Environomics

From the LA Times, How to Get Wall Street to Hug a Tree, is an article that brings up the abuse of upwardly biased values of the environment (again):

Environmentalists and investment bankers are working together to put a price tag on nature. The new 'greens' think that human beings are ready to start paying for Mother Nature's services—and that calculating their financial worth will save the planet.

...

If ecosystems that do a great deal for people are to be recognized as of great monetary value, "ecosystem services" will have to become a household phrase.

Despite the snooze-inducing moniker, ecosystem services have occasionally appeared on the public-consciousness radar. ... The next visibility boost for ecosystem services came in 1997, when a team of scientists led by Robert Costanza, then with the University of Maryland, published a study in Nature that estimated the value of all the ecosystems and natural capital on the planet. The very rough figure: $33 trillion a year. The research led to a predictable rush of newspaper stories about Mother Nature's price tag and, despite being criticized for weak methodology, the study nudged the concept of ecosystem services valuation further into the mainstream.

Perhaps the biggest indicator of the trend—you might call it environomics—is that the world's largest conservation organizations have embraced it. The just-launched Natural Capital Project, a $15-million-plus program that seeks, as its literature explains, to make conservation "economically attractive," is a collaboration of Stanford's Woods Institute for the Environment, the Nature Conservancy and the World Wildlife Fund. The project will measure the carbon, hydrology and biodiversity benefits of the Afromontane region of East Africa; China's upper Yangtze River basin; California's Sierra Nevada range; and the islands of Hawaii. The goal? Putting a price tag on all of them.

In the past we've written about how this methodology isn't based on sound economics because the  resulting value of the ecosystem service is greater than income (Tim style: here, here and here). Now, admittedly, I'm applying my own neoclassical bias to this critique, but I don't see how we can take seriously a comparison of economic values where one is seriously flawed.

If I'm comparing an environmental benefit of $1 million against  a cost (i.e., foregone profit) of $500k, how can I conclude that the benefits exceed the costs if the benefits are measured incorrectly? I'd rather have environmental benefits measured correctly so that we can compare apples to apples.

It is for this reason that I don't buy into the "big values raise the environmental consciousness" argument for supporting this line of research.

The article then reviews market based approaches to environmental protection and

One of the more famous examples of a market-style strategy for environmental improvement is the Acid Rain Program, started in 1990. The U.S. Environmental Protection Agency established a limit for overall sulfur-dioxide emissions nationwide, then distributed pollution credits among the major emitters (i.e., power companies). From there, the market took over, with some polluters using up their credits, others buying credits from companies with greener practices and still others saving credits.

Not long after the Acid Rain Program began, another market, this one for wetland banking, emerged, aided by federal regulation requiring degraded wetlands to be replaced with "compensatory mitigation," usually in the form of restored wetlands elsewhere. Today, wetland bankers carry out large-scale restoration projects and then sell credits to customers, usually developers (although critics argue that murky ponds filled with cattails are no substitute for biologically rich natural wetlands). Then there is the Big Kahuna: markets for trading greenhouse-gas emission credits. The European Union Greenhouse Gas Emission Trading Scheme is by far the largest, but many people are eager to see what happens with the relatively new Chicago Climate Exchange after the planet's most prominent global-warming naysayer leaves the White House in 2008.

Obviously, a cleaner atmosphere provides countless benefits to humanity. But environomicists want more than gradual pollution reduction through cap and trade programs; they want a marketplace in which conservation is a moneymaker. For that to happen, they must bring the idea of ecosystem services not only to Goldman Sachs but to Everyman, then quantify the value of those services and then, for a select audience, explain why partnering with Wall Street doesn't mean selling out.

The problem with the idea can environmental protection can be a money maker is that the benefits of environmental protection are ultimately public goods. Their value can't be extracted so a cleaner environment can't be profitable. The only profiteering that can be achieved is of the minimizing losses type. The "revenues" accrue in improved health, better recreation, etc.

The danger with "environomics" is the possiblity that environmental valuation research that adheres to economic theory gets tossed in with the upwardly biased "environomics" estimates. Then bad estimates will drive out the good. The upwardly biased estimates will ultimately be dismissed by decision makers due to their obvious upward bias (if you don't believe the upward bias, why are ecologists and environmentalists embracing the methodology that has emerged from ecological economics, instead of the methodology that has emerged from the more traditional environmental economics?).

Comments

[earl paolo limosnero]

it's very nice to take care our environment and also its very nice if it is properly implemented to achieve sustainability and development...but the question is specially applying it to the developing country, "can it be properly accounted to the people?" the most problem in developing country is that most people are uneducated and it is hard to implement as such policy or program..towards the commitment of the project in the long run process..this is earl..

[Dano]

The problem with the idea can environmental protection can be a money maker is that the benefits of environmental protection are ultimately public goods. Their value can't be extracted so a cleaner environment can't be profitable.

My undergrad adviser is a pioneer in CBA for urban ecosystem services. The original idea was to assign a valuation in order to educate the folk about what was being lost. IMHO, I agree with John/Tim that the implicit things have gone too far. IOW: there are limits to the utility of virnmintul CBA.

Best,

D

[dWj]

Prices, in neoclassical economics, are essentially derivatives. They are marginal values. When you start to get to economy-sized numbers, aggregating total costs becomes epistemologically sketchy. (I would assert that even talking about the federal debt is a bit meaningless, but that's not low-hanging fruit for my point, so you should probably just ignore this parenthetical.)

In any case, some meaning can be attached to a large-scale number if we have a way of comparing one thing to another. It's no longer actually a derivative; we're acknowledging a finite change, and some nonlinearity. It's still an affine space, though; if we're going to talk about the "benefit" provided by the environment, we have to be comparing it to a benchmark of some kind. "Smouldering cinder" seems a popular benchmark, but, unless there are some gung-ho smouldering-cinder--advocates out there, I'm not sure it's a meaningful one. If we're looking to trade off "big hunk of change in environmental condition" versus "big change in man-made lucre", we can construct numbers based on differences between alternatives that are actually on the table (or, at least, we can try). If we're trying to use price to do something else meaningful -- something that isn't "make a desperate plea for attention" -- we may actually have to try to understand the question we're trying to answer, and look for an answer that's appropriate to the question.

Big values do not raise the environmental consciousness so much as they lower credibility. The reason $33 trillion per year intuitively seems bogus is because it is.