In putting a price tag on endangered species and degraded ecosystems, ecologists and economists have joined forces to formulate a new rationale for environmental issues:
restoring natural capital
© Erich Schlegel/Dallas Morning News/Corbis
Ecological restoration is expensive. The United States government is slated to spend almost $8 billion restoring parts of the Florida Everglades as wetlands between 2000 and 2030. The Army Corps of Engineers had a plan to spend $14 billion to restore New Orleans' barrier islands before Hurricane Katrina arrived. On a smaller scale, South Africa, whose gross domestic product (GDP) is 4% that of the United States, is spending $450 million to restore native vegetation and increase water supply.
Can countries afford to spend such sums on ecological restoration? A new school of economists and ecologists answers with another question: Can the world's economies afford not to? Consider New Orleans: Ecological engineer William J. Mitsch1 claims that restoring Louisiana's wetlands would have saved a massive bill for rebuilding New Orleans. The $14 billion cost of restoring barrier islands pales in comparison to the $100 billion it is now thought reconstructing the city will cost, says Geoffry Heal, a business school economist at Columbia University.
Other examples include the 2004 Asian tsunami. "Where the mangrove forests were still intact, the wave's impact on infrastructure was significantly less. Where the mangroves had been removed, infrastructure was swept away," says James Blignaut, an ecological economist at the University of Pretoria, South Africa. Southern Africa's food production is at serious risk, because topsoil has been eroding after failure to restore indigenous vegetation.
This new way of thinking - known as restoration of natural capital (RNC) - attempts to put a price tag on restoration projects, and even on the costs of restoring particular species, and then contrasts that with the cost of man-made substitutes. That allows officials to see that such restoration of natural ecosystems can prove far more cost-effective in the long term, and even in the short term. Blignaut's summary is a paraphrase of E.F. Schumacher: "Economics as if ecology mattered, ecology as if people mattered."
The issues raised by the RNC boil down to four interrelated questions: How is natural capital defined? Should we assume that we will always find man-made substitutes for all its functions? How do we put a dollar value on its various forms? And what are the resultant policy implications for economic growth, population growth, and development?
Advocates of RNC use the language of economics rather than conservational ("green") rhetoric to make their case. "Any economist will tell you: 'If you don't invest in your capital stock, you are going backwards, my friend,'" says Blignaut, who is one of the editors of a book on RNC due out next year. "And ecologists will say the same. So RNC provides a common platform for the two disciplines, because the terms underpinning the concept are familiar to all of us."
The RNC analysis doesn't always work, of course, and "depends on the specific problem," says Stanford University economist and Nobel laureate Kenneth Arrow. "The benefits sometimes exceed the costs and sometimes fall short."
VALUES, BIG AND SMALL
Florida's Comprehensive Everglades Restoration Plan is budgeted to cost $7.8 billion and will require 30 years to complete from the year 2000. Operating costs thereafter are estimated at $182 million per year. University of Florida studies supervised by Mark Brown in 2000, using energy evaluation methods, projected a gain in overall economic productivity of $10.3 million annually, just on the comfortable side of breaking even. But this evaluation does not include the potential gains from reduced flooding, nor the CERP's less quantifiable environmental benefits - restoration of a unique ecosystem, and increased biodiversity, including the recovery of rare species like the wood stork (Mycteria americana) and snail kite (Rostrhamus socialbilis)2 "The Everglades will be a good test of whether we know enough to guide investment in the restoration of natural capital," says Heal.
COURTESY OF M. POWELL
Such projects needn't be immense. In the Annestown/Dunhill valley in Ireland's County Waterford, 13 farmers and the County Council are using a series of entirely new wetlands to treat wastewater. In a nearby watershed, the Kilmeaden cheese factory pumps some 250,000 gallons per day through similarly constructed wetlands that filter the effluent. Project management estimates that a conventional treatment plant would have cost many times more than building the wetland, and that operation costs are 10% of those incurred by artificial methods. Value is added through the creation of new habitat for wildlife, including the return of sea trout to the Annestown/Dunhill stream after a century's absence. That in turn brings added economic benefits from tourism.
From Waterford to South Africa and beyond, the science of restoration has advanced significantly in recent years, and it is more feasible than is generally realized to repair damaged ecosystems (see Working for Water and How Much Does It Cost). Restoration of wetlands, and the reforestation of sites denuded by mining, for example, have become commonplace in public policy in the United States, Europe, and even in parts of the developing world. So while the RNC lobbyists warn of drastic consequences from natural capital depletion, they are not doomsayers. "Look, it is possible to actually augment the stocks of natural capital in many cases," argues James Aronson, an American ecologist and one of Blignaut's coauthors.
Nevertheless, how would one put a dollar figure on the benefits of these projects? Such valuation remains contentious and is only in its infancy. For example, a group of South African scientists estimated the economic value of terrestrial and marine biodiversity in the Cape Floral Region at $1,430 billion per annum in 2002.5 This estimate included elements as diverse as fishing, the contribution of bees to fruit production, and tourism. It also included less tangible items such as "existence value," based on contingent valuation studies, a method using surveys of public preferences that some mainstream economists dismiss as far too subjective to be meaningful.
Estimating the costs of ecosystem services is particularly tricky, because the value of a service would rise steeply as it approached the point where it would no longer be available. Ecology theory predicts that degraded and damaged ecosystems reach a point where they flip, undergoing radical transformations in their functions; this situation generally refers to a catastrophe. The issue is especially evident in the debate about climate change, but there is no consensus on a method of predicting the point at which these flips may occur.
Economists generally agree that fossil fuels, soil, and water are assets (some renewable, some not) with which nature supplies "goods" to all human economies. It is beyond this common ground that some RNC theorists part company with mainstream economics, as RNC theorists want to include "ecosystem services." The issues then become "wickedly complex," say ecological economists Joshua Farley and Herman Daly.
The most famous (or notorious) attempt to put a price on natural capital was a controversial but much-cited 1997 paper in Nature by Robert Costanza and colleagues6 that gave a value of $33 trillion as a "minimum estimate" for the planet's annual services, almost twice the gross national product of the global human economy at the time. Its methodology has been rejected, even ridiculed, by many economists, but others see it as a "heroic" if flawed exercise, which has at least drawn attention to a black hole in economic thinking.
Costanza insists today that the significant point to emerge from this debate is that the resolution of almost all of these problems would revise values upward. "Work is progressing on valuing ecosystem services," he says, "and the more we learn about the complex ways that ecosystems support human well-being, the more valuable we recognize them to be."
RNC advocates argue that whatever valuation methods may ultimately be chosen, it seems extraordinary that, in national accounting systems such as GDP, natural capital and its services are not valued at all, even in their most obvious form as natural resources. Heal points out that private companies must follow much more rigorous standards: "British Petroleum's annual financial records include a charge against depletion of oil reserves. Countries are not required to do this, which means that GDP can be grossly overstated. Apply this rule to Saudi Arabia, and its GDP would be slashed by 90%."
The World Bank has made some progress in this direction,7 but the lack of generally accepted criteria, and especially of data, makes the task difficult. "Failure to account for natural capital has serious implications for how we plot our economic and ecological futures," says Princeton University ecologist Simon Levin. "It's not surprising that I should say that, as an ecologist. What is more surprising is to hear leading economists like Kenneth Arrow say so."
THE FIELD TAKES SHAPE
Levin and Arrow are currently part of a group of economists and ecologists, sponsored by the Beijer Institute of Ecological Economics in Stockholm, who are working on this issue. The group reads like a Who's Who of heavyweights in both disciplines: Gretchen Daily, Paul Ehrlich, and Larry Goulder (all of Stanford), Partha Dasgupta (University of Cambridge), Karl-Göran Mäler (Beijer Institute), and Tasos Xepapadeas (University of Crete). "We are trying to map out systematically, theoretically, and empirically how key factors will interact to determine whether we can maintain living standards," says Goulder. "The factors are rates of population growth, rates of technological change, and substitutability of natural capital." He concedes that "there are big uncertainties in all these areas," but he says he hopes they will come up with preliminary guidelines as to how natural capital could be included in national accounting.
Heal and his Columbia colleagues, Glenn-Marie Lange and Jeffrey Sachs, are involved in similar research that the Global Environmental Facility of the World Bank sponsors. Heal stresses that GDP measurements, widely accepted today, were regarded as "impossibly difficult to achieve" when they were first mooted in the 1940s. He says agreeing on national accounting measures for natural capital will be "enormously difficult," and implementing them will be "enormously costly." But he thinks it can be done.
"This now controversial issue of green accounting will in the future seem much less so," says Larry Goulder. "It will seem normal."
Many consumers have a more pressing concern. Green accounting, with even a modest degree of recognition for the use of natural capital, could have a critical impact on a consumer lifestyle to which the developed world has become accustomed, and the developing world aspires. Goulder reasons: "The answer depends in part on the degree of substitutability between natural capital and other types of capital. It also depends on the rate of technological progress. If the degree of substitution is relatively small, or the rate of technological progress is relatively low compared to the rate of population growth, then it will not be possible to maintain real living standards per person with a continually growing population. Given the uncertainties about degrees of substitution and technological change, it seems prudent to work toward stabilizing human population size."
"We are not antigrowth," says Aronson, "but we want growth to change direction." However, he stresses sustainable development rather than growth. Presenting RNC as a development strategy gives it appeal in developing countries, where scarcity often makes the classic ecological arguments seem like a luxury.
Still, not all ecologists accept the entire RNC model: "I don't take for granted that the bottom line is the prime motivator for people on ecological issues," says Bill Jordan III, one of the founding fathers of the ecological restoration movement in the United States.
"The distinction between restoration of whole ecosystems, including all their features (species, processes, etc.) for their own sake, and restoration of elements or features selected for ulterior reasons, whether these are economic, aesthetic, or whatever, is of immense importance," says Jordan, "Nothing less than the future of classic landscapes and the noneconomic species that make them up - that is, the large majority of species - depends on it."
FAULT LINES REMAIN
All is not peace and harmony in the new convergence of ecologists and economists. Blignaut sees a "fundamental paradigm difference" between ecological economists, among whom he counts himself, and environmental economists. Ecological economists stress that the depletion of natural capital has already reached critical thresholds. Stocks must therefore be preserved, and, where possible, restored, as an urgent priority.
Environmental economists, he says, have "an unwavering faith in the neoclassical economic dogma that the market and technology will provide man-made substitutes for natural capital. This is not the case. Natural capital does things, absolutely essential things, which man-made capital cannot do."
This question of substitutability is a major bone of contention. Mainstream economists have strong historic precedents on their side. As humankind depleted stocks of wood as sources of energy and heat, we learned to use coal, then gas and oil, then nuclear energy. But Blignaut, Aronson, and their South African coauthor, Sue Milton, argue that many forms of natural capital are reaching a critical threshold, beyond which they cannot be restored.
However, Goulder says the argument is about data, not economic paradigms. "Very few economists of any stripe," he says, "are wedded to the idea of perfect substitutability. The disagreement is about the level of substitutability." He agrees that, as the level of natural capital erodes to a critical point, substitution becomes more difficult and eventually impossible. The problem, he says, is to determine how close we are to that point.
Foretelling the future is difficult: Ehrlich's 1981 prediction that half of Earth's species would be lost by the year 2000 now looks more than a little hyperbolic. Still, Farley advises applying a precautionary principle: "We should not be standing at the edge of the precipice; we should be moving back from it."
The precautionary principle is a double-edged sword, says Levin. "Ecologists say we don't know what is going to happen, and therefore we must restrain growth. Economists say we must not endanger a healthy economy because of a hypothetical ecological risk."
There is consensus, however, that a shift will occur towards RNC thinking. "That is a very apt strategy, it is laudable, and it is already having an effect," says Goulder. "This now controversial issue of green accounting will in the future seem much less so. It will seem normal."
1. W.J. Mitsch, "Applying science to the conservation and restoration of the world's wetlands," Water Sci Technol, 51:13-26, 2005; see also M. Lafferty, "Ohio scientist, others, call for big changes to New Orleans Land," Columbus Dispatch, Sept. 10, 2005.
3. G. Daily, ed., Nature's Services: Societal Dependence on Natural Ecosystems, Washington, DC: Island Press, 1997, p. 3.
4. J. Turpie et al., "Economic value of terrestrial and marine biodiversity in the Cape Floristic Region: implications for defining effective and socially optimal conservation strategies," Biol Conserv, 112:233-51, 2003.
5. R. Costanza et al., "The value of the world's ecosystem services and natural capital," Nature, 387:253-60, May 15, 1997.
6. "Where is the wealth of nations?" Washington, DC: World Bank, Dec. 6, 2005.
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