10/22/2010 12:37 pm ET | Updated May 25, 2011

The Invi$ibility of Nature: Green on Green

Crossposted with

Does the color green signify nature or dollars ... or both?

Time was, economists saw concerns about nature to be largely opposed to concerns about economic growth. But not so much anymore.

The Benefits of Valuing the Good Green Earth's Goods

Ecosystems and biodiversity are now recognized to provide highly valuable services to us without which we would be demonstrably poorer. These services include clean water, food and fiber, and unique gene pools.

The classic example of this: New York City avoiding having to spend billions of dollars on a water filtration system by restoring the forest and riverine ecosystems in the city's Catskills watershed. Taking care of distant forests hundreds of miles upstate might seem a bit counterintuitive, but if you lived in New York in the 1990s, the decision to do just that saved you a bunch in tax dollars.

The lesson: Take care of the green Earth or prepare to part with lots of greenbacks to replace the stuff the Earth provides us free of charge.

The problem: The metric we use to assess economic activity and growth -- the gross domestic product (GDP) -- does not include ecosystems in it valuation. (For more, see this previous post on GDP.)

This problem was highlighted in a new UN report [pdf] The Economics of Ecosystems and Biodiversity: Mainstreaming the Economics of Nature: A synthesis of the approach, conclusions and recommendations of TEEB released at this week's Convention on Biological Diversity meeting in Japan.

The report concludes:

"Natural resources are economic assets, whether or not they enter the marketplace. However, conventional measures of national economic performance and wealth, such as GDP and Standard National Accounts, fail to reflect natural capital stocks or flows of ecosystem services, contributing to the economic invisibility of nature."

It's Not Nice to Fool With, or Take for Granted, Mother Nature

What do we miss when we fail to put the natural world's contribution to our economic well-being on the same footing as our own productivity? A lot. Take forests for example. A standard economic valuation of a forest would limit that valuation to the goods that forest can directly provide us, such as lumber. But that can lead to a perverse decision -- cutting down a forest to harvest lumber and inadvertently destroying potentially more valuable services and assets such as water purification, carbon storage, erosion prevention, and habitat.

Here's a more specific example: according to the report, the extractable value of Cameroon's tropical forests, on the order of $700 per hectare per year (for timber, fuelwood and non-timber products), is less than the forests' climate and flood benefits, which add up to about $900-$2,300 per hectare per year.

Current Economic Measurements Fail to See Big Slices of the Economic Pie

In addition to not including ecosystem services, the report's authors point out, GDP only measures economic activity in terms of goods that enter the marketplace.

This leads to especially perverse results in developing nations because considerable parts of their economies -- namely ecosystem services and non-marketed goods from agriculture, fisheries and forests -- never get measured by GDP:

  • In Indonesia, these sectors account for 75 percent of the effective income of 99 million rural and poor households, and yet they contribute only 11 percent to Indonesia's traditionally calculated GDP.
  • In India, they make up 42 percent of the effective income of 352 million rural and poor people, and yet contribute goods worth only 17 percent of the national GDP measure.
  • In Brazil, it's the same story, with these unmeasured sectors providing 89 percent of the effective income of 20 million people while officially producing goods equivalent to six percent of national GDP.

These numbers illustrate how poor households disproportionately rely on natural capital for their livelihood and therefore have few means to cope with the loss of goods and services (such as clean drinking water and natural hazard protection) as ecosystems are degraded.

But the perversity is not limited to developing economies. Consider this example from right here in the USA: Economists from JP Morgan estimate that the Deepwater Horizon oil rig explosion and subsequent oil spill may end up adding to the U.S. GDP because of all the jobs created by the clean-up efforts. The economic losses from the environmental damage caused by the disaster? Largely left out. The main exception: spill penalties paid out by the companies responsible for the devastation.

Bottom line: increasing GDP does not necessarily lead to increasing economic well-being. The idea of using a more comprehensive metric -- a "green GDP" -- has been around for quite a while. Maybe the time is finally ripe for its implementation.