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Mainstreaming of Environmental Economics

"The secret of business is knowing something which no one else knows" said shipping tycoon Aristotle Onassis. In that spirit, when training people the skills of foresight, in particular scanning for information that has truly strategic value, we often make the sarcastic quip that if you read it in The Economist it's too late. This is not a judgment about the quality of periodical's information (often first rate), but rather about timing -- that is, where the information is the diffusion cycle of ideas. In competitive races, this is important because strategic advantage often emerges when innovators can create value out of un-codified, uncertain, fringe developments before they become mainstream and established.

So with that, it's official: some of the well hashed ideas here -- such as the death of (old style) environmentalism and the importance of the tools of finance and green accounting -- are moving into a different phase, tipping into the mainstream

A great example of this being the Economist's cover story, Rescuing Environmentalism (and the Planet). Echoing our posts, as they put it,

If environmental groups continue to reject pragmatic solutions and instead drift toward Utopian (or dystopian) visions of the future, they will lose the battle of ideas. And that would be a pity, for the world would benefit from having a thoughtful green movement... Whether the big environmental groups join or not, the next green revolution is already under way... 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.

There is also a nifty article in the S&T section on Environmental Economics (subscription required, I think). The article describes several innovative solutions to serious environmental problems using ecosystem valuation. In Panama, for instance, the Canal requires 200 million liters of fresh water to operate the locks. This water is drying up, not helped by the fact that deforestation around the canal has made water retention and silting a major problem. To solve this problem, John Forgach, an entrepreneur and chairman of ForestRe in London is proposing a deal that uses financial tools (in this case, a 25 year bond) that enables companies dependent on the Panama Canal to pay for reforestation, and thus the truer costs of the ecological services they are consuming.

The development of credible valuation measures for ecological services, which Alex and others have written about here is incredibly important for sustainability. Environmental thinkers like Hawken and Lovins have long argued for market players and the market system to pay for the true costs of externalities and environmental inputs like water, soil quality, and air -- inputs which were often used free, or almost free, of charge -- and thus a form of subsidy. Until recently, putting numbers on the environment costs of these activities was hard to do because the quality of measures were poor and not taken seriously. Well, no longer, as evidenced by the report, Valuing Ecosystem Services, from the American National Research Council and a flurry of other studies like the Millennium Ecosystems Assessment. As the Economist explains, this shift has occurred because

...science is producing abundant evidence that the natural environment provides a wide range of economic benefits beyond the obvious ones of timber and fish. Ecologists now know a great deal more than they used to about how ecosystems work, which habitats deliver which services, and in what quantity those services are supplied... Fortunately, according to two reports published by the World Bank at the end of 2004, significant progress has been made towards developing techniques for valuing environmental costs and benefits. There is, says one of these reports, no longer any excuse for considering them unquantifiable.

New tools beget new knowledge which begets new capabilities and understanding and thus traction for action. A classic virtuous cycle, but one not without systemic flaws. Mindful attention needs to be paid to the unanticipated distortions these measures might create, for very often what we measure is what we get. The current short termism on Wall Street, for instance, was triggered in the 1980s with the introduction of the "shareholder value" revolution. This dynamic was far from the intended wishes of the economists who pioneered these metrics. (The best treatment of this story is "The Greed Cycle" by The New Yorker's John Cassidy.)

So while this is exciting, the kinks will become clear only after we live with these measure for a while. As they write, "many conservationists dislike valuation. Some misunderstand it as an approach that ignores cultural and spiritual values. It does not. It simply converts these values into monetary units that can highlight the cost of a course of action." Sure, so long as we don't let scientific methods dominate our values, moral, and aesthetic judgments, which has been the consistent pattern since the age of reason began. In any event, the good news is that from a mainstream perspective, free riding the environment is moving away from a tolerated norm to an unacceptable and senseless practice. Let's hope this trend accelerates and becomes widely practiced, sooner rather than later.

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Comments

Nicole-Anne, merci beaucoup pour votre aperçu prometteur.

I'd be more convinced by the idea of "Environmental Economics" if I thought there were such a thing as "Economics". I don't. I think there's only "Political Economy," the inextricable twining of political and economic forces. If we begin to see an emerging consensus of an "Environmental Political Economy," that will be a great sign of hope. At least it will signal transcendence of dichotomous thinking.


Posted by: David Foley on 26 Apr 05

mr foley-- i think what youre getting at is the deficiency of neo-classical economics in incorporating qualitative data into economic analysis-- a strong quantitative bias. I agree with you heartily about this, as do many amazing writers and thinkers in the feminist economics school of thought... there are fundamental dynamics at work in political economic systems that really cant be quantified because of their complexity.

however, i disagree with you that quantitative analysis, what youre calling straight up "economics," doesnt exist. as anne-nicole, amory and hunter lovins, et al. (and now the economist) demonstrate is that one of the major faults of neoclassical economics has been its failure to extend its powerful quantitative analysis *far enough*. by failing to factor in the quantifiable value of environmental systems like pollination, photosynthesis, genetic diversification, etc., economic leaders and regulators create a political economy that is also not holistic (or sustainable).

basically, economics, or political economics, or environmental economy, or human ecology, or whatever you want to call it, (sustainability science?) needs more data and more analysis, qualitative and quantitative, as well as fresh thinkers to transcend the neo-classicist dogma thats prevented these ideas from penetrating the mainstream 'til now.


Posted by: shiva polefka on 26 Apr 05

I know next to nothing about economics. Could someone sum up for me the answer to a naive, cynical question that springs to mind? Namely: If a price is put on the environment, what stops those who can afford to from trashing it?


Posted by: Gyrus on 26 Apr 05

Yeah, Gyrus

What ever happened to doing something (or not doing something) because it's the right (or wrong) thing to do?

The whole economic environmentalism thought process bothers me a little because it ignores what's right/wrong unless it can be expressed in economic terms.

However, if it's the only way that environmental concerns can make progress, then I'm willing to stand aside while we argue about $. Maybe someday people will realize the bigger picture.


Posted by: Erik Ehlert on 26 Apr 05

Gyrus,

The simple answer to your question is, because they won't be able to afford it.

Look, the Earth is the only thing in the Universe which at this time can sustain human life. That means it's worth a whole heck of a lot to a whole heck of a lot of people. No one person or entity (not Bill Gates, not even the US Govt) has enough money to convince everyone to commit suicide.

Even when the day comes when we can colonize Mars and the Moon, most people will want to stay right here on Earth. How much would you pay for fresh air and clean water? $100/ month? Multiply that by the billions of people who breath and drink water, and you should see what I mean. Luckily, while Demand may be infinite, Supply is fungible, so market forces will keep prices down (don't worry about the jargon, it just means fresh air will have to be paid for, but affordable.

(Yes, I know, most people can't afford $100/ month, but every American, W. European, and Japanese person could, and that's enough to get the ball rolling. Once India and China get to the point where they can even pay $5/ month/ person, it'll be unstoppable.)

The real problem I see with Environmental Economics at this point is legal/ political - specifically, property rights. Who has the right to charge for environmental services? Well, the landowner I guess. But lots and lots of land is owned by the world's Governments. Gov't is a notoriously bad resource manager. Pretty much all of the land currently in the public domain will have to switch to private hands before we really see big gains from this. Yellowstone Park doesn't have any incentive to charge for services, but Yellowstone, Inc. would. Teddy Roosevelt's park system was a great idea for its time, but that time has passed. Better for the parks to pass into private hands so that their full environmental value can be realized (and monetized).

Also, once you start paying people for fresh air, the next logical step would be to charge people for pollution rights, at all levels. This would put enormous pressure on every business and consumer to minimize pollution production and switch to clean technologies. We already have Cap-N-Trade systems for bit polluters, like electric utilities, but once we have clean cars/ lawnmowers/ etc., there's no reason not to 'monetize' the folks who insist on using gasoline.


Posted by: Cardozo Bozo on 26 Apr 05

Cardozo,

Thanks for the detailed response. I'll read the articles linked to here when I get time, for more background. I'm still wondering if "selling water by the river" is just an old cliché, or brazenly pertinent ;-)

I'm pretty pragmatic - whatever reduces environmental damage to sustainable levels, sure. But regarding the idea that what stops people trashing the environment being that they can't afford to, the question's being tackled a little monolithically (to be fair, my original question was pretty sweeping!).

What I mean is, under some Environmental Economic policy, maybe Corporation X won't be able to afford actions that would damage the environment to the extent that the future of the human species would be in jeopardy - phew! But maybe they could afford to damage certain aspects of the environment that would... jeopardise local ecosystems, wipe out some animal or plants species, destroy communities, etc. A global supply of fresh air is valued by everyone, but some things are intensely valuable to one person/community/country/species, but worthless to someone else. And maybe that someone else is Corporation X, with vastly greater resources than any of the threatened parties.

Isn't this just a formalisation of the worst aspects of the current situation? Legitimisation of "financial might makes right", with basic safeguards to make sure the whole shebang isn't screwed up?


Posted by: Gyrus on 26 Apr 05

gyrus, thanks for probing this.

heres a quick example i think of for why environmental economics holds promise for generally increasing economic sustainability:

timber leases in US national forests are ridiculously cheap, and logging companies are often (if not always) actually subsidized to log a forest. but what if we (the American public, as owners of the National Forest) got rid of the subsidy, and then charged the corporation that wants to log the trees a price that included fees for all the services that forest provides, such as CO2 sequestration, oxygen production, flood control, biodiversity banking, et cetera? well, the wood would be a lot more expensive, so then all of the sudden paper mills would be looking a lot more closely at securing recycled paper pulp supplies, Victoria's Secret wouldnt be mailing out 1,000,000 catalogs a day (which they do), and builders would be incorporating sustainable building techniques and technologies much more rapidly.

instead, by not properly valuating the "natural capital" of the forest (and instead calling it a natural "resource"), ie by giving away logging leases, we're doing something akin the factory owner selling off the fixtures and tools in his factory and calling that income from "resources", rather than more appropriately calling that activity a liquidation of assets.

increasing our societal understanding of the quantitative value of natural systems will only lead to more protection for those systems, because the services they provide to the economy are so immense and so immensely precious. IMO the path toward true valuation of natural systems is like identifying the true parameters to economic sustainability; if it becomes too expensive to log the forest (because the logger would have to pay for replacement of all those services elsewhere), then the "expensive" sustainable options we all drool over here at WorldChanging are suddenly well beyond competitive.

Sort of addressing Erik's perspective-- its a way to make would-be amoral exploiters do the right thing without having to convince them that it is the right thing (because the wrong thing [destroying natural systems for a buck] is just too expensive).


Posted by: shiva polefka on 26 Apr 05

Gyrus,

I see your point. Well, the hard truth is that for the moment pollution of some kind if unavoidable. The "good" news is that we won't be able to pollute for free anymore, so the Corporations that provide the products we demand will be encouraged to pollute less (to reduce prices and capture market share). Corporation X will be able to pollute in some ways, but less than today.

So that's what Environmental Economics gets us - not perfection, but progress.


Posted by: Cardozo Bozo on 26 Apr 05

Shiva, thanks for your thoughtful comments. Your example of logging on public lands reinforces my point - the decisions are political-economic, not merely economic. That logging is done for absurdly cheap leases; the logs are trucked on a taxpayer-funded system of roads larger than the U.S. Interstate Highway System. The ecological services provided by the forests are, as you say, largely ignored. If there were a serious effort to change this, the "rational" timber company would find the cheapest solution to be influencing key members of Congress. That could probably be done for between $50,000 and $5 million - much less than the costs of improving the logging operations. That "economic" situation arises because of our "political" situation. (Clean environments and clean governments go hand in hand.)

The ill effects you cite are often called "externalities." (Amazing use of language, yes?) One of the most effective ways to increase profitability is to create an "externality" - that is, to dump the costs of one's actions onto somebody else. That's regularly done through laws and regulations.

For instance, it's our property laws creating a situation that when I "own" something, I "own" the responsibility for disposing of it, usually via a taxpayer-subsidized facility. I live in Maine; we have a beverage-container deposit law. Maine decided to create a price signal that it's dumb to "throw away" (another amazing term) bottles and cans. That's a political-economic decision.

There's endless debate about the value of markets versus laws. To me, it's ultimately a fruitless argument, since markets and laws are Yin and Yang, each creating the other, a whole system called Political Economy. I'm just saying that we can't "Green" one without "Greening" the other.


Posted by: David Foley on 27 Apr 05

more discussion here :D

http://www.worldchanging.com/archives/002577.html

but i would encourage people to look at bernard lietaer's "future of money," [more here http://ud.lir.be/tiki-index.php?page=Money ] where he looks at how economics mirror the currency systems we choose and whereby adopting currencies that better reflect principles of sustainability [ e.g. http://terratrc.org/ ] would also provide incentives to preserve the environment! btw the first international complementary currency summit takes place july 31 - august 5, 2005 http://www.accessfoundation.org/ :D

like this is what douglas rushkoff has to say about that:

http://edge.org/3rd_culture/foreman05/foreman05_index.html#rushkoff

"the development of complementary currency models, such as Ithaca Hours, allow people to agree together what their goods and services are worth to one another without involving the Fed. They don't need to compete for currency in order to pay back the central creditor—currency is an enabler of collaborative efforts rather than purely competitive ones"

cheers!


Posted by: videlicet on 27 Apr 05



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