Valuing the environment

Last Updated: Saturday 04 July 2015

THE WORLD Bank recently organised a conference in Washington on 'Valuing the Environment'. There is probably no other way that market economists can deal with the environment except by treating it as an externality that ought to be 'internalised' through suitable valuation and appropriate fiscal interventions in the marketplace. The prices that we pay do not reflect the ecological costs of our production or consumption and these get passed on to the poor of the current generation or to unborn generations. It is, therefore, necessary that these ecological costs be valued and consumers and producers forced to pay these costs through various forms of levies and taxes.

In recent years, a number of studies have been published on countries like Costa Rica and Indonesia by the World Resources Institute. The UN Statistical Office is also working on the modification of national income accounts to reflect the depreciation of the natural capital. These studies do show that GNPs and rates of growth of several countries, when adjusted for ecological costs, went down. Impressed by these studies, the ministry of environment and forests in India has also asked several institutes to work on valuation of the environment.

But there are some fundamental issues that need to be resolved before this activity gets widely accepted. One, where do we begin this exercise of paying for the environment; and, two, who should determine these 'ecological costs'.

Let us take the first question. It is now well accepted that it is the rich who consume most of the world's ecological resources. And it is obvious that most of the world's rich live in the industrialised countries, while most of the world's poor live in highly degraded regions. From the peanut exporting countries of West Africa to the beef exporting countries of Central America, all have seen their environment degrade steadily, partly because of international commerce.

If ecological costs have to be incorporated in market prices, then it is imperative that this exercise begin with a global structural adjustment so that Northern consumers and producers begin to pay the ecological costs of their consumption.

The North ought to pay between $50 billion and $100 billion every year for use of the South's share of global atmospheric benefits. Keeping tropical forests as an insurance against global warming and erosion of biodiversity will ultimately benefit the global automobile, oil and gas, food and pharmaceutical industries. Taking an annual rent of $40 per annum per ha of tropical forests, we get another ecological subsidy of the order of about $80 billion a year. In addition, the North should pay royalties on the use of the South's biodiversity, and damages for the destruction of the ozone layer. Finally, there are all those ecological costs that ought to be paid for production of internationally traded commodities such as bananas, tea, coffee, cocoa, chocolate, peanuts, prawns and pineapples.

Should anybody think that ecological valuation is not a one-way street and that similar valuation by the North will mean an equally high outgo of payments from the South, that person should recognise that the North is already beginning to charge the South for the ecological costs of its production. Any time an Indian buys a Japanese or European computer, he or she can be certain that a reasonable proportion of the ecological costs have been captured. But the international marketplace has totally failed to capture the ecological costs of Southern commodities and ecological services -- and the reason for that lies greatly in Western economic and military clout and in the policies pursued by agencies such as the World Bank and the IMF.

If indeed we do not begin with a global ecological structural adjustment and move straight into a national ecological structural adjustment, we will find ourselves in a piquant situation. Economic calculations based on current, ecologically subsidised, international prices will immediately show that countries of the North are pursuing a very sustainable process of economic development, while those of the South are very unsustainable. Indeed, some studies are reaching precisely such a conclusion. This will be the ultimate irony in discussions on international inequity. Ecological costs would finally have been carefully valued and, equally carefully, passed on to the developing world.

Given the process of economic globalisation and the emergence of a world market -- the result of a long process promoted by the World Bank, IMF and GATT -- adjustment of international prices makes eminent sense. The rich of the South, too, should pay the full ecological costs of the food, electricity or timber they consume. But the exercise to adjust international prices should justifiably precede or be simultaneous with the adjustment of national prices.

This brings us to the second question: Who should fix these ecological costs? A managerial and technocratic approach would be to ask World Bank experts or national financial managers to work out these costs and then introduce them as taxes and levies. But there are many resources whose prices should not be fixed in this technocratic manner. The state can never be trusted to do this work honestly and will inevitably collude with the entrepreneur to undervalue ecological costs.

But if those who suffer the consequences of the misuse of ecological resources were to determine the value of those resources, their prices would be very different from those negotiated by the state. From a political point of view, this is a matter of environmental rights and democracy.

The prices that the local community would demand for the use of its environmental resources would reflect the true value of the trade-offs that the local community wants to make. And this would be very salutary for changing market prices, production patterns and consumer behaviour all around.

The value at which the Gujarat forest department has sold off its forest lands to the Sardar Sarovar authorities for submergence would surely be a fraction of the price that the local tribal communities would demand if they controlled the forests that constitute their habitat. This value would then change the cost of the project. It is also possible that communities, as in Goa, may put such a high value on their landscape and local heritage that they may deny any land to a development project like the Konkan railway. The additional costs of re-routing would then have to be appropriately borne by those interested in the project instead of a forced ecological subsidy coming from local Goan communities.

This is the route that developing countries should take for the valuation of the environment: a political rather than a technocratic approach. This does not mean that the state should not hire experts to determine ecological values. Because even if communities controlled their ecological resources, they may not have a full idea of the ecological costs involved in the use of their resources. Himalayan communities may, from experience, know that deforestation costs include the costs of landslides and soil erosion, but they may not know the cost of the erosion of biodiversity, of the reduction of carbon reservoirs or of floods downstream. NGOs, activists, experts and government officials can then play a key role in improving the market further by informing and educating the community about these costs.

Valuation of the environment is, thus, more a political exercise than an economic one.

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