Accounting scandal at Mother Earth, Inc.

Put that rainforest on your spreadsheet and suddenly the global economy looks different, by trillions of dollars, a new study shows.

Published August 19, 2002 4:02PM (EDT)

Grandchildren have figured prominently in the politics of environmentalism. When a president sets aside preservation areas, he does it for the benefit of "our grandchildren." When a policy group wants to tell us about the problems caused by a few-degree rise in the mean temperature over a hundred years, it asks us to think not about ourselves but to remember that our grandchildren will have to live here, too. Why should we recycle, or buy hybrid cars, or boycott restaurants that serve Chilean sea bass? That's easy: Think of the grandchildren.

It's obvious why environmentalists care so much about our grandchildren -- by the time the earth manifests the full effects of this generation's environmental recklessness, we'll all be on death's doorstep, and the grandkids will be left holding the bag. The problem with the appeal, though, is that it's hard to get too worked up about the lives of grandchildren who, for most of us, don't exist yet; it's a fuzzy argument, disconnected from the daily whims of working people, and -- if the popularity of President Bush is any sign -- it's been a failure.

That's where Robert Costanza comes in. Costanza is one of the founders of ecological economics, an emerging field that attempts to measure environmental damage more meaningfully than by predicting unpleasantness for putative grandchildren. Ecological economists believe that the planet's ecology contributes significant economic output to the world's markets, and that each time some environmental resource is destroyed, it costs us dearly, in dollars. Which means, Costanza says, that there are more than moral reasons for governments to pursue environmentally friendly policies: There can also be significant economic value.

In 1997, Costanza, who co-founded the International Society for Ecological Economics, published a widely-quoted article in Nature that estimated the global value of "nature's services" -- such as its regulation of the climate -- at somewhere between $18 and $61 trillion each year. That's comparable to the gross economic output of the globe, not a small sum.

Now, working with Andrew Balmford, a conservation biologist at Cambridge, and more than a dozen other economists and ecologists from around the world, Costanza has found that environmental protection is a very good investment opportunity. In a new study, published in the August 9 issue of the journal Science, he finds that for every dollar spent on conserving the world's remaining intact natural habitats, society will get at least 100-fold payback in nature's services. (The full report is available online to subscribers of Science, and others can register at Science's website for an abstract.)

The report is to be presented at the second World Summit on Sustainable Development, which will be held late in August in Johannesburg. In the decade since the first earth summit, held in Rio de Janeiro, the destruction of natural habitats has accelerated. How can this be, if protecting the environment makes economic sense? In a telephone interview with Salon, Costanza explained that the problem is -- what else, these days? -- bad accounting. If governments devised rules that required corporations to "internalize" any environmental damage they might cause, Costanza says, we'd probably see a lot of companies thinking about the fate of our grandchildren.

Tell me what your new study found, and how you found it.

The bottom-line answer is that the benefit-cost ratio for preserving most of what's left of relatively wild natural areas is at least 100 to one: From the society's point of view, when you preserve wild nature, you're getting at least a hundred times the benefits over what it costs.

We looked at the rates of loss of wild nature, and the economic value of that loss in terms of lost ecosystem services -- it's about $250 billion lost each year, out into the indefinite future.

We said, given what's left of these natural areas, what would it cost to maintain them? We had a hypothetical network that consisted of 15 percent of the terrestrial biosphere and 30 percent of the [oceans]. We're already spending about $6.5 billion on natural area conservation preserves right now. We figured to expand to this hypothetical area would take about $45 billion a year, worldwide. So it's an order of magnitude [greater than what we spend now], but it's a lot more area, and $45 billion a year in the larger scheme of things is not that much money. It's a small fraction of the global military budget.

And it's also a small fraction of what's spent on perverse subsidies -- those are huge subsidies that are not benefiting society at all but are benefiting only the private recipients of those subsidies. Society would be much better off if they were eliminated -- so if you eliminated even a small fraction of those perverse subsidies you could pay for this reserve network. So $45 billion a year for the global reserve network: We're not saying that's all you have to spend, but it's our hypothetical scenario.

How did you find this? How do you measure what's being lost, and what's being gained with the $45 billion?

That's the other side of the coin, the benefits. There we looked at the value of the 17 different ecosystem services. Those were largely calculated in the 1997 paper that came out in Nature magazine.

The services [provided by the ecosystem] range from things like climate regulation -- from very global things to more regional things like storm protection, erosion control, soil formation, nutrient cycling, to even more local things like pollination services from insects and birds, water supply services, food and raw martials, recreation, genetic resources and cultural and scientific amenities.

How do you measure that? For example, like climate control -- do you measure how much it would cost, if we didn't have that, to technologically provide climate control?

That's one way, the "replacement cost" approach. Some other ways would be to -- well, for example recreation services, you can survey people and ask them how much they would be willing to pay to recreate on these areas, even if they're not currently paying for it. You usually get fairly large estimates from that. That's a "contingent valuation" approach.

There's something called "hedonic pricing," where you look at differentials of property values. Like if you live on a shoreline with a view of water, your property value's $30-40,000 more than it would otherwise be. So that's one of the aesthetic benefits of lakes and rivers and oceans, for example.

There's a lot of stuff out there and a lot of different techniques. Another approach that we used more recently is to build a sophisticated simulation model that looks at how all these things interact with each other, and within the model you can estimate the marginal contributions of all these services to get the total value. So what would happen if you changed it a little bit -- how would the overall value change?

So in this study you looked at five "biomes"?

Well, we looked across all of the biomes, but we only could find five. The 97 paper looked at the gross benefit, like the total benefits from tropical rain forests and coral reefs, by biome. For [this study] we wanted to say, what's the opportunity cost? If we leave it as a natural area, there's some benefit. But if you convert it to some alternative use, like pasture or plantation, logging, there's still going to be some ecosystem services coming off of it -- and we basically wanted the difference between the intact and the converted state as a measure of the net benefits that we would be preserving by investing this money in the conservation network. That's where those five case studies came in: to get an estimate of what the net benefits were as opposed to the gross.

You looked at tropical forests in Malaysia and Cameroon, a mangrove in Thailand, a wetland in Canada and a coral reef in the Philippines. And in every case you found that it's better to keep it as it is or have some sort of environmentally friendly processes there than to convert it to human use.

Exactly. And that the average was like 50 percent better [to keep a natural area relatively intact than to convert it for humans]. And so we took that 50 percent figure and applied that to all of the biomes in the reserve, and so on average that's our best guess as to the net benefits versus the gross benefits. So you do that and you get $4.5 to $5.5 trillion a year as the benefits of ecosystem services from the reserve network that we identified. Compares with the cost of maintaining the reserve network [$45 billion], you get a 100 to 1 benefit-cost ratio. And as we say in the paper, that's probably an underestimate because of various assumptions that we made.

But the problem is, who --

Who's going to pay for it? Well the problem is that these are social benefits, and the private benefits are much smaller. The reason that these things get converted in the first place is that the private owners can capture the private benefits and they don't have to pay the social costs. So from their private point of view it all looks very good economically, but from society's point of view it looks very bad.

That's the point we're trying to make. This is a situation like almost all public goods situations -- and ecosystems are public goods, meaning that you can't exclude people from benefitting from them or using them, and they're not necessarily rival goods, meaning that because I use the benefits of the climate doesn't prevent you from using them. So they have these public good characteristics, and almost all public goods are not well handled in the market. And somebody has to do something about that. The government has to step in, basically.

So does that explain why the development still continues, why it's accelerated since [the Rio conference]?

Yes. We boil it down to three main failures. There's the information failure: one thing you can say is that governments and nobody else really knew how big the benefits were, and we didn't really have this research assembled. Part of the rationale for doing the paper was to tell people that, hey, this is a situation. Some of the information was out there, it was just a matter of getting people to pay attention to it. Stating it as a benefit-cost ratio -- one idea we had there was that it will get people to pay attention to it and read past the first sentence.

Then there's also market failures. The market doesn't cover these public benefits, so you can't expect the market on its own to do a good job of dealing with them. They're just outside the market, and the solution is to internalize them, in some way. So you could use a system of ecological taxes, where people were charged a tax in proportion to how much of these ecosystems they were damaging, and then that would become an important part of their decision making. Then the private benefit-cost ratio would be more consistent with the social benefit-cost ratio, and we'd get the right kind of decisions.

The third reason was policy failures, our system of perverse subsidies -- you can think of that as a policy failure.

That's the case where you give a subsidy to someone to essentially destroy an ecosystem?

Right. That makes it even worse where the public is concerned, although from the private individual's point of view they're getting money to do this -- so they're doing OK. It all revolves around this distinction between the private and the social benefits and costs, and if you really want the market to work efficiently, those two sets of calculations have to be consistent. If they're not consistent there's a problem, you're getting a sub-optimal allocation of resources.

That's pretty basic economics. I think the thing that we've added to the discussion is that in the past, most economists thought that those externalities were minor. They think the market covered most of the stuff, and the stuff outside the market is kind of a side show. What we're saying is that it's just the reverse: the externalities are the main show and what's in the market is really what's minor.

So we're taking that argument 180 degrees. and that's where it's essential to bring ecologists and other natural scientists into the discussion. The conventional economists who study what's in the market, if that's not the important stuff to be studying, if you really want to be studying what's outside the market, you want people people who understand the earth as a system.

So you have this figure of $45 billion -- if the world spends that money, we would somehow gain the economic benefit of those resources. Say the world spends that $45 billion. How would we economically justify that investment? Who would see the payback?

What we would see is not a further degradation of services. You can argue that's not enough either, and you need to restore some ecosystems that have already been converted. For the purposes if this study we said to avoid the loss of $250 billion a year, you can invest in this preserve network and that will prevent any further losses.

And also there are some critical thresholds, and we don't know where they are. A lot of the climate research is showing that there may be a point where the Gulf Stream shuts off, for example. There's this dramatic threshold where you're getting minor changes up to some point, but after that point the changes are so dramatic and the costs are so huge that you just don't want to go anywhere near that point. So this is another way of keeping us away from the thresholds -- because once you're passed the threshold and you're on the other side, you can't go back to where you came.

But if we are destroying this $250 billion in services, wouldn't we see that in the economy in any way?

I think we are seeing it in terms of climate change that's already happened, that's having an economic effect in terms of increased storm frequency and bigger storm intensity. There are health effects, in terms of the new diseases that come into the system and spread to a larger part of the population. We're talking about big numbers here, damages that could be prevented with relatively small investments right now.

It seems that a problem with an argument like that is that there's always going to be disagreement over the numbers. I can think of one recent example, the Arctic National Wildlife Refuge, where proponents of [drilling for oil] said it wouldn't destroy anything, and opponents said it would have a huge impact. What do you do in that case where there's disagreement over the numbers?

That's a good question, and I wrote an op-ed piece for the Washington Post about the solution to that dilemma. It proposed using a system of assurance bonds. This is what we do in other parts of the economy where we have high uncertainty, and you basically want to hold the party that stands to gain responsible for any damages that do occur.

So if the oil companies say "There won't be any damages, there won't be any damages," well, let them put their money where their mouth is and post a bond large enough to cover the worst case potential damages. If the damages never occur, they get the bond back. And if the damages do occur they forfeit the bond, and the money is used for restoration activities.

As long as the bond is large enough, instead of facing this situation they are in now -- which is, "all we have to do is get the permit and then we can externalize these damages" -- they have to internalize the risk. And once they've internalized the risks, then their private benefit-cost calculations are more consistent with the social calculations: they end up either being extremely careful when they do the exploration to avoid damages, or just give it up all together and say it really isn't that good a deal, we'll go explore somewhere else. So either way society's better off, and the environmental community is better off.

So you're appealing to society's bottom line?

We want to improve the honesty of the bottom line. What we've been doing, it's worse than the Enron and the Worldcom kind of accounting scandals. That was small-scale -- taking things off the books and making profits look larger than they were. What we're seeing here is exactly the same thing on a larger scale, by [the world] ignoring these ecosystem benefits. We're making corporate profits look much larger than they really are because they're not paying the full costs. So if we got our accounting straight, both in the corporate world and the larger, natural world, we'd be doing much better.

In 1997, you did the first study and you found that there was something between $18 and $61 trillion a year in the value of the services provided by the ecosystem -- and the numbers were criticized by economists. In the Wall Street Journal last week, one economist [Paul Portnoy of Resources for the Future, a Washington-based think tank] said that "equating nature with its replacement value is seductive, but from an economist's perspective, a non sequitur. Something's economic benefit is determined by how much people are willing to pay for it."

Well that's just not true. Replacement costs can be a valid way of estimating the value of things, especially when you don't have anything better, and only in certain circumstances. The circumstances are when the service is absolutely essential. The maintenance of the climate on the earth, our life support structure, is certainly an essential service. So if we started losing pieces of that we would have to pay to replace it in some way. You could argue that we could technologically replace the services of the biosphere. But think about Biosphere II -- we're talking about huge per-capita cost, and it didn't even work, it didn't function properly. So it's questionable whether we could do it technologically, and even if we could, the costs would be huge.

In the world of economics, does your research usually get such criticism? Are your arguments seen as novel? Are they accepted?

I think both. They're not universally accepted, but I think that economists who don't accept them are the ones who had in their minds that natural ecosystems services were a small percentage of what was happening, and what was important was inside the market. If they start with that mindset and someone says "no, it's the market that's trivial, not the environment," then they say that can't be true. There must be some problem in your numbers. But I don't think they really have come up with anything that is a valid criticism.

Lastly, what about policy makers? How do they react to your research?

Well, that's one of the reasons we're putting this out there now, before the presentation in Johannesburg. We've noticed some steps, but we think that if we can present it as a cost-benefit analysis and show that we need some better accounting on this, some people would take that into consideration. There needs to be a new approach in the environment. The moral arguments for protecting the environment -- they have their place, but it's obvious we need some new approach.

By Farhad Manjoo

Farhad Manjoo is a Salon staff writer and the author of True Enough: Learning to Live in a Post-Fact Society.

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Economics Environment Global Warming U.s. Economy