Study Adds Up Economic Benefits of Conservation

National Geographic News
August 19, 2002
Shell-shocked investors bouncing between stocks, bonds, and real estate
are putting their money in all the wrong places, according to a paper
published in Science magazine. The best deal going, by a wide
margin, is the environment.

An annual investment of U.S. $45 billion in preserving large tracts of wild nature, said the paper's authors, would yield an annual return to society of between $4.4 trillion and $5.2 trillion in "ecosystem services" like water filtration and climate regulation, a 100 to 1 return on the investment (ROI).

Greenbacks aren't rushing into green causes because the market-based economy doesn't tell the whole financial truth, according to Robert Costanza, director of the Gund Institute for Ecological Economics at the University of Vermont and one of the paper's co-authors.

"Converting ecosystems typically benefits only a few private individuals," he says. "Leaving wild nature wild produces benefits in the form of ecosystem services, but these services are public, rather than private goods. They serve society as a whole and aren't captured by the imperfect market."

In economics, a "public good" is one that benefits everyone, whether they pay for it or not. For example, a private good like a car benefits only the person who buys it, while a public good like clean air benefits everyone.

Markets work on the idea that people will pay for the best goods, which motivates producers to provide them. Prices—which are determined in part by how much people are willing to pay for something—tell producers what the best use of their resources would be. That way, members of society get what they want.

But most economists agree that markets have trouble providing public goods, because an individual doesn't lose the public good if he or she decides not to pay for it. A person can't buy clean air just for him or herself—he or she has to buy it for everyone. This means that it isn't profitable for private companies to provide things like clean air or military defense. Prices thus don't give producers a motivation to produce things that people want, but can't buy for themselves.

Calculating the Real Costs

The paper constructs a careful argument to recast the globe's balance sheet so it takes into account environmental research about the relative benefits of developed and undeveloped ecosystems.

Costanza and his co-authors first wanted to determine the full economic impact of developing wild areas, adding environmental factors to the mix.

They identified five studies that compared diverse "biomes," or massive ecosystems, before and after development took place—for instance, a tropical forest in Selangor, Malaysia that was converted to high-impact logging and a mangrove system in Thailand that became an aquaculture and shrimp-farming economy.

The authors list numerous ways that people benefit for free from natural ecosystems—"aesthetically and culturally; via the provision of ecological services such as climate regulation, soil formation, and nutrient cycling; and from the direct harvest of wild species for food, fuel, fibers, and pharmaceuticals." Based on past studies that estimate how much people would pay for these benefits if they weren't free, Costanza's team calculated that the environment provides people with $38 trillion per year in services.

The study then compared the economic gain from farming, logging, and other forms of development with the loss of non-marketed services like soil formation, flood protection, and carbon dioxide conversion, and the compromise of low-impact activities like tourism and the sustainable harvesting of plants and animals. The biomes lost about half their value after development took place, according to the combined results of the studies.

That net loss translates to about $250 billion a year, given current rates of global development of wild areas. Some economists have questioned the techniques that the authors used to assign a dollar value to environmental services, but the authors say that they used conservative estimates. They also say that the magnitude of the benefit they calculated is so enormous that their conclusion is accurate even if the numbers are off a little.

The authors performed several statistical analyses to reach the 100 to 1 ROI figure.

To establish the $45 billion annual cost of building and maintaining an adequate global reserve of wild nature, which they define as 15 percent of the terrestrial biosphere and 30 percent of the marine biosphere, the authors extrapolated from current studies, including their own earlier research. To preserve land areas, $20 billion to 28 billion per year is needed, said the authors, while $23 billion per year is needed for the seas.

To reach the $4.4 trillion to $5.2 trillion annual return figure, the authors modified previous researchers' estimates of the gross value of 17 ecosystems across 16 biomes. For the current study, they used the net benefit of conversion—the value of the intact system minus the value of the developed system. While the reasoning sounds abstract, the financial analysis is all too real, Costanza said.

"In many cases, we're talking about replacing services that ecosystems provide, flood protection, for instance, or repairing damage once ecosystems have been compromised. It takes real money to do that."

There are also lost opportunity costs, such as the loss of potential pharmaceutical products if rain forests are razed, and quality of life issues, which can also be assigned a monetary value.

According to Costanza, the current system of cost accounting is plainly out of whack. Harmful development policies go unchecked largely because of a lack of information: Values aren't assigned to natural goods and services so markets are by definition distorted. In addition, private developers don't produce social benefits—or pay social costs.

"A compensatory system is clearly needed," said Costanza. "Corporations need to know the true cost of doing business. If we assign a system of compensatory levies, for instance, individuals will make different, more environmentally and socially beneficial decisions."

Further muddying the water is a welter of perverse subsidies, widely in use around the globe, that promote ecologically damaging behaviors that don't make sense economically. For example, many governments subsidize logging by building logging roads and selling logging rights to public lands at well below market value.

"By reallocating the funds that are supporting perverse subsidies," says Costanza, "we can easily pay the annual costs of preserving the global reserve network."

Instead of subsidizing activities like logging and cattle ranching, Costanza's team suggests that money should be used to preserve wild lands, which would yield a higher benefit to society in the form of a clean environment. This type of action would be necessary to fill in the gap produced because the market doesn't place a value on these public goods.

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