Not so Priceless

By Mayank Kapadia

Natural resources are the fundamental pre-requisite for human survival. Water, food and oxygen are the basis of most multi-cellular life on earth. It is this enduring dependence, which has for centuries, led us to believe that nature is priceless. However, at some point in time, this collective and conventional wisdom became a symbol of mankind’s blissful ignorance.

Case in point, the Ecuadorian government recently set up a crowd-funding initiative aimed at preserving 722 square miles of oil-rich tropical rainforest. Ecuador hoped that it would be compensated for the opportunity cost of leaving the oil untapped – a bold idea then, and as it turned out, just as naïve. Of the $3.6 billion targeted, the initiative raised a paltry $6.5 million, after a year of campaigning round the globe. It came as no surprise when in 2013, Ecuador approved drilling, opening up Yasuni Park to commercial exploitation. If nature is priceless how can we, in a world of 7.2 billion inhabitants and trillions of dollars of gross product, not devote a small fraction of our collective disposable income to preserve one of Earth’s most biodiverse areas?

The problem lies in the way economics, and society as a whole, has developed. As a discipline, economics relies on the assumption of agents’ incentives chosen for their elements of self-interest and measurability. Take global warming for example – many studies have been published on the introduction of carbon tax, a levy on the emission of excessive carbon fumes. Most of these studies deal with an individual tax system for each firm, since developed countries have substantial data on carbon emissions from manufacturing facilities in their states. Taxes increase costs of production, which are measurable, monetary incentives to self-interested firms. While economic assumptions allow creation of theories and models, they can ignore and leave out valuable solutions to real-world problems. Incentive to maintain a sustainable environment for the future generations is considered idealistic or futile since it is immeasurable. It’s probably the reason why economists are often told that they know the price of everything but the value of nothing.

Yet all is not doom and gloom. As it turns out, Tony Juniper, a leading British environmentalist who realizes the limitations of a purely economic mindset, has found a way to introduce the ‘value’ of Nature within a mathematical framework. In the example of the Ecuadorian rainforest, the government used the price of oil under Yasuni park to estimate the opportunity cost of conserving the rainforest. Juniper provides a more intuitive alternative way of valuing the service the rainforest provides. Instead of using tangible and material products contained in an ecological area to estimate costs, Juniper suggests using the actual services an ecosystem and its surrounding environment provide to arrive at its inherent value. The challenge is to identify and put a price on the aforementioned services. A rainforest, in our example, produces oxygen from carbon dioxide and is a crucial part in the continuous cycle of precipitation in the tropical area, and these are only the services that provide the fundamental requirements of survival. As previously established, these are priceless services but in attempting to make the services more quantifiable, we can equate these services to artificial products that provide the same service. To put it in perspective, Juniper makes the preliminary calculation in “What has Nature ever Done for Us?” that the price of these basic services from all the forests in the world would exceed twice the world’s GDP.  Other prominent economists, including the financial accounting consultancy EY, claim that consideration of so-called ‘natural capital’ will become as prominent a business concern in the 21st century as the provision of adequate financial capital was in the 20th century.

Indeed, economists who solve the puzzle of appropriately valuing natural services might give us the tools to provide a framework for effective conservation practices such as charging private industries for deforestation or calculating the net monetary benefit of setting up a dam on a river. Perhaps, knowing the artificial price will save the natural economy. While the concept seems a good start, it remains riddled with issues – for example, what is the value of one tree in an entire ecosystem? Since a forest is greater than the sum of its parts, it is harder to estimate such values. Nonetheless, economists now have an incentive to solve the complex problem of identifying the real value of nature.  If they do, the effects might be priceless.

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