Rebuild the Economy by Investing in Natural Capital

Posted on Wednesday, October 22nd, 2008 at 12:38 pm by dpacheco

For years, environmentalists have been trying to appeal to our better natures—pleading to humanity to preserve the environment simply for the environment’s sake. Clearly, that approach hasn’t worked out too well. But maybe the results of an EU-commissioned cost-benefit analysis will open people’s eyes.

From the BBC:

The global economy is losing more money from the disappearance of forests than through the current banking crisis, according to an EU-commissioned study.

It puts the annual cost of forest loss at between $2 trillion and $5 trillion.

Study leader Pavan Sukhdev says, “…whereas Wall Street by various calculations has to date lost, within the financial sector, $1–$1.5 trillion, the reality is that at today’s rate we are losing natural capital at least between $2–$5 trillion every year.” I’m no economics wiz, but these numbers are pretty clear. The services that forests perform that benefit mankind, such as providing clean water and removing carbon dioxide from the atmosphere, are being undercut by human activities. Not only do big companies need to add environmental impacts to their balance sheets, they need to start investing in eco-markets; if they want to stay in the black, they’ll have to get in the green.

In an article on investing in “nature’s capital,” also from the BBC, Andrew Mitchell has this to say:

A major new theme of this Congress of the World Conservation Union (IUCN) is about how we value natural capital, which up to now has not appeared on company balance sheets.

I believe the current financial crisis may force the global community to right that wrong, along with many others, because we all want a more stable economy.

However, in global markets today, rainforests are worth more dead than alive. Poor and often opaque governments, with little to sell, offer their rainforests to raise revenue, attracting largely risk capital with strings attached.

The only way to do this is to convert rainforests into something else, usually timber, beef, soy or palm oil that Westerners, and now prosperous Asians, have a burgeoning appetite for….

Seven billion tonnes of carbon dioxide (CO2) annually places rainforests just second to energy as a source of global emissions and is more than the entire world’s transport sector put together.

And it is not just about carbon. The world’s rainforests are a giant “utility”, providing services we all use but do not pay for.

The Amazon releases 20 billion tonnes of water into the atmosphere each day. This air-conditions the atmosphere, waters agri-business and underpins energy security from hydro to biofuels across Latin America on a gigantic scale.

Were it possible to build a machine to do this, every day it would consume the energy equivalent to the world’s largest hydro dam running on full power for 135 years; and the Amazon does all this for free. Now that’s natural capital and we are eroding it fast.

Pavan Sukhdevs’ landmark report, The Economics of Ecosystems and Biodiversity, published by the EU earlier this year, estimated the annual losses of natural capital to be, at the low end, equivalent to the value of the Indian stock market and, at the high end, the entire London stock market.

If what biodiversity does for us is so valuable, why is this happening? The answer is in part ignorance and, in part, that the global economy may no longer be fit for purpose.

The problem is that nature is priceless. What nature does for us is not valued economically. Whilst only financial and human capital drive human endeavour, and inputs from natural capital remain unrecognised, business proceeds on a false sense of security.

The economy, I believe, is at a truly historic tipping point where the global economy will rapidly need to incorporate the risks from the collision course that energy security, food security and environmental security are all on….

Markets are by no means perfect but they are inventive. Who would believe 30 years ago that a bottle of fashionable mineral water would sell for more than petrol. But left to itself, the global market puts a value on bottled water of 70bn euros per year but nothing on vital rain from rainforests.

A scheme to value forest ecosystem services in global markets could deliver financial flows at scale, in addition to those provided by carbon markets.

Some understandably fear turning natural capital into bonds or equities because the market can be a beast, but government funds sourced from taxation are unlikely to meet the $30-50bn annual bill for halting deforestation….

Rich nations, which have caused climate change, may have the financial muscle to help solve it and should find a way to recognise “real capitalism” inclusive not only of financial and human capital, but also natural capital.

If the global economy can, almost overnight, find two trillion dollars to cut the risk of Fannie May and Freddie Mac and the global banking community from going down the pan, surely it can find a fraction of that to cut the risk of forests going up in smoke.

The implication is clear. Governments, together with private industry, need to make it more financially attractive for poorer countries—where the bulk of deforestation is taking place—to preserve their forests than to destroy them. Putting a dollar value on them, while it may seem a bit ruthless, is a good first step. When companies’ bottom lines start going up in smoke, maybe they’ll listen.

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