Wednesday 25 July 2012

Ecosystem Services: What is the Environment really worth?

Robert Pollard

Ecosystem services value things the environment provides us that contribute to our well-being. Source: DEFRA.
In the 21st 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.
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.