Privatising environmental risk

By Barbara Unmuessig

Putting a price tag on ecosystem services could lead to adverse financialisation of nature

Today, few people retain any illusions that United Nations conventions like the Framework Convention on Climate Change and the Convention on Biological Diversity can avert global warming, the loss of biodiversity, and the depletion of arable soil and water.

Likewise, the pursuit of hard caps for CO2 emissions and stricter environmental and social standards to reduce natural-resource consumption and protect workers seems to have fallen out of vogue, with crisis-stricken economies concerned that such regulations would impede investment and trade.

As old methods have lost credibility, some governments, economists, and international institutions like the UN Environment Program have adopted a new approach, based on the view that nature is an “ecosystem service” provider. In doing so, they have shifted the onus of addressing environmental risk onto the private sector and market-based mechanisms.

In this new paradigm, ecological preservation is a commercial matter, with the natural environment amounting to nothing more than a set of tradable goods and services. The upshot of this logic is that ecosystem services will no longer be provided for free.

Indeed, according to Pavan Sukhdev, the lead author of The Economics of Ecosystems and Biodiversity study, which aims to highlight the economic impact of environmental degradation, “We use nature because it’s valuable, but we lose it because it’s free.”

To be sure, assigning value to ecosystem services goes beyond simply putting a price tag on them. In fact, this approach can help to shape environmental policies that more efficiently capture the benefits of biodiversity and ecosystems.

Unlike GDP, some new accounting-system models include mechanisms for quantifying either the advantages of ecosystem services or the costs of their destruction, thereby creating a basis for political and economic action.

The danger lies in how easily the new paradigm could lead to the financialisation of nature. Indeed, the process has already begun; with the UN’s REDD program using market and financial incentives to reduce greenhouse-gas emissions from deforestation and forest degradation.

Similarly, “habitat banking” enables developers to trade habitat or biodiversity credits – earned through measures to protect, restore, or enhance habitats or species – to compensate for development’s environmental costs. And carbon-trading schemes reduce the value of soil and forests to their carbon-storage capacity.

All of this implies private ownership of ecosystem services. But, in many countries, the remaining intact ecosystems are in areas populated by indigenous peoples, making conflict with – and within – the affected communities all but inevitable.

Local people will demand to know who is to own the services and profit from the associated credits. And whoever that is will have to assume responsibility for fulfilling complex accounting and compliance requirements, while mitigating exclusion risks.

Moreover, the private sector’s willingness to finance, say, forest conservation depends on the various credits’ integration into global emissions-trading schemes – a highly unlikely outcome, judging by the state of international climate negotiations.

As it stands, emissions trading works only as a way to redress the industrialised countries’ business-as-usual approach. Market-based instruments’ growing role in conservation will merely enable businesses to manipulate their environmental obligations, while making it easier for governments to neglect their responsibility to devise effective environmental policy.

For example, last year, Brazil’s powerful agribusiness lobby managed to push the government to approve a new forest code, which uses market-based instruments to give agricultural producers more leeway on conservation.

As a result, landowners who clear more vegetation than is legally permitted can now return to compliance by purchasing offset credits through the Rio de Janeiro Green Exchange (Bolsa Verde) from those with more than the mandated minimum amount of forest cover.

Motivated by the new regime, those seeking to provide offset credits staged a land grab in areas where logging is not profitable – a market-based response that was accompanied by human-rights violations.

Brazil’s experience highlights the dangers of weak environmental policy – namely, that it offers those with money the option of buying their way out, at the expense of more vulnerable citizens, particularly indigenous peoples and poor small-scale farmers.

The global economic crisis exposed the risks of relying exclusively on markets to regulate economic activity. Given that the consequences of a global environmental meltdown would be far more devastating, depending on market-based mechanisms to protect and enhance the natural environment is a recipe for disaster.

In order to avert such an outcome, people worldwide should reject the conception of nature as a service provider and call on policymakers to work actively to protect and restore habitats and biodiversity. Mechanisms for “offsetting” damaging activities must not be allowed to continue to distract from the real imperatives, like preventing deforestation and phasing out fossil fuels.

To this end, the financialization of nature using derivatives and other financial products must be forbidden. After all, while an intact rainforest’s current monetary value cannot match that of the natural and mineral resources that it contains, its importance for human survival exceeds these terms.

Furthermore, governments should phase out subsidies that damage the climate and biodiversity, such as cash incentives aimed at encouraging the clearing of forestland for “productive” activities like agriculture. Doing so would enable countries to meet their objectives for environment protection while saving fiscal resources.

None of this is to say that market-based mechanisms cannot contribute to environmental protection and restoration. They can (and they have), but only if they are part of a more comprehensive framework that accounts for the natural environment’s true – and unquantifiable – value.

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Barbara Unmuessig is President of the Heinrich-Böll-Stiftung.