Can Nature Be Monetized?

Many members of the Capital Institute community believe that the emerging markets for ecosystem services hold considerable promise as tools for redirecting the flow of capital toward economic activities that honor ecosystem constraints.  However, a paper that recently circulated among us entitled “The Environmentality of ‘Earth Incorporated‘”  raised some questions that challenge that belief.   The author, Sian Sullivan, argues that the  “intrinsic fallacy at the heart” of ecosystem services market initiatives is that they attempt to incentivize environmentally ethical behavior.  She maintains that the market does not produce “virtuous behavior” and that it is essentially naïve to take the view that if only we design them correctly we can halt or reverse ecosystem degradation.   She further states that the danger of these market initiatives is that they promote the  “valuing of nature as money,” and do not acknowledge “nature’s immanence or sentience,” or the reality that humans are merely one of many “companions” in nature’s community.  Sullivan’s argument might lead one to conclude that efforts to save our fragile ecosystems should be focused more on shifting humanity’s view of its place in the natural order rather than harnessing the financial markets to restore that natural order.

Is it an either or proposition?  Are there ways that we can design these markets to enable the “virtuous behavior” we seek to encourage in market participants? Can we value and protect our ecosystems without privatizing them? The Capital Institute’s mission is predicated on the belief that capital markets can be transformed with the aid of enlightened public policy supported by a shift in societal awareness.   We also hold the view that enlightened capitalists, through their collective actions, can lead the way to a more just, resilient, and sustainable economic system, even ahead of enabling public policy.

Below a number of thought leaders of the Capital Institute community engage in a free-ranging discussion of these topics.  What are your views? We invite you to participate in the continuing dialog.

Pavan Sukhdev, Study Leader of the G8+5 Economics of Ecosystems and Biodiversity (TEEB) project, is a career banker on sabbatical leave from Deutschebank. He was appointed TEEB’s Study Leader by the EU Commission, and is also Special Advisor and Head of United Nations Environment Programme’s Green Economy Initiative.

I have for long believed that markets (i.e., private wealth barter) have been allowed to become the spoilt-child of the economy, and commons (i.e. public wealth-sharing) allowed to languish as its much larger Cinderella. And I believe it is a challenge to wake up humanity to the value of the Cinderella commons without letting the “spoilt-child” saying “Mine Too!!” to follow that imagery.

TEEB was also faced with this tension and its attendant risks. I believe we have managed to represent a mature understanding of the commons and markets, in describing a wide policy arena, within which arena several mechanisms can operate to restore nature and reward responsible custodians of this public wealth, and among those mechanisms in some cases markets can work to create transparency and efficiency.

TEEB regards valuation as a human institution (see chapter 4, Ecological & Economic Foundations, on which is three-tiered: recognizing value, demonstrating (economic) value, and capturing (economic) value. Policies can respond to any of these tiers. Mechanisms are usually based on the second or third tier. Markets need the third tier, but not all capture of value needs to be “market” capture.

Robert Costanza joins the faculty of the Center for Sustainable Processes and Practices at Portland State University this fall, where he will also serve as director.  Most recently he served as Director of the Gund Institute for Ecological Economics at the University of Vermont. He is co-founder and past President of the International Society for Ecological Economics.

There is a fundamental misunderstanding here. Valuation is NOT privatization! We can (and must) value the commons without privatizing and commodifying them.  We do this implicitly anyway with every decision we make about the commons – to say we don’t or shouldn’t is pure denial. The value of the commons is OUTSIDE the market and the commons are not (and should not be) traded in markets.  But that does not mean they cannot be valued. We need new, non-market institutions that claim property rights for the commons without privatizing them (e.g., see “Creating an Earth Atmospheric Trust,” from 8 Feb. 2008, Value can be expressed in any of the units involved in trade-offs – money, energy, land, time, etc. The choice is more dependent on what communicates with the audience rather than on anything fundamental.

Peter Victor, professor and former dean of the Environmental Studies Program at York University, served as the Assistant Deputy Minister of the Environmental Sciences and Standards Division in the Ontario Ministry of the Environment and is the founding President of the Canadian Society for Ecological Economics. His latest book is Managing Without Growth: Smaller by Design, not Disaster.

It’s better to keep the weakly related issues of the valuation of ecosystem goods and services and the establishments of markets for them distinct. One reason that economists get so much play in policy discussions is that there is a dearth of “policy relevant” information which economists are ready and willing to fill, to such an extent that they have circumscribed the kinds of information that are considered policy relevant. To their credit, economists have tried to lay bare the assumptions on which their (faulty) worldview is based, including their approach to evaluating alternatives. Natural scientists have not done a particularly good job of providing policy relevant information. Efforts to generate useful science-based metrics (such as the ecological footprint) are rare.  Perhaps this is not surprising if the following quote from Phil Jones, director of the Climate Research Unit at the University of East Anglia, is at all representative of environmental scientists:  “I don’t hold a world view – that’s ridiculous. I have no interest in policy at all. I’m interested in the science, not the policy…” (New Scientist, July 31-August 6, 2010, p.10)

Robert Costanza: The standard assumptions are certainly not the only way to go.  They assume way too much that is not realistic in many cases.  What we want to estimate are the benefits to sustainable human well-being attributable to ecosystem functioning, whether people perceive those benefits or not.  This is a wide open research area in my view.

Peter Victor: I agree that this research area is wide open. One of my concerns is the use of monetary units as the valuation metric. If we follow the standard conventions developed in CBA over decades (and which can be understood as simulating the prices that would prevail in a well-functioning market) then we inevitably import a range of assumptions about humans and the environment with which we may not agree. I tried to set out these assumptions and some alternatives to them in the two graphics that I circulated. But if we adopt different assumptions on which to generate monetary values then it’s not clear how we are to interpret and use the results. Comparing them to values based on CBA or emerging from market transactions could be misleading and yet the use of such a metric invites these comparisons. Conclusion – we have to dig deeper into the meaning(s) of value and derive new metrics accordingly.

Robert Costanza: Totally agree that “we have to dig deeper into the meaning(s) of value and derive new metrics accordingly.”  But expressing trade-offs in monetary units does not imply (to me anyway) buying into the standard assumptions or interpretations.  I think the units you use to express the tradeoffs are somewhat arbitrary and inter-convertible and can be chosen to aid communication.  What is important (and largely missing) is a better understanding of the tradeoffs themselves.  Contingent valuation surveys are never going to reveal those. We need to understand and model the integrated system of humans embedded in the rest of nature to get at these questions. See “Modeling the Dynamics of the Integrated Earth System…” and “Visions, Values, Valuation and the Need for an Ecological Economics,” which explore these ideas further.

Peter Brown, a professor in the Departments of Geography and Natural Resource Sciences at McGill University’s School of Environment, is a former Professor of Public Policy at the University of Maryland where he founded the Institute for Philosophy and Public Policy, the School of Public Policy, and the School’s Environmental Policy Programs. He is the author, most recently, of Right Relationship: Building a Whole Earth Economy

Despite the very substantial advances in ecological economics brought about by Bob Costanza and others I think it remains significantly trapped in the pre-analytical vision that it is trying to escape.  This is exemplified, in my view, in the language and practice of valuing ecosystem services.  To complete the revolutionary agenda begun by ecological economics we will have to rethink many of our assumptions about the human self, the nature of knowledge, ethics, what we need to measure and how we measure it, economics, politics, and religion.  At least.  The re-envisioning proposed by ecological economics is but the beginning.  We have a long way to go and a short time to get there.  (See Brown’s paper, “Are There Any Natural Resources.”)

Hazel Henderson, President and CEO of Ethical Markets Media, is a renowned futurist, evolutionary economist, worldwide syndicated columnist, consultant on sustainable development, and author of Ethical Markets: Growing the Green Economy and nine other books.

This is a very rich discussion and this important paper gives us all an incredibly valuable “teachable moment” before we jump any further into the global casino, which I have always identified as the flywheel of social and environmental destruction on a planetary scale.

I thought first about all our deeply held values and determination to transform finance essentially by helping humans expand their awareness of the vital functioning of the biosphere in which we are embedded.   This does require humility, rather scarce among financial people who are still under the illusion that they create “capital,” “wealth” and “money” rather than accepting that financial trading, up to a point, serves a useful intermediary function in bringing savers, borrowers, entrepreneurs, buyers and sellers into a communications matrix.   But if this matrix continues to be driven by limited consciousness and false prices, it will continue replicating unsustainable practices.   The paper is an important update on how far astray financial markets have gone with their efforts to create new markets for carbon, offsets, and other derivatives of Nature’s intrinsic values.

Part of the error comes from the Arrow-Debreu theorem mathematizating the nations “economy.”  Arrow won the Bank of Sweden Prize for this in the 1960s and it helped propagate the idea among financiers, with its assumption of the importance of a goal of ” market completion,” that they should keep expanding markets to overwhelm all the “commons” that existed around the world, based on small communities sharing resources cooperatively with collectively-derived RULES !

I pointed out in Building a Win-Win World and in The UN: Policy and Financing Alternatives, that there were TWO regimes of exchange:  markets and commons. [See diagram at right.]  My article, “Defending the Global Commons,” in Whole Earth Review  (Fall 1998)  and my use of the term the Love Economy [see diagram below] spelled out this dual nature.Karl Polanyi always emphasized this in his Archaic Economies and The Great Transformation, pointing out that markets, as Adam Smith taught, were indeed part of our human “propensity to barter.”   But when governments legislated national markets, as in Britain, that changed everything  for the worse!

This expanding markets uber alles has continued and morphed into the excesses of trading carbon, wetlands, species, etc., described in Sian’s paper. Not until Elinor Ostrom’s work refuting Garrett Hardin’s Tragedy of the Commons (derived from neoclassical economic thinking that only turning commons into “markets” could protect them via “property rights”) did the movement for defending the Commons get going. [For the full text of Henderson’s commentary visit the Ethical Markets website.]

Juliet Schor–a best-selling author, professor of sociology at Boston College, and the founder of the Center for a New American Dream–is a past Fellow of the John Simon Guggenheim Memorial Foundation, where she directed the “New Analyses of Consumer Society” project. Her latest book is Plenitude: The New Economics of True Wealth.

Painting too broad a brush about markets can be a mistake, because usually the analysis leaves out a key variable which influences how they actually operate, which is the underlying distribution of assets. Neoclassical economics says this underlying distribution is irrelevant for outcomes other than distribution (except in cases of oligopoly and maybe not even then) but that’s wrong. There’s a world of difference in how a market with many small producers, each of whom has a trivial share of the market, operates in comparison to a market with large corporations.  Structure on both the buy- and sell-side matters. My view is that a number of effects often attributed to “the market” are caused by the concentration of power in large corporate (and other entities). This is particularly true in some of the most ecologically damaging areas (mining, energy, etc.). We need to define the kind of market we’re discussing.

William Rees, a professor at the University of British Columbia’s School of Community and Regional Planning, is the originator of the “ecological footprint” concept and co-developer of the method. He founded the Canadian Society for Ecological Economics, is a Fellow of the Post Carbon Institute, a Founding Fellow of the One Earth Initiative, and a co-investigator in the ‘Global Integrity Project,’ aimed at defining the ecological and political requirements for biodiversity preservation.

I agree with Juliet. For markets to work with the allocational efficiency promised they must satisfy the basic assumptions of general equilibrium, two of which are: 1) an infinite supply of buyers and sellers all of whom have 2) perfect knowledge of all present and future markets. These assumptions—and others—cannot be satisfied in the real world (so we don’t really have efficient markets anywhere on this criterion alone).

Actually, since we can never identify all the direct and indirect benefits and costs of any action the entire concept of “efficiency” is suspect. This weakness is exacerbated in analyses that fail to consider the lopsided distribution of those benefits and costs that can be identified. Thus B/C analysis (explicit or implicit) too frequently becomes a rationale to serve the interests of a few as when the ecological and social costs of development decisions turn out to be transparent to identification, incalculable when identified or, worse, discounted or ignored.

BTW, isn’t it hypocritical to continue claiming we have an efficient market economy if we keep ignoring or purposefully violating the basic conditions for efficient markets? Again, to follow on Juliet, if we were serious about having a true market economy, mergers and acquisitions and other means of concentrating power would be disallowed. We would recognize the folly of subsidies to fossil fuel producers, farmers, and fishers. All such subsidies are inefficiently counterproductive as they result in overproduction and accelerated depletion of natural capital.

The more one looks the more it appears that  “the market” is really politics cloaked in theoretical bafflegab. I’m aware this is not an original discovery. Nonetheless, I don’t understand why more professional economists aren’t up on their hind legs in protest at the violations of market principles (to say nothing of common sense) that actually corrupt our “market” economies. I would suggest that frequently the monetization of nature does not aid conservation and may accelerate its destruction, as when the discount rate exceeds the reproductive rate of the resource, or the exchange value of its products exceeds its perceived monetized conservation value.

Also, money valuation or any tradeoffs that can be interpreted in pure market terms, displace other kinds of valuation and community judgments that might actually save (some of) nature. For example, in my region there is no hydroelectric dam on the Fraser River because to approve one would be political suicide for the government involved. People here–and not only First Nations–take some of their identity and sense of place from simply knowing there is a Sockeye run in the river.  The salmon are worth a fraction of the value of the electricity that could be generated by damming the flow but still the people prefer the salmon. They are unwilling to pay the non-monetized opportunity cost of river development, despite the huge economic benefits. I.e., there is no economic case for conserving the salmon. Non- existence value trumps money value in this.

John Fullerton, founder and president of Capital Institute, is also the principal of Level 3 Capital Advisors, LLC, an investment firm focused on high impact sustainable private investments. He is a former Managing Director at JPMorgan and served as the bank’s representative on the Long Term Capital Oversight Committee.

I agree with both Bill and Juliet.  “The market” is way too generalized, and leads to ideological debates not grounded in how it all works in the real world.  As Juliet said, structure of markets determine outcomes, which can vary greatly (see Enron: electricity in California, or Subprime more recently). I would modify some of the details of Bill’s premise to say “many” instead of “infinite supply of buyers” and perfect knowledge of all available information instead of “all present and future markets” but completely agree with his conclusion that we rarely if ever have “efficient markets.”

To add another layer requiring clarity, “cap and trade” mechanisms, while they have many practical challenges, are not about monetizing nature (as I perceive them – please correct me if you see it differently).  They are about using a market as a tool for the efficient distribution of limits.  Again, I repeat, they have many difficult practical challenges in terms of structuring and implementation, and certainly challenging politically to get right.  But it would seem to me that it is both reasonable and logical to hold the following positions:

  1.  Yes, it is helpful to estimate the “value” of nature in monetary terms, to get it on the table in the market-based system in which we live. Same for the gift economy.
  2.  Yes, to agree that this monetary value is not “true value” and should never be confused with true value.  Monetary value is just a component of value, a reflection of the monetary economics of a particular time and place.  Must not imply it can be “traded at will.”  A life insurance policy puts an economic value on a life, often linked to its monetary earnings power, yet no one confuses this with the value of the life of a loved one.
  3.  Yes, to quote John Liu, the function of nature trumps all, so it must come first.  no function, no services, no life.  So yes, protect it as a commons.
  4.  To achieve protection of commons “at any cost” in a “full world” implies limits.
  5.  Allocation of limits will become a very difficult political, ethical, and economic challenge for the economy of the next century.  Markets are a tool (not the only tool, and not universally the best tool) that can be useful in tackling this challenge efficiently, if properly structured and enforced.  This requires a lot of thought and care.

Privatization presents an entirely different challenge since much of land-based nature is already “private.”  So there’s private but in “good hands” (i.e., local stewardship) or “bad hands” (rapacious global corporation or speculator only interested in optimizing short term monetary value).  Practical solutions must start from this reality.  This is a highly complex challenge, but this is where we must begin the discussion of the purpose and duty of capital I believe.

Allan Savory, president and co-founder of the Savory Institute, is a research biologist, farmer, and rancher who, in the 1960s, made a breakthrough in understanding what was causing the degradation and desertification of the world’s grassland ecosystems. In 2003 he received Australia’s International Banksia Award “for the person or organization doing the most for the environment on a global scale,” joining previous recipients Rachel Carson, and David Attenborough, among others. He recently won the prestigious Buckminster Fuller Challenge

I agree that one needs to recognize the full and healthy functioning of our environment in any future economic thinking.  For example there are those promoting a system of carbon credits for the services provided by the vast deciduous forests in Northwest Zimbabwe, Namibia, Zambia and Botswana but those services hardly currently exist.  These vast forests are net emitters of carbon no doubt as they are managed today and have been for the last 80 years or so.   In addition they are shedding more water and eroding more soil than should be taking place were they functioning as they should.  This is due to the malfunctioning of all four ecosystem processes — water, and mineral (nutrient) cycling, biological community dynamics and solar energy flow are seriously malfunctioning. Giving carbon credits without evidence of management change that restores full functioning of all four processes would be entirely the wrong thing to do.  Second example, the same thing is taking place with almost all the carbon credits for grasslands  I am reading about that are, and have been for a long time, net emitters of carbon– and for the same reasons, malfunctioning of all four ecosystem processes.  Rewarding bad practice is wrong I believe.  It seems logical that in the future any valuing of ecosystem services should be tied to evidence of sound practice and the actual provision of such services as a fundamental premise.

In addition, in the future the “system” will need to recognize that the same practices produce different effects on ecosystem functionality along the brittle environment scale.  There is essentially no one size fits all.  Ultimately I do not believe this is as difficult to sort out as it always appears on first exposure.

Tim Toben, co-founder of Pickards Mountain Eco-Institute, is an entrepreneur, green building developer, and North Carolina farmer.  

Sullivan evokes Thomas Berry’s concept of  “a communion of subjects, rather than a collection of objects.”  It also seems that the farther away a product (or its component parts) gets from its market, the easier it is to disassociate from the affected ecosystem or human community. Do we think of the Niger Delta when disposing of a water bottle?  “The market does not care,” and it cares least when the costs/consequences occur outside that market.

Is it our expectation that “consciousness raising” will change markets from the top down?  Can one infuse a market with conscience?  Perhaps we should also consider a bottom up approach.  That is, are markets configured in ways that are fundamentally sustainable?  Should markets be more like bioregions, each with its own unique ecosystems, capacities/limits, and the threats from “invasives?” Rather than being imposed from the top, consciousness might arise out of local interdependence, with secondary benefits of strengthening communities, spreading wealth, protecting ecosystems, and diversifying markets.


Proposal for a Common International Classification of Ecosystem Goods and Services (CICES) for Integrated Environmental and Economic Accounting