How can we put a value on the natural environment?by Frances Cairncross / October 15, 2015 / Leave a comment
Natural Capital: Valuing the Planet, by Dieter Helm (Yale University Press, £20)
It was, as it happens, an economist who first suggested 40 years ago that more than 2°C of warming would “take the climate outside of the range of observations which have been made over the last several hundred thousand years.” William Nordhaus of Yale University compared humanity’s approach to climate change to spinning a roulette wheel: “Every year that we inject more CO2 into the atmosphere we spin the planetary roulette wheel… and the more we continue increasing the emissions that warm the planet the more the odds are stacked against a favourable outcome.”
The roulette wheel has continued to spin. Last year the World Bank argued that “present emission trends put the world plausibly on a path toward” 4°C warming by the end of the century. Indeed, 2014 was the hottest year on record, and this year looks like being hotter still. The proportion of scientists who believe that warming is at least partly the result of human activity has steadily increased. So has the evidence that warming may bring with it not just higher temperatures, but more cataclysmic climatic events, such as hurricanes and floods, and events of greater severity and violence.
Grim stuff, and in spite of innumerable meetings, politicians have made only modest progress. True, China and the United States are talking more seriously about policies to cut their soaring output of warming gases, but it is now almost a quarter of a century since the United Nations Framework Convention on Climate Change first created an international agreement to tackle the greenhouse effect. Since then, the world has spewed out more carbon dioxide pretty much every year, and we burn even more coal—the most damaging fuel—than ever before. When the UN climate change conference assembles in Paris at the end of November, it will be the 21st gathering of the nations which signed the framework convention, and the eleventh meeting of the parties to the Kyoto Protocol which succeeded it. No wonder the conference’s aspiration, to achieve a legally binding and universal agreement on the climate from all the nations of the world, has been met with some scepticism.
Could economists come to the rescue? Three years ago, Dieter Helm, an economist and professor of energy policy at Oxford University, published a book called The Carbon Crunch which argued the case for a mixture of cost-effective energy policies—go for gas, especially abundant shale gas—with a carbon tax and investment in clean technologies such as energy storage and electric vehicles. Don’t cover hillsides with uneconomic wind farms, he said; subsidising renewables can make energy production less climate-friendly, not more, because renewables need lots of continuous back-up non-renewable capacity. Introduce a tax with border carbon adjustments on imported carbon products, to stop the madness of importing goods that incorporate huge amounts of carbon-belching coal in their manufacture. To close factories in (fairly) clean Britain and replace their products with imports from (very) dirty India makes no sense at all.
Such views, which seem to be equally unpalatable to Greenpeace and to governments, are unlikely to make much progress in Paris. Meanwhile, Helm has moved on to another, even tougher issue than global warming: that of natural capital. He is the right person to take on this complex and profoundly important subject, which encompasses everything from birds and butterflies—through landscapes bleak or beautiful—to minerals in the ground and clean air and oceans. To discuss how we should treat the vast range of the bounties of nature, he brings to bear a long career of combining the pragmatic with the academic. Indeed, his rare ability to combine economic sophistication with articulate good sense has made him one of the most important commentators on energy, water and environmental policy. He has founded an economic consultancy, Oxera; he has advised successive governments and the European Commission on many aspects of infrastructure and the environment, regulation and resources; and he is involved in the work of a local conservation group.
He has two further attributes which define this book. He writes with clarity and precision, even when attempting to explain the complexities of national accounting and its relationship to natural capital, and he has chaired the government’s Natural Capital Committee through its first three years of existence. Indeed, the book is clearly to some extent a manifesto for the future of that committee and a bid to give it some teeth.
Teeth are clearly needed. Protecting the natural world from humanity’s relentless damage has been a glum story of incessant defeats and retreats. From the unsuccessful efforts of Octavia Hill, founder of the National Trust, to preserve Swiss Cottage Fields from developers, through extinctions and burning tropical forests and on to Kyoto’s limited achievements: saving nature has generally been a thankless and dispiriting task. As Shakespeare put it in a rather different context: “How with this rage shall beauty hold a plea,/Whose action is no stronger than a flower?”
Helm has something better than beauty to offer: proper accounting for natural assets, both renewable (like fish and forests) and non-renewable (like oil and minerals). We had better start using this tool properly, because the pressures on our natural capital, hefty though they are, will soon be vastly greater. We will need to feed at least another three billion people (“more extra people than the entire world’s population in the middle of the last century”). Economic growth on current trends could multiply the size of the global economy 16 times over by the end of the century. Global temperatures may rise by more than 4°C (assuming countries continue to ignore the Carbon Crunch solutions). Half of all species may vanish.
“The basic rule for a sustainable economy should be this: ‘The aggregate level of natural capital should not decline.'”
A first step to restrain the degradation and to begin to improve our natural capital would be to measure it properly and to incorporate it into economic policy. Moreover, protecting natural capital can bring economic benefits and go hand-in-hand with sustainable economic growth. Unless we measure and value the natural capital that is the raw material from which our economies are built, he argues, we cannot set a sustainable growth path, and we cannot make good choices. “What is measured tends to be what matters.”
The basic rule for a sustainable economy should be this: “The aggregate level of natural capital should not decline.” This rule, Helm argues, gives meaning to the idea of sustainability: it implies that we should pass on to the next generation a set of assets, natural and manmade, at least as good as those we inherited, even if humans have altered those assets. It should be the rock on which a sustainable economy is built. It would apply differently to renewable and non-renewable assets: the aggregate level of renewable assets would not decline, but the depletion of non-renewables such as coal and oil would be offset by compensation to future generations which might take the form of investing in assets that would improve the lives of the unborn, or by creating the sort of fund in which Norway has invested its oil money, or by spending on projects to save or repair renewable assets such as landscapes and habitats.
All of this raises some tough questions. How far can we—should we—substitute manmade assets for natural ones? Many environmentalists would say: never. No motorway should be built through this ancient woodland, however great the saving in time and petrol the new road would produce. Helm, by contrast, argues that the argument for or against the motorway is more likely to be persuasive if a serious attempt is found to value the woodland and balance it against the saving in time.
Such valuations are an imperfect art, as Helm freely admits. We know the market value of a non-renewable asset such as coal, but its true value should surely be docked to account for the environmental impacts of mining it and burning it. Those environmental costs need to be reflected in taxes, which in turn yield revenue that can be put towards environmental restoration. Valuing renewables is vastly more difficult, if only because many are not traded directly. How to value the existence of the orangutan, or of the Lake District, or of the Arctic? There are proxies; the money tourists pay to visit Borneo, the value of a house near Windemere, the time and the money people pay to drive to a beauty spot.
But all techniques for valuing natural capital are fallible, in ways that Helm rightly acknowledges. Setting the right price of carbon is difficult enough. Indeed, it may be easier to set an overall limit on the growth in emissions, and then let the market set the price, as (more or less) happens with cap-and-trade mechanisms. Pricing a pristine Arctic or valuing the survival of the leopard is infinitely more difficult and controversial. Sometimes, the effort of finding a suitable mechanism to generate convincing valuations reminds one of the anonymous little rhyme: “Economists have come to feel/What can’t be measured isn’t real./The truth is always an amount/Count numbers, only numbers count.”
In the end, Helm understandably concludes that “prices might be imperfect but they are usually vastly superior to the alternatives.” But they are an essential foothold for good environmental policies. These come in three main kinds: compensation for environmental damage, taxes on polluters, and the protection of natural assets which are “public goods,” and thus would not otherwise be provided by the market. All three strands raise difficulties. Thus how does a house builder compensate for destroying a forest in which nightingales sing? Who, exactly, is the polluter who causes a diesel engine to damage air quality: the oil company, the car manufacturer, the driver? How does one protect natural resources that nobody owns but everyone values, such as the deep ocean?
A first step in all this is to persuade governments to concentrate less on whether economic growth has gone up or down, and more on the overall state of assets, natural and man-made. After all, some economic growth is illusory, achieved only by using up natural capital whose true value exceeds that of the manmade assets it is deployed to create. So we should focus on measuring changes in our national wellbeing by auditing our assets, rather than on calculating changes in GDP. Are the roads getting better or worse? What is the state of our water and our air quality? Is biodiversity in good shape?
To handle the task, says Helm, we need the right institutions. Oddly, given the importance of natural capital, we have few with a mandate to protect or enhance it. Government departments tend to be captured by institutions which want to exploit the environment: farmers, oil companies, big producers. Even environment departments have their lobbyists, whether makers of solar panels or green campaigning groups. In the case of climate change, the creation of the Climate Change Committee has demonstrated ways in which institutional design can try to give targets credibility: it has statutory goals, and is answerable to Parliament for achieving them.
From his vantage point on the Natural Capital Committee, Helm regards the Climate Change Committee with some envy. His own group has the immense task of advising the government on “the sustainable use of England’s natural capital; our forests, rivers, atmosphere, land, wildlife, oceans and other natural assets.” Yet it has no explicit, legally monitored targets on which it is answerable to Parliament, and its initial mandate ends this year. Instead, we need something stronger: “an overarching champion of natural capital… with a remit to hand down to the next generation a better set of natural capital assets.” It would report annually to Parliament. “The lesson from the Climate Change Committee experience,” Helm argues, “is that statutory backing is of considerable importance.”
“The easy bit is climate change”
Certainly the work that the Natural Capital Committee has done in its first three years is remarkable. It produces an annual report on the state of our natural capital; it has proposed a 25-year policy to analyse what needs to be done in order to better protect and improve our natural capital; it has been teaching companies about corporate accounting for natural capital. But its work has still not been received with the interest and agitation as, say, the reports of the Office for Budget Responsibility, which does another sort of reality check on government policies.
So does this mean that natural capital, like climate change, will continue to deteriorate? “The easy bit is climate change,” says Helm in his final chapter, because there are almost certainly lots of technological fixes that could radically cut emissions, though he adds ominously: “Put another way, without them the climate is probably stuffed, since existing renewables and existing nuclear cannot bridge the gap, and it is hard to imagine that global energy demand is going to fall without technological breakthroughs.”
And there are technological answers to some aspects of our ravaging of nature. We can use agricultural land more efficiently if we accept advances in the technology of food production (including genetically modified crops). We can use technology to help protect rainforests and species, and to work out which ecosystems matter most. We should use some of the vast revenues generated from the depletion of oil, coal, gas and other minerals. So the issue is ultimately political. “There is a massive problem. There is a solution… The choice is not as painful as some would have us believe… Sustainable economic growth is not low growth.”
In the past year, many more companies have decided to put an internal price on their carbon pollution, recognising that, sooner or later, governments will agree to make carbon pricing mandatory. It has taken a quarter of a century to get this far. Tackling the loss of natural capital—of biodiversity, of birds, bees and beauty—is just as urgent. We need to create the institutions which will help us to make a serious start.