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Environmental Economics
Alex Steffen, 21 Apr 05

Ecological Economics sets a price to the ecological services of the planet. Environmental economics, works out to being the same thing, or, depending on who you've asked, is a broader concept which encompasses effects on human health and productivity.

The Economist has come out with a pair of articles on the subject: Are you being served?, which begins by exploring the problems deforestation along the Panema Canal are causing, and a novel approach to reforestation which is, ahem, taking root there:

[A]ny scheme to reforest the canal's watershed is, in fact, an investment in infrastructure. Normally, this would be provided by the owner. But in this case the owner is the Panamanian government, and Panama is in debt, has a poor credit rating and finds it expensive to borrow money. And yet investing in the canal's watershed clearly makes economic sense. Who will pay?

In the case of the Panama Canal, the answer may turn out to be John Forgach, an entrepreneur, banker and chairman of ForestRe, a forestry insurance company based in London. Mr Forgach's plan is to use the financial markets to arrange for companies dependent on the canal to pay for the reforestation. Working in collaboration with several as-yet-unnamed insurance and reinsurance companies, Mr Forgach is trying to put together a deal in which these companies would underwrite a 25-year bond that would pay for the forest to be replanted.

Which is a pretty great example of restoration for profit.

The second article, an opinion leader, Rescuing environmentalism, contends that "market forces could prove the environment's best friend—if only greens could learn to love them." I disagree, personally, with some of the conclusions, but it's as readable a summary of "free-market environmentalism" as you're likely to see:

One example lies in the assignment of property rights over “commons”, such as fisheries, that are abused because they belong at once to everyone and no one. Where tradable fishing quotas have been issued, the result has been a drop in over-fishing. Emissions trading is also taking off. America led the way with its sulphur-dioxide trading scheme, and today the EU is pioneering carbon-dioxide trading with the (albeit still controversial) goal of slowing down climate change.

These, however, are obvious targets. What is really intriguing are efforts to value previously ignored “ecological services”, both basic ones such as water filtration and flood prevention, and luxuries such as preserving wildlife. At the same time, advances in environmental science are making those valuation studies more accurate. Market mechanisms can then be employed to achieve these goals at the lowest cost.

...The world may yet leapfrog from the dark ages of clumsy, costly, command-and-control regulations to an enlightened age of informed, innovative, incentive-based greenery.

I particularly find the use of leapfrogging in the last paragraph to be a cynical and content-free use of the term. That said, this is an important debate, and learning to attach value to ecosystem services is, I believe, absolutely critical.

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The Panama plan is amazingly right-thinking: imagine that, having the people who benefit the most be the ones to ante up the most! And they'll benefit both by retaining their future transportation channel and making an extra profit.

It saddens me how rare it is that biodiversity is seen as intrinsically valuable. Where you saw cynicism in the "leapfrog," I saw it in the phrase "luxuries such as preserving wildlife." Perhaps cynicism isn't the right word... maybe clueless?

Posted by: Stephen A. Fuqua on 22 Apr 05

This portrayal of ecological economics is quite off the mark. See for more information. Briefly, however, ecological economics is distinguished from "environmental" economics (a subset of neoclassical economics) on a number of fronts. I’ll mention two: 1) Ecological economics begins from a different starting point; i.e., natural sciences including especially laws of thermodynamics and principles of ecology. 2) Ecological economics deals with far more than "pricing" natural resources. It’s primary emphasis is SCALE, the size of the human economy relative to the ecosystem that sustains it. Thusly recognizing a limit to economic growth, it goes on to address the issue of DISTRIBUTION (of wealth), which must be equitable enough for social stability and a sustainable outcome. Finally, like neoclassical (including environmental) economics, it deals with the ALLOCATION of resources (this is the "pricing" issue) for the sake of efficiency.

Brian Czech, President
Center for the Advancement of the Steady State Economy

Posted by: Brian Czech on 25 Apr 05



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