Economics and nature

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Déforestation Abidjan Arthus Bertrand environnement
Following various ecological crises, the world has understood that protecting nature comes with a cost. However, nature also provides numerous services that must be assigned a value. Now that an increasing number of collective decisions are considering the ecology, and are evaluated in economic terms, a growing number of studies are also attempting to attach a price to nature. However, the environment is not a piece of merchandise, and evaluating it is not an easy task.

A growing number of ecologists seize economic arguments to prove that defending nature is not only a moral necessity, but also a reasonable investment in everyone’s best interests. Using these arguments, ecologists address political and economic decision makers, highlighting the profit to be made from investments which may initially seem costlier but which in the long term will be less costly and therefore more profitable.

In a world where many decisions are taken on financial grounds, the field of economics attaches greater or lesser importance to things by assigning them a greater or lesser value. Since several environmental resources have become scarce, the question arises of assigning them a value in order to manage them as efficiently as possible.

The birth of an idea

For centuries, nature’s resources were considered a gift. The Earth was the basis for all wealth, yet nature had no price. With the emergence of industrial society, economists (classical, Marxian, and neoclassical) believed that value arose more from labour and capital than from the Earth.

However, once production capacity increased to a previously unseen scale, humans increasingly exploited nature and discovered that some resources were not unlimited. Once they became scarce, it was understood that fresh air, drinking water, healthy arable land, etc. must also have an economic value.

What price to attach to nature?

There are several ways to calculate the value of nature. To take the example of forests in France, three criteria may be identified.

The first criterion is the market output of this forest, i.e. EUR 1.34 billion earned for France through the sale of wood, Christmas trees, truffles, and cork, or from activities such as hunting and berry- or mushroom-picking. This value corresponds to the market output of the forest and the use of its resources.

The second criterion is what is called “services rendered” by this forest – not necessarily services which can be assigned a monetary value. Forests stabilise the soil and protect against flooding and landslides. This explains why following the Yangtze flooding disasters of 1999, – which left 2 million homeless and cost billions of dollars – the Chinese government decided to adopt a very strict anti-deforestation policy. Forests also filter rain water. The city of New York, when considering the best way to provide drinking water to its population, decided to protect neighbouring forests rather than build costly water purification plants. For a lesser cost, the population has access to naturally pure water.

Finally, a third criterion consists of determining what consumers would be willing to contribute. A survey was carried out to estimate the recreational value the French attach to forests (for example, as a destination for outings). The survey found that the French spend EUR 2 billion annually in transportation costs to travel to forests. However, when asked how much they would be willing to pay to protect the biodiversity of forests, the same survey found that the French would be willing to pay EUR 15.2 per household on average, which equals EUR 364 million per year.

Nature is priceless

Money alone can not indicate value. Human beings could not live without nature for the provision of the air, water, and energy that are indispensable for life. Ecosystems contribute to the world’s diversity: they mould culture and identity, and provide beauty, poetry, and spaces of tranquillity and meditation. All of these aspects are priceless.

Global evaluations

Nature includes elements that are difficult to quantify; the list of services rendered by it never ends. All methods that attempt to do so are open to debate, and estimates often differ considerably. In 1997, an early study by researcher Dr. Robert Costanza for the United Nations Environment Program (UNEP) concluded that nature’s services rendered worldwide were worth USD 33.268 billion annually. According to the UNEP, 40% of the world economy (approximately USD 20,000 billion) relies on biological products and processes.

In 2006, the Stern Review estimated the cost of the consequences of global warming at EUR 5.5 billion if nothing is done to prevent it. The same report states that reducing greenhouse gas emissions would require an investment of 1% of global GDP, and that the losses triggered by climate change would be equivalent in cost to those of both World Wars combined, or the economic depression of 1929.

“The Tragedy of the Commons”

An important and controversial reference work in the field of environmental economics is “The Tragedy of the Commons” by Garret Hardin (1968). In it, Hardin takes the metaphor of the commons on which all the farmers of a certain village put their animals to graze. This leads to overgrazing and destruction of the grass, from which the entire village suffers in the end.

Garret Hardin shows that free, unlimited access to a good encourages its overconsumption and hence, its destruction. In his view, the sum of individual interests ensures neither the preservation of a resource nor the collective good. In saying this, he contradicts the classical economic theory of Adam Smith. To protect a resource that is freely available, access must be limited through regulations or tax (for example, an admission tax for pasturage grounds or pro rata payment for the area grazed). Alternatively, the resource must be privatised so that the owner becomes responsible for its sustainability.

A parallel can be drawn with the situation of global fish stocks which are at an alarming level. According to the FAO, over three quarters of marine stocks are overexploited or depleted. Fishers still have access to this resource without necessarily being liable for its demise [See : Fishing article].

Moreover, privatising a resource does not prevent overexploitation. A privately-owned resource can become depleted if the user, motivated by strong demand, does not allow for the resource to renew itself.


When factories pollute neighbouring river water, the resulting environmental damage is not counted as a production cost as traditionally calculated, even though it definitely affects the community as a whole. This pollution gives rise to clean-up costs which are not covered by factory owners. In economics, the indirect effects of an activity are called “externalities”, since they happen “outside” the activity itself and off traditional accounting sheets. They are rarely taken into account when calculating wealth.

This phenomenon was described by economist Arthur Pigou in the 1920s. Externalities can be beneficial or harmful. Take the example proposed by James Meade in 1952, that of a bee-keeper who benefits from his location next to a garden. The honey is of better quality, sells at a better price, and the bees help pollinate the nearby trees, thus improving their yield. Here there is a two-way, positive externality.

The polluter pays principle

Externalities shed light on the issue of pollution liability. Generally, it is up to States and institutions to require accountability for the cost of externalities from those responsible, and there are several ways to do so. Laws and regulations can provide a framework for some activities or assign responsibility for the clean-up costs. Polluters can reach agreements with those affected by their pollution. Additionally, emissions trading systems can be set up. [see the article on the Kyoto protocol]

In 2008, the polluter pays principle entered French law: from now on, polluters are deemed liable and must repair damage caused by their pollution and compensate victims. However, this law does not assign financial responsibility to parent companies for the environmental damage caused by their bankrupt subsidiaries. It also frees polluters from liability related to “development risk”, which means that if environmental risks are not scientifically proven at the time of use or production, polluters are not held liable.

Ecology and business

The economic model of uninterrupted growth and the pertinence of associated indicators are currently questioned (see sustainable development and degrowth). However, with changes in legal frameworks and consumer preferences, ecological correctness is not necessarily incompatible with business profitability [see corporate social responsibility].

For example, Xerox saved USD 700 million through its recycling program for copier and printer cartridges, and AT &T reduced its paper budget by 15% after implementing a double-sided-only printing policy. The offer for green, fair trade, or organic goods and services is sustained by continually growing consumer demand. Moreover, environmental protection concerns are now spurring innovation (research on green technologies and clean energy); employment (in France over 370,000 individuals are employed in environment jobs); and growth.

Some business and organisations self-promote a fashionable “green” image to sell non-environmentally-friendly products. This practice, known as “greenwashing”, is regularly condemned by environmentalists.

In January 2008, a Paris court ruled that those responsible for the Erika oil spill were liable for EUR 192 million in damages for the resulting environmental damage. Environmentalists applauded the ruling as a historic one in the annals of environmental disasters. In previous disasters, fines had been exacted based solely on economic damages, such as by compensating shellfish farmers for damage to their crops, or tourism agencies for a drop in business. In the Erika case, however, for the first time a ruling took nature itself into account, as “non-commercial life”. This would include the 36,000 oil-covered birds rescued by the LPO bird protection league.

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