Estimating the Monetary Value of Environmental Damage (Report)

Please read article below my commentary for an interesting study that attempts to monetize environmental damage.   It is a contextual example for my commentary.  The link to the report itself is above.

It is an example of an approach to environmentalism that has been growing since the 70's.  After many a failed attempt at environmental advocacy in the face of economic gains, some suggested that environmentalists would do better to speak the language of economics and fight the good fight on economic grounds.  After all, if environmentally damaging projects or policies we moving forward because the economic gains to be had were irresistible, environmental protection might do well to demonstrate that these gains were false.

In general, the idea was that putting such damage in monetary terms would make the environmental losses somehow more real and communicable.  This is particularly interesting in light of the fact that monetary value is an abstraction that is currently based primarily on (thoroughly anthropocentric, perceived) value mediated through exchange relations between "self-interested" human transactors.  The irony is that we need abstractions (that are, by definition, very distant from the reality of ecological functioning and health) to make things more "real" to us (at least in the modern economically-oriented world).

The question remains as to how to internalize these costs into the economic system, for until we are able to do this, the concreteness of the abstraction in terms of influencing human behaviour is likely (as economics would also predict) to remain illusive.

As long as the ecological goods and services required in virtually every successful transaction (we cannot have an economy without an environment with which to ensconce, feed and sustain it) are not a party to the valuations and negotiations in human economic transactions, there is a need for a means to ensure that economic transactors are made to take these costs into account (i.e. pay them).

The only way to do this effectively according to economists is by way of a pricing mechanism that provides more complete information, signals and incentives that reflect the "real" (in this case, "real" = ecological) costs.  Economists remind us that If people had to pay the "full" costs of resource use, they would probably use them more judiciously (i.e. for higher valued uses) and there would be less waste.  The result would be that resources would be more likely to go to their most valued uses resulting in the maximization of value on a society-wide basis. 

"Market failure" as manifest in (especially) negative externalities.  The paradigm case of negative externalities is environmental pollution.  It is the example used to demonstrate that markets do "fail" in certain circumstances.  (Virtually every economics text provides pollution as an example of market failure.)  "Failure" means that markets fail to optimize value for society as a whole.  This coheres with Adam Smith's oft-cited statement that is thought to provide a perfect justification for markets.  He justifies it, not egoistic terms (since that would arguably be no truly ethical justification at all) but, in terms of societal wealth.  Those who quote him, (knowingly or not) align themselves with this foundation as their ethical justification for markets.  Conversely, their shared basis for applause (when markets succeed by providing maximal societal wealth) or lament (when markets result in suboptimal societal wealth).  This means that advocates from the entire ideological spectrum (from left to right) have a shared value about what economic and political systems are for.  Everyone seems to agree that they are about optimizing societal wealth.  The only disputed question is about how to best accomplish this shared objective either in individual situations or as a rule based generalized system.

The oft cited Smithian statement goes as follows,

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages"

This suggests that solely self-interestedly rational transactors in the market place lead to greater than intended social good (positive externalties).  What is generally glossed over by "free" market ideologues is that the reverse effect (with which Smith was well aware) is also true.  Free markets based on rationally self-interested transactors lead to both positive and negative externalities.  Most often a mixture of both is the result.

It is a problem in both cases.  When positive externalities result, it means that the producer is not being fully rewarded for the social value that her invention provides society.  This can lead to suboptimal levels of entrepreneurship and inventiveness and a consequent loss to the societal value that could have been created were the incentives more fulsome.  When negative externalities result, it is more obviously a problem.  Rather than the loss of positive value that could have been, we are faced with manifest negative value that IS.  Rather than the ailing person not having access to a drug that  otherwise might have been invented, they might be ailing as a result of toxins that have already been emitted. 

In either case, market failure suggests the need a tempering mechanism.  Until we decide on and implement this, the costs of market failure will accumulate in our biosphere to our detriment (and that of many other beings).

Where negative externalities are occurring in the case of, for example, anthropogenic global warming, carbon taxes are likely to provide price adjustments that will deter activities that are lesser valued that generate them.  Once we are more aware of the costs we currently choose to ignore and "externalize," societal value will indeed become more "real."

By the way, there is no "external" or "away" - as in the expression, "throw it away" - when it comes to planet earth.  We live it is a "closed system" for the purposes of material and energy exchange with outer space.  The sun is the only net "input" to earth and there are virtually no "outputs."  It all stays here in an all-ecompassing cycle of production, use and assimilation.  This means that, in spite of economic vocabulary like "externalities" there is, in ecological reality, really only "internalities."  So, while economic transactions may involve effects that go well beyond the transaction itself and the parties to it (e.g. buying a gallon of gasoline for your car), ecological vocabulary on a biospherical level has no such word or phenomenon.  This is perhaps where the shared roots of economics and ecology (manifest in the Greek root word "oikos" that is sometimes translated as "household"), show their starkest divergence.  There is no external to the ecological "household," even though there appears to be in the economic one.)

Yet our political system (i.e. the popularity contest we call "democracy") is ill-equipped to act on the evidence (i.e. "bad news") and generate foresighted action and policies that can increase societal value for the benefit of present and future generations.  While economic instruments such as carbon taxes may make both ecological and economic sense in terms of maximizing societal value (if only by reducing low value uses), there is almost no appetite for implementing such policies.

Thus, we may be justified in concluding that it is not economics that is driving unsustainable behaviour on a societal and global scale.  It is politics.

JRF
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DAILY NEWS Oct 25, 2010 12:00 PM - 0 comments

Global environmental damage could surpass $28 trillion by 2050: study

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Global environmental damage caused by human activity in 2008 represented a monetary value of $6.6 trillion, equivalent to 11 per cent of global GDP, according to a new study by the UN-backed Principles for Responsible Investment (PRI) and UNEP Finance Initiative. Those global costs are 20 per cent larger than the $5.4 trillion decline in the value of pension funds in developed countries caused by the global financial crisis in 2007 and 2008.
The study, an initial effort to quantify in monetary terms the environmental harm caused by business and the possible future consequences for investor portfolios and company earnings, estimates that, in 2008, the world's top 3,000 public companies were responsible for a third of all global environmental damage.
The study warns that as environmental damage and resource depletion increases, and as governments start applying a more vigorous "polluter pays" principle, the value of large portfolios will be affected through higher insurance premiums on companies, taxes, inflated input prices and the price tags for clean-ups.
The most environmentally damaging business sectors are utilities, oil and gas producers, and industrial metals and mining. Those three accounted for almost a trillion dollars' worth of environmental harm in 2008. The top 3,000 companies by market capitalization, which represent a large proportion of global equity markets, were responsible for $ 2.15 trillion worth of environmental damage in 2008.
Workers and retirees could see lower pension payments from funds invested in companies exposed to environmental costs, says the study, which was conducted by Trucost, the global environmental research company.
The study projects that the monetary value of annual environmental damage from water and air pollution, greenhouse gas emissions, general waste and depleted resources could reach $28.6 trillion in 2050, or 23 per cent lower if clean and resource-efficient technologies are introduced.
The study recommends investors should exercise their ownership rights, collaborate to encourage companies and policy-makers to reduce these environmental externalities, and request regular monitoring and reporting from investment managers on how they are addressing exposure to environmental risk.
"An increasing number of large investors are recognizing that environmental externalities generated by one company are likely to come back and hit their portfolios in another place or time," says James Gifford, executive director of Principles for Responsible Investment. "This report provides an important rationale why investors need to exercise leadership and responsible ownership by acting together to reduce corporate externalities."
For the full report please see:

Principles for Responsible Investment - Official Home