Wednesday, October 05, 2005

The economics of conservation

Rahul, who is an "energy researcher" studying Natural Gas, asks if there is a conflict between economic viability and sustainable resource utilization, and applies economic theory coupled with science, to suggest that economists might have to change some of their views on the issue.

Now, if only looking at the primary motive of an economic enterprise (direct profitability), it appears as if there isn’t necessarily a direct co-relation between (say) the environment, and the economic aspect. But, if looked at holistically, there is. For example, mining (for lets say steel) is a very profitable industry. It might be that a specific ore rich area is a dense forest on hills. Given its value as a resource, it seems essential to mine it, and of far greater value than that one little forest. But, the resultant deforestation is bound to result in deteriorating air quality in that area. Additionally, the hills serve as catchments for the local water sources, which run dry. The amount of soil erosion substantially increases. This results in local agriculture suffering, and the health of the people deteriorating rapidly. Economists do not consider the costs (in terms of human health, or actual resources lost due to losses in livelihood) due to the factory. The question to be asked is if the total value (of the particular economic enterprise) in absolute monetary terms offsets the losses in revenue due to the losses in health and productivity of an entire region. Rahul suggests incorporating an economic value for these losses, that should be considered in the original projection of the economic enterprise.

But the example I’ve taken largely has anecdotal or speculative evidence. Yet a lot of hard-nosed, practical environmentalists (who value the environment, but realize that economic factors are going to be paramount in human societies) are beginning to study environment and conservation in terms of monetary value (nothing speaks to developers or economists like money). The goals of preserving bio-diversity are difficult, and slippery. For example, the Florida panther is extremely endangered. But the land it lives on in Florida is very valuable for commercial enterprise. Sure, the loss of the panther (a sub-species of the mountain lion/cougar) is terrible, but is it far more important than the economy, economists ask? Anecdotal evidence is not an argument against this. But the more practical environmental researchers have realized this relationship between economics and conservation, and this is being reflected in actual research.

For example, take the coffee industry. It is extremely valuable, and employs millions of people worldwide. Coffee is grown on hillsides that were once lush tropical forests. Obviously, the losses to forests have been massive, but given the demand, the logic went that greater coffee plantation areas are needed. But now, hard-nosed studies are showing otherwise. Coffee can self pollinate, but bee visitation can increase yields of coffee by 15-50%. Now, with decrease in native habitat (read tropical forest), the pollinator diversity and visitation rapidly decreases. So, there is some importance of native habitat to the coffee plantations themselves. A detailed and thorough study (with rather conservative numbers) shows the decrease in visitation of pollinators in plantations due to surrounding forest depletion (2004, Conserv. Biol. 18, 1–10). A more impressive study (PNAS, August 24, 2004, vol. 101, no. 34, 12579-12582) (with more conservative numbers) quantifies the economic losses (in coffee productivity) due to forest depletion. In the study done in Costa Rica, a 1 km range of forest patches (for effective pollination) was taken. In the plantation the first 480 hectares were within 1 km of large forest patches, while the rest were not. In the region with forest patches, the output was 21.5 fa/ha, while in the rest, it was only 17.8 fa/ha. The income losses in the region without forest patches was $62,000 per year. So here, more was not better. This study did not even consider indirect benefits (like carbon sinks or water retention/purification) of forests).

Last year, South Asia was devastated by the tsunami. Anecdotal evidence told us that mangrove forests (that existed along the coast, but had since been depleted) would have protected the region. This was even seen in areas like Pichavaram in Tamil Nadu, that surprisingly had little damage due to the tsunami (due to the forests), but neighboring regions were severely affected. But a quantitative study in the area was missing. A recent report (Current Biology, Volume 15, Issue 12 , 21 June 2005, Pages R443-R447), systematically studied sites in Sri Lanka, with different degrees of degradation, and quantified the damage done by the tsunami in these areas (these were all directly in the path of the tsunami, with similar wave energies). Their results clearly showed that where there were mangroves, there was substantial protection against the tsunami. More surprisingly, the damage to the mangrove forests themselves was minimal (due to their own adaptation for survival in such environments!). There was a clear difference between mangrove forests, and mangrove associates (cryptic ecological degradation), and plantations of mangrove associates didn’t make it. Conversion of mangrove forests in to shrimp farms, resorts, urban or agricultural land contributed to the massive human and economic losses due to the tsunami, worth billions of dollars, and countless human lives.

In both these specific cases (with solid numbers), economists did not consider an economic value to the environment (that was being affected).

Our most recent example of course, is with the devastation Katrina wrought recently. Louisiana has massively depleted wetlands, and unfortunately the city itself was not protected against level 4 hurricanes. On a recent NPR show, a planner from Holland was interviewed. He said that Holland had very strict wetland conservation rules, and also spent a fair bit of money in ensuring level 5 hurricane safety to every inhabited region. Sure, the money spent was fairly large, but, in his own words, compared to the devastation bad economic planning had allowed the hurricane to wreck, it was peanuts.

Here’s Rahul’s solution:
Value Added Tax can be modified to include an exergy cost (sum of exergy consumption from the environment and waste exergy released to the environment).The tax is a measure of the physical value. This would automatically increase the costs of products that have harmful waste products and renewables would get a boost..


Iyer the Great said...

Wonderful post Sunil (and thanks for linking to my post). You present a very good case here, with a different take on the issue.

The proposed exergy tax (in my post) will not take into account costs related to deforestation (as in your example). Science, as far as I know, has no formal way to evaluate such environmental impacts. This could be because the cause and effect relationships are complex and not easy to model. Thus, ecological factors related to the the inhabitants of earth are not included in this tax.

It is rather unfortunate that all human activity is driven with economics in mind, without any concern for the environment. Views are changing, slooowly, but changing nevertheless - except for some who see it as leftist propaganda :).


Anonymous said...

Nice post, Sunil. Very informative.

gawker said...

Wonderful posts both Iyer and Sunil, who added to his argument. Articulated a number of thoughts I myself had, in terms of economics and science. We need more such expressive articles from environmentalists to show the free-marketeers that it certainly would be in the best interests of the economy to protect the environment because of their close interrelation. Kudos.

Michael Higgins said...

Hi Sunil
Interesting post and I will have to post about this subject.
I have written some comments on Rahul's blog, the second one is more applicable to this post.

There is no economist that I know of who would dispute the idea that the costs of items should in some sense reflect all of the cost associate with producing it including the cost of environmmental degradation. Quantifying that cost can be a challenge.

Anonymous said...

Great post!

Quantifying the monetory loss seems a great way to highlight problems we don't bother. Can this also be done for the problem of widening roads in Indian metros by removing/narrowing the pavements for pedestrians?

Sunil said...

Rahul...yes, you're spot on. I just expanded on your take, with a different perspective. I think it is more compelling now for economists to take a holistic view...because they're slowly beginning to realize that the economy and the environment are not necessarily different. Anand....thanks. Gawker.....research is beginning to take these aspects in to account, especially as environmentalists are realizing that a pure environmental arguement (or an arguement for the health and welfare of future generations) is not going to win any support.

Michael.....yes, quantifying that cost is a challenge, but something that economists should take up. In makes a lot of economic sense for the governments to step in now, and provide incentives for environmentally sound planning (including incentives to manufacturers and consumers) so that the benifits are long term and sustainable.

Srikanth.....hehe....yes. In this example, the "planners" are solving one problem, knowing well that they're creating new ones. I guess you've just moved to Bangalore...and this is hitting you hard.

Transmogrifier said...

Great posts Rahul and Sunil. I got to know about these posts through Gawker's comment on my blog. Thanks to Gawker for that. I got interested in relation between economics and the ennvironmental issues because of some readings on the fair trade movement. But few weeks ago I had read a post about The Natural step framework. I had looked into it a bit and then kept it as a issue for further reading. But from what I read the natural step framework basically comes from an idea similar to the one Rahul has proposed i.e the exergy destruction in production processes etc. It is based on the 1st and 2nd laws of Thermodynamics. I have NO detailed idea what the natural step framework is. But just thought I'd mention it and see what your thoughts were. Also it suggests to me that some means of quantifying the exergy destruction (i.e putting an economic cost on the destruction of environment) may already be available?

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