Grant McDermott

Data. Economics. Environment.

Putting a price on nature (I)

As usual, George Monbiot has produced a thought-provoking column this week. However, rather than continuing to raise the ire of fellow greens $$-$$ i.e. by proposing that nuclear power is actually relatively environmentally friendly $$-$$ his latest effort decries the UK Government's "well-intentioned" attempts to put a price on its natural heritage:

Last week, the Department for Environment, Food and Rural Affairs announced the results of its national ecosystem assessment, a massive exercise involving 500 experts. The assessment, it tells us, establishes "the true value of nature … for the very first time". If you thought the true value of nature was the wonder and delight it invoked, you're wrong. It turns out that it's a figure with a pound sign on the front.

[...]

The exercise is well-intentioned[...] But there are two big problems.

The first is that this assessment is total nonsense, pure reductionist gobbledegook, dressed up in the language of objectivity and reason, but ascribing prices to emotional responses: prices, which, for all the high-falutin' language it uses, can only be arbitrary.[...]

The second problem is that it delivers the natural world into the hands of those who would destroy it. Picture, for example, a planning enquiry for an opencast coalmine. The public benefits arising from the forests and meadows it will destroy have been costed at £1m per year. The income from opening the mine will be £10m per year. No further argument needs to be made. The coalmine's barrister, presenting these figures to the inquiry, has an indefeasible case: public objections have already been addressed by the pricing exercise; there is nothing more to be discussed.[...] Cost-benefit analysis is systematically rigged in favour of business.
Given that a large part of any environmental economist's job is about trying to "put a number" on nature, I obviously have some skin in this game. I'd therefore like to make a few comments that hopefully add context to the discussion. In particular, I hope to partly assuage George's fears and counter some mistaken views that he has regarding economic valuations of the environment.

All right. Let's have a look at the rationale and methodology that underpins environmental assessments from an economic perspective:

The area under discussion here is known as non-market valuation. It forms one of the more ambitious arms of environmental and resource economics, as it tries to understand the additional value of natural goods and services (i.e. beyond what is indicated by the explicit market price). While inherently difficult, the profession has developed a range of methods and tools that make things more tractable and, ultimately, realistic. This includes hedonic pricing, contingent valuation, shadow price estimates, etcetera. Each method has its own particular short-comings (and strengths), but together they offer a reasonable framework towards understanding the value of nature in economic terms. Further, I should say that the purpose is to gain a sense of nature's value in terms of its direct contribution to our productive activities, as well as in situ (i.e. its natural state). The important thing that I'm trying to convey here is that the methods used by environmental economists cater for both objective and subjective forms of valuation, and across multiple dimensions. Here are two documents that provide a good breakdown of the methods of non-market valuation, as well as the broader implications in terms of interpretation: Harris, 1996 (specifically section 4.2) and Stavins, 2004.

The broader point is that, as much as they want to, environmentalists can't simply play the "nature is beyond valuation" card at their leisure. This only serves to seal off the debate and, whether we like or not, it is vital to understand what the monetary worth of something might be... Even if that does not capture all of the value at stake. Indeed, I would say that economic valuation of the environment isn't meant to be the final word on the subject and one certainly shouldn't make that claim.[*]

An analogy: It may be scant comfort for a widow that she receives a life insurance policy in the event of her husband's death. She would, presumably, trade them instantly if she could. However, at least she does not have to want for material necessities or comforts in his absence.

To be sure then, monetary valuation is an imperfect way of evaluating environmental trade-offs, but an important one nonetheless, as it at least offers the possibility for comparison in some common unit of measurement. Rather than the be-all-and-end-all, I would therefore suggest that economists' estimates regarding the monetary value of nature are merely meant to act as guides that may help to inform public (and private) opinion. Equally important, is that these estimates provide a figure for economic agents $$-$$ whether firms or individuals $$-$$ to benchmark against when it does come to paying for certain environmental goods. As an example, I have argued numerous times on this blog that water needs to be priced better (i.e. according to market forces) if we are going to use it more responsibly. Understanding how much a litre of water is "worth" to a power firm in producing a unit of electricity (because of cooling purposes), or a textile mill that produces cloth (for cleaning and spinning), provides the crucial foundation from which either of these can set about defining their subjective marginal values. And that is the first step towards establishing a price level that will ensure sustainable usage.

A final point on this issue $$-$$ where I think George is missing something very important $$-$$ is that valuation should not be static or linear. In particular, it's not the case that (using George's own example) all forests and all coal mines will be valued at a ratio of 1:12... Or, even that the specific meadow/mine that he imagines will continually be valued as such. It all depends on what happens to the other forests and coal mines around the country. For instance, if some forests are cut down for whatever purpose (farming, mining, what have you), then the value of our particular forest would be expected to rise. This is the beauty of the price mechanism: it adjusts with increasing scarcity. As I have written previously, accounting for this change in the relative prices of environmental goods is, I believe, one of the strongest economic arguments for decisive action against climate change.

That is not to say, however, that relative prices will necessarily adjust in such a way as to reflect the true intrinsic value of an environmental good. In this light, my next post will try to flesh out a lingering concern that I have with conventional market transactions as applied to the environment.

UPDATE: Part II is here.

[*] Having read through some of the UKNEA report, I think that it does err on the correct side of this divide. So, while it is introduced as showing "the true value of nature[...] for the very first time", this seems to me a more clumsy (though convenient) soundbite summary than anything else. It is tempered by the context provided in the actual research of the report.