Words by Scott Cole
“By failing to put an explicit price on nature’s benefits, even an imperfect one, we are essentially allowing somebody else to impose their price on us … And that price is very often zero”
When bread crusts sat on the counter for too long, Grandma Goodwin would put a stop to it: “Chuck those — they’re for the birds.” Grandma wasn’t just saying that we should stop wasting good butter: her choice of phrase reflected a deeper meaning about a resource that no longer had value for us. It was worthless.
As an economist, I see price as one way of signalling value. It also helps us to decide how best to employ society’s limited resources. Should we spend on protecting wilderness or providing recreational access? Should we keep land for producing food, or enhance habitats for wildlife? How much should we invest in greenhouse gas reduction today versus tomorrow? There are no easy choices, nor obvious lenses through which one “should” view such questions.
The so-called dismal science does have a few suggestions. For example, economists have long argued for taxing “bads”. Under the “polluter pays” principle, it is commonly accepted that those who generate pollution should bear the costs of managing it, which includes addressing the adverse impacts for society. As a result, carbon taxing is gaining traction, and evidence continues to mount that pricing emissions creates an effective incentive to reduce them.
Biodiversity offsets — which aim to enhance or recreate environmental “goods” including habitat, species and services provided by nature such as recreation — also create effective incentives by communicating to polluters or developers that there is a cost associated with damaging the environment, and to entrepreneurs that it can pay to invest in environmental goods.
Requiring polluters and developers to finance environmental compensation measures that generate value is an attractive policy, even if that value falls short of the full environmental value lost. So, what are the implications?
Nature always has a price
Today, nature’s worth is not factored into the price of land. Developers must pay for a site, permits, and all of the materials, labour and professional services it takes to erect a building or new infrastructure. But they don’t have to pay for the nature they destroy at any point in the process — that’s free. It is the public who bear the costs in terms of a slow-but-sure decline in things like biodiversity and recreational access — both of which are highly valued commodities in our fast-growing cities.
I have heard some ecologists and philosophers suggest that nature is priceless, that it’s impossible or even immoral to put a monetary value on biodiversity or other services that nature may provide. But here’s the problem: by failing to put an explicit price on nature’s benefits, even an imperfect one, we are essentially allowing somebody else to impose their price on us. And when it is set not by a body acting in the public interest but by a private actor responsible primarily to its own shareholders, that price is very often zero. If we choose not to value nature, we will have to live with the consequences.
In contrast, where a society requires developers to purchase biodiversity offsets, it is explicitly valuing nature’s benefits. This not only penalizes those who damage nature, but rewards those who create it — establishing a marketplace for “habitat entrepreneurs” who invest in restoring nature in return for payment for the compensation credits they create. Such credits are sold via habitat banking systems, which are well established in the US, Germany and Australia, and in development in the UK. The potential of these banks has spurred policy suggestions in a number of other countries including Sweden.
Observe how decisions are made in the world today and you will see that resources flow towards goods and services whose price reflects their high value to consumers, from the latest iPhone to rare minerals to organic food (even if market failure means that the price still doesn’t reflect the true value of the resources consumed during their production). Because non-marketed goods like national parks, recreation and biodiversity lack an explicit price, they are often undervalued. The result is that society invests too little in these goods and misses opportunities to prosper.
The cost of an offset may fall short of the true value to society of the damaged resource. But as our ability to measure and recreate nature’s benefits improves, so too will the price signal, leading to even better incentives for addressing the full suite of lost values.
"Requiring developers to purchase biodiversity offsets not only penalizes those who damage nature, it rewards those who create it"
By humans for humans
Any credible economist will tell you that estimating environmental value is fraught with challenges, methodologically and practically. But they will also tell you that doing so is unavoidable given the anthropocentric basis of environmental policies generally, and compensatory offsets specifically. This reflects the way that we humans see the planet: as an instrument to improve our long-term standard of living. We create such concepts as “no net loss” and“sustainability” because of our capacity for long-term thinking and because we worry about our children’s wellbeing.
This is not necessarily to the detriment of the planet’s other inhabitants. In addition to providing compensation for the direct value that nature provides us, we may also be motivated to require offsets because our wellbeing improves just by knowing that species and habitat exist around us, even if we may never “use” these species or benefit from them directly.
Others reject this approach and instead insist that nature be protected for its own sake. This is another way of viewing offsets, a perspective that economists describe using the concept of intrinsic (or non-instrumental) value. This emphasizes nature’s own moral standing, where the value of other species can be motivated by their own existence, independent of any benefit they may provide to humans.