Environmental Economics and the Economist

The Economist has a long article on the importance of and advances in ecological valuation. They seem to have become fans of the work of the MA.

The article begins with an interesting example of the establishment of a market for ecosystem services associated with the Panama Canal:

AT the Miraflores lock on the Panama Canal it is possible to watch the heartbeat of international trade in action. One by one, giant ships piled high with multi-coloured containers creep through the lock’s narrow confines and are disgorged neatly on the other side. If it were not for the canal, these ships would have to make a two-to-three-week detour around South America. That would have a significant effect on the price of goods around much of the world. It is therefore sobering to consider that each ship requires 200m litres of fresh water to operate the locks of the canal and that, over the years, this water has been drying up.

Scientists at the Smithsonian Tropical Research Institute, in Panama, think that reforesting the canal’s denuded watershed would help regulate the supply. One of them, Robert Stallard, a hydrologist and biogeochemist who also works for the United States Geological Survey in Boulder, Colorado, has operated in the country for two decades, and knows the terrain well. A deforested, grass-covered watershed would release far more water in total than a forested one, he admits, but that water would arrive in useless surges rather than as a useful steady stream. A forested watershed makes a lot more sense.

Another problem caused by deforestation is that it allows more sediment and nutrients to flow into the canal. Sediment clogs the channel directly. Nutrients do so indirectly, by stimulating the growth of waterweeds. Both phenomena require regular, and expensive, dredging. More trees would ameliorate these difficulties, trapping sediments and nutrients as well as regulating the supply of fresh water. Planting forests around the Panama Canal would thus have the same effect as building vast reservoirs and filtration beds.

Viewed this way, any scheme to reforest the canal’s watershed is, in fact, an investment in infrastructure. Normally, this would be provided by the owner. But in this case the owner is the Panamanian government, and Panama is in debt, has a poor credit rating and finds it expensive to borrow money. And yet investing in the canal’s watershed clearly makes economic sense. Who will pay?

In the case of the Panama Canal, the answer may turn out to be John Forgach, an entrepreneur, banker and chairman of ForestRe, a forestry insurance company based in London. Mr Forgach’s plan is to use the financial markets to arrange for companies dependent on the canal to pay for the reforestation. Working in collaboration with several as-yet-unnamed insurance and reinsurance companies, Mr Forgach is trying to put together a deal in which these companies would underwrite a 25-year bond that would pay for the forest to be replanted. The companies would then ask those of their big clients who use the canal to buy the bond. Firms such as Wal-Mart, and a number of Asian carmakers, which currently insure against the huge losses they would suffer if the canal were closed, would pay a reduced premium if they bought forest bonds.

And then moves on to discuss a bit of the scientific background:

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 (pdf ) 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 valuation of ecosystem services is not without its difficulties. Nevertheless, the fact that there is a growing consensus about how and where it is appropriate is an important step forward for economists and environmentalists. In 1817, David Ricardo, a pioneering economist, noted that abundance in nature was rarely rewarded: “where she is munificently beneficent she always works gratis.” But if nature pays, who then will pay for nature?

3 thoughts on “Environmental Economics and the Economist”

  1. The aspects of Millennium Assessment (http://www.MAweb.org) that seem most attractive to the Economist are (1) the documentation of ecosystem services, which provides the fundamental data necessary for any valuation effort, and (2) the extensive consideration of economic policy instruments for ecosystem services. Other important topics assessed by the MA — such as cross-scale feedbacks, regime shifts, and other policy instruments (adaptive governance, cross-sectoral and cross-scale ministry organizations for example) seem equally crucial for sustaining ecosystem services, as well as of central interest for resilience researchers.

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