Internalising the externalities: how can businesses incorporate the value of nature into decision-making?

Internalising the externalities.

“Climate change presents a unique challenge for economics: it is the greatest and widest-ranging market failure ever seen.”

-The Stern Review on the Economics of Climate Change

The loss of wild nature

Sophus zu Ermgassen

The loss of wild nature is a case study in what happens to mutually beneficial resources when there is no adequate accounting and enforcement mechanism to regulate its use. Despite the agreement of the majority of the world’s inhabitants that nature and biodiversity are valuable and that climate change will be highly damaging, habitat conversion still exceeds habitat protection by a ratio of 1:10 for the majority of the world’s ecosystems[1]. We are collectively losing an exceptionally valuable resource as a result of economic development.

In recent decades the emphasis of conservation research has shifted to acknowledge this economic driver. The agenda has shifted to find mechanisms that account for the economic value that nature provides, so that it can be incorporated into mainstream decision-making, using a metric that makes nature directly comparable to other economic outcomes – the monetary value.

These monetary values, measurable through a wide range of methodologies which are context specific, are referred to as ecosystem service values. Results range across different spatial scales and processes, from valuing the entire world’s ecosystem services at $116-54 trillion per year[2], to valuing the contribution of having natural sea grasses towards commercial fisheries’ catches in Southern Australia at around $25,000 per hectare per year[3].

Although ecosystem service approaches do have sharp and often justified critics (here’s an excellent summary by Guardian journalist George Monbiot[4]), the problem is that conventional conservation is failing, and ecosystem services are engaging new and diverse corporate sponsors and bringing in more investment than conventional conservation has ever done[5].

Ecosystem services values framework

Ecosystem services values are meaningless without a framework for how to apply them. One approach could be to set up international markets for all of the natural ‘commodities’ that nature provides, internalising the negative externalities generated by development. This has been the logic of the rise of carbon markets worldwide which have attempted to address the absence of a market regulating greenhouse gas emissions, although our first few attempts have been poorly implemented. Again, the idea is fraught with severe problems, but in theory, these markets could find the most efficient solution for the allocation of resources split between development and conservation. Hugely expensive actions that would have to pre-date the establishment of any of these markets would include the requirement to accurately measure ecosystem services across small regional scales (the fundamental flaw that led to the ineffectiveness of the US clean air act[6]), a mechanism for the enforcement of market violations, and most importantly – finding a way to get people to participate and pay for services they have always received for free.

Implementation through industry consortiums

This challenge is certainly too great to be implemented at the level of international policy. However, one interesting avenue could be the implementation of ecosystem service markets within major industry consortiums.

The Consumer Goods Forum, an industry consortium including members encompassing around $2.85 trillion in sales, has come to an industry-wide agreement to achieve zero net deforestation by 2020, a highly ambitious goal. The agreement could be reached because all of the major companies in the consumer goods industry were involved in the consortium, thus minimising the risk of a firm not involved in the consortium achieving stronger competitiveness because of not being burdened by the commitment. Truly collective industry-wide agreements that could enable entire industries to internalise their negative environmental externalities could be powerful drivers of sustainability in the global economy.

A way to scale impact?

Developing efficient ecosystem service markets, though fraught with complexities, could be a key part of the solution to the major environmental crises of our time, with the advantage that they operate within our current economic paradigm. And with the evidence suggesting that ecosystem services are attracting more attention from economic players than traditional conservation has ever done, they could be a way of scaling conservation and making action truly global.

“Sorry, did I say nature? We don’t call it that any more. It is now called natural capital.”
– George Monbiot


[1] Hoekstra, J.M., Boucher, T.M., Ricketts, T.H., and Roberts, C. (2005) “Confronting a biome crisis: global disparities of habitat loss and protection.”Ecology Letters 8, 1:23–29
[2] Costanza, R., d’Arge, R., de Groot, R., Farber, S., Grasso, M., Hannon, B., Limburg, K., Naeem, S., O’Neill, R.v., and Paruelo, J. (1998) “The value of the world’s ecosystem services and natural capital,” Nature 387:253-26.
[3] Blandon, A. and zu Ermgassen, P.S.E. (2014) “Corrigendum to “Quantitative estimate of commercial fish enhancement by seagrass habitat in southern Australia” Estuarine, Coastal and Shelf Science 141:1-8
[4] Monbiot, G., (24 July 2014) The price of everything
[5] Goldman, R.L. Tallis, H., Kareiva, P., Daily, G.C., (2008) “Field Evidence That Ecosystem Service Projects Support Biodiversity and Diversify Options.” Proceedings of the National Academy of Sciences 105(27):9445-48
[6] Greenstone, M. “Did the Clean Air Act Cause the Remarkable Decline in Sulfur Dioxide Concentrations?” Journal of Environmental Economics and Management 47(3): 585-611

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