A price on nature

G Magazine

Economists and environmentalists have traditionally clashed heads. But what if we can get the two to work together? We take a back-to-basics look at green economics.


Credit: iStockphoto

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As environmentalists push for the preservation of natural resources, there is continued resistance from those who view this as economic suicide. If we’re to battle climate change effectively and introduce any kind of turnaround for our future, environmentalists will need to engage with economists and business leaders.

Green economics is a reality that young environmentalists are starting to tune in to. Katerina Kimmorley, 23, is an alumni of the Centre for Sustainability Leadership. “I was an idealistic environmentalist, then I realised no one will take on these great ideas unless the project also demonstrates an understanding of the economic system in which they are going to be placed,” she says. “Economics – looking at the rate of growth of the economy, inflation, distribution of finite wealth and budget deficits – is what the people with power know and understand, and pushing a barrow when you don’t understand the key metrics of decision-makers is futile.”

With an honours degree in economics majoring in energy markets guiding her, Kimmorley points to three key economic factors she believes are currently hampering environmental progress. “Perpetual growth, not valuing natural resources and discounting the future are all keys to why our economy is not working for the environment,” she says.

What is a green economy?

The distinguishing feature between traditional free market economics and green economics is that the latter directly values nature’s resources and services as having economic value. This approach results in improved social equity and human wellbeing, while taking into consideration the Earth’s limited natural resources and risks to the environment.

According to Pavan Sukhdev, project leader of the United Nation Environment Programme’s Green Economy initiative, we live in a society that depends largely on market prices to indicate value, yet we don’t measure environmental value in these terms. “The [environment’s] economic invisibility is fundamentally the reason we let things get destroyed, and that’s not good for anyone,” he says. “Bees and insects are pollinators, but you don’t get invoices from bees.”

Jennifer Westacott, KPMG’s partner in charge, sustainability, climate change and water says a green economy is emerging, but slower than some might like.

“The concern KPMG has is that it’s not happening fast enough. Ultimately we can’t go on preserving the environment in competition with the economy, we have to find a way of growing the economy that preserves the environment,” she says.

The growth of industries focussed on delivering green products and services, renewable energies, low-carbon transport, energy-efficient buildings, clean technologies, turning waste into a resource, sustainable agriculture, forestry management and sustainable fisheries are examples we’re seeing as a shift toward a greener economy.

Such developments are a new engine for growth, employment and alleviating poverty, according to Sukhdev.

How do we create a green economy?

Westacott says we all need to start understanding the economic realities of the cost of resources in our supply chain. “We haven’t been pricing water and energy properly in terms of their long-term renewability. Businesses may see some of these resources as an infinite supply, and not factor the full cost or potential scarcity of them into their long-term business planning.”

There are also less tangible factors – such as the loss of biodiversity, or ecosystem degradation – that are not reflected in the price of goods. These are considered ‘externalities’.

“When we buy a plastic bottle the transaction is between us and the retailer, but there are a range of externalities occurring that aren’t costed in,” says Ben Eltham, fellow with progressive Australian think tank, the Centre for Policy Development. “For example, the waste that is created by that transaction, or the
cost of the bottle being cleaned up by council and sent to landfill,” he explains.

Humans love an incentive

“The reason why we are unable to find a global solution to the problems of environmental sustainability is that many governments and people in them don’t have strong enough incentives to worry about it. So, they take actions which are not consistent with long-term environmental sustainability,” warns Fabrizio Carmignani, formerly an economist with the UN, now a senior lecturer at the University of Queensland.

“In Cameroon [Africa] they have fantastic rainforests that are being depleted at quite a fast rate. Local people cut down the trees because they have absolutely no other economic alternative. We can’t go to them and explain the long-term importance of the forests; they wouldn’t care because that’s the only way they can make a living. So we have to make the protection of forests in their own interests,” Carmignani says.

Closer to home, Eltham points to South Australia’s waste policies as a successful use of incentives in encouraging sustainable consumer behaviour. “For a long time they had compulsory deposit/return schemes, and now you get paid for returning empty bottles,” he says.

As Sukhdev continues to lobby globally for a price on nature, he believes both economists and environmentalists need to change their thinking.

“We aren’t saying there’s no spiritual and societal value to nature, but just that it also has economic value. So why aren’t we reflecting that in the accounts of society? It’s not either/or: it’s both. Why not account for it?”

The Carbon price

Failing to put a mandatory price on carbon emissions or hold businesses and consumers to account for their part in carbon pollution doesn’t make the economic implications of our current behaviours disappear.

“Not putting a price on carbon imposes big costs on future societies. There’s also a large opportunity cost imposed on us by not moving quicker to de-carbonise,” says Eltham.

“China is leapfrogging ahead of Australia in renewable energies and at some point in the future there will be a reckoning.

There’ll come a time when, internationally, our products will no longer be in demand, a bit like the Detroit auto industries,” he adds. Interested onlookers like Kimmorley have spent the last 12 months watching the debate over a carbon price through economists’ eyes.

“A carbon price is a price on one form of externality: pollution from CO2 emissions. It’s a step in the right direction but not the be-all and end-all. Recent electricity price hikes in New South Wales are about three times what the carbon price would be. People can put too much hope on that as a way of stopping us using so much electricity,” she says.

The mining tax

Carmignani says the recent debate over mining taxes is an excellent example of a key economic principle: redistribution of wealth.

“Think of the wealth of the country like a cake. Today a large part of the cake goes to those in mining, however, the cake needs to be shared by other sectors too. We can’t just rely on the profits of the mining sector to boost our whole economy.

“The mining sector is not labour-intensive and therefore a mining boom does not generate much employment. The mining tax, which would take a relatively small part of the profits from that sector, will generate revenues that can be used to strengthen the supply of public goods, such as health and education, to develop infrastructures and to promote economic activity and employment in other sectors. Sharing the cake today creates the conditions to make the redistributed cake bigger in the future,” he says.