Value of everything and the price of nothing?

 By cgt

Yesterday saw the release of key findings of the long-anticipated National Ecosystem Assessment (NEA), a pioneering project looking at the value of nature to people in the UK. If you’re one to consider economists as knowing the price of everything and the value of nothing, this should give you pause for thought.

The idea of the NEA – a government and UN Environment Programme project – is to capture all quantifiable ‘ecosystem services’ provided by the environment: wellbeing, health, supporting food systems, flood protection, recreational value and so on. These extensive services have been categorised into supporting (e.g. nutrient cycling) regulating (e.g. pollination, which affects food production), provisioning (e.g. food) and cultural (e.g. spiritual value). Each of these service types are quantified for eight categories of habitat, which are equally extensive, from sea to farmland to mountain.

But, is all value quantifiable? The short answer is: yes. Values are already being put on the environment and its benefits. This is being done, mostly implicitly, every day around the world as people trade-off competing uses for all kinds of resources, such as land and water. Yet, in spite of people’s intuitive value for the environment, when these trade-offs take place it is the hard cash that wins out, with zero cash flow assets such as forest-covered land, being ascribed a zero value. The NEA’s results serve to make environmental value explicit, with an understanding that even without cash flow the assets have a value to all stakeholders and that, directly or indirectly, their destruction will cost people. Without a price for any of these assets, we find ourselves in a rather unfamiliar world, where economists know the value of everything and the price of nothing. The Tick (who also lives in this parallel world) seems to appreciate this point: “You know, when a tomato grows out of your forehead, it gets you thinking. What do we know about anything? Life is just a big, wild, crazy tossed salad, but you don't eat it. No sir. You live it!”

It can be tempting to view the figures in the report as arbitrary. Yet, these figures have been elicited using state-of-the-art techniques and attempt to reflect the uncertainty which necessarily exists when people aren’t actually paying for a service, but say they value. A better description of the figures would be subjective, which these figures clearly are but no more so than virtually every other economic figure.

So how does it actually work? The toolkit used in the NEA comprises a variety of valuation techniques. This includes looking at variation in house prices to see if they reflect preferences for nearby green spaces, or replacement costs associated with flooding that is avoided by natural coastal structures. Many values are derived by simply asking people (‘contingent valuation), albeit in fairly sophisticated ways. In all cases, people’s judgement of the value of nature is hugely dynamic, and changes over time and space. This is no different to other assets: how much one would pay for a bottle of water depends on their thirst, the environment, the quality of the water and so on.

The difference, however, is that bottled water is an established market: if you want it, you can buy it. Nature doesn’t work like this. If you want to take a walk in a park, for example, it’s rare you’d actually have to pay. Yet, the park depends on capturing these values if it is to compete with other alternative uses for it, such as building real estate. The contribution of the NEA is, in a sense, to create a representation of such a market – while no transactions are taking place, the park has real value to the community. One application of such thinking is the Index of Sustainable Economic Welfare (ISEW), which nef has been working on for regions of the UK. The ISEW is an index, similar to the familiar GDP, and weighs up the positive and negative impacts of economic activity to see whether the UK is actually growing.

On the other side, will these values be enough to stop the persistent and tragic degradation of the environment? Policy-makers may have a tendency to see the NEA’s value of the environment as simply the sum of its parts. But this would be an extremely dangerous misinterpretation of the NEA: if changes are small, then marginal values can provide good approximations of a particular ecosystem’s value, but sudden large changes would feedback on these marginal values and make them non-representative. This makes direct aggregate comparisons impossible: whether the environment as a whole is worth more or less than the budget deficit, or even Facebook, cannot be answered by the NEA. Obviously, the value of the environment as a whole is infinite. Simply put, we could not survive without it. Its composite parts may also be infinite, if it were not for their renewable nature and their capacity to absorb damaging human activity. But in the Anthropocene era, how much more can the environment absorb? Only within sustainable limits are the NEA’s values accurate, yet it is the sustainability dimension which it has not captured. The warning, therefore, is that mis-using the NEA’s figures could actually exacerbate environmental problems. On all other counts, though, we should celebrate the NEA’s contribution.