What’s the World Worth?

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We cannot manage what we do not measure, says Pavan Sukhdev, special advisor to the United Nation’s Environment Program’s Green Economy Initiative. The first step is to end the economic invisibility of nature and its benefits by changing our antiquated economic compass.

In 2008, the Global Financial Crisis hit the headlines every day for over a year. The International Monetary Fund estimated the loss of financial capital to Wall Street and City of London investment firms to be in the order of US$2.4 trillion.

At around the same time, our project ‘The Economics of Ecosystems and Biodiversity’ (TEEB) estimated the value of the earth’s natural-capital losses at US$2–4.5 trillion – in other words, up to twice the losses suffered through the financial crisis. Scarcely a headline featured this fact. Why?

Is it because natural capital losses are losses of ‘public wealth’ – of assets owned not individually but by all citizens, collectively – rather than losses of private wealth? Because natural capital is rarely quantified in monetary terms, making it difficult to assess the size of these losses? Or because we have an innate bias towards man-made over natural capital? Perhaps the answer is all three.

Biodiversity, or wild nature, is the living fabric of this planet. It is the whole gamut of the earth’s ecosystems, their extent and variety, the diversity and abundance of all species that inhabit them, and the amount and variability of genetic material. This living fabric provides many benefits, from food, fuel and fibres to services such as freshwater cycling and carbon capture and soil retention right through to leisure, happiness and wellbeing.

The value of wild nature

Our home is something to which we ascribe infinite value, but through the lens of economics, this value is not always factored in. At TEEB, we undertook a scenario analysis of the 50-year impact of ‘business as usual’. Our baseline was land-use change to support an OECD population forecast of 9.5 billion in 2050 (currently 6.7 billion) and world GDP growth from $US65 trillion to $US195 trillion (A$72.8 trillion to A$218.4 trillion).

Deforestation already destroys around 12 million hectares of forest every year. Through our modelling, we came to the conclusion that if we continue with business as usual, by 2050 we will have lost from wild nature a land area roughly the size of Australia (7.5 million square kilometres). This will dramatically and irreversibly affect the earth’s biodiversity and ecosystems.

The loss of this biodiversity would result in lost benefits of up to seven percent of global GDP on the horizon of 2050. These economic costs – in terms of lost human-welfare benefits – can be calculated by looking at the loss of ecosystem services every year from the natural areas lost.

We also expressed this in terms of lost ‘natural capital’. Calculating natural capital involves discounting and, at TEEB, we chose a range of discount rates from four percent to one percent. This choice of discount rates was not a result of economics – it was an ethical choice. If we use a discount rate of four percent, what we are saying is that we can trade off nature’s benefits to our grandchildren at one-seventh of what they are worth to us now. We are in effect leaving them with one-seventh of what we currently get from the planet. This is a somewhat odd ethical choice. Even using a one percent discount rate is not completely ethical, in my opinion, because you are then saying that your grandchild deserves only two-thirds of what you get from nature.

Even when we used these high discount rates, we came to the staggering answer that the natural capital being lost every year was in the order of US$2–4.5 trillion (roughly A$2.24–5 trillion).

The economic invisibility of nature is one of the key drivers of its destruction. This leads to its loss – by replacing natural areas with land uses that do have visible economic values, such as human habitation or agriculture. So first, we need to understand and appreciate the value of our collective environmental assets.

Second, we need to change from ‘business as usual’, through new national policies and more evolved business responses towards the environment. Third, we need > to recognise and address those weaknesses in our institutional infrastructure that exacerbate environmental problems.

Accounting for externalities

The Amazon rainforest is a vast store of carbon: it prevents the loss of economic value through climate change. We should also value the biodiversity and the water that is generated by this rainforest. It provides rainfall for the water supply to a trillion-dollar agricultural industry. If the economy is worth a trillion dollars, what value would you like to assign to the fresh-water component of this key resource input into that economy? Traditionally, it is seen as an externality and is not priced (that is, not assigned a value). Unaccounted-for negative impacts of economic activity, such as pollution, are also externalities.

To start accounting for the value of nature, we need to account for the value of these externalities, both positive and negative. A study undertaken by Trucost for the United Nations Principles for Responsible Investment estimated the externalities of about 3000 listed companies.

  • The study revealed the following:
  • The value of the externalities of these companies was close to US$2.25 trillion per annum.
  • The three largest contributors to corporate externalities were greenhouse-gas emissions, water extraction and air pollution.
  • Externalities accounted for seven percent of the companies’ turnover and a third of their profits.

These are significant numbers but the reality is that nobody really accounts for them. We need two transformations to make people aware of the true costs of externalities:

  • We have to measure the value of these externalities because if we don’t measure them, we are never going to manage them.
  • We have to look inside the corporations themselves. Change will happen; the question is how unsettling the transition will be.

Increasingly, corporate executives are aware of the value of natural services to their operations. Our recent TEEB report showed that company heads are aware in direct relation to the stress being placed on their own environments: over 50 percent of CEOs surveyed in Latin America and 45 percent of those in Africa see declines in biodiversity as a challenge to business growth. In contrast, less than 20 percent of their counterparts in western Europe share such concerns.

Companies are beginning to take steps in the right direction. Multinational mining giant Rio Tinto, for instance, is one company that has committed itself to achieving a net positive impact on biodiversity. Other companies with commitments on biodiversity include Walmart (Acres for America initiative) and BC Hydro (no net incremental ecological impact).

Economics is not just about numbers and estimating monetary values. It’s about assessing wellbeing and how humans are affected. We need to think of ecological infrastructure in the same way as we do economic infrastructure. It’s not about being ‘greenies’: it’s about making use of smart technologies to restore wealth to people.

As people become more comfortable with the idea of including natural capital in economics, we will move towards a society that not only makes a profit but can also live in harmony with nature.

A ballad of ecological awareness

The cost of building dams is always underestimated –
There’s erosion of the delta that the river has created,
There’s fertile soil below the dam that’s likely to be looted,
And the tangled mat of forest that has got to be uprooted.

There’s the breaking up of cultures with old haunts and habits loss,
There’s the education program that just doesn’t come across,
And the wasted fruits of progress that are seldom much enjoyed
By expelled subsistence farmers who are urban unemployed.

There’s disappointing yield of fish, beyond the first explosion;
There’s silting up, and drawing down, and watershed erosion.
Above the dam the water’s lost by sheer evaporation;
below, the river scours, and suffers dangerous alteration.

For engineers, however good, are likely to be guilty
of quietly forgetting that a river can be silty,
While the irrigation people too are frequently forgetting
That water poured upon the land is likely to be wetting.

The water in the lake, and what the lake releases,
Is crawling with infected snails and water-born diseases.
There’s a hideous locust breeding ground when water level’s low,
And a million ecological facts we really do not know.

There are benefits, of course, which may be countable, but which
Have a tendency to fall into the pockets of the rich,
While the costs are apt to fall upon the shoulders of the poor.
So cost-benefit analysis is nearly always sure,
To justify the building of a solid concrete fact,
While the Ecological Truth is left behind in the Abstract.

By Kenneth E. Boulding: economist, educator, peace activist, poet, religious mystic, devoted Quaker, systems scientist, and interdisciplinary philosopher.

Pavan Sukdev

Pavan Sukhdev is special advisor to the UNEP’s Green Economy Initiative, and study leader of The Economics of Ecosystems and Biodiversity (TEEB).  Sukhdev has extensive experience in finance, economics and science and is a board member of Deutsche Bank’s Global Markets Centre Mumbai, a dedicated front-office offshoring hub for Global Markets and a market “first” of its kind. At Deutsche Bank, his roles included being Chief Operating Officer for the Bank’s Asian Global Markets business, Head of Money Markets division for Global Markets Asia, and Chief Operating Officer for the Bank’s Global Emerging Markets division, based in London. Sukhdev’s long-standing interest in environmental economics and nature conservation includes working with the Green Indian States Trust, where he has published work on preparing comprehensive ‘Green Accounts’ for India and its States, a first among developing countries. And in his spare time, Sukhdev manages an award-winning eco-tourism and rainforest restoration project in Tarzali, North Queensland, Australia, as well as an organic tea and coffee plantation in the Nilgiri hills, in south India.

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