Valuing the Environment

Sharon Beder


Citation: Sharon Beder, 'Valuing the Environment', Engineering World, December 1996, pp.12-14.

This is a final version submitted for publication.
Minor editorial changes may have subsequently been made.

Sharon Beder's Other Publications


How much would you be willing to pay to save the snow leopard from extinction? It may surprise you to know that asking questions like this is one of the best ways economists have for working out what the environment is worth. The spontaneous answer you and others give to such a question may determine whether a forest is protected. The whole project of integrating environmental and economic goals seems to depend on one proposition: that it is possible and desirable to attach monetary values to separate parts of the environment.

This proposition is being promoted by a group of economists, who call themselves environmental economists. Responding to environmental crises that have emerged in recent years they have adapted traditional economic models and theories to take account of the environment. They believe that giving the environment a monetary value is the only way to ensure that decision-makers in government and business consider the environment when they made their decisions.

Many of these environmental economists come from the neoclassical school of economics, a branch of economics that believes the 'free market' is the best way of organising society. They are searching for ways of adjusting the market system because they recognise that it has failed to protect the environment. For example, many firms who sell their products in the market cause environmental damage that neither they nor their customers pay for. They can pollute the air or the waterways without paying for the damage. Other firms dig up resources and cut down trees without paying for the loss of environmental amenity and habitat that result. Each firm considers only its own profits and costs. Environmental costs seldom get a look in. They are external to the company account books. Economists call these costs "externalities".

These environmental economists of the neoclassical school argue that the market would protect the environment if everyone had to take account of these "externalities" or environmental costs. And what is the best way to do that? By putting a price on the environment. They say that unless the environment is valued in monetary terms it will be neglected. Managers and politicians are used to dealing with monetary values and can more easily relate to them. For instance, the benefits from preserving a wetland can be compared with the benefits of filling it in and building a housing estate if each option is given a monetary value.

Once the various parts of the environment are given a price then all sorts of decisions are affected. National accounts can be adjusted to take account of environmental resources lost in the process of generating wealth. In this way measures such as GNP and GDP will give a better indication of the true wealth of a nation. As a result, the theory goes, governments will find that economic development that destroys the environment does not improve GNP so they will be less likely to encourage it.

Similarly cost-benefit analyses used to decide whether government projects should go ahead can include quantified environmental costs and this means that governments will give more weight to environmental considerations when they decide if the project should go ahead. If the profits from the project will be less than the cosy of the environmental losses then the project is unlikely to be given approval.

Environmental taxes and charges can be used to ensure that private firms pay the costs of the environmental damage that they cause. This is supposed to provide an incentive for them to reduce that damage. For example a company that has to pay a charge to put toxic waste into a river may work out that it can save money by treating its wastes before putting them in the river. If it decides not to do this then it has to pay the full charge. In this way the cost of the pollution is incorporated into the price of its products. Consumers then have the choice of paying the extra. Alternatively they can buy a different product that is cheaper because it causes less environmental damage. (Assuming such alternatives are available!)

In all these ways, putting a price on the environment is a way of ensuring that the cost of environmental damage is considered by governments, firms and individual consumers when they make their decisions. The decision is still theirs, which is why it is attractive to free market advocates, but the balance has been shifted in favour of the environment. But is this enough to protect the environment for future generations?

One of the first problems is whether the price the economist puts on the environment reflects its true value. Do we have enough information to know the real value of species and ecosystems? Our society is ignorant of most species that exist, the role they play in their ecosystems, how they interact, and the use or value they might be to humans now and in the future. "How do we deal with values of organisms whose very existence escapes our notice?" David Ehrenfeld, a US professor of biology, asks. "What sort of value do we assign to the loss to the community when a whole generation of its children can never experience the streams in their environment as amenities?"

Bryan Norton compares the reasoning of economists to hospital administrators trying to work out which parts of a life-support system can be disconnected and sold to raise money for the hospital. They do not really know which part is necessary for the continued operation of the support system, and have to guess which parts will not be missed. "It is one thing to treat the valuation of biodiversity as a guessing game or as a set of very interesting theoretical problems in welfare economics. It is quite another thing to suggest that the guesses we make are to be the basis of decision making that will affect the functioning of the ecosystems on which we and our children will depend for life."

Yet most of the methods used by economists in practice do not consider the value of the environment in terms of its role and functioning as a life support system. Rather they value the environment as a commodity whose market value can be assessed by finding out the public's willingness to pay to preserve it. This is done directly through surveys where a selection of people is asked what they would pay to protect, for example, a particular area of forest. The responses are averaged and totaled up for the whole community so that a final dollar amount for the forest is arrived at. Alternatively willingness to pay is calculated indirectly. For example the value of clean air might be arrived at by estimating how much extra people actually pay for homes in an unpolluted area.

People's willingness to pay is of course intimately linked with their ability to pay or their incomes. Affluent people are more willing to pay large sums of money for what they want because they are able to pay large amounts. Does this mean that they value their local environment more than poorer people value theirs? Clearly methods that depend on willingness to pay underrate the values of people with low incomes. This was most evident recently when environmental economist David Pearce and his colleagues used this method to value lives and found that the lives of people living in affluent countries were worth up to 15 times the lives of those living in poor countries because people in poorer countries were less willing to pay large amounts of money to avoid risk of death.

The market is a system that advantages those most able to pay. So relying on a market system to protect the environment will inevitably disadvantage the poor. Siting a dirty industry in an already dirty area or an area where property values are depressed will be less costly, according to the economists, than siting it in an affluent low-pollution area because the costs of pollution, if measured in terms of decline in property values, will be lower.

Just because the quantified benefits of an action outweigh the costs, it does not mean that the decision is morally correct or politically acceptable. For example, child labour or slavery would be considered immoral even if the economic advantages to the whole society outweighed the costs to some individuals. Pricing mechanisms and markets tend to ignore distributional issues such as who gets the benefits and who bears the costs. Economists assume the society as a whole is better off if total benefits outweigh total costs, even if a small group of people gets the benefits and a whole community suffers the costs.

Judging the value of the environment by how much today's generation is willing to pay not only discriminates against future generations and the poor. It also suggests that the only value that nature has is in terms of its usefulness to humans. Deep ecologists would argue that this is unacceptable and arrogant. It denies other living things any intrinsic value, that is any value outside their value to humans.

But why is it that ordinary citizens balk at answering questions such as how much are you willing to pay to save the snow leopard from extinction? Economists have found people are often unwilling to co-operate with valuation surveys. This is because many people find that putting a price on nature is as abhorrent as putting a price on family, friendship or freedom. It represents the further creep of the market and economics into areas of life that have traditionally been considered above material concerns. They do not see what their willingness to pay has got to do with environmental policy which surely involves ethical and cultural questions that the community as a whole must decide.

And it is this issue which is at the heart of the debate over valuation. Should environmental protection be the subject of political debate or a technocratic exercise undertaken by economists? Should it be a collective decision or a collection of individual preferences? Should people have their say by naming their price of by expressing their views?

Currently, citizens can influence governments to protect the environment by campaigning and demonstrating as well as by voting. It is because communities value the environment differently from developers that conflict arises in the first place. Giving the job of assigning value to economists does not resolve that conflict. It merely gives more influence to the values of those who employ the economists. A system where the optimum level of environmental protection is decided by firms and consumers responding to prices may seem to avoid conflict but it reinforces the power of the wealthy.

Environmentalists disagree over the issue of whether the environment should be given a price. But at the heart of that disagreement is the question of who should be deciding. Those who favour pricing, are attempting to persuade those in power to give more consideration to the environment by making them see how much it is worth. The well-known British environmentalist Jonathon Porritt argues that 'when you are talking to the people who are really in the business of destroying the environment, you have to use concepts that will allow them to begin to understand what we're saying'.

However, other environmentalists argue that such concessions will not change the power structure. Larry Lohmann, in an editorial in the Ecologist, responded to Porritt by pointing out that more environmental battles are won by local people chanting and demonstrating in their own language and forcing leaders to listen to them, than by people 'who allow their views to be phrased in consultants' cost­p;benefit terms'.

Putting a price on the environment is a band-aid measure that will shift the balance more towards environmental protection but it is a measure that reinforces the status quo. It does this by reaffirming the market as the primary social decision-making mechanism and emphasising the importance and priority of the economic bottom line. It supposes that once environmental values are internalised business can continue as usual and the environment will be protected.

A more radical conception of the problem would target these very institutions-the freedom of the market and the profit imperative-as leading causes of environmental degradation and inequity in modern societies. In this case the problem of valuing the environment becomes one of finding genuinely democratic ways to ensure communities have more say about what is produced and what is protected. And protecting the environment means ensuring that those communities have a true understanding of the way humans and the environment interact and a real feeling for the intrinsic value of nature.

Professor Sharon Beder is a visiting professorial fellow at the University of Wollongong.
Sharon Beder's Publications can be found at http://www.herinst.org/sbeder/