Human beings are connected to nature, which is a major part of our economies and well-being. To date, our global human society has invested so little in nature that we’re having trouble preserving important resources for ourselves. One means of pursuing more beneficial outcomes for humans and the environment would be to gauge and preserve the economic value of biodiversity.
That economic policies should be evidence-based is (or perhaps should be) an incontrovertible requirement. But evidence is of no use if it’s obtained from a misleading conception of the human condition, for faulty models produce spurious evidence. Systems of thought mislead if they do not acknowledge humanity’s embeddedness in nature, when those systems are applied to project the present and future possibilities that are open to us.
Earth scientists see 1950 as the year we entered the Anthropocene. Since then, an expansion in our demand for “provisioning goods” from nature (food, water, timber, fibers, pharmaceuticals, and nonliving materials—the ingredients that, with human effort, shape the final products reflected in GDP) has eaten into our ability to derive “maintenance and regulating services” from nature, such as carbon sequestration, nutrient recycling, decomposition of waste, pollination, nitrogen fixing, soil regeneration, purification of water, and maintenance of the biosphere’s gaseous composition.
A tension exists between the global demand for the biosphere’s provisioning goods and the human need for maintenance and regulating services. That tension is apparent when humans engage in the mining, quarrying, and broader land use changes that accompany expansions of crop agriculture, livestock farming, plantations, and construction. The biosphere is not exactly a house of cards, but we humans are now so ingenuous that we would be able to reduce it to one if we put our minds to it.
For many years, research in environmental and resource economics has demonstrated that the practice of detaching the human economy from the biosphere in contemporary economics can cause harm. Perhaps we can reconstruct contemporary economics to produce more positive outcomes. In that case, we will have to study our embeddedness in nature at all levels: the individual person, households, communities, nations, regions, and the global economy. The latter is where growth and development economics of the long run are fashioned, so a reconstruction also would refashion macroeconomic models of the long run.
Meanwhile, mathematical formulations of the economics of climate change have viewed the climate system in isolation from the biosphere’s other systems. The models graft an isolated climate system into contemporary models of growth and distribution, which interpret the human economy as being external to the biosphere—an abiding weakness of the models. This disconnect between humans and the biosphere is the reason that early estimates of the global cost of carbon were so low as to be unbelievable at $10–$20 per ton. Dramatic increases in the estimates of the global cost of carbon in recent years—$185 or more per ton, based on recent research from Resources for the Future (RFF)—indicate the recognition that, among other impacts, extreme climate events can be expected to occur more frequently with rising carbon dioxide concentrations in the atmosphere.
Credit: James Round
Biodiversity is a characteristic of ecosystems. Depending on how it gets defined—for example, by emphasizing the functional diversity of ecosystems as opposed to species diversity—biodiversity has been found to enhance the ability of ecosystems to supply maintenance and regulating services. Biodiversity can facilitate services by, for instance, increasing the resilience of ecosystems to disturbances. This line of thinking is an application of capital theory, such that the biosphere is taken to be an asset in which the human economy is embedded.
Well-intentioned though they are, the United Nations’ Sustainable Development Goals were framed with little attention to the economics of biodiversity. We call the gap between the demand by humanity on maintenance and regulating services, and the biosphere’s ability to meet that demand on a sustainable basis, the “impact inequality.” The aggregate demand for nature’s services would be called the “global ecological footprint,” the sum total of individual footprints. The impact inequality is a snapshot of the global socio-ecological system. It is an accounting statement on the state of Earth’s ecosystems at a moment in time. One estimate of the ratio of our global ecological footprint to the biosphere’s capacity for meeting that demand on a sustainable basis, necessarily crude though it is, stands at 1.7, meaning that we need 1.7 Earths to sustain our current aggregate demand.
Other things equal, increases in the efficiency of maintenance and regulating services would reduce the ecological footprint. The received economics of climate change has focused on technological change and pricing carbon emissions as the means for increasing this efficiency. This strategy accompanies the belief that even a moderate annual investment in the transition to clean energy (say, 2 percent of GDP; see also the recap of RFF’s recent Net-Zero Economy Summit from this issue of the magazine) can achieve net-zero emissions by 2050 and enable the global economy to enjoy growth in GDP indefinitely.
But this optimistic view may be a misplaced reading of the biosphere’s workings. Because of the complementarities among nature’s services, a reliance on energy pricing and the development of clean energy technologies to overcome our ecological overshoot could be expected to backfire; we should be looking for ecological solutions, as well. Raising the biosphere’s stock and the net regenerative rate by allowing nature to grow constitutes an investment in nature. Such investment does not so much involve machinery and hardware as it involves simply waiting; that is, waiting for nature to recover.
Accounting for Natural Capital
Inclusive wealth increasingly serves as an appropriate measure of economic well-being. An economy’s inclusive wealth reflects the social value of its stocks of produced capital (roads, ports, buildings, machines), human capital (health, education), and natural capital (ecosystems, minerals, and fossil fuels). While GDP is useful for short-run macroeconomics management, we can consider the utility of creating a parallel system of capital accounts, akin to a firm’s balance sheet, for judging economic performance.
Inclusive wealth is a good measure with which to conduct both sustainability assessments and policy analysis. Inclusive wealth increases over time if and only if well-being across generations increases over time; inclusive wealth and well-being across generations are two sides of the same coin. A nation’s inclusive wealth would increase over a period if aggregate consumption in the period is less than net domestic product (i.e., GDP minus the depreciation of capital assets). Thus, we have a criterion for sustainability that can be based on flow accounts. National statistical offices in an increasing number of countries are creating natural capital accounts—not as a substitute for national income accounts, but rather as a complement (as recently announced in the United States).
However, accounting prices of natural capital are often deeply contentious, and the stocks frequently are hard to measure. Often, the best we can do is create natural capital accounts that offer qualitative descriptions of their state; for example, whether the health of an ecosystem has improved or deteriorated over the previous year (Figure 1).
Figure 1. Global Capital Stocks per Capita from 1992 to 2014
Data source: Managi and Kumar (2018)
Some forms of natural capital are not owned by anyone, such as the atmosphere and the open oceans. But if agents in an economy have free access to these assets, then the assets should be noted in inclusive wealth. For example, the accounting price of a global public good such as the atmosphere as a sink for our carbon emissions (e.g., the subtraction of $185 per ton of carbon emitted) is the sum of the accounting prices of the asset enjoyed by each nation.
Managing Ecosystem Risks and Investments
Imagine a chain of supermarkets that’s so inefficient at their check-out counters that customers take home most of the goods they want without paying for them. Pilfering enables people to enjoy a high standard of living, but the benefits are bound to be short-lived, as the supermarket chain is guaranteed to go bankrupt. Globally, we don’t pay for the vast quantities of maintenance and regulating services that we use, which means that the current high standard of living in rich countries comes at the expense of future living standards. We can outline three examples of why our use of the biosphere amounts to pilfering from nature.
- Environmental Subsidies
The aggregate subsidy that humanity pays itself to “mine” nature (e.g., energy subsidies) is on the order of $4 trillion–$6 trillion annually, or some 5–7 percent of global GDP. That value amounts to a negative price for nature and creates an enormous pressure on the world’s ecosystems. The subsidies provide us with a strong incentive to plunder the biosphere, rather than preserve it. - Global Commons
We don’t pay for such global public goods as the open seas and tropical rainforests. The oceans represent an open-access resource (beyond exclusive economic zones) and suffer from the “tragedy of the commons.” Rainforests are located within national jurisdictions; hence, national incentives to conserve them are less than the global incentive. - Trade and Wealth Transfers
It is not an accident that the bulk of the world’s biodiversity is in the tropics and that most of the world’s poorest people live there. Principal exports from those regions are primary products, and their extraction from mines, plantations, wetlands, coastal waters, or forests inflicts adverse externalities on local inhabitants. The externalities are not reflected in export prices. Thus, local ecosystems are overexploited, which amounts to a transfer of wealth from the exporting country to the importing country—that is, from a poor country to a rich country.
Credit: aquapix / Shutterstock
Policy implications arise from these three examples that are drawn from the contemporary economic world. Few attempts have been made to assess quantitatively the effect on our consumption patterns if the subsidies were removed, perhaps because the implications of the first example are obvious enough. On the one hand, an immediate effect would be an increase in commodity prices and therefore lower disposable incomes; on the other hand, reduced taxation would mean an increase in our disposable incomes. The key point is that removing the subsidies would lead to consumption moving away from nature-intensive goods.
The oceans have received far less attention among national and international decisionmakers than the atmosphere as a sink for our carbon emissions. But the seas are vital for our existence. The second example points to the need for an institutional mechanism that incentivizes a reduction in the stress that we inflict on the oceans by commodity transportation, cruises, fishing, and pollutants from land. The standard tools of public economics are regulations (e.g., quantity restrictions) and taxes. The former are enshrined in such policies as protected zones. A benefit of such regulatory policies is that they can be reached by international agreements without the need for an agency to implement them. But such policies have downsides; for example, the benefits from rents imposed for the use of oceans would be enjoyed by users, rather than by the public.
Taxation of public goods has the merit that the rents themselves would, in principle, accrue to us all, though implementing this kind of a tax would require an international agency. The establishment of an agency with the remit to monitor and charge for the use of the high seas by, for example, taxing ocean transportation, deep-sea fishing, or the refuse that is deposited into them by nations, could be possible. Such a solution could raise billions of dollars annually, given that $1 trillion or more of merchandise is shipped across the oceans each year.
Incentives are necessary to motivate importing firms to protect ecosystems that are upstream in their supply chains—not insurance against the collapse of these ecosystems.
Another benefit of taxation is that the rents so collected could be used in part to pay nations to conserve the oceans or tropical rainforests in their jurisdiction. Currently, the rest of the world complains about the continual destruction of what remains of the world’s rainforests, but little is done about it. Payment for ecosystem services is becoming familiar within nations, and such a payment system could be extended internationally.
The third example of trade and wealth transfers tells us that the global South collectively should impose export taxes on primary products. This strategy would ease pressure on local ecosystems and could serve as a source of income for the exporting nations. Individually, exporting nations would not impose taxes for fear of losing markets, and the global South faces this familiar prisoner’s dilemma over the export of primary products. If climate negotiations are taken as illustrative, African nations would find it hard to reach collective agreements.
Although exports of primary products involve wealth transfers from exporting to importing countries, the influx of wealth is not an unalloyed benefit for importing countries. That’s because the transfers carry risks for importing companies. Directors of investment companies and financial institutions consistently raise concerns over the financial risks for investors due to ecological overshoot. Formal models connect risks for importing firms to the risks of ecological collapse in the countries that export primary products. Insuring against such risks in the marketplace is not a viable option: Not only must we contend with the moral hazard along extensive supply chains, but the risks also are positively correlated (e.g., if a wetland is damaged, pollination suffers in neighboring farms).
Incentives are necessary to motivate importing firms to protect ecosystems that are upstream in their supply chains—not insurance against the collapse of these ecosystems. Investment in nature would be a highly effective form of insurance. Investment in the sources of primary products makes business sense, if for no other reason than that firms would enhance their reputation among investors. Maintaining the integrity of ecosystems in supply chains is sound business practice for companies.
Credit: Favious / Shutterstock
How does the risk of ecosystem collapse at the top end of the supply chain of a company translate into the company’s risks? We’ve studied that, by deriving the adjustment that firms should make to the value they attribute to ecosystem services. Suppose a supply source (e.g., a wetland) yields a benefit to a firm. Because ecosystems are being degraded everywhere, the firm fears that the source will collapse at an uncertain, or random, date. This example, albeit stylized, has a general message: the risk of ecological collapse translates into a risk factor on an ecosystem’s value.
An extension of the model that’s worth considering involves abandoning the assumption that the benefits provided by the supply source are constant. With the world’s rainforests being razed to the ground to make way for cattle ranches, plantations, and mines, we would expect the benefits to increase over time relative to our assumed income.
But a company that makes a unilateral move toward ecological stewardship faces risks if consumers are not ecologically minded: first movers don’t necessarily have an advantage. How strongly investors and consumers feel about ethical practices matters. One option could be for companies to collectively disclose conditions in their supply chains. A way to do that could be to lobby the government to make disclosure mandatory. Decisionmakers could estimate the accounting price of an asset that is expected to suffer collapse at an unknown date in the future. This estimation would be the first step in translating ecological risks into business risks.
Demographic Pressure on Natural Capital
A nation’s demographic structure once was taken to be an essential factor in development options for the United Nations. But demography considerations tend to be absent from environmental and development thinking, in what seems to be a recent phenomenon. For instance, demography has been left out of sustainable development strategies, as reflected in the practice of major global economic players allocating less than 1 percent of their aid budget to family planning and reproductive health. In its budget for 2021, the UK government reduced its already meager allocation to family planning by 85 percent.
The world population in 1950 was 2.5 billion. Today, 8 billion people live on the planet. Population projections by the United Nations Population Division predict that global population in 2100 will be 10.2 billion (Figure 2).
Figure 2. Regional Population Projections from 1950 to 2100
Data source: United Nations Population Division (2019)
Some forms of natural capital are not owned by anyone, such as the atmosphere and the open oceans. But if agents in an economy have free access to these assets, then the assets should be noted in inclusive wealth. For example, the accounting price of a global public good such as the atmosphere as a sink for our carbon emissions (e.g., the subtraction of $185 per ton of carbon emitted) is the sum of the accounting prices of the asset enjoyed by each nation.
Is that population size likely to be supportable at a comfortable standard of living on a sustainable basis? Work that I published this year with Aisha Dasgupta and Scott Barett showed that a sustainable global population is approximately 3.2 billion, which was the global population in the early 1960s. Hence, the current impact inequality is substantial.
Reducing population size can reduce the pressure that a population inflicts on its local ecosystems. However, a common assertion is that the source of humanity’s overreach is not the size of global population, but rather consumption in the global North. The truth is that both high consumption in rich countries and human population size are important parts of the reason for our ecological overshoot. Global population numbers, regional population numbers, and family planning services all have salience in addressing the problems of climate change and biodiversity loss.
Conclusions
Human beings are connected to nature, which is a major part of our economies and well-being, now and in the future. Economists would do well to acknowledge this fact officially and explicitly. To date, models of economic growth have the shortcoming of interpreting the human economy as separate from global ecology—but we have the means to assess services from nature, our consumption of those services, and the regeneration of those resources. By acknowledging these interconnections explicitly, stakeholders can better assess and manage risk, policymakers can govern and distribute resources, societies can sustain their needs, and humans can cultivate the type of biodiversity and healthy ecosystems that are necessary for a healthy planet.
A version of this article appeared in print in the Spring 2023 issue of Resources magazine.
