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Putting a price on nature, with a twist

Putting a price on nature, that is, quantifying and monetizing its services seems counter-intuitive—especially in the contexts of environmental degradation, climate change. It seems, it would only worsen the case for nature, let alone improve it. There is, however, a twist in the tail— what if this price accorded to nature finally makes it too costly to exploit? And therefore, at long last, making it’s protection a priority? Or would it backfire?

It is rightly said that we will continue to exploit nature as long as it is beneficial for us to do so. In this apparatus, the very important variable of “cost” has been systematically ignored — the cost-benefit analysis has so long left out its other half, the cost variable, when it comes to nature and its use. The profits generated by the use of nature’s resources find their way into the accounting books, but externalities like pollution and its long term cost, nature’s services like air filtration, water purification and the plethora of other such services, are neglected. The national accounts of countries, therefore, neither highlight the contribution of nature’s services to the country’s wealth nor its deterioration (or depreciation) in relation to the same. 

This is now bound for a change — nature will finally count.

Nature as capital?

The understanding of natural resources as capital stems from what is already in practice— it is difficult to imagine production without any resource input from nature, whether direct or processed. A very basic requirement for economic production is land. But unlike other physical capital, the stock of natural capital cannot be substituted or renewed easily. If natural resources are to be considered as capital or inputs, their contribution must also appear on the ledger. This is precisely what Natural Capital Accounting (NCA) aims to do— if natural resources are so vital for production, they must be recognised as an asset that is managed and maintained, with their  contribution (and depreciation) measured and considered in policy-making .

What the GDP does not show

GDP looks at only one part of economic performance— income— but says less about the assets that underlie them. An even graver issue is the under-representation of natural capital and services. Although it manages to include the income from the felling of trees, it overlooks the services that trees render—air filtration, carbon sequestration, among many others. A country could seemingly clear all its forests and use those resources to spike up the GDP to unprecedented levels, but it will lead to depreciation and more clearly, depletion of this very vital resource. This is exactly what GDP misses out. There is, however, a new standard now— one that could potentially relieve nature from this ordeal— The System of Environmental Economic Accounting (SEEA). 

Bhutan serves as a good case study in this context. Its carbon negativity (absorbing more carbon dioxide than it emits) can be hailed as the result of following a certain principle— including nature in growth calculations. The Gross National Happiness (GNP) index, through which it measures progress, accords a significant emphasis on the protection of nature. The same principle, although underlying a different standard (The SEEA), has been adopted by the UN in 2021.  

The System of Environmental Economic Accounting

Although the concept of natural capital accounting has been around for some time now, it lacked a standard by which nature’s services could be properly quantified and gauged. The SEEA bridges that gap. Adopted by the United Nations in March 2021, it provides a common framework for organising and presenting statistics on the environment and its relationship with the economy. In simpler words, the SEEA attempts to put nature and growth on an equal footing in decisions about economic development.

To understand the structure of the SEEA it is essential to first be acquainted with the knowledge of ecosystem services. There are a myriad services that nature provides, most of which are invisible to us— and therefore ignored. From trees filtering the air, water bodies assimilating wastes, bees helping in pollination, to mangroves preventing soil erosion and restricting storms— all are services rendered by nature. In quantifying the same, we acknowledge the possible economic and monetary losses that we would have to bear, if these cost-free services, were absent. But that is not all.  We attach cultural values to ecosystems as well and especially communities which have lived in close intimacy with nature for generations. These qualitative variables have been a major hindrance towards achieving a standard to quantify nature’s services. However, it seems possible now.

There is not one all-encompassing ecosystem account— there are multiple— because ecosystems are not all the same. There are 5 core accounts that constitute the SEEA—  Ecosystem extent (physical area of the ecosystem and its assets), Ecosystem condition (and changes over time), Ecosystem services, Ecosystem monetary assets (changes in stock of ecosystem assets like trees) and Thematic accounts. Take for example an ecosystem asset—forest— its condition in terms of soil depth, quality is first gauged. The healthy forest vegetation then renders the essential service of water purification before rainwater reaches the rivers and streams. This significantly reduces the cost of water purification and the beneficiaries are people who live downstream. This invisible service is what would be expressed in monetary terms.

There are several benefits to monetary estimation. It will provide a better comparability when deciding on issues of national importance, like budget allocation. The cost-benefit analysis, that this standard enables, will help in addressing the dilemma over economic development or environmental protection— a critical juncture developing countries often find themselves in. Indeed, it can be the balance that sustainable development long asked for.  

Evidence from India

According to a World Bank report a few years ago, India suffered a cost of $550 billion, about 8.5 % of the GDP due to air pollution, reports the Hindu. The cost of externalities such as water pollution and land degradation were possibly far higher. This loss will appear along the GDP in the new estimation— when we adjust it to fit in the accounts of natural capital. But there have been steps in the affirmative direction. In 2006, the Kanchan Chopra Committee Report on the Net Present Value of forest land converted into deforested areas for economic purposes was submitted to the Supreme Court of India. The Green Indian States Trust (GIST) has been one of the foremost players which created environmentally adjusted accounts in 2003. The GIST funded Green Accounting for Indian States Project 2007 was one of the benchmark studies in this area. 

But the most important study was conducted by the World Wide Fund for Nature- India in 2016. It estimated that the value of ecosystem services in the Terai Arc region in Uttarakhand was 19% higher than the total income of all residents of the region. It meant that if the ecosystem services were to be exploited for economic benefit, the local community must be compensated with 19% of the profit that the activity generates.

But like in any other economic and computational model, there are loopholes, ambiguity, and conditions that do not fit in.

Concerns and Criticism: What do we value?

There is an obvious criticism to quantifying nature’s services— commodification of nature. Although setting a monetary standard does not imply that nature will be bought and sold like any other commodity, the very computation is vulnerable to manipulation. If the monetary estimates are tweaked to satisfy vested interests, the balance sheet of nature might never possibly tally on the ground. This might leave us with little recourse, because any criticism might be deflated with inflated estimates.

The concept of value has an important bearing in this discussion. Economist Mariana Mazzucato in their book “The Value of Everything” explores how value and how we assign things value has changed over time— from assigning price to valuable things to determining whether a product is valuable by looking only at its price. In simpler words, only those things are valued, that can fetch a price. This change has prompted the necessity of assigning nature a price— because without it, we just would not care. But there are non-use and non-consumptive services rendered by nature— one’s culture, especially in India, is more or less influenced by the ecosystem they reside in. One might just enjoy a beautiful sunset or just be content at the thought that nature exists. In light of that, it is useful to ask— why should valuing nature be only legitimized by its economic viability? The answer to this can only be found in our values.

Krishanu Kashyap is a student at Ashoka University, pursuing economics and social anthropology.

One response to “Putting a price on nature, with a twist”

  1. Natural Capital Accounting is a very interesting concept. It is an unique approach to see the cost of environmental impact of development


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