by Jack Rosebro
|The proposed valuation framework for biodiversity loss and ecosystem degradation. Click to enlarge.|
The Economics of Ecosystems and Biodiversity (TEEB), an assessment of the potential economic costs of deteriorating ecosystems and mass extinctions, was released 30 May at the Ninth Conference of Parties (COP 9) for the Convention on Biological Diversity, meeting in Bonn, Germany. Modeled on the 2006 Stern Review on the Economics of Climate Change, the current iteration of TEEB is an interim report.
Work on the interim TEEB report, which is referred to as Phase I, was organized by Sigmar Gabriel, Germany’s Minister of the Environment, and Stavros Dimas, Environment Commissioner for the European Commission, following the Potsdam G8+5 summit in March 2007. Pavan Sukhdev of Deutsche Bank is TEEB’s lead author. The Conference of Parties comprises signatory countries that meet periodically under the umbrella of the Convention on Biological Diversity, a key agreement of the 1992 Earth Summit in Rio de Janiero.
Acknowledging that “the well-being of every human population in the world is fundamentally and directly dependent on ecosystem services,” the report’s authors propose that existing world markets are based on a “defective economic compass” which cannot properly value natural resources that are crucial to human life, even when it is apparent that such resources are dwindling.
The Decline of Ecosystems
Citing previous studies, the TEEB report notes that by 2050, a business-as-usual harvesting of ecosystems could lead to the loss of up to 11% of the world’s natural areas that remained in 2000, primarily to agriculture and development, as well as the effects of climate change. Another 40% of the land currently under low-impact forms of agriculture may be converted to intensive, high-impact agricultural use, with further deterioration of biodiversity, in part due to the changing diet of an expanding global middle class.
Although much biodiversity has already been lost, the effects of such losses are only now beginning to appear: earlier this year, a World Resources Institute Corporate Ecosystems Services Review predicts that “global warming may dominate headlines today...ecosystem degradation will do so tomorrow.”
Among other red flags, the report’s researchers found:
Globally, forests have shrunk by approximately 40% in the last three centuries, having completely disappeared in 25 countries; another 29 countries have lost more than 90% of their forest cover.
About 50% of the planet’s wetlands have been lost in the past century, with increasing pressure in the last half-century to convert tropical and sub-tropical wetlands to alternative land use.
Around a third of the world’s coral reefs—which can have higher levels of biodiversity than even tropical forests—have been seriously damaged through fishing, pollution, disease and coral bleaching; another 25% are in immediate danger of the same fate.
More than a third of the world’s mangroves have disappeared in the last two decades; in some countries, the loss is up to 80%, via conversion for aquaculture, over-exploitation and storms.
The Earth is currently undergoing its sixth mass extinction event, which has the distinction of being the only one that has been human-induced. The rate of manmade species extinction is estimated to be 1,000 times faster than the natural rate of extinction which is typical of Earth’s long-term history.
The net effect is that more than half of the world’s life-giving ecosystems, which operate in interdependent ways that are not fully understood by science, have deteriorated in the last half-century, primarily as a result of human impacts. In their introduction to the report, Stavros Dimas and Sigmar Gabriel bluntly assert that “we are, so to speak, erasing nature’s hard drive without even knowing what data it contains.”
Economic Policy vs. Equity and Ethics
The decline of biodiversity is estimated to already be costing the world economy hundreds of billions of dollars per year, and is projected by the report to affect the world’s poor hardest and first, primarily subsistence economies such as farming, animal husbandry, fishing and informal forestry. The report notes that economic losses related to the decline are typically expressed in terms of a few percentage points of GDP, and argues that such losses are more clearly framed in terms of equity and ethics.
A climate change-induced drought, for example, that would reduce the income of the poorest of today’s 28 million Ethiopians, would nevertheless cut global GDP by less than 0.003%. “The right of the world’s poor to livelihood flows from nature which comprise half of their welfare or more, and which they would find it impossible to replace... most of the [UN] Millennium Development Goals today are in fact hostage to this very basic [biodiversity] issue,” says Sukhdev.
While a rising GDP is conventionally considered to be a positive metric, recent concern over GDP growth and resource use by emerging economies has also highlighted the limitations of conventional economics. Speaking to the UK’s Guardian, James Rice, who oversees China operations for Tyson Foods, the world’s largest meat producer, recently said “This is the end of self-sufficiency for China. This year will be the last in which China produces enough corn for itself, and the last that it is self-sufficient in protein.”
|Land and water resource demands of different foodstocks. Click to enlarge.|
Rice expects China to be importing US$4.5 billion worth of protein by 2010. “Whenever China goes from being a net exporter to a net importer of anything, it has a big impact on global prices. Just look at oil. The $40 per barrel price popped just when China started buying.”
Increased global demand for meat-based diets, largely fueled by the expanding middle class in BRIC (Brazil, Russia, India, as well as China) countries, is expected to place additional pressure on the world’s food supply, as well as the conversion of land to high-impact agricultural use.
A Challenge to Conventional Economic Theory
One drawback of conventional economics is its dependence on the concept of discounting to calculate valuations of services in relation to time: the farther in the future that gains or losses occur, the less significant they become. The problem of discounting has previously been raised with regard to the use of economic modeling in climate change scenarios, notably by Stephen DeCanio of the University of California, Santa Barbara, who has asserted “current [modeling] practices only hide the essential questions behind a technical facade.”
Using a typical discounting rate of 4% per year, any essential natural resource, as well as its “service”, in economic parlance, would be discounted to one-seventh of current value in fifty years, reducing incentive to current economies to preserve it for future generations.
Many ecosystem benefits are not included in GDP calculations, yet losses of natural capital stock are felt beyond the year of the loss, as the reduction in the service flow continues over time. Citing the convention that &lquo;we cannot manage what we do not measure,” the TEEB report proposes to develop a method of valuing ecosystem services in scientific as well as economic terms. This will be developed in Phase II.
Parallels with Ecological Economics
Although the interim report does not expressly cite ecological economics as its foundation, the report’s philosophies largely mirror the tenets of ecological economics, which challenges standard economic growth theory and its counting of the destruction of natural capital as income. Herman Daly, a pioneer of ecological economics, framed the problem in a 1994 lecture to the World Bank:
...In balance of payments accounting, the export of depleted natural capital, whether petroleum or timber cut beyond sustainable yield, is entered in the current account, and thus treated entirely as income. This is an accounting error.
Ecological economics, which is not to be confused with the separate discipline of environmental economics, has existed since the 1970s, but has until now remained somewhat isolated from the mainstream economic community. Rarely taught in depth in the world’s schools of economics, it proposes that a perpetually expanding economy is by its very nature at odds with the finite ecosystem in which it resides.
The classic economic concept of substitution, for example, dictates that different but equal services or goods can take the place of goods and/or services that are no longer available. Ecological writer Paul Hawken has famously framed the dilemma of substitution with two rhetorical questions: “how much is a blackbird worth, and how much will the last blackbird be worth?”
Toward a Valuation Framework
The market’s failure to properly value ecosystems is seen as an information failure as much as a policy failure. For some services (e.g. scenic beauty, hydrological functions and nutrient cycling), supply and demand are difficult to calculate by conventional means. In addition, “perverse economic drivers” as well as failures in markets, information and policy were found to be significant barriers to accurate valuation of ecosystem services. Economic gain resulting from ecosystem degradation is counted as part of GDP, but the degradation itself is not counted.
A re-thinking of subsidies that distort trade is particularly encouraged: global subsidization of the fishing industry, for example, is estimated to be equal to the total value of the product itself. The report also calls for an expansion of damage valuations to address degradation of biodiversity and ecosystem services. Using the “polluter pays” principle, the polluter is frequently required to pay for damage caused, either by bearing the costs of restoration, or through punitive damages. However, such damages are typically event-based, while the majority of ecological degradation is ongoing.
Another potential tool is the use of habitat banking and/or payments for environmental services (PES), in which individuals and corporations invest in ecosystems of interest. For example, the Vittel mineral water company, which is part of Nestlé Waters, pays farmers that affect its watersheds to make their practices more sustainable, reducing nitrate contamination caused by agricultural intensification. Vittel has also financed needed technological changes so that the farmers would not need to tie up their own capital.
Although the evaluation and economic valuation of biodiversity is a primary goal of TEEB, it “is not as an end in itself,” Sukhdev explained at a workshop earlier this month, “but as preparing a valuation toolkit, tailored for successful end use, to help engage end users, with the end goal of achieving biodiversity conservation.”
Phase II: Next Steps
Phase II’s primary goal is to develop a so-called “economic yardstick” that also encompasses the non-economic, intrinsic values of ecosystem services, and to
publish a science and economics framework which can help frame valuation exercises for most of Earth’s ecosystems, including in its scope all material values across the most significant ecosystems;
further evaluate and publish recommended valuation methodology for major ecosystems as well as values which had not been investigated in depth in Phase I;
engage key end-users of the work from the beginning, to ensure that output is as focused as much as possible on their needs, and is user- friendly in terms of organization, accessibility, and usefulness; and
further evaluate and publish a policy toolkit for policymakers and administrators which supports policy reform and environmental impact assessment with the help of revised economics, in order to foster sustainable development and better conservation of ecosystems and biodiversity.
Much as the IPCC Report on Climate Change provides a range of scenarios arising from various atmospheric concentrations of greenhouse gases, TEEB’s Phase II, which is expected to be completed in 2010, will apply a range of discount rates, representing different ethical approaches, to ecosystem valuations.
Pavan Sukhdev et al: The Economics of Ecosystems and Biodiversity (TEEB), May 2008
Source material for TEEB interim report
Draft proceedings, international experts workshops The Economics of the Global Loss of Biological Diversity, 5-6 May 2008, Brussels
Presentations from The Economics of the Global Loss of Biological Diversity, 5-6 May 2008, Brussels
World Resources Institute: Corporate Ecosystems Services Review, 11 March 2008
UNEP: Millennium Ecosystem Assessment website (report competed 2005)
Herman Daly: Five Policy Recommendations for a Sustainable World, 1999
Jonathan Watts, “More wealth, more meat: how China’s rise spells trouble,” The Guardian,30 May 2008