Why it is important to put a price on nature

Price fixing

Jan 18th 2010
From Economist.com

Why it is important to put a price on nature

THE insight that nature provides services to mankind is not a new one. In 360BC Plato remarked on the helpful role that forests play in preserving fertile soil; in their absence, he noted, the land was turned into desert, like the bones of a wasted body. The idea that the value provided by such “ecosystem services” can be represented by ecologists in a way that economists can get to grips with, though, is rather newer. A number of the thinkers who have made it a hot topic in the past decade gathered at a meeting on biodiversity and ecosystem services held by theRoyal Society, in London, on January 13th and 14th. They looked at the progress and prospects of their attempts to argue for the preservation of nature by better capturing the value of the things – such as pollination, air quality and carbon storage – that it seemingly does for free.

Environmental valuations aim to solve a problem that troubles both economists and ecologists: the misallocation of resources. Take mangrove swamps. Over the past two decades around a third of the world’s mangrove swamps have been converted for human use, with many turned into valuable shrimp farms. In 2007 an economic study of such shrimp farms in Thailand showed that the commercial profits per hectare were $9,632. If that were the only factor, conversion would seem an excellent idea.

However, proper accounting shows that for each hectare government subsidies formed $8,412 of this figure and there were costs, too: $1,000 for pollution and $12,392 for losses to ecosystem services. These comprised damage to the supply of foods and medicines that people had taken from the forest, the loss of habitats for fish, and less buffering against storms. And because a given shrimp farm only stays productive for three or four years, there was the additional cost of restoring them afterwards: if you do so with mangroves themselves, add another $9,318 per hectare. The overall lesson is that what looks beneficial only does so because the profits are retained by the private sector, while the problems are spread out across society at large, appearing on no specific balance sheet.

Ecosystem-services researchers are now providing such balance sheets in more and more of the world. Poor countries such as South Africa and Tanzania have realised that if they study the provision of such services sensibly, they can make more rational decisions and avoid some of the costly mistakes made by those places that have already developed. To this end, the Natural Capital Project, a group based at Stanford University, California, has developed a suite of computer programs called InVEST, which will analyse and map ecosystem services. InVEST allows farmers, landowners and government officials to make better-informed decisions about the current and future costs of an activity.

In the Eastern Arc mountains in Tanzania, for example, deforestation is reducing river flows, which leaves the people and industries of Dar es Salaam, the country’s largest city, short of both water and hydroelectricity. InVEST is being used to find the least bad places for further upstream development, and to pinpoint those areas where paying the locals to maintain the environment will yield the greatest dividends downstream. Meanwhile, in Colombia, funds have been created by water users, particularly the thirsty sugarcane industry, to pay for investment in watershed conservation and restoration. Again, the priority areas for such funds are being discovered by mapping the ecosystem services.

The move to put a price on nature has its critics. Some think the notion is an affront to those who place cultural, spiritual or aesthetic value on biodiversity for its own sake. It would be a mistake to look at things this way. In valuing a particular service – such as the cost of erosion to Greek hillsides – which can be quantified with a reasonable degree of certainty, you do not exhaust the reasons for preserving the groves where the dryads play.

The other concern, among nature lovers, is that valuations may not always give the answers that they want. Humans are fond of pandas and elephants: yet the species that provide the greatest utility may turn out to be dung beetles, bacteria and trees. To others, though, including many who come from economics, this is a feature, not a bug (or a beetle). It means that the service approach really is trying to measure something useful, rather than confirming prejudices about what needs saving.

Partha Dasgupta, an economist at Cambridge University who gave the Royal Society meeting’s opening address, stressed that the ecosystem approach has still more to offer: it can go beyond being a decision tool to becoming a key part of macroeconomic thinking. Dr Dasgupta wants a new measure of national wealth that captures the state of a country’s environment in ways that GDP cannot, a measure he calls “Inclusive Wealth”. Pavan Sukhdev, an economist at the United Nations Environment Programme, agreed. By way of example, he offered the observation that although GDP incorporates increases in medical spending on respiratory diseases, it does not incorporate the value of reducing air pollution. GDP, he concludes, is an imperfect measure of progress.

Ecologists, then, need to remember that the ultimate prize in ecological economics is not just an increase in the extent to which the environment is a factor in decision-making, but to find ways of weaving it into the fabric of economic thinking. If that results in a better and fuller approximation of the truth, economists should be pleased, too