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The financial value of nature

Paul Horrell
10 April 2008

Category: Discussion

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Photograph: Cora Reed, Dreamstime.com

You know perfectly well the value of wildlife and of beautiful places. That’s why you’re on this site.

Or do you? I don’t. Not in the financial sense anyway.

Imagine if someone could put a financial value on the oxygen generated by rainforests. On the carbon they absorb. On the water they purify. What would be the cost to us if we lost them?

Or how about the value of the biodiversity they contain? All the things that the rainforest plants provide - such as new drugs? An even harder calculation is to value beautiful places as an amenity – to put a price on the happiness and wellbeing they create.

Hang on. Why should we be so mercenary? Let’s just stand back and enjoy, without having to be so cynical as to put a numerical value on everything.

No, we can’t just stand back. Because the capital markets pretty much control the world, whatever has no financial value will be literally undervalued.

So, for example, a logging company can buy forest land, and then cut the trees to sell at a profit – a simple financial transaction, but not one that accurately reflects what has happened. The loggers haven’t paid those nearby who lose out on water. They haven’t paid those further away who suffer resulting climate change. They haven’t paid those in the future who might miss out on the benefits of biodiversity.

Hence the need for a financial value. Then the price of logging rainforest would rise. And the pace of rainforest destruction would, by force of the market, be slowed. And it’s not just rainforests that can benefit from this approach. I merely use them as an example. By the same token, without measurable values, how can a government make an informed decision about, say, building a dam or siting a new town?

This emerging economic science is called ‘ecosystem services’. It means establishing a value for the benefits from an ecosystem. It’s a gigantic project. The UN sponsored the Millennium Ecosystem Assessment and amassing the data took 1,360 experts some four years at a cost of $24million.

As a result, the British Department of Environment, Food and Rural Affairs is sponsoring such a project in the UK, which should help in balancing decisions that affect the environment and wildlife. So is the US Department of Agriculture’s Forest Service.

But governments weighing up ecosystem services when they make decisions is just the start. Global commerce is often more powerful than governments. When corporations start having to pay for their external environmental effects, things might really change.

Well, some companies are now betting that they will. In a pioneering development this month, a private equity firm, Canopy Capital, invested in rainforest in Guyana. It didn’t buy the forest, but it now has the right to take a percentage of the value of any future sales of ecosystem services. The vast majority - 80 per cent - of the profit will stay with indigenous peoples. This means those stakeholders will have a financial incentive to preserve the ecosystem, rather than to sell it for destructive exploitation.

Of course no-one quite knows how ecosystem services will be traded. But the fact that capitalists are exploring the matter does signal a remarkable change. Simply trying to appeal to corporations’ better natures to save the environment doesn’t work. Regulation hasn’t worked well enough. Maybe it takes a market to change a market.

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