Environment

As President and CEO of the National Round Table on the Environment and the Economy, David wrote this bold statement on where Canada needs to go.

The Globe and Mail / Comment / Wednesday, September 4, 2002 / A13

THE NEW ECONOMICS

Earth summits won't achieve sustainable development.
We need to start a real accounting for the use of natural capital.

The Prime Minister is being congratulated for his twin announcements at the World Summit on Sustainable Development at Johannesburg. Putting the Kyoto climate change agreement to a parliamentary ratification vote and creating 15 new national parks indeed establishes Jean Chrétien's environmental legacy.

As important as these moves are, the real legacy lies less in the initiatives themselves than in what they represent -- which is no less than the beginning of a brave new era in which we value nature and call it by its true economic name: natural capital.
We need a new economics that values -- and in many cases gives a dollar value to -- natural capital. New economics begins by recognizing that the world's natural capital provides us with both services and products, and has a net worth.

Natural capital's services make life possible on a biological level. These services include air and water purification, productive soils, wildlife, climate regulation, flood control, and pollination of crops. Yet we take them for granted economically and typically assign no dollar value.

Natural capital "products" enrich us economically. They go well beyond natural resources like ores and oil. For millenniums we have been filling our medicine cabinets with remedies found in nature: Penicillin is produced by a mould; codeine is obtained from poppies. Nature also inspires technological innovation. Engineers have developed a substance stronger than steel by studying spider webs. The common field-burr was the model for Velcro.

Much of our economic activity is financed by the DNA Bank of Nature, where the accumulated capital of 500 million years of evolution is on deposit. Yet we do not take nature's value into account in decision-making. As the old business adage goes, you can't manage what you don't measure.

Monetizing some of this natural capital is a prerequisite to accurately measuring economic activity. It is also a prerequisite to informed decision-making that takes into account the measured limits of the Earth's carrying capacity.

One risk is that we could be significantly depleting our natural capital without even being aware of it. We do not now account for the true and full costs and benefits of economic decisions, either because these costs and benefits are not currently monetized, or because they are borne by parties outside the transaction. Such "externalized costs" lead to inefficient and inappropriate decisions -- market failures.

An example of a market failure born of externalized costs is the burning of coal to generate electricity. That's an economic activity that contaminates the air -- natural capital -- with smog pollutants, while damaging people's health. The Ontario Medical Association estimates that provincial health-care costs associated with smog pollutants are in the order of $500-million each year. The resulting worker sick days add a $500-million charge to the province's employers.

But when it comes to the impact on the value of our air per se, it's not accounted for. The electricity generator doesn't pay for damaged air quality or the ensuing health care costs and sick days; those costs are external to the company's bills. So acting as a perfectly rational, individual economic player in an imperfectly designed economic system, the polluter ignores health impacts that deplete other people's budgets and buys the "cheapest" fuel.

We must learn to factor the costs to, and benefits of, natural capital if we are going to change these rational individual (but irrational social) decisions, and make our economic behaviour more sustainable.

How do we move forward?

First, we must recognize the value of our natural capital, and when appropriate, assign a dollar value to it. If the Kyoto Protocol is ratified by enough countries to come into effect, its single greatest influence may be to monetize carbon in the international emissions-trading market that will quickly follow Kyoto's adoption. When market forces place a dollar value on the act of reducing carbon emissions, our economic system will be positioned to solve an environmental problem in the normal course of business.

The monetization and trading of carbon-reduction credits also presents us with an economic efficiency opportunity. Those emitters who can reduce most cheaply will find it profitable to "overreduce" and sell their surplus reductions to emitters whose cost of cleaning up is higher. This gives society the chance to achieve the necessary emission reductions at a lower cost. In fact, the costs of implementing Kyoto in Canada could be cut by more than half with an emissions-trading program, a study done for the National Round Table on the Environment and the Economy found.

Second, we must develop ways to measure and track natural capital, so that we can eventually reflect in an honest, intelligent fashion the true health and wealth of our country. This is why the round table is developing a set of indicators and national accounts for natural capital.

The parliamentary vote on Kyoto ratification will involve a serious national debate about the true costs and benefits of addressing climate change -- or not.

The coming debate on Kyoto is truly welcome. For, in part, it will tell us whether Canada is ready to move to the new economics that give value to natural capital, and integrate the environment and the economy.