'Prices must tell the ecological truth.'

Can an economic valuation of nature actually internalise environmental costs?

New Economy of Nature: Glossary: Ecosystem Services and Environmental Pollution

The economic valuation of nature is said to enable companies to internalise the (environmental) costs they cause. This is based on the idea of organising economic activities in such a way that the price of goods and services ‘tells the ecological truth’, so that the associated environmental costs are borne by the polluter or consumer and not by the general public.

In practice – even if economic calculations are made – prices do not tell the ecological truth because such prices would be unenforceable

The prices of goods and services do not at present tell the ecological truth. Most direct and indirect costs of environmental destruction are not reflected in the price of the products or services; they are borne by the general public. The difficulty of putting the idea of internalising environmental costs into practice is evident from climate policy, which uses price signals as a key regulatory tool to drive energy transition away from fossil carbon use. Various model calculations based on the economic cost of greenhouse gas emissions for society (‘the social cost of carbon’) indicate levels of the price for emitting carbon dioxide based on their calculations. According to a study published in 2015, emitting a tonne of carbon dioxide ought to cost 200 times of what it does today, simply to reflect the projected economic damage caused by climate change. The widespread reaction to the study is telling: "No government is likely to impose such high prices on their businesses and industry any time soon."

This shows that an economic valuation of the destruction of nature or of environmental damage does not result in prices that tell the whole ‘ecological truth’ – even where indicative levels of such costs have been calculated. And there are additional questions that arise: How high would prices have to be to cover not only the internalisation of local environmental costs but also – in the case of climate change, for example – preventing the Earth from reaching an ecological tipping point or ensuring that global ecological limits are not exceeded? There are methodological difficulties, too: what price should be put on the extinction of a species? How much for the salination of drinking water thousands of kilometres away from the coal mining area or the headquarters of the mining company? The sheer scale of the figures that would have to be allocated is highlighted in a study that puts an economic value on 17 selected ecosystem services in 16 habitats worldwide. That value is estimated at between 16 and 54 billion US dollars per year. Yet for a world economy that is based on unlimited growth, what is the relevance of a figure that is too huge to have practical relevance – and at the same time too low to reflect the actual damage?

Prices can never tell the 'whole' truth

Even such a huge figure must of necessity be far too low because the calculation takes into account only those functions of nature that can be measured. Even a high price mark-up calculated from this figure would still not tell the ‘ecological truth’ of a product or service. Not only the unmeasured ecosystem functions but also the social, cultural and spiritual functions of nature would still not be taken into account and would therefore remain ‘external’. In the rationale of economic valuation as it is performed in a capitalist economic system, nature is still incompletely and unequally internalised. Each new internalisation also creates new and maintains some existing externalities. At best, some functions of nature change their status from ‘external’ to ‘internal’. Which functions of nature are internalised is always a political decision. But precisely that fact is seldom made clear in the current debate about the economic valuation of nature.

Putting a price on (environmental) costs distracts from the structural causes of degradation

In the context of present environmental crises, the call to 'put a price on pollution and destruction of nature' such as greenhouse gas emissions and habitat destruction distracts from the core challenge, which is to address the structural causes of the problems. In the case of climate change, the focus on discussing prices and market-based instruments already means that more attention is paid to damage limitation (regulating greenhouse gas emissions by putting a price on them) than to tackling the real causes (leaving coal, petroleum and natural gas in the ground).

This article is part of our dossier "New Economy of Nature".