What is the world worth? Putting nature on the balance sheet
3 August 2010, Sydney Opera House
Miriam Lyons, Director CPD:
Good evening and welcome to “What is the World Worth? Putting Nature on the Balance Sheet”. I’m Miriam Lyons from the Centre for Policy Development and I’ll be your MC for this evening. Before we get started, I just want to give you a little background on what inspired us to invite Pavan Sukhdev to do a speaking tour in Australia. The Centre for Policy Development is a progressive think tank devoted to making good ideas matter. We’re especially interested in the ideas that get neglected because of short term thinking, in both the public and the private sectors. Good ideas that get shelved because they have long term benefits but short term costs. Like putting a price on carbon, for example. We’re also interested in ideas that are in the common interest but are fiercely opposed by vested interest. Like, say, a fairer return to Australians for our non-renewable resources.
So I first stumbled across Pavan’s name in the interim report released by the Economics of Ecosystems and Biodiversity Project, in which he pointed out that we’re trying to navigate some very complex terrain using a defective economic compass. He also referred to Adam Smith’s observation that prices are often out of whack with what things are really worth. Water is essential for life, yet incredibly cheap. Nobody dies without diamonds, yet diamonds are expensive. Which brings me to tonight’s topic: “What is the World Worth?” The cost of the global financial crisis stunned the world – how does this compare to the cost of bailing out bankrupt ecosystems? After years of running down our natural capital, are we getting close to an environmental version of the credit crunch?
Climate change has been grabbing most of our headlines in recent years, but we’re now coming up against multiple environmental limits at once. We’re running out of fresh fish and water and we’re living through the greatest mass extinction event in sixty five millions years. Pavan’s work looks at what this tells us about our economic system and about how it needs to change. He’ll describe what it would take to put nature on the balance sheet, and he’ll then be joined by a panel of local green economy thinkers, to talk about what that means for Australia.
Just before I invite Pavan on stage, I just need to make a few thank yous. First to the people who made this event possible, the amazing CPD staff, the Board, our volunteers, to, of course, our principle sponsor Qantas the major event sponsors, KPMG and UTS Business –without whom tonight would not have been possible.
So just a few words on Pavan, and there’s actually a lot more on Pavan in the little flyer on your seat, and he is really worth reading up on. But I’m going to make the introduction short. He is the head of The Economics of Ecosystems and Biodiversity Study, which is getting dubbed, really, Stern for nature. So think of how Stern has been adding up the costs of climate change, Pavan’s been doing that for everything else. And it’s really quite an important study and it’s been coming out with a series of reports: TEEB for policy makers, TEEB for business and soon, coming up, TEEB for citizens. I’m sure we’ll all be interested in that one. He’s also the Head of the Green Economy Initiative, which is run out of the United Nations Environment Program. Which is also doing some really important work, the Green Economy Report, which is again been coming out in stages, is due to be released early next year. And he is doing all of this while on sabbatical from Deutsche Bank. So, you know, this is kind of a hobby for him and I think that we should all give him an extremely warm welcome, a very big round of applause for all of the work that Pavan is doing in his spare time. Please welcome Pavan.
Pavan Sukhdev, UNEP:
Thanks Miriam and ladies and gentlemen, I am delighted to be here while on my sabbatical. When I went on a sabbatical, it was assumed that I’d be enjoying myself and doing almost no work. I can assure you that this one has turned out to be quite different from that expectation. There’s been a lot of work, a lot of reading, a lot of writing and a lot of travel, as you can see. And thanks to the CPD, the Centre for Policy Development for organising this, because it’s not often that I get to visit Australia – especially Sydney, a city I love, and North Queensland, where I shall go after I finish with you guys, and where I bought a small block of land many years ago when I started offsetting my footprint. But more of that later.
Today the task is quite easy actually. What’s the world worth? Simple enough question, what’s the world worth? Well, before you value something, you need to see what it’s about. So here are some pictures from my friend Yann Arthus Bertrand, the film-maker. That’s a glacier in Argentina. A water reserve, if you like. The next one’s right here, the Great Barrier Reef. And you can see, by distance microscopic, a tiny little helicopter which is in the corner there. The next one’s a forest, actually in Russia. Huge carbon store. Here’s another forest, a rainforest. This is the Amazonas. Massive store of carbon but also a freshwater pump for Latin America and a global biodiversity store. So, what’s all this world worth? What’s our biosphere worth? To get the answer to that question is in fact very straightforward. Just look at a world without a biosphere. Anyone recognise this? Mars, yes, exactly. So, no biosphere means, clearly not much life. Probably none. Definitely no humans, therefore no society. No society, no humans, mean no transactions between them. In other words, no economy. So the economy here is worth exactly zero. Then we have a world with a biosphere, which has, of course, lots of life and human beings, a society. Huge amounts of exchange, and a massive economy. “One” economy, therefore.
So, what was the difference? Well, one minus zero, divided by the original, which is zero. So the answer is infinity. The world is worth infinity. That’s all, Thanks. Okay that’s done, see you later !!
Miriam, the problem was not the first question, it was that subtitle that you put in there. “Putting nature on the balance sheet.” Why did you have to make my life difficult? Anyway, so let me answer the other part of it, you know, the subtitle, Putting Nature on the Balance Sheet. That’s a little more complicated. For that you need to understand what is nature. And the way one expresses it – and I know these are horrible terms: biodiversity, ecosystems, ecosystem services – you know, sometimes people think that perhaps the reason people invented the terms biodiversity and ecosystems is that they wanted people not to want to understand what nature is about. And, of course, to make life even more difficult, everything that comes free to us, clean air, fresh water, you name it, is called ecosystem services. But in a short summary, what I’d say is biodiversity is the living fabric of this planet. It is at the ecosystem level, which is that conglomeration that you saw in terms of the glacier or the forest or the coral reef. Its also at the species level, and it’s also at the genetic level. And each of these levels of biodiversity, each of these levels of the living fabric of this planet, actually provides economic value. In other words, welfare, wellbeing and benefits to us all.
Take ecosystems: from there we can get recreation by visiting them; you can get water regulation as the rainfall from the Amazonas; you can get carbon storage – all of the forests are massive carbon stores. At the species level, fish, for example, are food. The quantity, the abundance of fish matters. Design inspiration – there are few ads without any element of “nature” in them. And, of course, vital services like crop pollination. Of course bees don’t send invoices for pollination, and that’s part of the problem. Because the economics of nature, the wellbeing that it generates is largely “public goods and services”, and that is in fact the genesis of many of the issues and problems that we face today with the loss of ecosystems and biodiversity.
But the question to be asked is, why bother? I mean, isn’t this obvious? Why do you have to go through the process of economic evaluation of nature? Well, let me try and address that for you. And then also try to explain how it is to be done. The earth’s biosphere is something wondrous. It is our only home, and it’s worth infinity, we’ve just established that. Why do you need to put value to the ecosystem services that you get from it? And how do you do this? In simple terms, envision Nature as a three dimensional, colourful, ball. My colleagues call this the “disco-sphere” and you can probably guess why. But the problem is that you are trying to measure something that is multidimensional along an axis which is single dimensional. It is essentially the dollar axis, if you like, the economic value.
But if you don’t, then there’ll be other things, there’ll be other uses of land which are measured in economic value terms. And this will result in trade off choices being made, which means that nature would be destroyed. Wild nature would be replaced by built areas, by agriculture, by just human ingress into areas which are natural.
The thing is, in order to balance that equation and also balance that trade off that is happening, you have one end of the scale which has something which is measurable, tangible, like a factory or a piece of agricultural land, converting land into crop value. And on the other you have this mystical stuff which you don’t put a value to. To balance that, you need to measure nature’s services into society. And then when you do that and actually present two sides of the coin, your choice can be quite different.
I want to give a small example of this. Small because it is a locational, very specific example. This comes from South Thailand. This is about a shrimp farm which arose from a mangrove. And, in fact, this applies to a specific area in South Thailand. So, economically the logic was very clear. Shrimp farms, worth nine thousand, six hundred dollars per hectare, and if you leave the forest as it is, the mangrove forest, then that’s only providing you with something like six hundred dollars per hectare, based on the fuel wood that is extracted from there by the local community. Economic choice, very obvious. Convert the mangrove to a shrimp farm. But, hang on, if you also look at the subsidies that the local government, the Thailand government, provides to the shrimp farm, well, that’s eight thousand dollars. But if you subtract that, we’re talking about not such a huge comparison. A thousand two hundred, versus six hundred dollars. But, hang on, that’s not the end of the story. Because having the mangrove there means that you actually have a massive store of protection from storms and cyclones as they get more frequent, especially with climate change. And not only that but as a result of the shrimp farm, typically in three to five years, you end up having to just reconstruct the whole area because salination and the deposition of chemicals has basically destroyed that land. So you need to redo the whole area. That costs money. It costs about ten thousand dollars. And the value, you can work it out, of the mangrove protecting the area that you’ve got along the coastline in terms of local communities, their housing and their livelihoods, that can be measured in terms of areas which had mangroves and those which didn’t, how much cyclonic damage they suffered versus the others. And that works out to something like twelve thousand dollars. Now look at the trade-off choice. And this is the whole point, that if you look at public wealth and include that in your trade-off decisions, you get to a completely different answer than if you simply looked at private profits and worked your trade-off choice on that basis. In fact you get the opposite answer. You get conservation as the right economic choice and not conversion.
So is this just an isolated example from some small community on the southern coast of Thailand? No. A calculation, a much bigger calculation like this has been done by a group in the UK, a research group called TRUCOST. And their numbers were quite staggering. They worked out that the so called externalities, in other words, the cost to society of normal business by corporations with normal people, like you and me – us buying things like cars, petrol and then selling and us driving it around and creating a carbon externality. Or us buying fresh water for too cheap compared to where it comes from and creating, if you like, a negative fresh water externality. All of these added up – and pollution and so on. All of these added up, according to them, are something like 2.25 trillion dollars. That’s a huge number, fine, but it’s also, interestingly enough, a third, almost a third of the profits of those three thousand corporations. And you can imagine that this is three thousand corporations, so there will be some corporations where their externalities, which means their cost to society of doing normal business, are actually higher than the profits that they generate. Now is that a good business model? Have a corporation, license it, set it to work and get, guess what? At the end of a few years, it’s destroyed a lot more value than it’s created. Can you keep doing that? No. And that’s really the challenge. And that’s the challenge that corporations have to address and we, as society, have to address with them.
Do they know? Well if you, if I’d asked this question three, five years ago, probably I’d have said, well, not really. But let me tell you a story from recently, as recently as January this year, when I went down to Davos after having spent some time in Dubai, in a group preparing for Davos, which is the annual world economic forum meeting. In Dubai, at the end of last year, there were 800 experts gathered, collected in 75 councils, each exploring some aspect of a global problem. And mostly they were talking about their own areas, like the freshwater council was exploring freshwater. But when we went to them – I was biodiversity council chair – when we went to the, our group of ten people, one by one and found that the freshwater council was discussing loss of forest. When we went to the council on food security, they were discussing nutrients in freshwater and how that impacts them. When we went to the council on migration, they were talking about climate change. And finally we got talking about coral reefs and what happens in terms of migrations from coral areas. So all of the councils, when we talked to them, almost forty out of the seventy five had identified a major problem, whether it was to do with security or education or freshwater or food, or anything of the sort, that was connected to biodiversity. In other words, the loss of the living fabric of this planet.
The good news, therefore, is that in January after that meeting in Dubai, in January this year, Davos, normally there’s about one or two sessions which address nature. This time there were six sessions. And there were two on biodiversity. There was one on fisheries, there was one on the oceans. There was one specifically on a scheme called REDD Plus, which is quite interesting, I might say a few words about that later. And then there was a beautiful session which was a whole roomful of CEOs collected on tables, each discussing connections: connection between biodiversity and food, connection between freshwater and forest, connection between forest, freshwater soils and food, and so on, basically a cross-connected discussion, roundtable on natural capital and how it is important and how the loss of natural capital is a potential threat to business. So I can certainly say that this year, and especially now, the business world and the business leaders are aware of it. The gentleman that you see on the left hand side is actually not a business leader. He is the Governor of the Amazonas province, the world’s largest rainforest. And he was speaking and you can probably see someone familiar looking in distance out there.
A couple of years back, our TEEB project, The Economics of Ecosystems and Biodiversity, delivered its first report, or its interim report, and basically we had three messages. It was a lot of work. There were 225 co-authors, had written five papers and delivered a huge amount of analyses. But we summarise it in fifty pages. And basically the three messages were, firstly, that the sheer size of these losses is huge. We were talking about two to four trillion dollars’ worth of natural capital being wiped out every year as a result of losses, of business as usual. In other words, at the end of fifty years we said, if we keep doing business as usual, that means natural areas of the size of Australia, seven and a half million square kilometres, would actually be converted to something else or lost due to climate change, etc. And the cost of that to society, and if you put in a present value to that, that was the range that we found out. And the ranges, because we used two different rates of discount, one of which is four per cent and one of which is one per cent – I don’t want to bore you with discounting, but essentially it’s a way of deciding what is something in the future worth to us today. It involves an ethical choice because who’s receiving it in the future is your grandchild, who’s getting it today is you. So it’s not just an arithmetical choice, it’s an ethical choice. And that is established now, pretty much, by the community.
Perhaps the most interesting, and that was the third thing that we found and broadcast as part of our interim report, is the strong link between biodiversity and poverty. The typical view that is taken is that somehow it’s a choice – you can either have biodiversity or you can have a solution to poverty. You can either have a development, or you can have nature, you can’t have both. And that’s false thinking. It is not the case that biodiversity is just the preserve of the rich. It’s valuable to everyone but is an absolute necessity for the poor. And the poor gravitate towards biodiversity rich regions, not because they’re mad but because they’re poor – because they get so much free, that that is where it’s best to live. We worked this out in economic terms like this: we said, ‘okay, what if the forests were lost?’ Yup, there would be an impact, depending on where you are. If it’s Brazil, you’ll probably have an impact of about 10% of GDP if you lost all ecosystem services. In India, 16%, in Indonesia 21%. Sounds big but, you know, not particularly fussed because we’re not losing all the forest. This is about total value being lost. But you ask the question differently, saying, who suffers if you lose the forest? Alright? So what does the forest provide? Flood prevention and drought control. Who suffers if the forests are lost? Ah, the poor farmer. What else do they provide? Oh, they provide nutrients and fresh water, which go from the forest into the fields and therefore provide the poor farmer – guess what – with his livelihood. The subsistence farmer once again. Who suffers if cattle can’t go into the forest and feed on leaf litter? Oh, it’s the poor farmer. Who suffers if they can’t harvest bamboo and fuel wood from the forest? Oh, guess what, the poor farmer once again. So, when we looked at to whom the benefits flow that we are talking about, it’s was all to the poor farmer or to the poor tribal. So we recalculated our number and said, alright, let’s find out not what are ecosystem services as a percentage of GDP, but let’s find out what are ecosystem services as a percentage of the GDP of the poor. Then we got to some rather more different numbers. Because then the answers were 75% in the case of Indonesia, 47% in India, 89% for the Brazilian tribals and forest dependents. That’s the point – that if you lose these forests, if you lose nature, you are actually making the poor poorer. You are actually hurting their livelihoods. And I think this is probably the first time that the economics of this was presented. I mean this was something that was known to people who are in the field of environmental management. But the economics of this was presented and I believe it did make a difference, in terms of bringing to attention to policy makers, especially in the development agendas, what is the meaning of ecological infrastructure. Why is it important? Why do we have to worry about nature? Why must we value nature?
TEEB is actually today now into its second phase. As Miriam explained, we’re now looking at pretty much covering all of the end-users, as we call them. A little story is that when I thought, you know, clients is what we call them in a bank, but I was told no, no don’t be ridiculous, you can’t call a government a client. They’ll be offended. So I said, end-user? They said, yeah, that sounds better. So that’s how we wrote, we called them end-users. Later on I started saying, well, you know, client is an end-user who pays for your services. But they don’t want to hear that.
So we have The Economics of Ecosystems and Biodiversity mark 1, which is basically the first deliverable, which is the economic and ecological foundations. That’s on the website. We’ve also got on the website, TEEB for policy makers, which is essentially looking at all these aspects of forests, of freshwater, how do you put values to them and how can you actually pay for ecosystem services? We then have something coming out later this year, which in September, which is for local policy makers and administrators. It’s all very well to have a national policy, but if your local rule just says, you will create 2,500 extra jobs this year, well, guess what? You’ll still destroy the forest because building a factory there creates 2,500 jobs. You’ll still do that. So you need to have reasons locally why you need change.
And finally, what has come out very recently, just a couple of weeks back, is the draft for TEEB for business. Because at the end of the day, corporations do rule the world – sorry, for those who are in government amongst you. And the reality is that they employ two thirds or more of humanity, and their taxes. And that’s a very important point and probably a very relevant point in Australia, as results of discussions happening on resources taxes or not resources taxes. The corporation taxes of the corporations feed the budget deficit. They basically finance the government. And that is important and that creates the nexus between one and the other. So it’s quite important for all of this to be understood and acted upon by corporations if it is ever to make any difference. And lastly, and probably I should say first, because Lord Stern, who is, by the way, an advisor to our project, said two things the first time I discussed this with him – one is that when I told him what I planned to call this project, SIBIOS – he said, what? SIBIOS, Stern Inspired Biodiversity Study. He said, oh, so I thought I’d better change the name. And the other thing he said to me is, you know, whatever else you do, make sure that you include people and how this impacts people. So therefore we have TEEB for citizens. Which, you’ll be delighted to know, is not a weighty tome that you’ll have to sit and go to sleep over. It’s just a website. It’s a website that’s going to be called TEEB 4 Me. TEEB 4 Me, as in you. And it’s easy, just log in there and play around with the value of your backyard or the value of your national forest and what percentage of the national forest public wealth belongs to you because you’re one of 23 million Australians, or one of a billion Indians, or whatever.
Let’s go back for a second to this rainforest. It’s not just a carbon store. There’s not just sticks of carbon sitting out there waiting for Reduced Emissions from Deforestation and forest Degradation. By the way, that’s the official name of a scheme that was launched in Indonesia many years ago and now reaffirmed in Copenhagen. This is not just about carbon. This is the world’s biggest rainfall factory. Okay, here’s how: it’s basically an Amazonian rainforest water pump, because evapotranspiration from the rainforest actually feeds the winds that come in from the north eastern side, which is the Atlantic, and they provide the water that feeds the agricultural economy of Latin America. So you get hundreds of billions of dollars’ worth of agricultural output actually entirely dependent on the Amazonas and the rainfall. That means, you know, the state of Mato Grosso in Brazil, Argentina, Uruguay, Paraguay, all of those countries depend on the Amazonas rainfall’s water seeding function. Great. So Governor Braga must be a happy man. He must be getting lots of money from all of these places. No. He’s not. Because he doesn’t. They pay exactly zero, zilch for this, this important and vital ecosystem service of freshwater provision. So we are actually trying to put a value to that and show that this is the extent of economic value that you are receiving free from the state of Amazonas because of the Amazonian rainforest and from other states where the forest resides. It’s a way of reminding policy makers in that continent that, yes, there is an issue here. And the lack of this is in fact one of the reasons why there isn’t enough pressure to conserve the rainforest, as against destroy it for wood and for conversion into more cattle ranches and more soya plantations.
Another example for policy makers is to do with fisheries, and this is very much an international policy maker issue. Global fisheries. We are fishing down the food web. We’re basically going for smaller and smaller species and, and I know it’s close to dinner, but I’ll mention that at some point we will be left with basically plankton and box jellyfish and other such fascinating stuff. So, if anyone’s got ideas on companies converting box jellyfish into delicious food, tell me, I want to invest in them.
There is a problem with fisheries, jokes aside. But open access and subsidies are the two main drivers of the problem. Open access means anybody and everybody can go into the seas and fish as much as they want, no constraints, no issues. You just can’t do it within two hundred miles of somebody else’s coastline. That’s fine. If you go into the deep sea, you can take what you want. And the other problem is subsidies, because the trawler fees which go into these open seas are heavily subsidised. Most of the subsidies of twenty billion trawlers, twenty seven billion dollars per annum actually go towards industrialised fisheries. They don’t actually go to the poor small fishing boats.
What’s happening is that because of over fishing and because of this background of open access, fisheries are being lost very rapidly. More than a third of the oceans have less than ten percent of the fish that they began with. In other words, they are, as we call it, depleted. So less than ten percent means it’s not commercial to go fish there anymore. If this continues, and there are many forecasts we receive suggesting that within forty years, effectively there will be no fish, eatable fish at least, unless you are into box jellyfish and plankton soup and whatever. But basically the problem here is one of economic mismanagement and at a massive scale, I think global scale. The estimate of how much more productivity we could get if we managed this properly is about 50 billion dollars per year extra. Subsidies, 27 billion dollars. Can you imagine, 77 billion dollars per annum of economical waste in an industry that only lands 85 billion dollars’ worth of catch? That is what I call economic stupidity and this has to stop. It’s not good for anyone because lives are at risk in terms of livelihoods: 35 million people depend on fisheries for their livelihoods, these are jobs. And not only that, but the health issue is even bigger, which is that over a billion people, mainly in the developing world, depend on fish as their main source of animal protein. Upset that and you’ve created a problem with their diet and therefore a potential health problem of a magnitude that you really haven’t imagined.
Here’s an example of what is happening just to illustrate the point, which is that, if you look at the green line, that’s what the investment in trawler fleets and fisheries is doing. And on the flipside, fish stock is being depleted so fast that in fact the catch per unit capacity is going down, that’s the red line. Now, economics is a science of scarce resources. The scarce resource here is fish. It’s not fishing capacity. So if you are investing in something, you should be investing in ways of increasing fish, not increasing fishing capacity. And yet, every year 20 billion dollars are poured into increasing fishing capacity. That is called perverse subsidies. It is actually harming the economy, it’s harming people, it’s harming the fish of course.
Now, is there a solution? Some people would tell you that, yes, there is a solution and it’s called marine protected areas. You need to conserve certain areas or have no go areas, which means that basically fish stock revives out there. And, and the logic they use is that, well, allow a female fish to grow twice the size, it could produce ten to a hundred times as many eggs and the net result is fish stock will come back. Maybe. Maybe not. Is this true? Let’s find out. Well, here’s an example from George’s Bank which is off the coast of Cape Cod. I haven’t picked this deliberately because of cod having vanished, but it just happens to be there. And this is the area that I’d like you to look at for a moment. The blue dots, green dots and all the other dots are basically vessel hours. In other words, satellite tagged vessel hours in the locations. And you can see that the protected areas, which is this triangle, that big triangle there and that rectangle here, don’t have any trawlers. Except maybe just a few who’ve wandered in by mistake – hint hint. But overall you might think, well, what’s this guy going on about? Mr Sukhdev is wrong, the fishermen are right. He’s denying them a livelihood. Clearly they’ve got to fish outside these areas and they must be affected by this, right? They must be losing livelihoods as a result of this. This is nonsense. Hang on, I invite you to look at this triangle a little bit more carefully. So here’s the next picture. There. Where do you think the trawlers are right now? They’re hanging around the edge of the protected area. Because, guess what? No-one told the fish that there’s a protected area. So the fish just wander in to the nets and they get picked up at exactly the edge. Of course it has restocked. Of course the theory is right and the scientists are right. All that’s happening is that the fishermen don’t have the patience, and sometimes their governments don’t have the willingness or the understanding of this issue to just support them for the three to five years that it take to rebuild fish stock. So instead of spending 27 billion dollars and wasting most of those 27 billion dollars – every year, the right thing to do is just spend some of that in supporting these fishing communities during the three, five or seven years it takes to restock. And keep the protected areas as a means of providing for these communities. Clearly it does work, and this is not the only example. We’ve seen dozens of other examples like this before.
Good economics does work and there are so many examples, I don’t want to bore you. But let me just pick some from this list that I’ve got out here: Costa Rica, the Panama Canal, Toyo Oka City, the Nakivubo Swamp. Costa Rica is an example that worked at a national level, where Costa Rica is a small country in the neck of the Americas, basically meso America, between North and South America in the little neck where you have Panama as well. In Costa Rica they decided as far back as ’97, that they were suffering because of loss of forest and they wanted to change that. So they worked out that the reason for that was that basically forests were being converted to pasture for cattle, for beef cattle. And the rough yield for beef cattle per hectare, per year was about fifty dollars. So the government decided to pay fifty dollars per hectare, per year to farmers who owned land, forested land, and in order to not convert it into more pasture. Because clearly that was having an impact on soil fertility and on freshwater and just on the look of the place. So they actually paid farmers to keep forests so that soil fertility could be maintained, freshwater would be improved and effectively, biodiversity would be conserved. The net result is that during these thirteen, fourteen years, it really has worked. And not only that, but the increased freshwater has improved the hydroelectric potential of these areas, because they do have some dams. And today we have a situation where forest cover has grown in Costa Rica from around 20 percent to almost 50 percent. And the country is prosperous. Small farmers benefit as well. It’s not just the rich farmers who have land who benefit, because soil actually collects more nutrients as a result of the forest and that increases the productivity of soil downstream or close by where there are smaller farms with subsistence farmers as well. So it is an experiment that worked. Again, good economics.
Another example I want to talk for a few moments is regarding the Nakivubo swamp in Kampala. Here’s a case where at some point the government locally decided – this is the capital city of Uganda – the local government decided that it would just convert the swamp into more agricultural land, forty square kilometres. It sounded good. Then an economist came along and did a calculation, we have the study, saying that, look the value, the present value of that agricultural output is something like a couple of million dollars. But, in fact, the swamp out there is collecting the garbage, collecting the sewage from the city of Kampala, it is effectively a sewage treatment facility. It is working for free and is providing value which is huge. And they worked out the value of an alternative cost of a sewage treatment plant for the city of Kampala, which turned out to be almost ten times the value of the agricultural land. So the government actually reversed a decision which it was going to take to convert and dam the swamp and block the area, to leave the swamp as it was, and it’s still there. It’s basically not designed as a sewage treatment facility, but it does that job tremendously well.
I could go on but there are more than fifty examples. In September, if you log into the website, you will actually see about fifty examples of good policy decisions based on clear economics, showing that public wealth increase as a result of conservation is the right way forward.
Is the economics the solution? Is there nothing that economics cannot save? I’m afraid that’s not true either. So, here’s an example of where economics does not save wild nature. This is about coral reefs and, of course, you’re all familiar with your own rather grand coral reefs in the Great Barrier Reef. But coral reefs are beyond beauty, they’re not just places to go to if you’re planning your next vacation or, you know, places that will, if they die, force you to take a vacation elsewhere, or go skiing instead of snorkelling. But they’re actually those red dots, those are the tropical coral reefs, they’re providers of livelihood and food for more than half, more than five hundred million people, more than half a billion people around the world. All the way from the Pacific Islands, Indonesia, Malaysia – these are heavily populated countries. Indonesia itself is 220 million people, Philippines, 75 million people. The Andaman Islands, Madagascar, the entire area out here in the Caribbean. The problem is this, that we are, and this is what people think coral reefs would look like, but the reality is that beautiful fish and coral grass beds and beautiful corals and so on is not necessarily what they look like. These are recent pictures. As a result of the loss of coral reefs, due to blast fishing, due to just degradation, due to chemical run offs, due to cyanide fishing, which is leaving cyanide, basically to kill off fish, and generally due to coral bleaching. These are the sort of images that you see today in coral reefs.
The problem here is that we globally are targeting a level of carbon dioxide of 450 parts per million. And what happens is that, as carbon dioxide builds up, it’s already at about 390. It starts getting absorbed in the oceans. The oceans are alkaline, but as a result of absorption, they became less alkaline or more acidic. And that’s really what ocean acidification is about. When an ocean acidifies, in other words becomes less alkaline, the net results is that the natural regeneration of the coral reef is prevented. You can’t get the aragonite crystal that forms out there to form. The problem is that at today’s targeting in Copenhagen, or for that matter in the climate process, we are targeting a level of carbon dioxide which most scientists believe is too high for coral reefs to survive on an ongoing basis. Scientists have given us numbers of 320 ppm, 350, 380 ppm – only one has given us a number of 480, which is higher than where we are targeting. So there is an issue here that, you know, we are probably making a societal choice, as a community, to not have coral reefs. Can economics save this? No, we can’t. The last coral reef is probably worthless because, you know, it just is too precious to put a price on. So we can’t actually apply the logic of economics and marginal value when you’re coming to the last unit of what’s left. And that’s where you need to make an ethical choice. So here we have it. We have an ethical choice. Sadly, this is an ethical choice which we are making kind of unconsciously, if you know what I mean. We’ve sort of stepped into it and made that choice without necessarily having thought through the consequences. And the consequences are huge. 500 million people dependent, potentially 200 million displaced as a result of that. That’s the biggest migration problem that the world would have ever faced and it’s nothing to do with politics. In some ways you might argue everything to do with politics because of the climate agreement not being there.
Another question, maybe flip it around, is that what about the other way round? Can nature save the economy? We’ve gone through an economic crisis. It’s not the first one. In my banking career, I’ve lived through and traded through four crises of this kind: credit blow ups, you know, Latin American debt, you name it. Are we doing something wrong that could be righted by using nature better? And I believe so. And I think there are many examples of the risks that we are creating for nature and in the world being potentially solutions as well. Carbon tax emissions, guess what? You can make business out of bio carbon offsets and the REDD+ scheme. Disturbing habitats and conversion of land, sure, you can make business out of biodiversity offsets and conservation banking. Freshwater overuse and misuse is a problem. We’re using too much. But, at the same time, you can make business out of payments for water protection. We have several examples of that actually working. Marine footprint, we heard about the fisheries, does it have to go that way? No, you can, as the example said, make an additional 50 billion dollars of value every year if you get sustainable fishing right. Pollution and waste, does it have to be a problem? No. You can make business out of recycling, out of tradable permits. There’s a lot of opportunity here. And not only that, even for the poor, this whole issue of adapting to climate change is a serious solution. Because, at the small end, at the level of the community which is dependent on natural flows, climate change is the biggest problem because it hits you on water security, it hits you on food security and it hits you in terms of storms and cyclones. And, in regrowing the forests, replanting the coral reefs and getting the fisheries back, or replanting mangroves and getting the fish back as well as wood stock, is actually a way of stopping that. So, yes, wild nature can actually help the economy. In fact, it can even save economics, that’s my point.
Today we are in a world where economics really only recognises manmade capital. But the reality is that there is also human capital and there is also natural capital. We are fixated on GDP growth, we are fixated on national accounts which don’t capture nature. That’s absurd because natural capital is actually the largest item on the balance sheet of the nation. So my point here is that we should, we can and we should include nature on the balance sheet. And we have to recognise that today we are in a kind of spaceship, spaceship earth if you like. We are navigating a spaceship. We should be having a bank of instruments that is huge, complex and fantastic and working really well. Instead we’ve got a mariner’s compass: looks lovely but it’s useless.
We can’t keep measuring progress at a national level with GDP growth. We can’t keep measuring performance for a company simply by looking at quarterly profits.
Ladies and gentlemen, we need that change and with that change hopefully we can get nature on to the balance sheet and provide the solutions that we are after.
Thank you very much Pavan. I’m going to invite the panellists to come up and join us on stage now. Just introducing them very briefly:
Jennifer Westacott, is the partner in charge of KPMG’s sustainability, climate change and water practices in Australia. And she oversees all of KPMG’s sustainability services. She’s also the leader for the sustainability and climate change across KPMG’s Asia Pacific works, and she’s the global leader for KPMG’s sustainability strategy. And she also has over twenty years of experience in state government, so comes from both a government and business perspective.
Peter Cosier is a director and the founding member of the Wentworth Group of Concerned Scientists. Probably many of you will be familiar with their excellent work on water in Australia. His work looks at the design of systems to mainstream the long term health of Australian landscapes into our economic and social institutions.
Paul Gilding has spent nearly a decade working with large corporations and business leaders on sustainability strategy. This frontline corporate experience was preceded by a twenty year involvement with social change organisations including heading up Greenpeace.
Please welcome all our panellists.
Peter Cosier, Wentworth Group of Concerned Scientists:
Thank you very much for the opportunity here. I’ve just been asked to briefly mention to you an initiative that Wentworth Group is actively engaged in in Australia at the moment. Which on the face of things, to most people, looks quite mundane and even bureaucratic. But after Pavan’s talked today, I think you’ll probably get to understand the significance of it.
It’s an initiative to build a regionally based set of national environmental account. And we’re looking at trying this model across Australia over the next twelve months. And then, when we’re successful, we hope to take it to the world.
Let me start with a positive note. For those nations that rode the wave of industrial revolution, it has created staggering wealth. We are, without doubt, the wealthiest, healthiest and most educated generation in our history. Since Australia became a Federation in 1901, average incomes in this country have grown from six thousand dollars per person in today’s dollars, to over fifty thousand dollars for every man, woman and child.
Our political systems were built to manage the industrial revolution. With the great contest of the age was a contest between capital and labour. We have, as a nation, become highly skilled in economic management, highly skilled in the social sciences – education, health, law and order. Our problem is that our political institutions were designed at a time when the natural world seemed endless, where nature was there for the taking and where land clearing was part of a heroic vision to develop the nation, where freshwater flowing to the sea was considered to be wasted. If we’re to have any hope of addressing the challenges that we’ve heard tonight, we’re going to have to apply the same discipline to environmental management that we currently apply to managing our economy. And it’s a very simple principle: if you don’t measure it, you can’t manage it. What we need are national environmental accounts that tell us, region by region, state by state, nation by nation, the health of our key environmental assets and any change in the condition of those assets over time.
National environmental accounts of Australia, proposed in what we call accounting for nature model, are effectively simply by biophysical accounts. They do not attempt to aggregate with economic account within a single measure. And the reason for this is best expressed by Joseph Stiglitz, the Nobel Laureate for Economics. He said recently, when driving a car, a metre that added up one single number, the current speed of the vehicle and the remaining level of petrol, would not help any driver. Both pieces of information are critical, and need to be displayed in distinct, clearly visible areas of the dashboard. We need a set of environmental accounts that sit alongside the economic accounts for the same reason.
Now, this sounds all impossibly complex. But it is, in fact, remarkably simple. Because our model for environmental accounts takes its design principles from one hundred years’ experience of economic management of the industrial revolution. It creates a common environmental currency from which all assets, which is being capable of managed, applied at any scale. It makes use of the vast array of existing scientific information that has already been collected. And it simply aggregates this information to produce accounts that can be used by anybody.
Before money was invented, people exchanged goods and services in a barter system. The creation of money – a common currency of exchange – revolutionised the world’s economic system. The magic of an environmental currency is the same. It will do the same thing that the economic accounts do for managing nature. It will allow us to compare the relative health of a sand dune with a river, an estuary with a rainforest. And in doing so, it will create the platform for managing our natural resources as affectively as the economic accounts underpinned the management of the industrial revolution.
Jennifer Westacott, Partner KPMG:
Thanks. I’ve been asked to talk about pricing. I want to take a broader perspective on this because I think there are three sets of issues to really manage here. Price, cost and value. So the first thing that I think, if we want to do this sort of thing in Australia, what we need to do is to stop seeing economic growth and environmental health as in competition with one another. The second thing, as part of that, is that we do need to recognise that the environment does have economic value. But we don’t have good tools for this. We know how to measure the cost of environmental failure more than the value of environmental health. That means we know the value of something too late. But we don’t have some good tools here so I absolutely agree with Peter about a national set of environmental accounts. But we also need better ways of measuring value and how we actually measure long term value versus short term value.
The third point about pricing is that we know for major economic transformation, and the major economic transformation that we need to undertake to deal with greenhouse gas reduction, we have to change the incentive structure and that does involve putting a price on greenhouse gas emissions. One hopes that’s the starting point for the citizen’s assembly. But there are a variety of natural resource issues where we’re not putting in place the right incentive structures, leaving price just to one side for a minute. For example, we don’t have any schemes in Australia where we’ve got incentives for environmental stewardship. And we don’t have market mechanisms for environmental stewardship. We’re not pricing water effectively, particularly in the urban context. In the rural context, we’ve done a lot of water reform and we’ve still got a situation where the environmental water holder, a very good initiative of the Federal Government, is trading permanent water, so it’s seen as a loss to farmers. As opposed to allowing farmers to participate in a water market where they sell water to the environment when it needs it, and I’m sure that would get a lot more engagement with that community if it was seen to be a market mechanism where everyone was a beneficiary. We don’t have proper incentives on land clearing, reforestation and building and infrastructure.
So the key issues, in terms of that incentive structure, are who pays - and we could have a long debate about that, which I won’t go into. And the role of subsidies, just to pick up on Pavan’s point. If we looked across Australia and did an audit of all of the subsidies that government is putting into a variety of industries, we would find a great deal of money washing around in that system. The difficulty is that those subsidies are never linked to environmental stewardship. They are, in fact, a free good to continue to consume more. If we linked those subsidies to incentive structures and to regulation which is about environmental stewardship, it probably would not cost as much as everyone thinks.
The fourth issue about pricing and cost is that we need to understand the real, long term cost to communities and individuals. And the real long term costs of inaction. When we say to the community, it will cost us more in the long term, I’m not sure they entirely believe this and we have to put some more real examples in front of them. The Australian community is now spending nearly thirty billion dollars trying to catch up on water infrastructure and water conservation and affectively to secure the water supplies of major cities. This is not coming at no cost to the community. This is coming at a very significant cost on people’s water bills. And we’re not engaging the community properly. But if we delay these decisions about more efficient use of our natural resources, ultimately they will be paying for the catch up.
And finally, we need to see the positive side of this. There are many examples where more efficient use of natural resources will come at a profit. It will improve the bottom line, it won’t be a negative cost to business. And we’ve got to get started on some things. One of the difficulties in this whole issue of pricing and market mechanisms, is that we want to design a Rolls Royce that never gets out of the garage. And we’ve got to be very careful about providing complete schemes, that don’t recognise the asymmetry of participants here. Farmers, fishermen, major corporations aren’t all going to be equal players in very, very complex market mechanisms. So they have to be designed in a way that allows people to participate easily in them. But the critical thing is to get started. If we try and design these perfect schemes that have absolutely no flaws in them, we will make very little progress in this matter.
Paul Gilding, writer, advisor and advocate on climate change and sustainability:
Thanks Jennifer. I want to make some comments about how I think this is going to unfold, like, how this will all translate into action and what timeframe and then finish with a question, Pavan, for you.
So, I guess my first response is that, again, great data, great frameworks. We’ve got, I’m looking forward to being an end user and using the information. But, you know, great information in there, obviously a very thorough analysis. And yet again, we have got more evidence of the logic, more evidence that, you know, we have a serious issue here and that these are not just environmental nice to have issues, these are fundamental, economic issues. So I think that it’s important to acknowledge this work’s always important and yet we still don’t get the change. And so the question of my focus is, why don’t we get the change and how will we get the change?
And looking at it in the Australian context, I think we are a classic microcosm of the world, in that we have a very cold, you know, CO2 intensive economy, among the highest per capita in the world. And we have some of the biggest impacts in terms of our, of our economy in terms of how this unfolds to us in terms of loss off reefs and so on, in terms of direct economic impact.
So, despite the fact that we know that and we measure, and with these sort of reports, we can measure them better and better, we still don’t get the change. So in Australia, we’re still stuck again in this cycle of really earnest agreement to do something, some time, some other time but not now. And everyone agrees that that’s a really important thing to act on, but we actually don’t do it. So I’m not sort of just saying, isn’t that terrible? I’m saying that’s the important issue. The important issue is, why don’t we act and how do we act and when are we going to act? And how to get ready for that, both in Australia economically, and more importantly globally.
So, I guess my kind of challenge to you, or my question to you, really is around that. How I see this as unfolding is unfolding as an economic impact, for all the data that you’ve got and put in that report, what that says is that degradation of the environment has an economic impact. Now, that’s not just a theory, that’s a practice, it’s a practical fact, therefore it will have an impact and therefore my view as to how it will unfold is that it’ll have an economic impact and that will prevent us from growing the economy any more. But if you’re running it, as we are globally, at about a 140 percent of capacity, in terms of sustainability, that doesn’t keep on going and you don’t keep on using up economic capital indefinitely. At some point that unfolds in economics impacts.
I guess that’s my kind of question to you is, how do you see this unfolding? How do you see this actually translating into economic impact and then into political impact after that?
Pavan, while you respond to that, I’m going to ask everyone who has a question to race along to the microphones located there and there. Again, just a reminder, please, one question per person, short, to the point and I am talking a tweet-length question. So, Pavan, do you want to respond to that briefly?
Sure, thanks. And also to the points made by the other two panellists. I think the first point that I’d like to address is, yes, the economic impact is something that needs to be measured. And it has to be measured at the national level as well as at the corporation level. What you do not measure, you cannot manage. And I think that’s been a mantra that I’ve been reciting for a long time, at least. And I think what you described, Peter, and what the Wentworth Group has worked upon, is an interesting and practical way forward in terms of measuring environmental impacts at the national level.
What perhaps is also worth repeating, although you did bring it up, is that these impacts would have an economic dimension to it. So you would be able to measure a value number against the quality of the environment, a value number against the extent of forests, the availability of fresh water, the quality thereof, etc, etc. So the first step is to get this framework set up where you are actually recording value, and you’re doing it at a national and a state and a locational level.
The other key vehicle, if you like, of our economy these days is, of course, the corporation. And I believe that one of the key ways in which we can move the corporation forward into recognising its impacts – because, whether we like it or not, the purpose of the corporation is its own self-interest. Its purpose is to create more capital for its shareholders. And we can keep objecting to that, but that’s law, that’s the way it works. The only way we can impact the shareholder, and through the stakeholders if you like – that’s you and me and the governments – is to make regulation arise which forces the corporation to be more transparent. In other words, if it’s got ten millions tonnes worth of carbon emissions, it should state that in its report. If the value of those emissions, or the social cost of those emissions is 850 million dollars at the Stern value of carbon, well, that should be disclosed. And there should be a rule which says how you disclose this based on the social cost of carbon, or whatever rule you wish to choose. But there should be a rule.
So there has to be a lot of calculation, a lot of standardisation and a lot of disclosure. When that disclosure happens, in other words when these economic impacts are not just being calculated by the TEEB report, but in fact being calculated at the company level and at the nation level, and reported, people will recognise what’s happening. This is your life. This is your economy. This is your wealth that’s going down the tube. And these are your fisheries, etc, etc. And I think that’s, I can’t emphasise how much information is worth, if you have the right information. And how dreadful it is when you don’t. Because if you do not have that information available, then measuring and managing simply does not happen.
So that’s in terms of the impact side. Now, the other side is behaviour change. We’re all consumers. We’re all citizens. We each have a local representative in a parliament. And I think that’s the other point that I will make, which is that change will only happen when consumer behaviour changes as well. So in addition to disclosure, which affects national planning and affects at the corporation level, it affects investor and it affects analysts and the way they examine a corporation – we have to also change behaviour. And I was given a lovely story about how Brisbane actually had something called target 140, where they targeted something like a fifth of their original water consumption and actually managed to achieve it over a span of some years by just managing their freshwater use more carefully. So clearly that was a question of consumer management and I believe it can be done. It has to be done.
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