IN A rainforest in Guyana, two men are trying to sell rain. If you want, they will also sell you soil, biodiversity, nitrogen-fixing bacteria and all kinds of other things.
Tempted? Thought not. But these men are not con artists. They are engaged in a serious experiment to save the planet: to see whether hard-nosed self-interest can succeed where altruism and politics are failing.
The experiment, run by zoologist Andrew Mitchell of the University of Oxford and banker Hylton Murray-Philipson, takes the form of a private company called . It does not own the 360,000-hectare , but has bought the rights to market its “ecosystem services”. For this it has so far paid half a million pounds.
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The services on offer include “the storage of carbon, the generation of rainfall, the supply of water, the maintenance of biodiversity, the prevention of erosion, the formation of soil, the fixation of nitrogen, the treatment of waste and pollution and the support of indigenous and other forest community livelihoods”. Anyone interested in buying these services can do so, in the form of green bonds.
It’s an impressive list. But who would pay for services from a remote rainforest when they already appear to come for free? And what, exactly, would they get for their money? At present the answers are: nobody, and not much. But that is partly the point. The future of the planet could depend on finding some different answers.
Welcome to the weird world of green economics, in which the value of ecosystems is being reduced – or elevated, depending on your perspective – to a matter of dollars, in a bid to save them from destruction.
It makes a certain intuitive sense. Economics and ecology are intimately related, and not just in name (the “eco” in both has the same Greek root, oikos, or “house”). All economic activity is dependent on the environment: what would the timber trade be without forests, or fisheries without fish? And those are just some of the direct connections. Without a stable climate, water to drink and air to breathe, there would be no economy at all.
But at present, the environmental factors that keep economies ticking over are almost entirely absent from economics itself. If they are acknowledged, it is as “externalities” that are not reflected in the prices of goods and services. A classic example is greenhouse gases: emitters emit them for free, and wider society picks up the tab.
To try to plug this loophole, economists have given nature a new name: natural capital. The argument is that only when we can see the true value of nature will we have the incentive to look after it.
This isn’t a new idea. The United Nations agreed a “” almost a decade ago. What is new is that global environmental politics is embracing it. Recent international conferences on climate change, rainforests, biodiversity and rivers have endorsed the idea that natural capital can turn the promises of politicians into real action.
So is natural capital really a game-changer? It’s a big ask. One reason natural capital has been ignored is that, by and large, nature is not owned by anyone. Most of it is shared. If you don’t own something, you can’t put it on your balance sheet as an asset. Investing to protect it makes little sense, because you would be giving your competitors a free ride.
The ecologist Garret Hardin put a name on this in a famous 1968 paper: “The Tragedy of the Commons”. In it, he pointed out that shared natural resources with open access quickly get depleted, because everyone has an interest in grabbing what they can, while they can (). This bleak logic plays out in the real world in the form of deforestation, soil erosion, overfishing and so on. It is easy to see the folly of such actions – but why would anyone stop unless they knew that everyone else would, too?
Making matters worse, people are often barely aware that natural capital exists until it disappears – that is, when deforested coastlines are flooded, drained wetlands cease to clean up pollution, razed forests result in droughts, and the trashing of coral reefs causes fisheries to collapse.
The task of green economics, then, is twofold. First, it must overcome ignorance by translating abstruse ecological value into a measure more easily understood – money. Secondly, and more controversially, it must turn that abstract valuation into real money, by finding ways for people to get richer by valuing nature. That way, the argument goes, the unstoppable forces of global capital will be directed towards saving nature rather than destroying it.
The first step, putting a dollar sign on natural capital, speaks to the old business adage that “you can’t manage what you can’t measure”. So what kind of numbers do the green economists come up with?
The biggest study yet, (TEEB), tried to value a range of important ecosystems. Coral reefs came top, worth up to $1.2 million per hectare per year, largely derived from tourism. The Amazon rainforest was reckoned to be worth between $6.5 and $13 billion a year as a carbon store alone. Even humble grasslands can be worth thousands of dollars per hectare, as protectors of water supplies and carbon stores. The TEEB study did not tell ecologists anything new, but it translated their knowledge into a metric that economists – and hopefully policymakers – can understand.
But simply putting a value on natural capital is not enough. What does it mean to say that coral reefs are worth $1.2 million per hectare per year? That’s not “value” in the conventional sense. It is not a physical thing that can be bought and sold, but more like a future or another similarly esoteric financial product.
To see how this value can be integrated into the economy, consider Thailand’s coastal mangrove forests. Many of these have been chopped down and turned into shrimp ponds, making Thailand the world’s largest shrimp exporter. Edward Barbier, an environmental economist from the University of Wyoming in Laramie, calculated that the farms had a value of $10,600 per hectare, 10 times that of the timber. Economically, it looks like a no-brainer.
But hold on. Mangroves also provide less tangible benefits, such as protecting the coastline. We learned this dramatically after the Boxing Day tsunami of 2004, when coastlines with mangroves suffered much less damage than those without (). Barbier calculated a value for that benefit at $18,000 per hectare – much more than shrimp ponds. Suddenly, trashing the mangroves doesn’t seem like such a canny idea ().
Conservation as investment
Knowing that is useful. But just knowing it won’t stop the spread of the farms, because they generate profits for individuals. The tragedy of the commons still wins out – unless the government decides to keep the mangroves intact in the national interest.
In the past that would have been a difficult decision to justify, but having a valuation helps. Setting aside a hectare of mangrove is equivalent to investing $18,000 in coastal protection. In this way, the tragedy of the commons is avoided.
Governments, of course, tend to be short-termist and vulnerable to business lobbying. But there are signs that the message is getting across. Some enlightened governments now pay people to protect ecosystem services on the understanding that, like preventive healthcare, it is cheaper than not acting until problems arise. There are already over 300 such programmes round the world, according to Sven Wunder, an economist at the in Belém, Brazil.
Most famously, Costa Rica reversed rampant deforestation by paying landowners to protect and replant. Less well known is that China, often an environmental pariah, has paid out more than $100 billion for reforestation and other such projects since 1999.
But there are two problems with such schemes. One is practical. Costa Rica’s payments were not rigorously monitored, undermining the accounting principles the system is built on. The other is more fundamental. National systems tend to be parochial, attuned to local needs. They generally ignore global benefits such as climate protection. If nations only assess the national value of ecosystem services, they will undervalue them.
So the big question is whether economics itself can be recast to incorporate global concerns. Can it find a way of giving a cash value to the huge variety of ecosystem services provided even by something as simple as a patch of rainforest?
For some, this is the holy grail of environmentalism. For others, it is a pernicious privatisation that can only bring disaster. If even nature can be owned and bought and sold, then there are no commons any more – not even the air we breathe.
“For some, this is the holy grail of environmentalism, for others, it is a pernicious privatisation of nature”
The first big test looks like being carbon in forests. Forests have value in various forms. They are valuable in a conventional sense for timber, food and medicine. The land on which they grow is potentially valuable as a place to grow crops.
As for their ecosystem services, one of the most valuable is as a carbon store. Every tonne of carbon held in a tree is a tonne of carbon not in the atmosphere warming the planet. This carbon store currently has no value to an individual or corporation, but it is extremely valuable to the planet. Can green economics create a market for it, one that encourages the protection of forests rather than their plunder?
A number of countries already put a price on industrial carbon emissions, based on the cost of cleaning them up. California will open the first such scheme in the US in January. In a system known as cap-and-trade, big emitters are granted permits to pollute, which they are allowed to trade. The economic theory behind this is that emitters who can make big cuts cheaply will do so and then sell surplus permits at a profit. The market should thus unleash incentives to find better ways to reduce pollution.
The next step is to extend the scheme to include forests. Say a power company is required to cut emissions, a task that will cost $30 per tonne of CO2. If it is allowed, as an alternative, to invest in protecting a forest and so keep CO2 out of the air at the equivalent of $20 a tonne, it will surely do so. UN climate negotiators aim to allow that to happen from 2020, through a scheme called Reducing Emissions from Deforestation and Forest Degradation, or . It would be the first global market in a key ecosystem service.
Policing the system won’t be easy, but if it works, the atmosphere will gain. The wider environment might also benefit. A recent study predicted that a global system that priced CO2 at $25 per tonne emitted could curb climate change, protect forests and, as a by-product, reduce the rate of species extinctions ().
The carbon market could just be the start. Canopy Capital is betting that governments will set up similar markets, allowing it to sell, say, nitrogen-fixing services to companies that want to offset their nitrogen emissions.
Well, maybe. Many ecologists are not convinced. All this talk of natural capital rings alarm bells. “Nature is very different from human, social or manufactured capital stocks,” warns Paul Ekins of University College London in a report for the UN Environment Programme. “It operates through its own complex laws and systems”.
Ecosystems are not like goods in a warehouse or money in a bank. If you spend half your cash you will still have exactly half left. But ecosystems are more complex. Chop down half a rainforest and you are left with half as much timber – but you might retain most of the biodiversity while destroying the forest’s ability to boost rainfall in a distant country.
Joseph Burger of the University of New Mexico at Albuquerque says that natural-capital accounting ignores these complex interactions. Moreover, says Ekins, putting a dollar sign on natural capital suggests that one capital stock is exchangeable for another. That means, for example, that selling rainforests and buying coral reefs – or next year’s rubber harvest or a shipload of computers – would be environmentally neutral.
This “tradability” looks like the crunch point at which economics and ecology are fundamentally incompatible. Pavan Sukhdev, a banker who led the TEEB project, insists that tradability is not the aim. “Privatising the ecological commons and letting markets decide the price of them is not at all what TEEB is about.”
But the logic of the market surely leads there. Economic theory holds that without trade, nothing has value. And the proposed carbon market comes close to doing what Ekins fears. It will allow carbon polluters to choose between cutting emissions or protecting a forest. The impact on carbon in the atmosphere may be the same, but their impacts elsewhere may be very different. Forest species may benefit, but human lungs downwind of the power station may suffer. So might fish in rivers suffering from the effects of acid rain. The overall environmental impacts are impossible to predict.
We are still a long way from finding out how such a market might perform. Since it opened for business in 2007 Canopy Capital has failed to sell a single bond. Its bankers concluded that, as yet, there is nothing to sell. Whatever its theoretical value, the rainforest had no actual market value beyond its timber and land. “It is taking longer than I anticipated to achieve value for the forest,” admits Murray-Philipson.
Some will be thankful that the money men still haven’t found a way to trade natural capital. It is only five years since the global banking system, one created by humans and based on strict rules and measurable units of currency, crashed. That, critics say, does not augur well for our chances of using markets to manage the planet’s ecosystems.
Perhaps green economics is the least bad tool we have. But like the global banking system, it could all turn into a massive gamble. Is that a risk we’re willing to take?
