Commentary: How best to value nature

Commentary: How best to value nature

Comment on Jutta Kill’s “Economic Valuation and Payment for Environmental Services”

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I agree with the main thrust of Jutta Kill’s essay, and am always pleased to be quoted. However, a different quotation from the same essay ( better conveys my perspective on how best to value nature.

“In the empty world, natural capital was a free good, correctly priced at zero. In the full world, natural capital is scarce. How do we take account of that scarcity without prices? This question is what understandably leads economists to price natural capital, and then leads to the monetary valuation problems just discussed. But is there not another way to recognize scarcity, besides pricing? Yes, one could impose quotas–quantitative limits on the resource flows at ecologically sustainable levels that do not further deplete natural capital. We could recognize scarcity by living sustainably off of natural income rather than living unsustainably from the depletion of natural capital…….Dollars become ration tickets; no longer votes that determine how big the scale of the economy will be relative to the ecosystem. The market no longer conveys the message “we can grow as much as we want as long as we pay the price.” Rather the new message is, “there is only so much to go around, and dollars are your ration ticket for a part of the fixed quota, not a vote that can be cast for growth.” Equitable distribution of dollar incomes (ration tickets) will then be seen as the serious matter that it is, to be solved by sharing, not evaded by growth, especially not by uneconomic growth.”

“Unfortunately, the more common approach in economics has been to try somehow to calculate that price that internalizes sustainability and impose it via taxes. The right price, given the demand curve, will result in the corresponding right quantity. However, there is a two-fold problem: first, methods of calculating the “right” price are usually specious (e.g. contingent valuation); and second, we don’t really know where the shifting demand curve is, except on the blackboard. In fixing prices, errors in demand estimation result in variations in quantity. In fixing quantity, errors result in variations in price. The ecosystem is sensitive to quantity, not price. It is ecologically safer to let errors in estimation of demand result in price changes rather than quantity changes. This is one advantage of the cap-auction-trade system relative to carbon taxes.”
In sum, the basic problem is unlimited growth in entropic matter-energy throughput. Cap-auction–trade systems primarily limit macroeconomic growth in throughput. They also use prices to ration the fixed throughput among microeconomic users, and by auction collect the scarcity rents on newly limited resource flows for public purposes. This makes it possible to reduce taxes on value added by in effect increasing equivalent “taxes” on resources (that to which value is added).  Increased prices of resources induce greater efficiency in their use. The Jevons effect whereby increase in resource efficiency induces greater use of the resource is blocked from the beginning by the quotas. The policy deserves better than to be thought of as simply “tradable rights to pollute or destroy”.


Cover: Economic Valuation and Payment for Environmental Services:Comment on the position paper by Jutta Kill:
Valuation and Payment for Environmental Services: Recognizing Nature's Value Pricing or Nature's Destruction?"

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