Sunday, April 24, 2005

Green capitalism

This week's Economist has an exciting article and leader about how market forces are being used to promote environmental goals.

As the article explains, the key is to put a cash value on the benefits of protecting nature. Once this is done, businesses and governments often find it is much cheaper to conserve the environment than to deal with the effects of its destruction.

Early attempts at such valuation resulted in impressive but unsound figures that were seized on by environmental advocates and then, when they were discredited, used by opponents to tar the whole idea. Now, though, things have improved.

First of all, science is producing abundant evidence that the natural environment provides a wide range of economic benefits beyond the obvious ones of timber and fish. Ecologists now know a great deal more than they used to about how ecosystems work, which habitats deliver which services, and in what quantity those services are supplied. Last month, for example, saw the publication of the
Millennium Ecosystem Assessment, the first global survey of ecological services. Its authors warn that attention will have to be paid to these services if global development goals are to be met.

But the only way this can happen is if ecological services have sound, real (and realistic) values attached to them. As “Valuing Ecosystem Services”, a report written recently for America's National Research Council, points out, the difficult part is providing a precise description of the links between the structures and functions of various bits of the environment, so that proper values can be calculated. What this means is that the more there is known about the ecology of, say, a forest, the better the valuation of the services it provides will be. Fortunately, according to two reports published by the World Bank at the end of 2004, significant progress has been made towards developing techniques for valuing environmental costs and benefits. There is, says
one of these reports, no longer any excuse for considering them unquantifiable.

The turning point for this way of looking at things was in 1997. In that year, the city government of New York realised that changing agricultural practices meant it would need to act to preserve the quality of the city's drinking water. One way to have done this would have been to install new water-filtration plants, but that would have cost $4 billion-6 billion up front, together with annual running costs of $250m. Instead, the government is paying to preserve the rural nature of the Catskill Mountains from which New York gets most of its water. It is spending $250m on buying land to prevent development, and paying farmers $100m a year to minimise water pollution.

When valuation has been done, payment can follow. In Cape Town, South Africa, for example, it proved cheaper to restore the town's watershed to its native vegetation than to divert water from elsewhere, or to create reservoirs. And there are a wide range of other cities and towns in the poor world that use ecological payments to protect their water supplies—from Quito in Ecuador with 1.2m people to Yamabal in El Salvador with only 3,800.

Meanwhile in Colombia and France, there are schemes financed entirely by the private sector. Large agricultural producers in the Cauca Valley pay fees for watershed-management projects, such as erosion control and reforestation. And Perrier-Vittel, a bottler of mineral water, has found it necessary to reforest parts of heavily farmed watersheds and also to pay farmers to switch to modern facilities and organic farming in order to preserve the quality of some of its products.

Putting a proper value on ecological services is bound up with another economic anomaly that haunts environmental economics. This is the creation of what economists term externalities—economic impacts made when those taking a decision do not bear all the costs (or reap all the gains) of their actions. When a piece of natural habitat is ploughed, for example, the conversion may make sense to the land owner, but it may also damage fisheries downstream, increase flooding and clog rivers with sediment. This makes those who lose out angry. It can also, in some circumstances, subtract from, rather than add to, a country's total wealth.

In such situations, the first reaction is frequently to legislate to try to ban the externality. But a more efficient solution can often be what is known as a cap and trade scheme, in which legislation creates both an overall limit to the amount of the externality in question, whether it be a polluting chemical or the destruction of a type of habitat, and a market in the right to impose the externality within that limit.

Sadly, the magazine suggests that many environmentalists have yet to catch up with such innovations:

If environmental groups continue to reject pragmatic solutions and instead drift toward Utopian (or dystopian) visions of the future, they will lose the battle of ideas. And that would be a pity, for the world would benefit from having a thoughtful green movement. It would also be ironic, because far-reaching advances are already under way in the management of the world's natural resources—changes that add up to a different kind of green revolution. This could yet save the greens (as well as doing the planet a world of good).

“Mandate, regulate, litigate.” That has been the green mantra. And it explains the world's top-down, command-and-control approach to environmental policymaking. Slowly, this is changing. Yesterday's failed hopes, today's heavy costs and tomorrow's demanding ambitions have been driving public policy quietly towards market-based approaches.

If governments invest seriously in green data acquisition and co-ordination, they will no longer be flying blind. And by advocating data-based, analytically rigorous policies rather than pious appeals to “save the planet”, the green movement could overcome the scepticism of the ordinary voter. It might even move from the fringes of politics to the middle ground where most voters reside.

I've long thought it sad that environmentalism has become associated almost exclusively with the left, and hope that developments like these will encourage centrist politicians to reclaim the issue.


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