Best New Ideas in Money: Every whale is worth $2 million? Why it’s time to add the value of nature to GDP

Whales lead long lives sequestering carbon dioxide in their bodies. At death the creatures sink to the bottom of the ocean, still holding that absorbed gas. Ultimately just one of those mammals is responsible on average for pulling 33 tons of heat-trapping CO2 out of the atmosphere for centuries. The estimated economic value of this service to slow climate change? A tidy $2 million per individual whale.

Readers of National Geographic may well be able to spout off a whale’s worth. College environmental programs certainly discuss it and all the benefits of healthy oceans. Even prestigious lending and aid institutions like the International Monetary Fund have reported on biodiverse ecosystems, sounding an alarm about what at-risk flora and fauna mean for economic health for the most vulnerable human populations. 

The problem is there’s never been an official global accounting of natural capital, not in gross domestic product (GDP), the calculation of goods and services, or any other broad economic measure.  

“The World Economic Forum says $44 trillion of global GDP, or around half its total, is highly or moderately dependent on nature.”

When GDP is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not. That’s been the conventional thinking for generations. But what happens when the effects of that growth — pumping fossil fuels, converting forests to fields, allowing hotter oceans to shrink whale populations, or clearing mangrove stands for seaside condos — chew up future growth? An increasing chorus of economists and policy makers want us to literally value our natural capital. 

“We need to consider an expanded definition of GDP that doesn’t paint an artificially happy picture by excluding the natural capital we deplete,” says Justin Johnson, assistant professor in applied economics at the University of Minnesota, who is part of the school’s Institute on the Environment.

It’s not a few inconsequential pennies, either. The World Economic Forum says $44 trillion of global GDP, or around half its total, is highly or moderately dependent on nature, most prominently in agriculture, construction and the food and beverage industries.

“The World Bank predicts global annual losses of $2.7 trillion by 2030 if ecological tipping points are breached without more investment to protect and restore nature.”

For the big thinkers, natural capital has less to do with price per acre of corn or the premium for a balcony view of the Pacific Ocean, and everything to do with what sustainability scholars say is a miscalculation of how much the natural world — increasingly under threat from human activity and climate change — actually drives the global economy. And, they ask, if we’re not assigning real value, what’s the impetus to save it?

The World Bank offers a number and timeline for sobering consideration. It predicts global annual losses of $2.7 trillion by 2030 if ecological tipping points are breached without more investment to protect and restore nature.

Already, 14 of the 18 assessed ecosystem “services” to the global economy have declined since 1970. This means smaller fish catches, a reduced ability of nature to control disease-carrying pathogens, less protection for communities from extreme weather and more challenges in sequestering carbon, which can slow global warming, the World Bank warns in its report, The Economic Case for Nature

Even billionaire Jeff Bezos may see the light; the Amazon founder’s first significant distribution from his $10 billion Earth Fund is marked for biodiversity.

All creatures great and small

Back to those majestic whales and their almost unfathomable value. Preserving and restoring whale populations worldwide would remove as much heat-trapping carbon from the atmosphere as what two billion trees can absorb, some researchers say. But whales can’t contribute as much if rising ocean temperatures lead to dwindling numbers. 

Then there’s one of the tiniest creatures among us: a pesticide-stricken bee population. The money that farmers earn from selling crops is counted in GDP, true. Yet there is no formal value assigned to the services of the bees that pollinate the crops. (The wind does some work, too.) There is also no broad accounting for the quality of the soil. That is, until the bees die or the soil loses fertility, causing yields to fall. The loss of pollinators alone would equate to a drop in annual global agricultural output of about $217 billion, the WEF predicts. What if instead, GDP accounted for earlier factors?

In a worst-case scenario, if countries are unable to adapt to a shock to ecosystem services, say via lost pollinators or severe heat, the global economy would shrink by 2.3% a year, the WEF said. For comparison, the world economy contracted 3.3% last year due to the COVID-19 pandemic, the worst peacetime decline since the Great Depression.

Listen to more experts on the value of bees and other contributors to natural capital

Developing economies would particularly suffer because they’re more reliant on raw materials and the goods and services provided by nature. Sub-Saharan Africa and South Asia would see real gross domestic product shrink annually by 9.7% and 6.5%, respectively, the World Bank said.

“As an example, consider a family with modest savings who is living within their means. They are financially sustainable. But, if they chose to spend down their wealth, they could have a much more extravagant lifestyle, at least for a little bit. This might feel good in the short run, but many would not be happy if they know this choice means they will be evicted from their home the next year,” said Minnesota’s Johnson. “It’s the same thing with our natural capital. We can extract it or exploit it, and often in the short term, this can lead to increased GDP. But spending down our natural wealth means we will have much more serious problems later.”

Also see: How the U.S. could be smarter about insuring against extreme weather-related disasters

Johnson said the authoritative U.N.’s Intergovernmental Panel on Climate Change (IPCC) “red flag” report shows this very clearly for climate change, and that has drawn much of the focus. But other reports show similar risks to our rich biodiversity or just the general health of our ecosystems. 

 A GDP add-on: GEP

Johnson and colleague Stephen Polasky at University of Minnesota’s Institute on the Environment, for instance, have formulated what they call GEP, gross ecosystem product. It accounts for the pollinators or a tourism boost from a clean river in a way similar to adding up the value of cloud storage, washing machines or dining out.  

Published in the journal Proceedings of the National Academy of Sciences, GEP has been tested in China where, for instance, in Qinghai province, the Mekong, Yangtze and Yellow rivers provide a critical water supply to wealthier provinces downstream but receive no credit for this natural capital in a traditional GDP equation. 

Countries sometimes set up payment for river usage, but policy development can be slow or burdensome without better measurement of a river’s total value, said Gretchen Daily, faculty director of Stanford University’s Natural Capital project, which has also pushed for a GEP. China would, for instance, apply GEP in making a decision about damming rivers.

 “We see a potential future where GEP is reported alongside GDP in all economies,” Daily told the institution’s news service, adding that her group’s study has linked job creation and the restoration of critical ecosystems to the inclusion of GEP use.

Johnson’s University of Minnesota also wants users to think of the approach as pro-growth. His team created an economic model, called GTAP-InVEST, which aims to incorporate both how the economy affects nature and vice versa in how the economy gets fundamental, irreplaceable value from nature: clean water, reduced soil erosion or protecting coastal communities from storms. The acronym’s “invest” plug is no accident.

“The reason to create a model with both the economy and the environment is that we need to make challenging policy choices, like how to protect land for biodiversity and climate change prevention while also not undermining our ability to produce food,” Johnson said. “Without a model to help navigate these trade-offs, we are essentially flying blind into a risky future.”

Costly reactions

New methods often lead to increased costs of implementation for businesses, which are ultimately passed on to consumers, and that worries some policy makers.

But Michael Gerrard, the founder and faculty director of Columbia University’s Sabin Center for Climate Change Law, says it is often only disasters that bring about the biggest change, which can be a “costly way for society to move forward.” 

For example, Congress enacted the Oil Pollution Act of 1990, passed as an amendment to the Clean Water Act of 1972, to streamline and strengthen the Environmental Protection Agency’s power to prevent spills, but only after the Exxon Valdez catastrophe in 1989. This spring’s ruling in a Dutch court, which ordered Royal Dutch Shell to cut its carbon emissions by a net 45% by 2030 from 2019 levels was a landmark case, Gerrard agreed, but will be challenging and slow to leverage elsewhere.

Rethinking subsidies

The Paulson Institute, working with The Nature Conservancy and Cornell University, has included a call to reform “harmful” subsidies as part of its proposal that details how to fill the funding gap to pay for saving biodiversity.

“If the biodiversity financing gap is considered as a monolithic number — over $700 billion per year — it sounds daunting,” says Henry Paulson, former Treasury Secretary, and his team, in their report. “But if that amount is split into a series of smaller, more manageable categories, closing the gap begins to appear within reach.”

For starters, according to the Organization for Economic Cooperation and Development, governments spend at least $500 billion annually on subsidies or other credits to agricultural producers, forestry and fisheries, as well as the fossil-fuel drillers. Hence, reforming subsidies in sectors that depend on ecosystem services, for instance delinking these payouts from how much farmers produce and attaching them to how much biodiversity farmers save, can provide more money to spend on natural capital preservation and still help producers.

A priority area could be maximizing synergies between the biodiversity and climate agendas — leveraging climate change payments like the global carbon funds that pay farmers for maintaining or restoring natural tree covers that sequester carbon, for instance. Such policies could reverse biodiversity loss while providing climate benefits for the larger community, the World Bank paper, The Economic Case for Nature, argues.

A ‘new deal for nature’

The economic data rethink to favor natural riches faces critical tests right now. 

Two major international conferences this fall have been labeled by some as a point of no return on tackling climate change and biodiversity. One of the key upcoming meetings is seen potentially bringing what some call a “new deal for nature.” At the 15th Conference of the Parties (COP 15) to the U.N. Convention on Biological Diversity, in Kunming, China, in October, some 200 participating parties started a framework for targets to reduce and eventually halt biodiversity loss by 2030 and beyond.

Also see: Sustainable agriculture is the next way ESG investors can fight climate change

Not much later, November’s U.N. climate meeting in Glasgow may well be the “last, best hope” for the world’s biggest polluters to take action, John Kerry, special U.S. envoy on climate, told a summit of 40 world leaders last Earth Day.

Already, the U.N. has made economic data change a priority. Its Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) warns that humans are exploiting nature far more rapidly than nature can renew itself and the panel has now issued defined standards for the measurement of natural capital.

For the U.S. in particular, the Biden administration has made a pledge to address climate change in a “whole of government” approach. And with more Republicans desiring a mixed bag of environmental solutions, their typically pro-growth stance may increasingly align with saving ecology for the economy’s sake.

Many observers believe serious attention now means it’s not too late.

“There is some hope that economic analysis and policy will rediscover nature before the damage to the services we get from it — and thus to everybody’s standard of living — becomes irreparable,” said Diane Coyle, professor of public policy at the U.K.’s University of Cambridge, and author most recently of “Markets, State, and People: Economics for Public Policy,” in a commentary.

Investing implications

The push for valuing nature hasn’t been confined to think-tanks and university campuses. Wall Street senses its own opportunity.

Also see: Biden matches Obama’s ‘social cost of carbon’ for now — it’s a figure roughly 50 times greater than Trump’s

There has been an uptick in biodiversity-linked exchange-traded funds and other investments that reflect a bet on growing interest for a stake in the next big environmental-investing push. That means thinking beyond investing in solar, wind, offsetting emissions, or making sure a fund is void of industrial polluters, the tack historically followed with most environmental, social and governance (ESG) investments.

S&P Global Ratings ranked biodiversity among the top ESG ideas for 2021. And firms including Fidelity International and Axa Investment Managers are now focusing on the separate-but-related threat of biodiversity loss, they said in outlooks for the year.

Institutional investors managing more than $7 trillion in equity assets consider biodiversity issues to some extent, including Allianz Global Investors, BNP Paribas Asset Management and California Public Employees’ Retirement System, known as Calpers, the nation’s largest public pension. Notably, $7 trillion is a sliver of the $100 trillion in total global assets under management, so clearly, a majority of investors and companies still don’t put a price tag on natural capital, or the cost of losing it. 

Also see: Opinion: If you want to fix climate change, you need to fix this flaw in conventional economic thought

There are broader factors for investment portfolios and retirement savings if pro-growth positions ignore what can’t be replaced. Stock market gains, for one, shouldn’t assume unchecked growth in perpetuity without regard to natural capital and climate change, argues Kathy Baughman McLeod, senior vice president and director for the Adrienne Arsht-Rockefeller Resilience Center.

“There’s an underlying expectation that a retirement portfolio can average 12%-15% returns, all things being equal. But that’s if loss of biodiversity, or pollution, doesn’t have a price on it,” Baughman McLeod said. “You can’t have 12% to 15% and not hurt the environment. We have to bring expectations down — that’s the expectations of investors, that’s the World Bank, others.”

The bill will come due at some point, via higher real estate or insurance costs in retirement, or unexpected risks from extreme weather to the supply chains that power favorite companies.

“We all need to bring return expectations down, because we’re still standing behind shareholder primacy over stakeholder,” Baughman McLeod continued. “What that outlook is not accounting for is the real loss to nature, natural capital and sustainable life. And that’s not a healthy return on investment, either.”

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