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We must put nature on the balance sheet

We must put nature on the balance sheet, writes Pavan Sukhdev.

12 September 2010

What’s the world worth? Simple enough question, what’s the world worth? What’s our biosphere worth? To get the answer to that question is in fact very straightforward. Just look at a world without a biosphere: Mars.

So, no biosphere means clearly not much life. Probably none. Definitely no humans, therefore no society. No society, no humans, mean no transactions between them. In other words, no economy. So the economy here is worth exactly zero.

Then we have a world with a biosphere, which has, of course, lots of life and human beings, a society. Huge amounts of exchange, and a massive economy. “One” economy, therefore. So, what was the difference? Well, one minus zero, divided by the original, which is zero. So the answer is infinity. The world is worth infinity. That’s all, Thanks. Okay that’s done, see you later!

[But] putting nature on the balance sheet: That’s a little more complicated.

For that you need to understand what is nature. And the way one expresses it – and I know these are horrible terms: biodiversity, ecosystems, ecosystem services – you know, sometimes people think that perhaps the reason people invented the terms biodiversity and ecosystems is that they wanted people not to want to understand what nature is about.

And, of course, to make life even more difficult, everything that comes free to us, clean air, fresh water, you name it, is called ecosystem services. But in a short summary, what I’d say is biodiversity is the living fabric of this planet.

It is at the ecosystem level, which is that conglomeration that you saw in terms of the glacier or the forest or the coral reef. It’s also at the species level, and it’s also at the genetic level. And each of these levels of biodiversity, each of these levels of the living fabric of this planet, actually provides economic value. In other words, welfare, wellbeing and benefits to us all.

Because the economics of nature, the wellbeing that it generates is largely “public goods and services”, and that is in fact the genesis of many of the issues and problems that we face today with the loss of ecosystems and biodiversity.

In the UK, a research group called TRUCOST worked out that the so called externalities, in other words, the cost to society of normal business by corporations with normal people, like you and me – us buying things like cars, petrol and then selling and us driving it around and creating a carbon externality all added up $2.25 trillion.

That’s a huge number, fine, but it’s also, interestingly enough, a third, almost a third of the profits of those 3000 corporations.

And you can imagine that this is 3000 corporations, so there will be some corporations where their externalities, which means their cost to society of doing normal business, are actually higher than the profits that they generate.

Now is that a good business model? Have a corporation, license it, set it to work and get, guess what? At the end of a few years, it’s destroyed a lot more value than it’s created. Can you keep doing that? No. And that’s really the challenge.

And that’s the challenge that corporations have to address and we, as society, have to address with them.

The typical view that is taken is that somehow it’s a choice – you can either have biodiversity or you can have a solution to poverty. You can either have a development, or you can have nature, you can’t have both.

And that’s false thinking. It is not the case that biodiversity is just the preserve of the rich.

It’s valuable to everyone but is an absolute necessity for the poor. And the poor gravitate towards biodiversity rich regions, not because they’re mad but because they’re poor – because they get so much free, that that is where it’s best to live.

We worked this out in economic terms like this: we said, ‘Okay, what if the forests were lost?’ Yup, there would be an impact, depending on where you are. If it’s Brazil, you’ll probably have an impact of about 10% of GDP if you lost all ecosystem services. In India, 16%, in Indonesia 21%. Sounds big but, you know, not particularly fussed because we’re not losing all the forest. This is about total value being lost.

But you ask the question differently, saying, who suffers if you lose the forest? So what does the forest provide? Flood prevention and drought control. Who suffers if the forests are lost? Ah, the poor farmer.

What else do they provide? Oh, they provide nutrients and fresh water, which go from the forest into the fields and therefore provide the poor farmer – guess what – with his livelihood. The subsistence farmer once again.

Who suffers if they can’t harvest bamboo and fuel wood from the forest? Oh, guess what, the poor farmer once again. So, when we looked at to whom the benefits flow that we are talking about, it’s was all to the poor farmer or to the poor tribal.

So we recalculated our number and said, alright, let’s find out not what are ecosystem services as a percentage of GDP, but let’s find out what are ecosystem services as a percentage of the GDP of the poor.

Then we got to some rather more different numbers. Because then the answers were 75% in the case of Indonesia, 47% in India, 89% for the Brazilian tribals and forest dependents.

That’s the point – that if you lose these forests, if you lose nature, you are actually making the poor poorer. You are actually hurting their livelihoods.

A rainforest is not just a carbon store. There’s not just sticks of carbon sitting out there waiting for Reduced Emissions from Deforestation and forest Degradation. By the way, that’s the official name of a scheme that was launched in Indonesia many years ago and now reaffirmed in Copenhagen.

This is not just about carbon. This is the world’s biggest rainfall factory. Okay, here’s how: it’s basically an Amazonian rainforest water pump, because evapotranspiration from the rainforest actually feeds the winds that come in from the north eastern side, which is the Atlantic, and they provide the water that feeds the agricultural economy of Latin America.

So you get hundreds of billions of dollars’ worth of agricultural output actually entirely dependent on the Amazonas and the rainfall. That means, you know, the state of Mato Grosso in Brazil, Argentina, Uruguay, Paraguay, all of those countries depend on the Amazonas rainfall’s water seeding function. Great. So Governor Braga must be a happy man. He must be getting lots of money from all of these places.

No. He’s not. Because he doesn’t. They pay exactly zero, zilch for this, this important and vital ecosystem service of freshwater provision. So we are actually trying to put a value to that and show that this is the extent of economic value that you are receiving free from the state of Amazonas because of the Amazonian rainforest and from other states where the forest resides.

It’s a way of reminding policy makers in that continent that, yes, there is an issue here. And the lack of this is in fact one of the reasons why there isn’t enough pressure to conserve the rainforest, as against destroy it for wood and for conversion into more cattle ranches and more soya plantations.

Good economics does work. Costa Rica is an example that worked at a national level, where Costa Rica is a small country in the neck of the Americas, basically meso America, between North and South America in the little neck where you have Panama as well.

In Costa Rica they decided as far back as ’97, that they were suffering because of loss of forest and they wanted to change that. So they worked out that the reason for that was that basically forests were being converted to pasture for cattle, for beef cattle. And the rough yield for beef cattle per hectare, per year was about fifty dollars.

So the government decided to pay fifty dollars per hectare, per year to farmers who owned land, forested land, and in order to not convert it into more pasture.

Because clearly that was having an impact on soil fertility and on freshwater and just on the look of the place. So they actually paid farmers to keep forests so that soil fertility could be maintained, freshwater would be improved and effectively, biodiversity would be conserved.

The net result is that during these 13, 14 years, it really has worked. And not only that, but the increased freshwater has improved the hydroelectric potential of these areas, because they do have some dams. And today we have a situation where forest cover has grown in Costa Rica from around 20 percent to almost 50 percent. And the country is prosperous.

Small farmers benefit as well. It’s not just the rich farmers who have land who benefit, because soil actually collects more nutrients as a result of the forest and that increases the productivity of soil downstream or close by where there are smaller farms with subsistence farmers as well. So it is an experiment that worked. Again, good economics.

Is economics the solution? Is there nothing that economics cannot save? I’m afraid that’s not true either. So, here’s an example of where economics does not save wild nature.

This is about coral reefs. Coral reefs are beyond beauty, they’re not just places to go to if you’re planning your next vacation or, you know, places that will, if they die, force you to take a vacation elsewhere, or go skiing instead of snorkelling.

But the tropical coral reefs, they’re providers of livelihood and food for more than half, more than five hundred million people, more than half a billion people around the world.

All the way from the Pacific Islands, Indonesia, Malaysia – these are heavily populated countries.

Indonesia itself is 220 million people, Philippines, 75 million people. The Andaman Islands, Madagascar, the entire area out here in the Caribbean.

Coral reefs are being destroyed, due to blast fishing, due to just degradation, due to chemical run offs, due to cyanide fishing, which is leaving cyanide, basically to kill off fish, and generally due to coral bleaching.

The problem here is that we globally are targeting a level of carbon dioxide of 450 parts per million. And what happens is that, as carbon dioxide builds up, it’s already at about 390. It starts getting absorbed in the oceans.

The oceans are alkaline, but as a result of absorption, they became less alkaline or more acidic. And that’s really what ocean acidification is about. When an ocean acidifies, in other words becomes less alkaline, the net results is that the natural regeneration of the coral reef is prevented. You can’t get the aragonite crystal that forms out there to form.

The problem is that at today’s targeting in Copenhagen, or for that matter in the climate process, we are targeting a level of carbon dioxide which most scientists believe is too high for coral reefs to survive on an ongoing basis.

Scientists have given us numbers of 320 ppm, 350, 380 ppm – only one has given us a number of 480, which is higher than where we are targeting.

So there is an issue here that, you know, we are probably making a societal choice, as a community, to not have coral reefs. Can economics save this? No, we can’t. The last coral reef is probably worthless because, you know, it just is too precious to put a price on.

So we can’t actually apply the logic of economics and marginal value when you’re coming to the last unit of what’s left.

And that’s where you need to make an ethical choice.

So here we have it. We have an ethical choice. Sadly, this is an ethical choice which we are making kind of unconsciously, if you know what I mean. We’ve sort of stepped into it and made that choice without necessarily having thought through the consequences.

And the consequences are huge. Five hundred million people dependent, potentially 200 million displaced as a result of that. That’s the biggest migration problem that the world would have ever faced and it’s nothing to do with politics.

In some ways you might argue everything to do with politics because of the climate agreement not being there.

Another question, maybe flip it around, is that what about the other way round? Can nature save the economy? We’ve gone through an economic crisis. It’s not the first one. In my banking career, I’ve lived through and traded through four crises of this kind: credit blow ups, you know, Latin American debt, you name it.

Are we doing something wrong that could be righted by using nature better? And I believe so. And I think there are many examples of the risks that we are creating for nature and in the world being potentially solutions as well.

Carbon tax emissions, guess what? You can make business out of bio carbon offsets and the REDD+ scheme.

Disturbing habitats and conversion of land, sure, you can make business out of biodiversity offsets and conservation banking. Freshwater overuse and misuse is a problem. We’re using too much. But, at the same time, you can make business out of payments for water protection.

Pollution and waste, does it have to be a problem? No. You can make business out of recycling, out of tradable permits. There’s a lot of opportunity here. And not only that, even for the poor, this whole issue of adapting to climate change is a serious solution.

Because, at the small end, at the level of the community which is dependent on natural flows, climate change is the biggest problem because it hits you on water security, it hits you on food security and it hits you in terms of storms and cyclones. And, in regrowing the forests, replanting the coral reefs is actually a way of stopping that.

So, yes, wild nature can actually help the economy. In fact, it can even save economics, that’s my point.

Today we are in a world where economics really only recognises manmade capital. But the reality is that there is also human capital and there is also natural capital.

We are fixated on GDP growth, we are fixated on national accounts which don’t capture nature. That’s absurd because natural capital is actually the largest item on the balance sheet of the nation.

So my point here is that we should, we can and we should include nature on the balance sheet. And we have to recognise that today we are in a kind of spaceship, spaceship earth if you like. We are navigating a spaceship.

We should be having a bank of instruments that is huge, complex and fantastic and working really well. Instead we’ve got a mariner’s compass: looks lovely but it’s useless.

We can’t keep measuring progress at a national level with GDP growth. We can’t keep measuring performance for a company simply by looking at quarterly profits.

This is an edited extract from Pavan Sukhdev’s public lecture ‘What is the World Worth: Putting Nature on the Balance Sheet’, organised by the Centre for Policy Development and held at the Sydney Opera House in August. The full lecture can be downloaded or listened to as a podcast from the CPD website.

Pavan Sukhdev is an economist and head of the UN Green Economy Initiative, a major project suite to demonstrate that the greening of economies is not a burden on growth but rather a new engine for growth, employment and the reduction of persistent poverty. He is the study leader of The Economics of Ecosystems and Biodiversity (TEEB).



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