Markets cannot deal with nature

A former head of Deutsche Bank's Global Markets business in Mumbai makes an unlikely disparager of markets and traditional economic theory. Yet, a recognition of the narrow limits of markets is fundamental to the work and outlook of Mr Pavan Sukhdev, who until recently held that position. “We are simply not recognising natural capital and we are not recognising what markets can deal with, which is private wealth… and what they cannot, which is public wealth,” he said at a recent meeting in London. “We are really stupid if we think GDP growth is going to deliver us out of poverty.”

Mr Sukhdev's views carry weight. Until recently, he headed the United Nations Environment Programme's Green Economic Initiative, while ‘The Economics of Ecosystems and Biodiversity' — or TEEB — project led by him, counting the cost of a loss of biodiversity and ecosystems, has been compared to Lord Nicholas Stern's 2006 report on the costs of climate change. Now, he lectures at Yale University on the lessons drawn from TEEB and runs a New Delhi-based consultancy, GIST Advisory, undertaking projects ranging from helping Azerbaijan manage its natural resources better, to assessing the impact of intensive farming on Punjab's ecosystem.

NEW PRACTICES

The TEEB project — conceived at a G8 plus 5 summit in 2007, hosted by the UN and implemented by Germany and the European Commission — published its final report in 2010, and now is well into its final stage, supporting countries, municipalities, communities and companies across the globe in finding practical ways to apply its findings. Some have already begun to do so: Last year, Puma became the first company to publish an environmental profit and loss statement, with its parent PPR planning to roll out such accounting across the group within the next few years, while India has pledged to introduce green national accounting in the next few years. Mr Sukhdev is also impressed by the British Government's White Paper on the Natural Environment, setting out concrete proposals for action during the next 20 years, which he describes as “almost too ambitious.”

A recognition of the value of ecosystems is already being factored into decision-making across the globe, says Mr Sukhdev. He points to a decision several years ago to preserve the Nakivubo swamp near Kampala rather than give it to agricultural projects, in recognition of the crucial role it played in treating and purifying urban water supplies. “They recognised what would have been gained from agriculture was far less valuable… The pure economic demonstration changed policy and led to the keeping of the swamp.”

The practical element means not just helping society recognise what it would lose from destroying natural ecosystems and biodiversity, but enabling it to find ways of incentivising society to preserve them too. “It's about paying farmers to change their use of polluting pesticides and fertilisers, paying municipalities not to dump garbage into the lake.” Mr Sukhdev cites the example of the Yujiashan village in China's Minshan mountains, where NGOs and the government joined forces to find a way to incentivise locals — through payments, sustainable energy supplies and some other support — not to pump polluting chemicals into the river serving the local capital city of Pingwu.

In fact, Mr Sukhdev is very encouraged by China's progress in natural resource preservation. China, he says, has recognised that without initiatives to preserve those resources it is “doomed to failure.” “Its two engines — the old brown economy and new green economy engine — are both running at full speed, as fast as they can.”

INDIA UNREFORMED

India performs poorly by comparison, he argues. India's failure to recognise the threat to its ecosystem and to biodiversity has lasted for decades, he argues. “We called it the green revolution but it was anything but green… it was brown and geared towards intensive farming and depletion of water tables,” says Sukhdev. Himachal Pradesh and Gujarat are a couple of States he points to for good practices, but otherwise believes it's been a lot of talk and little action. The Punjab project being undertaken by GIST is yet to report, though he doubts if it will paint a rosy picture.

“Punjab is still India's granary, and the impact on soil quality and the availability of fresh water is quite significant,” he says. “We can't keep pumping fertilisers into the ground with the intention that it will return ever new. We end up using more and more to produce less and less.”

He argues India's preoccupation with GDP growth at the cost of nature risks putting more and more people into poverty and the country's long-term economic prospects into jeopardy. “When the choice is between current income and future wealth, India always chooses future income,” he says. “We are not accounting for the depreciation in the value of nature. If you ran a company like that, you'd be bankrupt in a year's time.”

Also, playing into India's plight is the sharp divide between urban and rural communities. “Three hundred and fifty million people in rural communities in India depend on natural ecosystems; so if the forests get lost, city people aren't impacted, but the rural population lose their supply of fresh nutrients and water, their source of fuel and where their cattle graze,” he says.

He recognises that things aren't as simple as the Pingwu or Nakivuo projects, particularly when those that stand to benefit are thousands of miles away — such as the case of a wildlife reserve where the main costs aren't felt by local communities, but by foreign travel companies and international hotel groups. The challenge here is to find ways to localise those benefits.

VALUATION OF NATURE

Though there are plenty of good examples of policies from across the globe, the issue is if they can be replicated and scaled. It is politicians, rather than companies, who have to be the driving force, he argues. “Companies are perfect agents for a brown economy. They're agents of the market place and not there to create social wealth without the right incentives and right disincentives in place.” These are unfortunately missing.

“You have $650 billion of subsidies globally for fossil fuels, and $275 billion for cheap fertilisers and pesticides, so why would you use renewable energy or environmentally-friendly farming? We create our own problems.”

For Mr Sukhdev, an Oxford-educated physics graduate, the failure to recognise the immense importance of nature is a widespread one — and a failure, which until just a decade ago, he admits, he was guilty of, too.

“Adam Smith got it right when he made a distinction between use and value,” he says, pointing to the Scottish economist's remark on the discrepancy between the value placed on a substance such as a diamond and water. “We think price tells value but it doesn't. Value is a human institution, but we have a fundamental problem of being unable to value things that are free,” he says. “Nature doesn't have a price tag and doesn't send invoices, so we keep destroying it. It's when the service stops that you notice the cost.”

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