The economics of conservation

Rahul, who is an "energy researcher" studying Natural Gas, asks if there is a conflict between economic viability and sustainable resource utilization, and applies economic theory coupled with science, to suggest that economists might have to change some of their views on the issue.

Now, if only looking at the primary motive of an economic enterprise (direct profitability), it appears as if there isn’t necessarily a direct co-relation between (say) the environment, and the economic aspect. But, if looked at holistically, there is. For example, mining (for lets say steel) is a very profitable industry. It might be that a specific ore rich area is a dense forest on hills. Given its value as a resource, it seems essential to mine it, and of far greater value than that one little forest. But, the resultant deforestation is bound to result in deteriorating air quality in that area. Additionally, the hills serve as catchments for the local water sources, which run dry. The amount of soil erosion substantially increases. This results in local agriculture suffering, and the health of the people deteriorating rapidly. Economists do not consider the costs (in terms of human health, or actual resources lost due to losses in livelihood) due to the factory. The question to be asked is if the total value (of the particular economic enterprise) in absolute monetary terms offsets the losses in revenue due to the losses in health and productivity of an entire region. Rahul suggests incorporating an economic value for these losses, that should be considered in the original projection of the economic enterprise.

But the example I’ve taken largely has anecdotal or speculative evidence. Yet a lot of hard-nosed, practical environmentalists (who value the environment, but realize that economic factors are going to be paramount in human societies) are beginning to study environment and conservation in terms of monetary value (nothing speaks to developers or economists like money). The goals of preserving bio-diversity are difficult, and slippery. For example, the Florida panther is extremely endangered. But the land it lives on in Florida is very valuable for commercial enterprise. Sure, the loss of the panther (a sub-species of the mountain lion/cougar) is terrible, but is it far more important than the economy, economists ask? Anecdotal evidence is not an argument against this. But the more practical environmental researchers have realized this relationship between economics and conservation, and this is being reflected in actual research.

For example, take the coffee industry. It is extremely valuable, and employs millions of people worldwide. Coffee is grown on hillsides that were once lush tropical forests. Obviously, the losses to forests have been massive, but given the demand, the logic went that greater coffee plantation areas are needed. But now, hard-nosed studies are showing otherwise. Coffee can self pollinate, but bee visitation can increase yields of coffee by 15-50%. Now, with decrease in native habitat (read tropical forest), the pollinator diversity and visitation rapidly decreases. So, there is some importance of native habitat to the coffee plantations themselves. A detailed and thorough study (with rather conservative numbers) shows the decrease in visitation of pollinators in plantations due to surrounding forest depletion (2004, Conserv. Biol. 18, 1–10). A more impressive study (PNAS, August 24, 2004, vol. 101, no. 34, 12579-12582) (with more conservative numbers) quantifies the economic losses (in coffee productivity) due to forest depletion. In the study done in Costa Rica, a 1 km range of forest patches (for effective pollination) was taken. In the plantation the first 480 hectares were within 1 km of large forest patches, while the rest were not. In the region with forest patches, the output was 21.5 fa/ha, while in the rest, it was only 17.8 fa/ha. The income losses in the region without forest patches was $62,000 per year. So here, more was not better. This study did not even consider indirect benefits (like carbon sinks or water retention/purification) of forests).

Last year, South Asia was devastated by the tsunami. Anecdotal evidence told us that mangrove forests (that existed along the coast, but had since been depleted) would have protected the region. This was even seen in areas like Pichavaram in Tamil Nadu, that surprisingly had little damage due to the tsunami (due to the forests), but neighboring regions were severely affected. But a quantitative study in the area was missing. A recent report (Current Biology, Volume 15, Issue 12 , 21 June 2005, Pages R443-R447), systematically studied sites in Sri Lanka, with different degrees of degradation, and quantified the damage done by the tsunami in these areas (these were all directly in the path of the tsunami, with similar wave energies). Their results clearly showed that where there were mangroves, there was substantial protection against the tsunami. More surprisingly, the damage to the mangrove forests themselves was minimal (due to their own adaptation for survival in such environments!). There was a clear difference between mangrove forests, and mangrove associates (cryptic ecological degradation), and plantations of mangrove associates didn’t make it. Conversion of mangrove forests in to shrimp farms, resorts, urban or agricultural land contributed to the massive human and economic losses due to the tsunami, worth billions of dollars, and countless human lives.

In both these specific cases (with solid numbers), economists did not consider an economic value to the environment (that was being affected).

Our most recent example of course, is with the devastation Katrina wrought recently. Louisiana has massively depleted wetlands, and unfortunately the city itself was not protected against level 4 hurricanes. On a recent NPR show, a planner from Holland was interviewed. He said that Holland had very strict wetland conservation rules, and also spent a fair bit of money in ensuring level 5 hurricane safety to every inhabited region. Sure, the money spent was fairly large, but, in his own words, compared to the devastation bad economic planning had allowed the hurricane to wreck, it was peanuts.

Here’s Rahul’s solution:
Value Added Tax can be modified to include an exergy cost (sum of exergy consumption from the environment and waste exergy released to the environment).The tax is a measure of the physical value. This would automatically increase the costs of products that have harmful waste products and renewables would get a boost..

(cross posted at Balancing life).