 21st century.
[First posted August 12, 2014]