Free is very expensive

Pricing nature’s services reduces business risk and benefits society

By Meghna Tare and R. Paul Herman
When you breathe the air, smell the flowers, or pluck a fish from the ocean, the price is free.
Yet nature’s services, evolved over 4.5 billion years, are priceless. No MasterCard needed to benefit from earth, bees, and oceans – priced less than they are worth. In fact, what nature provides is worth at least twice the value of what is counted as revenue and Gross Domestic Product. That is right, for every revenue dollar of your company and our economy, Nature has granted at least twice the value of the top-line.
Back in 1997, a team of scientists estimated the value provided by 16 environmental ecosystems, from forests and trees cleaning the air as Earth’s lungs, to bees fertilizing flowers across gardens and farms. For that year’s global GDP at US$18 trillion, the total value of nature’s services was $33 trillion, or nearly 2 dollars of ecosystem value for every one dollar of revenue we know how to count. Dr. Robert Costanza, of Australia National University, the leader of a global academic and scientific group, led an update of the value of these ecosystem services in 2014 dollars to be US$ 142.7 trillion. It’s a powerful form of sticker shock.
From an economic point of view, ecosystems can broadly be seen as part of our natural capital, and the flow of ecosystem services is the interest on that capital that society receives. Just as private investors choose a portfolio of capital to manage risky returns, we need to choose a level of biodiversity and natural capital that maintains future flows of ecosystem services in order to ensure enduring environmental quality and human well-being and survival.
Biodiversity and ecosystems provide invaluable services and products to the society. These include food (we pay farmers for their work, but not Nature for the sun, soil and seeds, water (in many localities, water is under-priced), and protection from erosion, recreational services, medicinal products, and climate regulation.
Despite this significant economic, social, and cultural value of biodiversity and the associated ecosystem services, biodiversity is lost at a rapid rate – because it is nearly all free.
New tool: Payments for Ecosystem Services (PES)
Ecosystem values are measures of how important ecosystem services are to people – what they are worth. Economists measure the value of ecosystem services to people by estimating the amount people are willing to pay to preserve or enhance the services. Valuation plays an important role in creating markets for the conservation of biodiversity and ecosystem services, for instance through Payments for Ecosystem Services.
Payment for Ecosystem Services (PES) are agreements whereby a user of an ecosystem service makes a payment to an individual or communities whose practices like land use or deforestation directly affects the use of that ecosystem services. Interest in PES has been rapidly increasing over the past few years and according to the Organization for Economic Co-operation and Development (OECD) these projects channel over $6.53 billion annually.
Over 300 PES projects are implemented in countries like India, Indonesia, Costa Rica, Mexico, and Australia. These schemes fl ourish wherever private companies, public-sector agencies, and nonprofi t organizations like Conservation International (CI) have joined hands in addressing various environmental issues.
Corporate Social Responsibility (CSR) and PES
As corporate social responsibility (CSR) becomes an integral part of many organizations, PES offers an innovative solution that fi ts within the “Green Growth” approach of sustainable development- synergizing economic development with environmental protection.
Companies that are adopting CSR practices are implementing PES projects in partnership with the government and local communities to offset the damage to the ecosystem as a result of their operation or practices.
In southwestern China’s Sichuan Province, Marriott Hotels protects the source of fresh water for more than two billion people by investing $500,000 over two years in a Nobility of Nature program in partnership with a nonprofi t Conservation International (CI).
The partnership promotes beekeeping and honey production. Nobility of Nature honey is sold in nearly all Marriott hotels throughout China, with a portion of the proceeds going back to support the program. Marriott’s investment in the Nobility of Nature project addresses several of the company’s key CSR goals including the reduction of energy and water consumption and investment in innovative conservation initiatives like rainforest protection and water conservation. Locally Marriott’s funding has helped provide equipment to monitor the condition of nearby fresh water sources and wildlife, 600 bee hives, and training in the organic bee farming business.
Since Nature can manage natural resources more effectively than humans, preservation of ecosystems can be worth more than the human-made approaches.
For example, the City of New York calculated that it could avoid building new water treatment plants for $6 to $8 billion, and instead protect the upstate New York watershed that purifi ed the natural water systems at a cost of only $1.5 billion.
In the U.S., Dow Chemical has taken on the responsibility of valuing ecosystem services. They saved $38+M in CapEx (-95%) where they had planned $40M to build water treatment facility, yet chose project to invest only $1.4M to build a wetland that naturally cleans the water that treats 5MM gallons daily, and serves as habitat for multiple uses.
Tragedy of the Commons
Proponents of PES envision it as a solution to the so called “tragedy of the commons” (Hardin 1968), defined as “a dilemma in which multiple individuals acting independently in their own self-interest can ultimately destroy a shared resource even where it is clear that it is not in anyone’s long-term interest for this to happen.”
Will companies have to pay for Nature’s services in the future? Governments can institute limits in usage or set a market-pricing mechanism to ration resources for the common good. Companies that proactively manage their Earth metrics and look ahead long term will better manage the risk of new liabilities or expenses.
A promising concept that has received considerable attention, PES has the potential to become a conventional environmental management tool. It is an essential part of the set of instruments necessary for a transition to a green economy, triple bottom line benefits, and a sustainable society.
R. Paul Herman is CEO of investment ratings firm HIP Investor (@HIPinvestor). Co-author Meghna Tare (@ MeghnaTare) is Executive Director of the Institute for Sustainability and Global Impact at the University of Texas at Arlington with an MBA in Sustainable Management from Presidio Graduate School. For full disclosures, see www.HIPinvestor.com
Posted August 6, 2015 in 25115