The Economics of Biodiversity – and why it matters

Today is the International Day for Biological Diversity, so attempts are being made to drum up public concern about biodiversity loss in time-honoured fashion – by asking: “how much is it worth?”

Well, the ‘The Economics of Ecosystems and Biodiversity’ (TEEB) report for Business will be published in July, and – according to today’s Guardian – it is expected to conclude that biodiversity is worth an awful lot. Some of the approaches to putting a price on it seem a bit mad – like asking people how much they will pay to fly to see a bit of rainforest, as a means of calculating its value (if people ever care too much about biodiversity to want to fly anywhere, does that mean it becomes worthless?).

But, niggles notwithstanding, the TEEB Report for Business is being billed as doing for biodiversity what Stern did for the climate. The Stern Review, of course, pointed out that it is much better for economic growth, in the long run, to reduce emissions now rather than pay to adapt to climate change later on. Unfortunately, this wasn’t an argument that galvanised the world into forging a global agreement at Copenhagen, and, before the launch of “Stern for Nature”, it’s perhaps as well to ask why.

I’m going to offer two partial answers to this question, one economic, one psychological.

The economic problem with the Stern Review was this: having conceded that the case for climate change is most compelling when based upon cost-benefit analysis (CBA), this argument was left open to attack on the basis of the technicalities of how that analysis is to be conducted – in particular, what discounting rate to use.

So, for example the economist Richard Tol, happily accepting Stern’s rationale that decisions about whether or not to abate greenhouse gas emissions should be based on CBA, did his own number crunching and was led to conclude that it is uneconomic to try to contain atmospheric CO2 to less than 850ppm.

The problem is, that once you have conceded that the primary rationale for abating climate change is economic it is all too easy to become embroiled in arguments about what ‘economic’ really is.

Could we be heading the same way with biodiversity?

The signs aren’t good: whatever the aggregate costs of biodiversity loss, most companies don’t seem that worried. Also today, Price Waterhouse Coopers published some of the analysis they have done for the TEEB study. They find that “only two of the world’s largest 100 companies have identified biodiversity and ecosystem loss as a strategic issue” – this in the light of extinction rates estimated at up to 10,000 times background levels.

As one PWC partner says:

“Environmental destruction is not in most cases as a result of headline-grabbing man made disasters, but the steady erosion of biodiversity as a cost of economic development. But these costs to the productive capacity of the economy are not valued and not felt by any one company, so it’s easy to see why at this stage, the threat is less visible to business leaders.”

Well, if it’s not something that individual companies are going to do much about in their own self-interest, maybe the economic arguments will nonetheless lead to ambitious and proportional intergovernmental action on biodiversity loss?

This is where the psychology comes in – and again, the parallel with climate change shouldn’t fill us with optimism. The problem is this: there is surely an economic case to be made for collective action on climate change in pursuit of economic benefits. But this requires individual nation states to subjugate their own short term economic interests (compromising competitiveness now) in order to enter an international agreement (leading, as Stern argues, to more jam tomorrow for everyone).

Many people have difficulty with this. Clemons and Schimmelbusch have characterised this difficulty, in an American context, as follows:

“If we [the US] clean up our environmental act and the Chinese don’t we all die anyway and their economy will outperform ours while we live. If we don’t clean up our act, we still all die, but at least we have a stronger economy until then”

Unfortunately, viewed psychologically, this attitude is all-too-predictable. Concern about financial interest and concern about common-interest are almost perfectly opposed. There are many pieces of work that point to this: Prime people’s awareness of money, and they become more selfish, less co-operative, less trusting, and less concerned about the environment. Simulations of managing forests find that people who are more concerned about money cut down more trees, for a quicker simulated financial return (although they make less money in the long-run). And these effects seem to be detectable at a national level: Tim Kasser has found that societies where more people are concerned about wealth tend to have higher footprints (even when controlling for per capita GDP).

Put another way, the Stern Review demanded that governments accepted both the importance of prioritising the common-good and the pre-eminence of economic cost-benefit analysis (as a mechanism for establishing where the common interest lies). And yet, it is psychologically difficult to hold these two things as important at the same time. TEEB, it seems, is heading in the same direction.

The alternative? Don’t ask how much it’s worth. Ask why it matters.

This blog was originally posted on Identity Campaigning.

Tom CromptonThe Economics of Biodiversity – and why it matters
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