Thursday, March 11, 2010

The Economics of Ecosystems and Diversity - Pavan Sukhdev

Several locals in Niagara County have advocated for over ten years that restoration along the Niagara River would rejuvenate the region. The majority of our political leaders have failed to grasp the concept. Maybe reading how ecological restoration has "real economic value" in the New York Times will be more convincing. You can read the article below or here.

Saturday, Mar. 06, 2010

Should We Put A Dollar Value On Nature?

By Judith D. Schwartz

Nature lovers might cringe at the term "ecosystem services" to describe, say, the view of a pristine beach or a stream teeming with trout. But a growing number of experts within the scientific and economic communities say that putting real economic value on components of nature will help protect the environment and promote biodiversity.

Far from cheapening nature, thinking in terms of "natural capital" can offer a way to assess the crucial but unmeasured benefit that humans derive from the nature. Ascertaining that value can then help decision makers bring environmental factors more explicitly into their planning. (See the top 10 green ideas of 2009.)

Can biodiversity loss, then, be seen as a failure of the market? "Biodiversity is the living capital of the planet," says Pavan Sukhdev, a senior banker with Deutsche Bank and Special Adviser to the United Nations Environment Programme's (UNEP) Green Economy Initiative. Like any capital, he says, it has to be measured to be managed. "If you don't count half of your balance sheet, you're going to get your profit and loss ratio incorrect - and we have."

Sukhdev, who's also Study Leader for a UNEP initiative called The Economics of Ecosystems and Diversity (TEEB), says that currently "the economic value attached to nature is zero. Our metrics are geared toward consumption and production of man-made goods and services, and we tend to gloss over nature." This, he says, has led to "bad accounting" which, in turn, has contributed to rapid biodiversity loss.

There is clearly an irony in the notion that attaching a "price" to ecosystems can help people reconnect with nature and what it offers us. Yet appreciating nature from an economic perspective may put environmental concerns on the table in a way that governments and institutions can work with. "In speaking the language of economics, you can play a role in the policy process," says Edward B. Barbier, Professor of Economics at the University of Wyoming, who does research on the economics of natural resources. "Twenty-five years ago, people said, 'That's horrendous - you can't discuss nature that way!' Now they say, 'You're right. We've got to put a value on nature." (See the top 10 invasive species.)

What kind of value are we talking about? According to research cited in the TEEB report, an annual investment of $45 billion to biodiversity conservation worldwide could safeguard about $5 trillion in ecosystem services - a benefit to cost ratio of 100 to 1.

For a site-specific example, in Southern Thailand converting mangroves into commercial shrimp farms yields financial returns of about $1,220 per hectare per year. However, this does not consider the rehabilitation costs of $9,318 per hectare necessary when the area has been "shrimped out" after five or ten years. Other economic benefits the mangroves provide include: collected wood and other forest products; cultivation for off-shore fisheries; and coastal protection against storms, a total of $12,392 per hectare over the course of nine years. If the developer were accountable for the mangrove depletion, would you still want to invest in that shrimp farm?

"The reason we're losing natural capital is because it's free," says Ed Barbier, noting that we often think of conservation in terms of its costs rather than its value, and regard manufactured goods in terms of value rather than their environmental costs. Says Barbier: "When we incorporate the services of ecosystems we may start to think: maybe the costs of maintaining [the integrity of] ecosystems aren't that high compared with the benefits. Maybe the gains we get out of converting nature into commodities are not so large in comparison. The point is that we don't see that tradeoff until we go out and measure that value."

See the best business deals of 2009.

See the worst business deals of 2009.

The challenge is that our business institutions evolved at a time when nature seemed limitless; the idea of endless natural bounty is embedded within our national identity. "In the past, natural resources were abundant," says Robert Costanza, Director of the Gund Institute for Ecological Economics at the University of Vermont. "We've used up all the frontier. Those days are gone. People are recognizing this, but our institutions haven't caught up." So markets continue to ignore natural capital as if it's of no economic consequence.

Right now, he explains, there is an expectation of free and open access to nature. However, its use affects everyone. For example, unless an area is specifically regulated, someone can clear-cut a hardwood forest in a developing nation for the timber. But losing that forest also means the loss of habitat for wildlife, other forest products for food and shelter, soil fertility - plus numerous other functions, including climate regulation, which are not yet completely understood. (See the top 10 scientific discoveries of 2009.)

There have been other efforts to value ecosystem benefits, notably by British economist David Pearce, through his book Blueprint For a Green Economy, which was influential in the 1990s. (Professor Barbier was a coauthor.) What's different now is the urgency - we get news of nature disappearing every day - and new tools for measuring value, since research on ecosystems and valuation metrics have been evolving steadily over the last 20 years. Through programs like the Millennium Ecosystem Assessment, drawing on the work of more than 1,360 experts worldwide, the economic value of biodiversity - which, alas, is often determined after its loss - is becoming more apparent.

According to Costanza, we need different institutions for managing natural capital because of its "public good" aspects. For example, there are systems of payments for ecosystem services, such as compensating farmers who plant trees for carbon sequestration. These could be embedded in common asset trusts, set up to assign property rights to the community rather than private hands. Those who damage ecosystem services would be charged, while those whose land produces services could be paid. Economic incentives can encourage people to preserve natural assets. For example, in Costa Rica U.S. pharmaceutical companies are paying landowners to conserve their properties - essentially maintaining a genetic laboratory in an area with great natural wealth. (About half of manufactured drugs derive from materials found in nature.) "Costa Rica has been a laboratory in strategies for making money while saving the environment," says Barbier.

While such economic arrangements hold great promise, Barbier warns that focusing on one "ecosystem service" - as opposed to grappling with complex systems and interactions - can distort value. He also notes that payments may not cover all the costs of preservation, particularly in the short term. But they may, for instance, pay for running conservation programs, or supplement the income of people who live in the area.

The renewed interest in valuing nature gives Barbier some optimism. "If through scientific and economic analysis we can show the benefits that the natural environment offers, and show that the economic value is not zero, this gives policy makers a vehicle for addressing our fragile ecosystems," he says.

Pavan Sukhdev observes, "The loss of forests worldwide amounts to somewhere between $2 trillion and $4.5 trillion a year. Losses in the U.S financial sector [in the economic downturn] were between $1 and 1.5 trillion. But the banks made the headlines."

And, one might add, got bailed out.

NOTICE:  In accordance with Title 17 U.S.C. Section 107, this material is distributed, without profit, for research and educational purposes only.   ***

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