Tuesday, April 23, 2013

Global Ponzi Scheme: We're Taking $7.3 Trillion A Year In Natural Capital From Our Children Without Paying For It

Last week, David Roberts over at Grist flagged a report carried out by the environmental consultant group Trucost, at the behest of The Economics of Ecosystems and Biodiversity over at the United Nations.

The idea behind the report was simple. Tally up all the world's natural capital - land, water, atmosphere, etc. - that doesn't currently have a dollar value attached to it, and figure out the price. But the next step was where it got interesting. Figure how much of that natural capital is being consumed, depleted or degraded without the responsible party paying the cost for that use. The number the study hit on was a staggering $7.3 trillion in 2009 - about 13 percent of global economic output for that year.

This brings up what economists call "negative externalities." That's a technical term for what happens when one actor in the economy has to pay for another actor's mess. In a theoretically perfect market, the price of consuming, degrading or depleting a resource would be paid by the party responsible.

But getting the theory of markets to map onto the real world is difficult. Dumping trash on a neighbor's lawn is technically free, so a lot of us should be doing it more. But because we've built societies in which our neighbor can sue us, or the cops can fine us, we're forced to internalize that cost. Lots of costs can only be internalized through smart institutional design and government policy, rather than by leaving the markets free to do their market thing.

What Trucost found is that when you scale this problem up globally - all the river, air, and land and air pollution that isn't paid for, all the water and land use that isn't paid for, and especially all the carbon emissions dumped into the atmosphere that aren't paid for - the numbers get very big:

Global Greenhouse Gas Emissions: $2.7 trillion. This was by far the biggest single problem, and East Asia and North America were the two biggest culprits. That lines up with an International Monetary Fund study that determined the United States is the world's biggest subsidizer of fossil fuels - with Asia the runner-up - because it's failed to put a price on carbon emissions through a carbon tax or a cap-and-trade system. Trucost assumed a social cost to carbon emissions of $106 per metric ton. That's higher than the IMF's assumption of $25 per ton, but well within the overall range of costs studies have found.

Global Water Consumption: $1.9 trillion. Wheat farming was the biggest problem here, followed by rice farming and general water supply, mainly in Asia and North Africa. That's probably largely because developing and poorer countries have fewer institutions or infrastructure for managing water use.

Global Land Use: $1.8 trillion. Cattle ranching in South America came in first here, followed by cattle ranching in South Asia. Besides the usual uses, the effects of logging and fishing were also included. Trucost estimated the value of unused land using metrics laid out in the United Nations' Millennium Ecosystem Assessment.

Global Waste And Land, Air, And Water Pollution: $850 billion. Sulfur dioxides, nitrogen oxides, and particulate emissions were the big culprits for air pollution ($500 billion total) mainly in North America, East Asia, and Western Europe. Land and water pollution ($300 billion total) was actually mostly fertilizers, from North America, Asia, and Europe again. Global waste was the remainder, mostly hazardous materials. Trucost figured out these prices mainly through the costs of clean-up and health effects.

On top of that, the study's next conclusion was equally dramatic: whole sectors of power generation, materials production, farming and ranching across the globe would become entirely unprofitable if they had to pay the true cost of their natural capital use. The top five biggest regional industries the study looked at are in the chart below, and even in the best case their natural capital costs effectively wipe out their revenues:

In fact, of the twenty biggest regional industries the researchers examined around the globe, none of them would be profitable. Much of the global economy, in other words, is a giant Ponzi scheme that is (temporarily) viable only because markets fail to account for the value and use of the natural ecology - on which civilization depends for its crops, water, air, its very livelihood.

But that bill will ultimately be paid in full are - by our children and countless future generations.

The Consequences For The Economy

The purpose of the study was actually quite hard-nosed - to give investors some idea of the risks their investments may face. It's great for a business if someone else pays for their use of natural capital. Until that natural capital suddenly goes away, or the related ecological system collapses. Then the costs are "re-internalized" though droughts, extreme weather, rising seas, and all the attendant damage to infrastructure, to food prices, to cities, to human health and to human lives. One of the benefits of price signals - which is lost when these capital costs aren't accounted for - is that they prevent investors and industrial sectors from getting in over their heads in unsustainable practices.

According to a recent report from the Carbon Tracker Initiative and the London School of Economists, if the world successfully enacts policies to hold global warming under two degrees Celsius, then 60 to 80 percent of coal, oil and gas reserves could be rendered unusable. That would mean a loss of about $6 trillion in investments, which suggests how poorly the global economy is currently accounting for its use of the Earth's natural resources.

The Consequences For The Planet (And For Us)

The other benefit price signals ostensibly provide is that they prevent overconsumption of resources by keeping demand tethered to supply. By not pricing natural capital, we're losing out on that, too.

For a while now, the Global Footprint Network has been working on tallying up the planet's biocapacity, which is the ability of any unit of land - usually measured in global hectares - to produce useful biological materials like crops or drinking water, and to absorb wastes. What they've determined is that global biocapacity per capita is going down, since there's only a limited amount of Earth and the human population is rising. But also, humanity's ecological footprint per capita is going up, due to the all the ways we over-consume or poorly consume our natural capital. And ever since the early 1970s, we've been overshooting:

This isn't just a question of biocapacity's ability to supply human civilization with the resources it needs to function - it's a question of biocapacity's ability to regenerate that capital after it's consumed. The overshoot means that, at this point, it takes 1.5 years for the planet to regenerate the resources we consume in one year. In effect, we're taking money out of the bank faster than the interest payments can restore it. Eventually, we're going to spend biocapacity down past the point of sustainability. Eventually, something's going to give.

What We Can Do About It

In 2011, the public policy shop Demos put out a report exploring how gross domestic product has become a sort of catch-all measure of human welfare, and how inadequate it currently is to that conceptual task. One of the main reasons for that inadequacy was, not surprisingly, the fact that we don't price so many of the benefits human beings derive from natural ecosystems.

Demos suggested several ongoing projects as models for correcting that failure: There's the aforementioned Millennium Ecosystem Assessment, which attempts to put a quantifiable economic value on the ability of ecosystems to provide food, crops, fresh water, raw materials, air quality, protection against erosion, protection against storms, climate maintenance, and cultural benefits. Based off the Assessment's work, China instituted a system of ecosystem payments to make sure incentives to conserve natural resources compete equally with incentives to consume them. The World Bank has also set up a project of six to ten countries that's building ecosystem benefits into national accounting practices.

The United States has actually been working on Integrated Environmental and Economic Accounting (IEEA), which was proposed by the United Nations in 1999. It constructs assessments of ecosystem values that's directly compatible with methods already in place for national accounting. The hope is the IEEA will result in environmental policies that better weigh the value of ecosystems versus the traditional economy, and will help federal agencies better manage resources. Several governments - including Switzerland, Wales, and the United Arab Emirates - are also using the ecological footprint measure as a guide in their own management practices.

Finally, the report from the Carbon Tracker Initiative and the London School of Economists suggests that capital markets start accounting for climate change, and that regulators require companies to report the carbon emissions built into their current fossil fuel reserves - precisely the sort of price signaling that isn't currently being done.

In short, the problem is real, and enormous. America is deeply implicated, but there are already concrete models out there to start accounting for our use of the natural world on the level of both policy and economics. Can we get to work already?

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