Ecosystem Services: What is the Environment really worth?

Robert Pollard

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Ecosystem services value things the environment provides us that contribute to our well-being. Source: DEFRA.

In the 21^st Century, commodities and services are not free. You expect to pay for almost everything, whether it be a product or a service. Assigning monetary values to things is what makes our economy tick, and the total assets of each industry sector are in themselves trillions of dollars. However, infrastructure, materials, financials, government agencies, technology and all other sectors we value are underpinned by one thing – the environment.

The environment we live in, and the ecosystems in particular, are fundamentally responsible for all the products and services we hold dear. Anecdotally this relationship has been acknowledged for years, but unfortunately a non-fiscal association never translates onto the balance sheet, and therefore governments, corporations, and individuals have been degrading ecosystems with little consideration of the financial implications for decades. However, more recently we have seen a movement towards quantitatively analysing the global stock of ecosystems, the flow of services they provide, and what this means for our bank accounts.

Valuation

In 2000 the then UN Secretary General Kofi Annan called for the first global assessment of the state of our ecosystems, and how human activity has been impacting them. The Millennium Ecosystem Assessment (MA) began in 2001, and found that in the last 50 years humans have changed ecosystems more rapidly and extensively than in any other period of time in human history. For one of the first times, ecosystems were seen as a financial asset, and discussed in terminology which speaks to accountants, bankers, and investors directly. The MA conducted a global audit of the state of 24 defined ecosystem services, and determined that 60% of these are being degraded through non-linear depletion of the earth’s natural capital.  

The subsequent UK National Ecosystem Assessment in 2006, analysed the ecosystem stocks and quantified the value of their services within the UK. Ecosystem services operate at numerous levels and so the valuations reflect this. Local associations exist, such as the preservation of a river floodplain to reduce flood intensity during high rain (clearly the value of this went unnoticed by some local councils – as parts of the UK experienced severe urban flooding last week). As do more regional/global relationships, for example how a rainforest in the Amazon can be responsible for a carbon sequestration effect which regulates the global level of CO₂ in the atmosphere, keeping us from exacerbating global warming even further. 

Pros and Cons

Allowing the environment to take on a monetary worth is however, widely debated mainly in the realm of the associated risks. You open up an already exploited system to market opportunities, potential trade of ecosystems, and just a general commoditisation. On the other hand, monetising the service of an ecosystem means any degradation needs remuneration, and this opens the environment up to the realms of cost-benefit analysis by governing bodies. Let me illustrate this with a few examples.

The enterprise of shrimp farming in the waterlogged mangrove forests of South East Asia has grown exponentially over the past 20 years. More traditional shrimp ponds are a few hectares in size but shrimp farms can be in their thousands of hectares. The growth of this industry has brought considerable wealth both to coastal regions and the governments, who are happy to subsidise production. The problem is, in order to create these farms vast areas of mangrove trees must be cut down, obviously destroying a wide range of tropical habitats. Now, to an ordinary capitalist government, the degradation of an ecosystem such as this, as long as largely unopposed, is of little concern as long as it’s bringing in some money. 

However, in many parts of Asia, the now levelled mangrove trees served another purpose; wave attenuation. Now that huge areas of trees were missing, tidal damage to coastal towns was inevitable. So seeing as governments can’t just allow the homes of voters to be destroyed, they have to construct tidal walls and wave barriers, and remunerate the victims, all at significant costs. In Thailand it is estimated that shrimp farming generates approximately US$200 per hectare, whereas the intact Mangrove ecosystems were valued at anywhere between US$1,000 and $36,000. The cost of building the walls is more than the value generated from shrimps. Money speaks to governments, and it is this realisation that has saved large areas of Mangrove forest.

Issues do arise around the accuracy of valuations, exemplified in the large range in Mangrove cost given above. There still does not yet exist a universal, uniform unit of measurement. The definability of service scale has also been questioned in that a forest which is valued locally for its effect on precipitation runoff may be world-renowned for its scenic value. How do you combine two valuations which only exist relatively to the parties involved.

Nonetheless, the utility of ecosystem services valuation is now widely recognised, and has led to the birth of payments for ecosystem services. For example, Denmark now reduces nitrogen emissions to its coastal waters by paying landowners to (re)generate nitrogen-binding wetlands to reduce agricultural leaching. Approximately 2,500 hectares of new wetland were established between 2005 and 2009, which prevented over 280 tonnes of nitrogen per annum reaching the ocean.

The logistics of ecosystem service valuations restrict its expansion and this remains in need of address, but ideologically the system could largely bolster many national accounts, while sneakily protecting the environment. Most recently, research has revealed the potential for treating ecosystems as value-generating assets, and leveraging them to raise funds which help local communities develop. This would provide uniformity in value of diverse ecosystems which provide a singular service, using a capital market instrument. Corporate profit maximisation can thereby actually be achieved through the internalisation of negative externalities. Externalities are the third party effects arising from business activity, and include things such as ecosystem degradation. Destroying the environment often causes a market failure if the social effects are not properly reflected in price. Thankfully, by assigning the true cost of bulldozing the ecosystem, it becomes correctly accounted for in the price of goods we get from it. Each market then has to consider environmental impact – it affects company profit.

Deepwater’s Legacy in the Gulf after nearly two years on…

Tamsin Lee-Smith

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An Oil Sheen in the Gulf of Mexico - Derek Hingle/Bloomberg News New York Times

For the worst environmental catastrophe in human history, the legacy of the Deepwater Horizon spillage was inevitably going to be controversial. The event is said to divide people into two categories: those who can’t forget, and those who refuse to remember.

Those who do wish to remember are relegated into ranks of environmental campaigners and the more persistent variety of Gulf coast residents, who complain their livelihoods are irrevocably worse-off.

Meanwhile those who don’t wish to hold on to the consequences of the disaster are usually assumed to be Republicans, deeply unsatisfied by lowered levels of drilling during Obama’s Presidency.

But two years later it is possible to observe an osmosis which is blending these divisions both for better and for worse.

What exactly is there to remember?

The crisis began on April 2010 when a geyser erupted onto and above Deepwater’s rig, 240 feet up into the air.  A combination of mud, methane gas, and water then ignited into a firestorm. At this time the Deepwater Horizon was drilling at 35,000 feet. Due to this unprecedented depth in excess of 4.9 million barrels of oil were discharged. This happened at an almost uncontrollable rate of 12,000 to 60,000 per day. 

As with all spills, once the oil stops its initial float towards the surface it sinks to the seabed. Whilst it was thought to still be rising up - after 12 weeks - the disgraced BP CEO Tony Hayward told reporters he was 60-70% confident that the well of oil would be successfully plugged.

His estimation turned out to be right. As a result, one year on "the impacts have been much, much less than everyone feared," said geochemist Jacqueline Michel, a federal contractor who coordinated shoreline assessments in Louisiana.

By the end of 2011 year it was claimed that hundreds of miles of beaches had been reclaimed, with only a fraction still soiled: “Fish are edible. Jobs are returning.”

Those who won’t…

Delivering a speech in Oklahoma’s Republican oil country, the American President accused lawmakers of refusing to give his administration enough time to review the controversial 1,170-mile Keystone XL pipeline. He blamed Republicans for hesitations in the interests of the health and safety of those living in surrounding areas. 

A torrent of Deepwater Horizon warnings were provoked, and perhaps expectedly, these were rebuked.

“Under my administration” said Obama, “America is producing more oil today than at any time in the last eight years.” “We are on track to meet very aggressive increases in terms of dependence on energy goals,” added his aide, David Plouffe. On their recent energy tour of the United States it was made clear that when it comes to the future of policy, a combination of ‘all-of-the-above’ is going to be pursued.

Those who will…

Recent research not only counters this surge ahead, it goes some way to clarify the true scope of the environmental catastrophe. Though local activism is still persistent, enough time has now passed for the results of in-depth studies to be undertaken and published.

Despite US government claims that most of the oil from the ruptured well had dispersed, a 35km-long plume of oil deep in the waters has now been discovered.  The oil, which includes toxic components such as benzine, could cause genetic problems for marine life even at low concentrations.

And last month, a study showed that the oil spill had damaged sea floor coral as far as 7 miles away from the wellhead site. Meanwhile, the number of dead dolphins found stranded on the coast close to the spill has dramatically increased.

The costs of the event for BP have exceeded $8 billion, (that is more than the whole of DECC’s 2012 budget).  They are easy to quantify in comparison to the political fallout and environmental consequences. Speights of political opportunism in election years happen; but what is so objectionable in this case is that the most important set of consequences are the most difficult to ascertain, and their integrity is therefore more challenging to protect. 

The Axis of Energy

Tamsin Lee-Smith

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Russia is the world's largest hydrocarbons producer, China is the worlds largest consumer of these commodities businesstoday

In a recent presentation to King’s College London’s Russian Security and Eurasian Research Group, Professor Roland Dannreuther advocated the importance of energy to the geopolitics of the 21st century. Energy is not just an instrument of national power in itself, he argued. It has the capacity to underpin other forms of power: military and political as well as economic and technological. With global demand set to increase by over 50% in the next 23 years the relationship between producers and consumers will become even more important.

Nowhere is this perspective more significant than in the relationship between China and Russia at the moment. With its vast reserves in natural gas, oil and coal Russia is the world’s largest hydrocarbons producer.  China by contrast is the world’s fastest growing consumer of these commodities. Their rapid economic growth has fuelled energy demands that outstrip domestic supplies. Chinese oil imports alone have doubled in the last ten years and by 2020, they will have over-taken the United States.

The producer-consumer affair between these great powers should be strengthened by their proximity. The transfer of commodities across their 4200km border should be prone to fewer risks than long-haul journeys from the Middle East. As former CIA energy analyst Erica
Downs says, Russia and China make a perfect match.

These sentiments have certainly been expressed by the countries respective leaders. ‘Never before have our ties been characterized by such a high level of mutual trust,’ declared the then President Medvedev in 2010. The occasion was a meeting with his Chinese counter-part Hu Jintao, where they discussed some fifteen commercial deals including the construction of oil and gas pipelines.

Vladimir Putin and Wen Jiabao RT

 However, this courtship is certainly not without tensions. One agreement that would see Gazprom, the Russian state gas monopoly, supply 68 billion cubic meters of gas annually for 30 years to the Chinese National Petroleum Corporation (CNPC) has stalled. In fact, Gazprom and CNPC have been in talks over the construction of a pipeline since 2004, and a final deal has yet to be struck. China is said to be prepared to pay only $100 per cubic metre of gas less than the Russians demand.

 

For all the tones of ‘Neighborliness, Friendship and Cooperation’, there has been a lingering historical distrust between the two nations. This is not helped by their increasing competition for influence in Central Asia. China’s use of supply routes through Turkmenistan and Kazakhstan constitute an especially sore issue for Russia. As with Ukraine, Moscow still believes that Central Asia should be part of its empire.

Chinese energy companies have also forged recent partnerships with producers in Congo, Equatorial Guinea, and Nigeria. The problem here lies not in diversification, but the fact that Russia is thought to need China more than China needs Russia. The better their cooperation with the Chinese, the stronger their negotiating power in Europe.

Russia and China’s recent vetoes at the UN Security Council may signal their shared interest to counter Western hegemony. But China's forays into Central Asia and Africa are a constant reminder to Russia that their relations vis a vis each other will be less cooperative. Oil and gas are no substitutes for water when it comes to pouring liquid over troubles.

Hormuz and the Problem of Energy Insecurity

Tamsin Lee-Smith

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The Straight of Hormuz Forbes

Shutting safe passage through the Strait of Hormuz would be as easy for Iran as drinking a glass of water, so their Naval Chief recently boasted. And yet it would risk mobilising the U.S. Navy’s Fifth Fleet, consisting of 20-plus ships supported by combat aircraft, with 15,000 people afloat and another 1,000 ashore.  For through this 21 mile wide sea lane – or choke point - passes one fifth of the world's oil and one-third of its liquid natural gas. 

The Foreign Secretary’s immediate backing of America’s willingness to use force was to be expected. While Hormuz is of strategic importance to Governments throughout the East and the West, Britain’s is particularly dependent on it. In through Oman’s waters and out via the Persian Gulf passes 84% of our liquid natural gas – the fuel which accounts for ¾ of our energy consumption.

Iran's Navy Commander Habibulah Sayari

The proportion of Britain’s fuel which is purchased from other countries – mainly Qatar – has been steadily rising since Britain became a net energy importer in 2004. According to the Department of Energy and Climate Change’s latest figures, Qatar’s supply to the UK grew by 67 % from 2010 to 2011 alone.  Consider this in light of the fact that our indigenous production has fallen by roughly 6.2% since 2005.  Not only are we increasingly dependent on foreign energy sources, we are reliant on a supply source characterised by greater geopolitical tension. Of course it would be wrong to become too alarmist at this stage. The risk of resorting to force over Hormuz remains low. On closer reflection, Iran’s threat may be less of a response to international sanctions and more of a domestic political ploy. 

Christopher Parry, the MoD's former Director General of Development, Concepts and Doctrine says the forthcoming Iranian elections in March, in the grand scheme of political upheaval in the Middle East, give Tehran something to worry about.  He explains, ‘what they are trying to do is create a state of crisis and emergency, which I think will lead them to defer the election because they know they are going to get hammered, unless they are able to rig it.” Posturing of this kinds leads to exactly the sort of escalation they need. But whether the closure of the Strait could happen on not, the threat has shone a light on Britain’s dependency.  When we talk about the importance of Hormuz to UK energy supply, insecurity more aptly describes the level of concern. 

When asked for comment in relation to the Hormuz situation, the Department for Energy and Climate Change was careful to be re-assuring. A spokesman said they are devoting ‘a great deal’ of time to the issue, at least for now. ‘We are working across Whitehall,’ he states, before adding that the ‘relevant Ministers have been briefed’.  

However, there is an incongruity between these assurances and the cautionary statements issued by market analysts.  DECC insisted the UK energy supply is adequately diversified: ‘we have a variety of potential gas suppliers and energy sources should we need to draw upon them, including mainland Europe and Norway, and our own North Sea.’ But our importation rates from Norway have significantly fallen. Just in the last year for example, they dropped by 17 %.

Iranian navy members take positions during a drill in the Sea of Oman Ali Mohammadi/IIPA/AP ABC

As a recent report by the Select Committee on Energy and Climate Change pointed out, DECC have no strategy for which to achieve a robust state of energy security. On brief terms the Department have outlined areas to explore, for example, ‘seeking to recover indigenous reserves’ and ‘reducing domestic consumption’. In the absence of any specific targets as there are in with issue of climate change, there is little impression of any vision or commitment.

The report’s call for ‘an energy security strategy to be published in a single, dedicated document’ is one that should be welcomed from The Select Committee. But as a lone voice speaking for what is potentially one of the biggest threats to national security, there is surprisingly little debate on this stance. 

Their message is one that should be given greater amplification –especially now. In turn, the Government’s response to their Report requires even closer scrutiny. Historically, energy security measures have been at odds with green imperatives. Don’t let the fog of climate change obscure access to cheap fuel, we are told. With their aim ‘to be the greenest Government ever,’ those in control will have to make sure that what need to be their top two energy priorities are no longer mutually exclusive.