Home News The risk of putting a price on nature

The risk of putting a price on nature

by Lesotho Times

WITH the South African economy at risk of recession, it becomes particularly important to reflect on what economic growth means and how it is measured.
Jobs, livelihoods and government policies that will affect everybody depend on this. We hear about it every day: if the gross domestic product (GDP) goes up, we must all cheer; if it goes down, then we are expected to mourn.

For the past 80 years, since GDP was invented as World War II broke out, countries have been ranked according to this almighty number, the global definition of power has been based on GDP (e.g. superpowers, emerging powers), access to global governance institutions has been granted on GDP performance (e.g. the G8 or G20 members are selected according to GDP, and so are the Brics) and development policies have been driven by the GDP formula.

Yet, the convergence of the climate and financial crises has triggered a global debate on the usefulness of GDP as the key measure of economic performance.
As more experts acknowledge the flaws of GDP, including the fact that it focuses only on flows of money and disregards stocks –– depicting the exploitation of nature as an element of progress –– various attempts are made at setting up better indicators.

Genuine progress indicators and green GDPs have been championed by ecological economists, while the United Nations (UN) and the World Bank have introduced measures of “total” wealth that subtract the value of natural resources consumed in the process of economic growth.

When applied to Africa, these indicators show that most efficient economies in terms of GDP are actually shrinking their total wealth due to loss of non-renewable resources, costs of environmental degradation and lack of investment in human development.

This is why some African countries signed the Gaborone Declaration in 2012, a commitment to valuing natural capital and subtracting its depletion from the quantification of economic output.
Most of these initiatives are genuine in their ultimate goal. They are honestly trying to use economic reasoning for the preservation of the environment. In their view, people tend to neglect what they receive free of charge from nature, even if it is fundamental for economic development and sustaining life.

Their argument is that if Mother Nature were to be properly valued and incorporated into the calculations of GDP, we could not avoid recognising how critical its services are to economic welfare. For University of KwaZulu-Natal political economist Patrick Bond, natural capital accounting can become a powerful weapon against extractive African industries. Pricing would force people to be rational in analysing the gains and losses of developmental trajectories.

However, my research shows this is a slippery slope. Indeed, all attempts at measuring the value of intangibles have bumped against significant methodological challenges.
Unlike commercial goods, market prices for environmental resources are not available in real life: they need to be “simulated” through econometric models designed to create market-like conditions for the valuation of nature.

As a consequence, the market mentality underpinning GDP has expanded its reach, and a flurry of “price tagging” has ensued as investment bankers and professional services firms nowadays apply cost benefit analyses and opportunity costs to the monetisation of virtually anything.

In his recent book, Nature’s Fortune: How Business and Society Thrive by Investing in Nature, banker Mark Tercek advocates treating nature as a conventional investment opportunity by applying concepts such as maximising returns, managing risks and portfolio diversification. His former employer, Goldman Sachs, has been toying with the idea of introducing bonds for rainforests, an initiative already undertaken by the private equity firm Canopy Capital.

McKinsey, a company involved in various financial scandals over the past decade, is a leader in the valuation of natural capital. At the Rio +20 summit in 2012, a bunch of financial institutions signed a “natural capital declaration”, in which they pledged to integrate environmental accounting into their financial operations. In their words, “every economic activity can have an impact on natural capital… These impacts can lead to material financial risks, but also to relevant business opportunities.”

Some of the multinational corporations with the worst environmental track records, including Nestlé and Coca-Cola, have also declared their “interest” in the identification of financial instruments to conserve biodiversity.

Ultimately, it is the discount rates and the methodologies of these people that is shaping our understanding of the value of nature.

How credible can this be? In a recent article for Project Syndicate, Barbara Unmuessig has shown the proliferation (and degeneration) of the derivative industry supported by natural capital accounting, with all its biodiversity credits and offset markets. She argues that the collapse of carbon trading markets should warn one to stay away from similar approaches to environmental conservation.
Greenpeace has also pointed out that giving numerical values to “deeply interconnected natural systems is inherently speculative and not always sensible”.

Putting a price on ecosystems may force us to realise the economic contribution of nature, and it is often necessary when estimating environmental damage. This is no different from insurance companies estimating the value of human life when gauging premiums and compensations. We may estimate value in financial terms, but would be wary of allowing such values to be traded.
Yet, the systematic application of natural capital accounting to economic governance may open up dangerous possibilities for the marketisation of natural resources, given that anything that has a price can be bought and sold.

African countries should learn from these challenges and move beyond GDP to avoid the financialisation trap.

  • Fioramonti is the director of the Centre for the Study of Governance Innovation at the University of Pretoria and a leading voice in the beyond-GDP debate.

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