When Economists and Ecologists cooperate

*Some argue that William Bruce Cameron is to be credited for this quote

Return on Investment (ROI) measures the profitability of an investment. Simple, right?

Well not quite.

“Keep in mind that the calculation for return on investment and, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. […]This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user’s purposes.” [1]

When firms in the resource development industry are in the planning phase of any project, they conduct a feasibility study that essentially indicates whether the project will be viable, profitable and realizable. These studies often include complex external factors such as: probability of natural disasters, fluctuations in market value of the commodity being developed, stability of local governments, etc. Rarely, if ever, do these external factors include a project’s impacts on the services of ecological systems, natural capital stocks and/or ecological infrastructure integrated in the particular environment.

“Ecosystem goods and services represent the benefits human populations derive, directly or indirectly, from ecosystem functions. For simplicity, we will refer to ecosystem goods and services together as ecosystem services. […] Capital stock takes different identifiable forms, most notably in physical forms including natural capital, such as trees, minerals, ecosystems, the atmosphere and so on” (Costanza et al., 1997, p. 253-254)

Examples of ecosystem services include: pollination, nutrient cycling, climate regulation, water regulation, etc.

Costanza et al.’s seminal article titled “The value of the world’s ecosystem services and natural capital” attempted to put a dollar amount (in 1997) to the ecosystem services and the natural capital stocks of the world. Through previously published studies and some original calculations, the authors valued the entire biosphere in the range of US$16-54 trillion per year. To put this in perspective, the global gross national product in 1997 was around US$ 18 trillion [2]. With these bold results, the authors opened a forum for debate on the accuracy and merits of their calculations[3][4].

How to account for the value of ecosystem services?

In the TED talk brought to my attention in my colleague’s blog post, Pavan Sukhdev argues

“You can’t really have a proper model for development if at the same time you are destroying or allowing the degradation of the very asset, the most important asset which is your development asset that is ecological infrastructure”

Responding to the innovative calculations put forth by Costanza et al., organizations have begun to coalesce around the monetary assessment of “nature’s goods and services”. Mr. Sukhdev has been at the forefront of this movement by contributing to the UNEP’s Green Economy Initiative as well as taking on a leadership role with The Economics of Ecosystems & Biodiversity (TEEB). TEEB is a global initiative that draws attention to the economic benefits of biodiversity and attempts to quantify the economic invisibility of nature.

The following is a video of M. Sukhdev discussing TEEB

Being led by the World Bank, Wealth Accounting and the Valuation of Ecosystem Services (WAVES) is another initiative that is implementing the idea of Natural Capital Accounting in partnership with the UNEP, UNDP and several other organizations. This global partnership is helping countries in the developing world to more accurately calculate a GDP that uncovers the cost of impacts to the ecosystem services and natural capital stocks that intense development brings.

Implications with Environmental Impact Assessment

As momentum builds surrounding the valuation of ecosystem service, Michael Cortese and I argue that ecosystem services and natural capital should be fundamentally incorporated into the EIA process. By doing so, it would demonstrate to decision makers a more accurate representation of the currently unaccounted for negative economic impacts to ecosystem services.

If private firms are not held accountable for their impacts on ecosystem services, then there is no incentive for a company to calculate this externality into their feasibility study. If the actual “value” or “cost” of an impact to an ecosystem service could be calculated and included into an EA, the true economic benefits for that project would be revealed. We argue that this could drastically influence the ROI of any proposed project and have enormous impacts on the feasibility of the project.

This blog post was inspired by a podcast called “Worth” by Radiolab that a friend insisted I listen to . It turns out that the guest speaker was Robert Costanza.

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References:

[1]  http://www.investopedia.com/terms/r/returnoninvestment.asp

[2]  Costanza, R. et al. (1997) The value of the world’s ecosystem services and natural capital. Ecological Economics, Vol 25(1), p. 3-15

[3]  Toman, M. (1997) Why not to calculate the value of the world’s ecosystem services and natural capital. Ecological Economics, Vol 25(1), p. 57-60

[4]  Hornborg, A. (1997) Towards an ecological theory of unequal exchange: articulating world system theory and ecological economics, Ecological Economics, Vol 25(1), p. 127-136