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Ecosystem Services: Pricing to Peddle?

by Brian Czech

On November 15, five nations issued a complaint about a UN initiative called the “Global Green New Deal.”  These nations claim that “nature is seen [by the UN] as ‘capital’ for producing tradable environmental goods and services.”  They express their concern about the “privatization and the mercantilization of nature through the development of markets for environmental services.”   They also declare their “condemnation of unsustainable models of economic growth.”

For the purposes of this week’s Daly News, it matters little who these nations are, nor does it matter if their interpretation of the Green New Deal is completely accurate.  What does matter is that their complaint ripens our attention to a widespread and growing controversy about the implications of valuing ecosystem services.

The good news from the Green New Deal is that ecological microeconomics (such as valuing ecosystem services) has risen from the recesses of academia into the realm of international diplomacy.  The bad news is that ecological macroeconomics (such as limits to growth) apparently has not.  Let’s take a look at the implications.

The primary distinction of ecological economics, in contrast with conventional or “neoclassical” economics, is that ecological economists recognize limits to growth and a fundamental trade-off between economic growth and environmental protection.  The economic pie can only get so big even if all its pieces are correctly priced, including ecosystem services.  Because the economic pie can only get so big, society must also pay greater attention to fairly distributing the pieces.  In order to protect the environment, and to help allocate resources in the fairest manner, it helps to recognize the economic value of ecosystem services.  That’s what ecological microeconomics is all about; estimating the value of natural capital and ecosystem services.

In mainstream economic circles, on the other hand, limits to growth are seen as nonexistent or too far off to worry about.  That leads to a nonchalant attitude about fairness; just grow the economy because a “rising tide lifts all boats.”  Traditional economists don’t mind valuing ecosystem services, however.  As long as the prices are right, and markets are established, ecosystem services can be allocated efficiently, just like steel and milk into guns and butter.

The valuation of ecosystem services provides some common ground for neoclassical and ecological economics.  That should be a good thing.  However, common ground can be a minefield, too.  Many a well-meaning bureaucrat and diplomat are stumbling toward the landmines.

Perhaps the two most common concerns about valuing ecosystem services are:  1)  Many ecosystem services are beyond the ability of humans to estimate the value of, much less to “price” for the market.  “Value of the ozone layer?  Priceless.”  2)  The valuing of ecosystem services begs a market, then monetization of the services such that they are viewed as commodities to be traded like hogs or hoola hoops.  For many cultures this offends the senses of dignity and harmony with the natural world.  “Would you take 40,000 hogs for the climate regulation provided by that forest over there?”

But my concern is with another problem; namely, our inattention to where the money comes from to pay for services such as water filtration, carbon sequestration, pollination, etc.  There seems to be an attitude that, if we just throw enough money at a problem, we’ll solve it.  And that is precisely the attitude that creeps in when ecological microeconomics is not complemented with a healthy dose of ecological macroeconomics.  Markets convey the idea that you can have as much as you want as long as you pay the right price; ecological macroeconomics says the total is limited and the right market price should simply ration the limited total. And if the total is not limited then it is hard for the price to be “right”.

We especially need more awareness of the trophic origins of money.  Money doesn’t grow on trees, but it does come from the ground in a very real sense.  The amount of money available for the purchasing of guns, butter, hogs or carbon sequestration originates from the agricultural and extractive surplus that frees the hands for the division of labor.

In other words, it is not the ozone layer that “generates” money for throwing at its priceless service.  Nor does the North Pole “generate” the money for ecotourists to witness it.  What generates money is activity on the ground – on the farm, in the forest, in the fishery – that gives everyone else their food, as well as the materials for their clothing and shelter.  Everyone else is then free to work in the manufacturing or service sectors.  With plenty of surplus, the economy can even support bankers, actors, and financial engineers who set up markets for trading carbon permits.  That’s the trophic structure of the human economy.

The more our farmers, loggers, and fishermen produce, the more money we’ll all have for the bank, the movies, and trading in biodiversity credits.  But of course the more we ask them to produce, the more environmental impact we’ll have.  If you insist on growing the economy and protecting the environment, eventually the bank and the theatre will be empty; your money’s going straight to the ecosystem services market.  It’s like robbing Peter to pay Paul.

Now consider the other side of the coin, so to speak.  We often hear about the investment in the Catskill Mountains watershed that provides clean water to New York City.  I’m all for it!  But it’s no example of reconciling the conflict between economic growth and environmental protection.  What do the growthers think they’re going to do in that watershed:  open hog farms and build high-rises?  No, by “investing” in that natural capital a decision was made to keep the land relatively free from intensive economic activity.  That’s not the kind of investment they like to hear about in New York City, at least not on Wall Street.

So I’ll stop short of saying, “Let’s encourage all the ecological microeconomics we can get.”  Let’s encourage some of it, while realizing that there are only so many ecological economists to go around.  Let’s encourage far more study and practice of ecological macroeconomics.  With microeconomics, let’s help to demonstrate what’s at stake when we mine an aquifer or pull up a fishery.  But more importantly, let’s not peddle those ecosystem services like they’re rubber boots.  Remember where the money comes from to pay for them: the liquidation of natural capital stocks somewhere else.  That’s ecological macroeconomics, and that leads to a steady state economy where some of those precious ecosystem services stay where they belong: out of the market.

The Trophic Theory of Money

BrianCzechWe can only hope that last week’s edition of The Daly News finds its way into the monetary policy arena, but without the cartoon.  Something is very wrong with an image of Herman Daly holding a money bag from which a tree is sprouting.  The brainy proportioning of Herman is nicely done, but the relationship between the money bag and the tree is completely backwards.

This is no mere annoyance, this tree sprouting from a money bag, but rather symbolic of one of the most serious of all the misunderstandings about sustainability.  While it may be literally true that “Money doesn’t grow on trees,” that doesn’t mean that trees grow on money!  The notion that trees grow on money has gotten us into serious trouble.

Obviously we can use money to buy, plant, and cultivate trees, and to do all kinds of other environmental work.  This truism has misled many policy makers into thinking we can solve all environmental problems by throwing more and more money at them.  This fallacious reasoning is encouraged by economists touting the so-called “Environmental Kuznets Curve.”

But let’s stick to plain language here.  Why is it a fallacy to think that we can solve our burgeoning environmental problems by spending ever more money?  Because generating ever more money is what burgeons the environmental problems to begin with!  This is where the trophic theory of money comes in.

I introduced the trophic theory in chapter 3 of Shoveling Fuel for a Runaway Train.  The theory, in a nutshell, is that the volume of real money (adjusted for inflation) in an economy is a pretty good indicator of the ecological impact of that economy.  I believe that the trophic theory of money should become the principle monetary framework in ecological economics, and am grateful that it will be presented in the second edition of the Daly and Farley textbook.

Let’s review the basics here.  In ecology, or the economy of nature, “trophic” refers to the flow of energy and nutrients.  The lowest trophic level is the producers, or plants that produce their own food in the process of photosynthesis.  Herbivorous animals eat plants, and carnivorous animals eat herbivores.  That’s the economy of nature in a nutshell.  No plants, no animals.  In other words, plants are the foundation in the economy of nature, and they must be productive enough to produce more food than needed only for their own reproduction.  There has to be surplus plant production in order for herbivores to exist and, in turn, enough herbivores to support the carnivores.

In the human economy, the producers are farmers.  Only with an agricultural surplus can there be a division of labor into manufacturing and service sectors.  There are, of course, complex nuances to trophic theory, whether applied to the economy of nature or the human economy.  I have addressed some of these nuances in the journal Conservation Biology and in our CASSE fact sheet on the Trophic Structure of the Economy.  If, for example, you’re wondering where the service providers fit in these trophic levels, I recommend the article in Conservation Biology.

Here, we’ll stick with the basics and tie this trophic theory right back to the origin of money.  By “origin,” I’m not referring to the development in the human mind of abstract exchange value, nor to the evolution of monetary instruments from wampum to legal tender.  Rather, I am referring to the agricultural and extractive surplus that frees the hands for the division of labor and makes money a meaningful concept and a useful tool of exchange.  More real money means more agricultural surplus and therefore more environmental impact.

“Real” money, as we know, means adjusted for inflation.  In the simplest of terms, inflation means rising prices, which makes your money worth less.  The problem with this simple definition is that it puts the focus on money, so monetary policy miracles are sought to fix the problem.  What gets overlooked is that the prices are of real things, real goods and services.  That’s why inflation is measured using baskets of goods and services ranging from milk to shirts to haircuts.  Even funeral expenses go into the calculation of inflation.

All of these real goods and services occupy some portion of the economic trophic structure.  Because this trophic structure as a whole can only increase with increasing agricultural and extractive surplus, an expanding real money supply represents an increasing environmental impact.  To think otherwise is to fall into the fallacious trap that “there is no conflict between growing the economy and protecting the environment.”  So the trophic theory of money helps to explain why there is a fundamental conflict between economic growth and environmental protection, and why that conflict cannot be solved by throwing evermore money at it.

The trophic theory of money also helps to explain financial and monetary crises.  The monetary authorities and banks can extend credit and expand the money supply all they want, but if the capacity of the planet to generate more real money has been exceeded, credit leads to default, and the expanded money supply becomes “unreal” or inflated.

The main thing to remember, though, is that money – real money – represents a unit of pressure on the environment.  Benjamin Franklin said, “A penny saved is a penny earned.”  Accounting for inflation, we might say, “A dollar spent is a dollar burned.”  But what does that mean, “burned?”  Let me explain by example.

I started to think about the nature of money when I was the Recreation and Wildlife Director for the San Carlos Apache Tribe in Arizona in the early 1990’s.  Apaches love to hunt deer and elk, and venison is a staple in the tribal diet.  However, the biggest elk in the world come from the San Carlos Apache Reservation, and it was part of my job to sell a few elk tags per year to the highest bidder, from wherever the bidder might be.

In 1992, I sold three elk tags for $43,000 apiece, for a total of $129,000.  The money was earmarked for elk habitat improvement.  This seemed like a real “win-win,” we helped the elk while the tribal economy grew.  Something struck me as odd about this win-win reasoning, though, given that we sold two of the tags to the owner of the largest old-growth sawmill in the Pacific Northwest.

Actually, it didn’t strike me as odd for very long.  As a trained biologist, I viewed this transaction from the perspective of trophic levels.  Our buyer of two tags was an extractive agent, operating at the foundation of the economy, and at a very, very large scale.  So large a scale that he could afford to fly down to San Carlos on a private jet to hunt elk at the price of $86,000 for the tags alone.   He injected additional quantities of money into the tribal economy by purchasing a variety of goods and services, including guiding services during the hunt.  He brought real money, straight from… you got it – the trees!

Yes, the money grew on trees, not quite literally, but really quite “really.”  The extraction of these trees generated real money, not fiat money eeking out of the fractional reserve system.  At that time in the Pacific Northwest, timber was being harvested so rapidly that the old-growth stocks were being liquidated, used up, “burned,” and replaced by second-growth forests, roads, logging facilities, tourist operations, various other economic enterprises, and housing.

So a unit of real money represents a demand on real wealth.  A real dollar spent is a real dollar burned.  The size of the real money supply is an indicator of environmental impact.  None of this is very evident, however, without the trophic theory of money.