Natural Capital by Helm
Ref: Dieter Helm (2015). Natural Capital, Valuing the Planet. Yale University Press.
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Summary
First, what would a sustainable economy look like? Second, how can natural capital be accounted for, measured and valued? Third, what policies would be required to put natural capital at the heart of the economy? And fourth, how could the prize of a large-scale river, land and marine restoration plan be designed, financed, and delivered?
Nature is often valued inversely to its abundance. In other words, the rarer the species, the greater the enjoyment we get from seeing it.
In 1990 C emissions were growing at around 1–1.5 ppm per annum. They are now growing at nearly 3 ppm annually. The 400-ppm concentration has been breached (compared with the pre-Industrial Revolution level of roughly 275 ppm), and it is very hard to see how much can be done to stop the concentrations reaching 450 ppm in the next couple of decades. Beyond that, scientists predict that the warming may be more than 2°C. Too many people and too much consumption mean we face a potentially radical change to the earth’s climate.
To many environmentalists it is obvious: there is only one earth, within which everything depends upon everything else. Humans are just a particular type of animal, and depend upon the productivity of nature for all that they do. Our very survival depends upon this set of natural ecosystems.
It is a delusion to think that we can do without natural capital (nature).
Nature provided us with lots of gas, oil, coal, iron ore, copper and a host of other minerals. We have been depleting this cornucopia like children in a sweet shop.
Are more red squirrels in mid-Wales more important than the ability of teenagers to go mountain-biking near Cardiff city centre?
We must treat the environment not as a constraint on economic activity, but as an integral part of the economy.
The rich countries have trashed their environments, used up the timber and extracted the minerals, and they have exploited the poor countries’ natural resources through the processes of trade and colonization. There has been little compensation for depleting non-natural resources, and thresholds for renewable natural capital have been frequently breached as whole ecosystems and habitats have been damaged. The rich countries have both the responsibility and the wealth to act, whereas the poor developing countries have neither. Therefore, the argument goes, let the developing countries run down their natural assets as the developed countries have done until such time as they are rich enough to be able to afford to pay for protecting them.
The loss of biodiversity and much of our natural environment may be a physical and biological process, but the solutions lie squarely in the allocation of scarce resources – in other words, with economics.
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The Commons
There is no market in air, and no price. Many renewable natural resources have been treated this way – fish stocks, forests and uncultivated land. But as human populations have grown and wealth has increased, almost all these abundant natural resources have come under pressure. Humans impact on almost all of nature now and, where there is no price, and hence no cost to the users of these natural resources, there is no incentive to conserve them. That is why they are over-exploited and, as a result, degraded. In an increasing number of cases, this over-exploitation runs up against the thresholds, and even where stocks are above or close to the threshold, they are nevertheless reduced to suboptimal levels. The result is economic inefficiency. The result, inevitably, is overgrazing and a collapse of the common. Hardin actually had in mind the whole planet and its human population, and his remedy for the commons in general, and population in particular, was some form of coercion. In the absence of prices there is a very powerful economic incentive to drive renewables below the thresholds.
Rather like early slash-and-burn agriculture, the approach to the marine environment has been to treat it as a limitless renewable natural asset and as a convenient equivalent of a landfill site.
The problem with global marine public goods is that they are the responsibility of everyone and no one.
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Institutional Collaboration
Scott Barrett has led the way in applying the insights of game theory to work out when and how international environmental agreements might work. The elements are whether the entity to be protected is easily measured; whether cheating is easily detected; whether there are straightforward ways to punish those who cheat; and whether all parties gain from the attempt to conserve stocks and hence solve the problem of the commons.
A credible and well-designed institution requires a number of conditions to be met. It must have a coherent and consistent set of objectives. They should be measurable, so that they can be monitored and managed accordingly. The organization should be open to external independent assessment. The trade-offs between objectives must have clarity at the political level rather than be left to the discretion of its board. It must have at least as many instruments as targets at its disposal. The strategy of the organization needs broad social and political support. In order to achieve its objectives, there needs to be a plan. Finally, the skill sets need to be coherent so that the management of the organization can direct its workforce in a consistent fashion.
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Anthropogenic Drivers
Population
After the peak of around 10B is reached, it is predicted that the replacement rate will have fallen sufficiently to bring on a gradual decline.
Poverty
China could have burnt very little coal in the last two decades instead of being in large measure responsible for the continued growth of emissions since 1990. But that would have meant that the growth path would have been much lower, and tens or even hundreds of millions of people would still be in poverty. These are the sorts of choices to be made.
Consumption
Assuming that consumption remains at about the same proportion of income; by 2030 the world will be consuming 2x what it does now, 4x by 2050, and 16x by 2100.
By 2050, nutritional food output is expected to double (from 2015).
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Economics
A convenient fiction is to assume that it is businesses that do the polluting rather than people like you and me. Surely the owners and managers of businesses are the ones responsible? The same kind of logic leads people to believe that companies rather than individuals should be taxed. Yet this is an illusion. Companies are owned by shareholders, who receive dividends, and they sell products to consumers at prices that reflect their costs. If the farmer is not paying for the costs of the damage to the river that the nitrate fertilizers applied to the fields are causing, then the costs of production are artificially low. The result is that the price of bread is lower too, and those who buy it – you and me – are getting away with the benefits of the pollution, without having to pay the full costs. The consumers of the bread are the ultimate beneficiaries, and hence they are really the polluters. The farmer is doing the pollution on consumers’ behalf. The shareholder might also be a polluter if the company can capture the lower costs in higher profits rather than lower prices to us the consumers. But there is little escaping the inconvenient fact that the villains are the consumers and shareholders, rather than the easy scapegoat, some large corporate entity. Strictly speaking, companies do not pollute, only consumers and shareholders do. Companies are just our agents – intermediaries doing our bidding. Politically, few want to admit this and place the blame where it properly lies: with our consumption – at least in part. All that extra consumption that will come in this century will have embedded in it more and more pollution unless consumers have to pay in full for the damage their spending will cause.
Failure to take assets seriously led us into the financial mess that we are still struggling to escape. Failure to face up to liabilities is one reason why the debt that we ignored came back to bite us. Short-term cash accounts suit the Keynesians who drive economic policy still, but it is thrift, savings, asset maintenance and investment that provide the foundations of a sustainable growth path, not deficits, money-printing and ever greater indebtedness. Environmentalists need to understand how big the gulf is between Keynesian macroeconomic management and the goals they aspire to.
Economics- Basics
Economics: The allocation of resources.
Defining the optimal allocation of resources might be considered the objective of economics. Optimal points are ones where demand and supply intersect, where the marginal costs of an additional unit of output are just equal to the marginal benefits. Since the marginal costs of a renewable are effectively zero – or where human management is involved usually close to zero – the emphasis is on the marginal benefits. The trouble is that most (but not all) renewable natural capital has no market and hence no price.
The world’s economic growth rate is currently around 3-4% per annum.
A fixed supply of resources and continuous demand growth means that demand will surpass supply. It is just a question of time.
Economics- GDP
Depleting natural assets typically leads to an increase in GDP growth.
GDP accounting not only ignores the asset side, but also encourages the building-up of liabilities – debts the next generation will be lumbered with.
North Sea oil produces a flow of income, increasing output, and that means GDP goes up. There is no countervailing balance sheet adjustment for the fact that the oil is thereby used up.
By failing to account for the deterioration of the assets, GDP paints a picture that is far too rosy. It pretends that the deterioration does not matter.
Economics- Pollution
The greater the existing pollution, the lower the marginal cost of more pollution, and hence the perverse incentive to create the initial pollution in order to reduce the subsequent taxes.
Developed countries did the damage by putting all the C in the atmosphere as they industrialized, and therefore they should bear a disproportionate burden in reducing emissions.
Consumers from developed countries are contributing to the depletion of developing countries’ non-renewables without providing for the economic rents.
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Aggregate Capital Rule
Weak Aggregate Natural Capital Rule: The aggregate level of renewable natural capital should be kept at least constant, and there should be general capital compensation for the depletion of non-renewables.
The existing stock of assets should be maintained intact.
Strong Aggregate Natural Capital Rule: The aggregate level of renewable natural capital should be kept at least constant and the value of the economic rents from the depletion of non-renewable natural capital should be invested in renewable natural capital.
National Balance Sheet: Required by the Aggregate Capital Rule to ensure sustainable growth by accounting for and maintaining the natural capital stock of assets.
We need to know what these (natural) assets at risk might be, what the critical thresholds are, identify safe limits given the uncertainty about the science, and make sure they are not crossed. And if for other reasons they are depleted beyond the critical point then serious compensation will be needed.
Someone has to decide the total carrying capacity of the commons, who should have what share of the sustainable yield, and how quotas should be enforced.
The solution requires a demarcation between science and economics, and it does require the science to identify the thresholds and assets-at-risk, and the uncertainties, and to provide an understanding of the complexity of ecosystems and the linkages between the various assets.
The practical policies necessary to implement the natural capital approach to economic policy are compensation; environmental taxes, subsidies and permits; and the provision of natural capital public goods, including protected areas, parks and nature reserves.
Sources of finance: compensation payments, pollution taxes, and the contributions from the depletion of non-renewable resources.
The answer to the financing of capital maintenance on a sustainable basis is that it will be paid for by some combination of higher taxes and lower spending, so that our standard of living will be correspondingly reduced in the short term, but increased in the medium and longer term.
It is all about improving efficiency through pricing natural capital and damage to it, ensuring that the economic rents from non-renewable depletion are shared across the generations, and in the process raising the sustainable growth rate.
The central idea is that debt is the contract between the generations, and growth pays off the debt through the greater tax revenues that richer future people will be able to pay.
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Climate Change Solutions
Economic Solutions
In the absence of sufficiently constraining social norms, there are two routes forward. The first is that experts can decide. Authorities (national parks, government departments, EPA, etc) make the choices supported by a battery of legislation, from the EU Habitats Directive to the US Endangered Species Act. The second is to use the price mechanism, either directly by setting prices or indirectly by auctioning permits.
Taxation: Encourage producers and consumers to substitute away from their polluting activities.
Tax meat to reflect the environmental consequences.
Pricing: Get the prices right, so that the ultimate polluters (typically us as consumers) face the consequences of what is done by producers on our behalf to change our behavior to reduce our environmental footprint.
Uniform Rules (EU): Science based emissions limits; a car can emit a maximum level of various chemicals, a power station can emit so much NO2 and SO2’s, and so on.
Environmental Mitigation Hierarchy: Avoid, Reduce, Moderate, Minimize, Relocate, Restore, Offset.
Learning by Taxing: Using taxes to approximate the cost of externalities.
Double Dividend: Taxing things that are ‘bad’ (pollution) while reducing taxes on things that are ‘good’ (work). Taxing work distorts the incentives to work. Reducing these taxes makes the economy more efficient as wages better reflect the value of work done. Taxing pollution is correcting failures in the market by internalizing costs, so it raises money at the same time as getting the economy to work better.
GDP Accounting: Account for depletion of non-renewables and reduce total GDP by the capital maintenance charges from the aggregate natural capital rule.
Focus on the core assets needed for the economy and society to function, and ensuring that within this core the stock of natural capital should not fall in aggregate.
Prioritize the social primary goods necessary for people to participate in society and meet their basic needs.
Efficiency over Growth: Economic growth does not have to be abandoned to improve the state of natural capital. It just has to be sustainable economic growth, not the sort of growth currently so widely promoted.
A prudent approach for developed countries might be closer to 1% economic growth.
Direct scarce resources to where the marginal benefits are greatest.
Under the EU approach, each and every river needs to meet the minimum thresholds, and this dictates that most of the resources should be directed at the most polluted ones. Yet a moment’s reflection tells us that a marginal improvement to a biologically dead river will not make much difference, while removing P and N2X from an otherwise biologically rich upstream river might make a lot of difference. The EU approach is chronically inefficient from a natural capital perspective.
Take two very different examples of pricing pollution: the marginal damage from an extra tonne of C emissions; and the marginal damage from applying another tonne of fertilizer.
It does not matter where the C is emitted. A tonne of C saved in Birmingham is the same as one saved in Chicago or in Beijing. A universal global single C tax is needed. How much damage does that extra tonne do? The answer lies in considering the C targets, and in estimating the price that would deter emissions to such an extent as to bring them within the envelope to achieve the 2°C warming limit the IPCC scientists have suggested and the associated maximum ppm of C in the atmosphere. It can be achieved by setting the total amount of emissions, and then auctioning allowances up to that limit. This is indeed what the EU Emissions Trading Scheme (EU ETS) tries to do for the European component of the total emission targets (though it turns out this is a very badly designed scheme). Or it can be achieved by setting a C tax.
Now take the fertilizer case. There is a strong and immediate difference compared with the C example. The impact of fertilizers is context-specific. Suppose they are applied along the banks of a clear chalk stream, teeming with aquatic life dependent on high levels of O in the water. The effects could be devastating. Now consider the application alongside an already heavily polluted river with little biological activity. The marginal cost in the first location is massive; in the second it is negligible since there is little left to damage. Location matters too in respect of aquifers, the intensity of other pollution, and proximity to the sea.
Land Use Solutions
Create a patchwork quilt of protected areas.
Backyard biodiversity matters alongside rainforest protection.
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Climate Skepticism
Climate Change lacks drama, crises and apocalypses, but it is the slow-burn reality that confronts us.
The absence of imminent crises is what makes climate change problems so hard to tackle within the shorter-term political context.
There is a twist to the failure of the Club of Rome and other doom-laden predictions of the end of the world: when they fail to materialize, public skepticism grows. It is already the case when it comes to climate change. Attributing every bit of extreme weather to climate change, and repeated dire warnings of floods, heatwaves and other extreme weather events, has induced a rather bored indifference since life goes on.
So far C reductions have been relatively easy to achieve – partly because C reductions are measured in production rather than consumption terms, and partly because the economy has been deindustrializing and has been subjected to a massive economic recession.
Both sides will probably hire ‘experts’ and consultants to argue their cases, and maybe lobbyists and corporate public relations advocates too. This sort of strategic informational game is typical of a wide range of pollution cases: denial on one side, exaggeration on the other.
The Fat Tail Problem (Martin Weitzman): Future temperatures may result from increased concentrations of GHGs in the atmosphere are not known with any precision. The predictions for business-as-usual vary from about 1°C warming to over 6°C. Should we treat a small probability of a catastrophe (6°C) on the same basis as a larger probability of something much smaller? Weitzman says no, the former is more important, and he is surely right.
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Misc Quotes
“The notion that in all this (social and political) noise objective science is likely to prevail in the setting of regulatory rules is fantasy.”
“In trying to turn a complex subject (climate change) into simple numbers, it is arguably damaging to the cause.”
“Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.”-Hardin.
“In the US, ethanol now accounts for a significant amount of the total agricultural land use, with 40% of corn used in ethanol production.”
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People
Thomas Malthus (1766-1834): English Economist who influenced Darwin’s Theory of Evolution. For Malthus, land was a fixed factor of production, with subsistence rising at best arithmetically, and hence population would be checked as food production could feed only so many mouths. The geometric population growth would be checked by malnutrition, disease and war – as it had been for all of human history up to then.
Elinor Ostrom (1933-2012): American Political Economist; won the Nobel Memorial Prize for Economic Science for her work on social norms as solutions to the problem of the commons.
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Resources
The Climate Change Committee: Charged with achieving the 2050 C target through a process of recommending rolling 5-yr carbon targets, always set at least three 5-yr periods ahead. Its job is to analyze and measure, and to advise Parliament on the form of these carbon budgets. Parliament can reject its recommendations, but only if it can come up with a better way of achieving the same target. Its chairman and its staff are independent. The Climate Change Committee’s credibility comes from its statutory foundations and the role of the five-year carbon budgets. The statutory basis of the target means that its aims and objectives are given and not readily open to change. It has a legal remit which it has to carry out. It has some discretion in how it goes about its tasks, but it cannot deviate from these legal constraints. The 5y budgets force it to translate the target into bite-sized chunks, and for periods which are the same length as the gap between general elections. The requirement that Parliament must vote to approve the carbon budgets cements these into the political process.
UN Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (UN REDD): Pays developing countries to avoid destruction of forests and other habitats.
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Terminology
Economic Production: The combination of natural capital with other forms of capital and labour used to produce outputs, which we consume.
Efficiency: Maximization of benefits relative to costs.
Keynesian Economics: The role of government in correcting for supply and demand imbalances is by borrowing and spending. The spending would be multiplied through the economy, and would lift output and employment so that the borrowing would be paid back through the extra output. Unemployment costs would fall, and tax revenue would go up.
Keynes publicly urged housewives to go out and spend to create demand rather than to prudently save for a rainy day: ‘O patriotic housewives, sally out tomorrow early into the street and go to the wonderful sales … You will do yourselves good … And have the added joy that you are increasing employment, adding to the wealth of your country because you are setting on foot useful activities.’
Stationary State: In the 18c & 19c, land was the fixed factor of production, and land determined – and limited – the productivity of agriculture. Agriculture determined how many people could be fed, and hence determined population. Population as labour was what produced valuable output, and capital was just embodied labour. The fact that land was fixed meant that there was a natural limit to growth.
Sustainable Development: Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainability asks how the level of consumption can be kept up into the future – how future generations can be guaranteed to be at least as well off as the present generation.
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Chronology
2011: ‘The Natural Choice’, a British government White Paper, is published setting out the overarching policy objective: to be the first generation to not only stop the decline in the natural environment, but to improve it.-Natural Capital by Helm.
11 Dec, 1997: The Kyoto Protocol (aka the UN Framework Convention on Climate Change) is signed by 192 Nations. Countries were divided into two groups- developed and developing. Developed countries should act now while developing countries should develop first and act soon.-Natural Capital by Helm.
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