Environmental Economics

I often think that free trade would a be a lot fairer if there were a way to properly value many of the intangibles we enjoy in this country. Hmm, I guess I'll get to think a lot more about it during my trip to India in a few weeks. In any case, though, the general notion of accounting for environmental issues in a kind of credit system seems like a generally good idea to me, especially if it could be enforced in trade agreements. This was one of the basics of the Kyoto accord, and it's not really a new idea. I thought this article in the Economist was interesting. It gives as an example of the Panama Canal using fresh water at a huge rate, and the need for reforestation to help restore it. So how do you finance the reforestation when in fact Panama could probably make more money off of selling the water than they do off of running the canal?

In the case of the canal, the financial value of reforestation is clear even if who pays for it is not. But putting a cash value on what are called variously "environmental", "ecosystem" or "ecological" services has, historically, been a fraught process.

Early attempts at such valuation resulted in impressive but unsound figures that were seized on by environmental advocates and then, when they were discredited, used by opponents to tar the whole idea. Now, though, things have improved.

First of all, 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.

Some skepticism is warranted, of course. Cost benefit analysis has been used as an excuse for lots of things over time. We won't go into any of my, er, issues with the current administration.

Still, many conservationists dislike valuation. Some misunderstand it as an approach that ignores cultural and spiritual values. It does not. It simply converts these values into monetary units that can highlight the cost of a course of action. Of course, it might not be appropriate in some cases for this value to be a factor in making a conservation decision. For example, closing the canal and selling water, or building tower blocks on the site of St Paul's cathedral in London, might be perfectly rational from an economic perspective, but also very unlikely to happen.

How one agrees on the conversion process is the trick, eh.