Reply to “Should nature have to prove its value?”

Sian Sullivan from Birkbeck University of London has a nice piece over at http://www.greeneconomycoalition.org/ on whether we should price nature. The main points are that

 “[t]he current ‘green economy’ discourse on ‘valuing nature’ tends to mean the insertion of economic values for ‘nature’ so that calculated units of nature can become more visible in ‘the current economic paradigm’ and thus incentivise ‘greener’ economic preferences… A key question today, then, is whether or not the evaluative framework associated with the current economic paradigm is indeed the appropriate framework to use in attempting to resolve environmental and economic crisis.”

Sian Sullivan then goes to suggest that

“… by making the category of nature more and more legible to capital and market logics we may in fact be enhancing its exposure to market failures… because there is nothing intrinsic to capitalist market logics that encourages ethical behaviour.”

Furthermore, nature

“… can become a new source of monetary income (e.g. through Payments for Ecosystem Services and REDD+ carbon credits), and be leveraged as new forms of value-generating capital asset… it is very unclear how making nature even more legible as capital will counter, rather than intensify, the massive vested interests pulling the world towards greater inequity and environmental volatility.”

I like her discussion, somehow, because her blog makes an economist’s head spin! In a good way. Since it makes us think again about why we use markets or create them and whether that has always the desired effect. Basically, Sian suggests that we should be very careful when we create markets for nature, because these markets may have undesirable side-effects like reducing social norms/ethical behavior, and, by placing a price on nature, we may make it easier to sell nature. While I agree that there is some substitution effect with social norms/ethical behavior, I have a hard time buying (hehe) her second argument on selling out nature. So step-by-step.

Why do we create markets for nature if there were none before? Simply because there were market failures or an absence of property rights that make it necessary to price nature! Thus, if it was previously costless to dumb waste into the ocean and now we put a price on the impact of the waste on the ocean system, then this is raising the costs of the polluters. If this cost is sufficiently high (i.e. higher than e.g. recycling the waste) , then the valuing of nature helped to reduce the impact of waste dumping.

Similarly, if there was a forest and everyone could cut trees as much as one wanted, then a standard tragedy of the commons argument would apply and suggest that the forest will be fully cut down. In contrast, if we now create a market and place property rights on the trees, then we may solve this market failure and reduce the cutting down of the forest. That’s the way in which placing value on nature can enhance sustainability. Cap-and-trade is a similar point to note.

When is Sian right? Certainly if a market makes nature accessible where it was not. For example, for tourism, where a new tourist resorts gets opened up in a resort where there was no tourism before. But I do not believe this is a really relevant example for the valuation of nature that Sian discusses.

One point which I think partly supports Sian’s thoughts is if the valuation of nature is actually badly done. For example, the whole debate in the US on non-use versus use value and contingent evaluation following the Exxon-Valdez crash. However, a market, or a valuation of nature, in this case is still better than none, as it will lead the polluter to pay at least a part of the environmental costs that the polluter created.

Also, if nature turns out, for whatever possible reason, to be a sort of luxury good, meaning a good for which a price increase actually increases demand. I couldn’t come up with any examples though. Somone?

Conclusively, I am not entirely sure what Sian means when she writes that “… by making the category of nature more and more legible to capital and market logics we may in fact be enhancing its exposure to market failures.”

However, I can fully support her thought on the social norms/ethical behavior. This is a point that has been shown by a growing literature. For example, it was shown that asking parents to pay a fine if they pick their kids up late resulted in more parents showing up late since then they paid for it and there was no social norm attached anymore to coming late. Parents felt that they now deserved to come late since they pay for it. There are many, many more examples that point into this adverse reaction, where social norms get undermined once monetary valuations are introduced. But I also believe that sufficiently large monetary costs can more than substitute social norms.

It is also my opinion that, if society can solve problems through culture or social norms or ethical behavior, then this is much preferable than to try solving these problems through monetary incentives. The real problem, therefore, is to find out for which cases monetary incentives undermine social norms so strongly that they make matters worse. In this case, this then also requires that nature is mis-priced, since otherwise monetary incentives could fully substitute social norms. And then we are back to the start: What is a good price for nature? What do we want to achieve?

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5 comments
  1. niyi said:

    Good response to Sian, Ingmar.

    I am only concerned here. You said: “Thus, if it was previously costless to dumb waste into the ocean and now we put a price on the impact of the waste on the ocean system, then this is raising the costs of the polluters. If this cost is sufficiently high enough…”

    This does not stop waste being dumped. Markets are there for people to trade/ exchange not to stop it exchange. And the prices will never be high enough to stop dumping, it can only be high enough so that only those rich enough can dump. If the poor are taken of market (and production) because they cannot dump their waste then the rich have it again! And that is precisely what markets are meant to do, as you well know: redistribute resources! And that applies to all your examples. And the environment can only get worse.

    And painfully, market-dressing distracts from realistic solutions, genuine ways to reduce waste generation in the first place – importantly by reducing consumption and production.

    And to be open-minded on this is issue is to realize that tragedy of the commons as an economic theory does not explain much of the reality we see in resource use around the world. There are many several reasons and ways people value nature, economic value is just one. And by blanket economic valuation of all of nature we are saying only those who have money should breathe good air, drink, see a bird or even live.

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  2. Thank you for the comment. I think the steps in which one has to approach this are as follows:
    1. there is an externality somewhere (e.g. GHG emissions leading to climate change);
    2. we create a market and thus put a price on this (e.g. cap-and-trade);
    3. the externality is reduced or internalized, depending on the effectiveness of the market.
    Hence, the environment improved in comparison to the status quo, namely in comparison to no action having been undertaken.
    The fact that the rich may still be able to place an externality on the poor and thus inequality continues is correct. But the inequality – i.e. rich and poor – was there even without this externality or the creation of the market. The market is not created, or a price is not put on nature, in order to reduce the inequality. It is done in order to take care of the externality.
    Also, let us remember that zero pollution is generally not socially optimal either. The costs of achieving zero pollution tend to be often simply too high.
    Concerning the point that we have to reduce production/consumption and not find a market solution, this suggests that we should think about social ways to deal with our habits, fads, luxury consumption, etc. I would agree. I do not believe that the creation of a market is the sole solution for all the externalities that mankind creates and faces.

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  3. “Also, if nature turns out, for whatever possible reason, to be a sort of luxury good, meaning a good for which a price increase actually increases demand. I couldn’t come up with any examples though. Somone?”
    Vielleicht eine unberührte Südseeinsel?

    “Conclusively, I am not entirely sure what Sian means when she writes that “… by making the category of nature more and more legible to capital and market logics we may in fact be enhancing its exposure to market failures.””
    Ist nicht der Preiszusammenbruch von CO2-Zertifikaten schon ein gutes Beispiel?

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    • “Also, if nature turns out, for whatever possible reason, to be a sort of luxury good, meaning a good for which a price increase actually increases demand. I couldn’t come up with any examples though. Somone?”
      Vielleicht eine unberührte Südseeinsel?

      The commentator suggested “Maybe an untouched island?” So it is certainly true that if you create a market for which property rights previously did not allow the use of the resource/nature (here: e.g. governmental ownership of the island), then you will thereby add to nature’s degradation. The same example would apply to e.g. the privatisation of natural reserves, or forest areas, or alike. That means any kind of resource which the previous owner left in its natural state, or degraded only little, while a potential new owner may fully extract/deplete the resource. But in these cases a market is not created in order to deal with an externality, but simply to raise profits. In addition, it is not likely to be a luxury good, we should still expect an increase in prices to decrease quantity demanded. So I do not believe this is a correct example here.

      “Conclusively, I am not entirely sure what Sian means when she writes that “… by making the category of nature more and more legible to capital and market logics we may in fact be enhancing its exposure to market failures.””
      Ist nicht der Preiszusammenbruch von CO2-Zertifikaten schon ein gutes Beispiel?

      The commentator suggested “Isn’t the collapse in prices of CO2-certificates a good example?” And in my opinion it is not. The CO2 market is still working in my understanding, or basically it is doing what it is meant to do. Cap-and-trade means: If I put a cap on CO2 emissions, and if the cap is too high, then basically prices go to zero because no one really needs to trade any longer. So, in times of economic crisis as we have now, then CO2 emissions go down, and consequently the cap will be too high and nobody really needs to trade any more. The only way to make the price rise again is to either reduce the cap, i.e. reduce certificates. But what would be the reason for it? If we believe the cap was set optimally, then there is no reason to change that now. Or, in other words: One shouldn’t change the cap because prices are close to zero, but one should change the cap because one wants to have further emission reductions.

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