Green accounting gaining ground: how to price nature

New Delhi—What is a sip of clean water worth? Is there economic value in the shade of a tree? And how much would you pay for a breath of fresh air?

Putting a price on a natural bounty long taken for granted as free may sound impossible—even ridiculous. But after three decades on the fringes of serious policymaking, the idea is gaining traction.

As traditional measures of economic progress like GDP are criticized for ignoring pollution or diminishment of resources, there has been an increased urgency for a more balanced reckoning of costs.

Proponents of so-called “green accounting” hope putting dollar values on resources will slam the brakes on unfettered development.

Environmental economists argue that redefining nature in stark monetary terms would offer better information for economic and development decisions, making governments and corporations less likely to jeopardize future stocks of natural assets or environmental systems.

If the value of an asset like a machine is reduced as it wears out, proponents say, the same accounting principle should apply to a dwindling natural resource.

“Environmental arguments come from the heart. But in today’s world based on economics it’s hard for arguments of the heart to win,” said Pavan Sukhdev, a former banker now leading an ongoing project that was proposed by the Group of Eight industrialized nations to study monetary values for the environment.

Since 2007 that study has estimated the world economy suffers roughly $2.5 trillion to $4 trillion in losses every year due to environmental degradation—or roughly seven per cent of global GDP.

“You cannot manage what you do not measure,” Sukhdev said.

Using similar accounting principles, some countries are already changing policy:

The Maldives recently banned fishing grey reef sharks after working out that each was worth $3,300 a year in tourism revenue, versus $32 paid per catch.

Ugandans spared a Kampala wetland from agricultural development after calculating it would cost $2 million a year to run a sewage treatment facility—the same job the swamp does for free.

But environmental accounting still faces many detractors and obstacles. Among them is resistance from governments who might lack the resources and expertise to publish a “greened” set of national accounts alongside those measuring economic growth. Particularly in the developing world, many still struggle to produce even traditional statistics that are timely and credible.

Even proponents debate how to price natural resources and systems that encapsulate everything from pollination by bees to the erosion prevented by mangroves in an estuary.

The single largest difficulty is that markets, which are the easiest way to value goods and services, don’t exist for ecosystems.

“Since many things don’t formally have a market price, how do you value them? Almost all the debate and discussion really hinges around valuation issues, and that is where it can get flakey,” said India’s former chief statistician Pronab Sen.

Opposition is also expected from parts of the corporate world, since green accounting could make doing business or buying products more expensive.

A forest once valued by what its trees fetch on the timber exchange might instead be valued according to the carbon dioxide it absorbs, the animals it supports, the water it filters and the firewood it provides. Or it could be revalued with future generations in mind. That might lead to higher felling fees, pricey replanting requirements or more expensive wood. Some might rethink the economic benefit of cutting it down. Science would become a more important factor in economic decision-making.

At a national level, green accounting is already being embraced by some.

India plans for green national accounts by 2015. Australia will soon begin taxing carbon dioxide emissions, which Costa Rica has been doing for a decade to fund forest preservation.

Late last century, a team of U.S., Dutch and Argentine researchers put a $33 trillion value—more than double the U.S. economy—a year on natural resources such as water, wood and fossil fuels and “services” such as a forest’s absorption of carbon dioxide.

While admitting difficulties and uncertainties in their methods and calculations, the team’s report said the $33 trillion figure was conservative.

Carbon credits, perhaps the best known example of giving a value to an environmental good, also illustrate the difficulties. Experts thought the pricing of carbon credits might have been straightforward, since emissions are easily measured and every CO2 unit is the same. But the carbon market wobbled wildly for years over estimates ranging from $5 to $500 per unit.

Still some experts in the field say the world is on track to having comprehensive green accounts within 10 to 15 years.

The World Bank, meanwhile, is backing projects in Botswana, Colombia, Costa Rica, Madagascar and the Philippines that are looking for national accounts to include the value of natural resources.