Biodiversity loss is not visible in the indicators used in economic policy planning
18.2.2021 Blog Anni Huhtala (VATT)
The main message of the Dasgupta Review is that the economy does not exist separate from nature. The activities of people, households and companies are based on the management of assets. It causes problems that nature has not been considered an asset, capital goods, and a source of wealth in the same way as human capital and produced capital.
A few years ago, the U.K. Treasury commissioned a review “on the economics of biodiversity” from the highly esteemed economist Sir Partha Dasgupta, Frank Ramsey Professor Emeritus of Economics, University of Cambridge, U.K.
The main message of the just released “Dasgupta Review” is that the economy does not exist separate from nature. The activities of people, households and companies are based on the management of assets. It causes problems that nature has not been considered an asset, capital goods, and a source of wealth in the same way as human capital and produced capital. Therefore, as a result of economic activity we have already exceeded the carrying capacity of nature and are consuming natural resources and ecosystem services in an unsustainable manner.
We fail to see the dangerousness of biodiversity loss in the economy, partly because the value of nature's ecosystem services is not reflected in market prices. Furthermore, the value of natural capital as an asset or changes in it are not displayed in financial statements, in the profitability calculations of investments, or in the national accounts. This is what the Dasgupta Review wants to change. The invisible value must be made visible in all financial decision-making. No matter whether we are dealing with everyday commerce, financial investments, construction projects or land use, the impacts of economic activity on nature’s carrying capacity should be taken into account. We should abandon any transactions and projects with highly detrimental impacts on nature if their adverse effects cannot be mitigated or remedied to a sufficient extent.
The report has already drawn criticism. On one hand, it has been asked does the economy – or economics – know no limits: must the value of natural resources be measured in monetary terms, down to the last animal species? On the other hand, it has been suspected whether the indicators used for demonstrating the decline in biodiversity have been right for the purpose – have not some indicators even suggested that species extinction would have stopped?
If one has patience to read the Dasgupta Review, one notices that it pays much attention to how difficult measuring is and makes efforts to prove that, just because measuring is difficult, we should still not forget about the measuring and indicators or about trying to correct the distorted economic decision-making through economic policies.
The critics may not have understood in how radical terms the Dasgupta Review criticises the indicators generally used for describing economic development that are based on theories of economic growth. Dasgupta proposes that we should also include natural capital, the natural resources, in the primary factors of production we use for describing economic productivity. The idea is not new, as similar extensions were introduced to the traditional Solow growth model already in the 1970s. Instead, the assumption that biodiversity affects the total factor productivity of the economy puts the measuring of the sustainability of economic growth to test.
In fact, Dasgupta criticises the climate review of another distinguished economist, his colleague Sir Nicholas Stern, as regards economic growth modelling. The 2006 Stern Review emphasises that the problems associated with the burden we put on nature can be solved by means of technology. Once we succeed in putting a price on a single unit of particular emission, carbon dioxide, we can control climate change, and the economy can continue its unlimited growth. According to Dasgupta, technological advances alone will not be sufficient means for protecting of biodiversity and mitigating air pollution and other environmental burdens.
Dasgupta proposes the inclusion of natural resources and ecosystem services in macroeconomic models. In the same manner, the carbon dioxide concentration in the atmosphere is today described in the integrated assessment models combining the economy and the environment.
It is clear that the modelling of natural capital is difficult. It is equally difficult to demonstrate how human labour or production capital (such as machinery and equipment, buildings) can replace natural capital in the national production. And if biodiversity also affects the total factor productivity of the economy – the famous Solow residual – how should this be taken into account in growth calculations? What exactly does the current method of measuring labour productivity indicate?
Dasgupta's analysis framework makes it easy for an economist to understand the mechanisms of biodiversity loss. But it is much more difficult to make biodiversity visible in political decision-making. Biodiversity loss is both a local and a global problem, and economic policy lacks indicators that could be utilised in national economic decision-making and policy planning.
Dasgupta illustrates the seriousness of the problem with the help of UN Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development. No one has demonstrated that reaching the SDGs would make the life on planet earth sustainable in terms of nature's carrying capacity. Quite the opposite. If the humanity is already, as things are, using natural resources and disposing of waste into nature in proportions corresponding to sustainable production of more than one and a half planet earths, nature' s carrying capacity would hardly manage the achievement of the UN SDGs.
The Dasgupta Review was received by the current British Prime Minister Boris Johnson. Biodiversity loss is expected to become a key theme of international politics as global policies are being outlined in the forthcoming climate and biodiversity agreement negotiations. The certain thing is that the economic impacts of biodiversity loss will be of interest to the international community. For Finland, too, it is worthwhile to study the review and take its message seriously in the national economic policy planning.
Anni Huhtala
Blog
Blogit
Energy, climate and environment
Environment, energy and climate policy
economic growth
economic growth and environment
environment
environment economics
environment policy instruments
environmental and resource policies
environmental impacts
environmental policy
growth theories
international environmental agreements
natural resources
resource economics
