Why cost-benefit analysis is a much better context for ecosystem service valuation than natural capital accounts

Help! I just discovered I agree with George Monbiot!

Well, sort of. He makes a number of sensible points against natural capital accounting that are worth considering:

Natural capital accounting suggests substitutability. Prices are substitutions. In a market money is best understood as a numeraire good, a good that has no immediate value of its own but that acts as an intermediary and a yardstick for the value (read: relative scarcity) of all the other commodities. I know natural capital adherents who try to estimate the monetary value of ecosystems, but flinch at any suggestion of it being a “price tag”: ecosystems cannot be substituted, they say. If a commodity cannot be substituted it has an infinite price. Attach a finite number to it, and it becomes substitutable. Period. This means two things. First, as Monbiot rightly argues, a price is meaningless without the suggestion of a transaction. Indeed, much non-market valuation aims at finding the compensating variation of a public good: how much money people should pay (receive) to make them just as happy as if they had not seen the public good reduced (improved). But these are incremental changes, whereas natural capital accounting regards the value of total stocks of capital. Second, if you value the total area of forest at some price (usually the per-hectare value times the area in hectares) you suggest we would be happy if we sold all our forest at that price (plus, say, one euro). But the per-hectare value reflects the marginal value of the first hectare you would cut; by the time you’re done cutting all the forest the last tree will be worth astronomic sums of money.

Pricing something crowds out intrinsic motivations to preserve it. A growing body of social-psychological research demonstrates that this is indeed a risk. A now-classic study demonstrated that when parents were fined for being late to pick up their kids at a day-care centre, they were more likely to be late – paying the fine absolved them of the moral obligation to be on time. Another study demonstrates that when being informed on the economic value of a park, people are less likely to donate money to its conservation.

I don’t think monetary valuation is entirely useless, but I do admit I’m getting more skeptical of natural capital accounting. Originally non-market valuation was developed to be included in cost-benefit analysis, and I think it should stay there. For three reasons:

Cost-benefit analysis has a null option. A properly done CBA compares at least two alternatives: adopting the policy and not adopting the policy. Both alternatives should be defined carefully, so they can be compared on their positive and negative effects on human well-being. NCA has no such null option. Suppose the government wants to build a highway straight through a forest. A CBA would compare two alternatives: one where we keep the forest and accept the traffic jams, and one where we lose the forest but win travel time. Comparing the economic costs and benefits of both alternatives gives us the incremental costs and benefits of building the highway. Now, I know that NCA was never meant to be used in such decisions (which raises for me the question what it is being used for), but the example demonstrates the problem with its lack of a null option: if we lose the forest, what do we have left? There is no proper definition of “no forest”: is it barren land, a hole in the soil, a graveyard of trees? The worst case of valuation-without-context is replacement cost pricing, where the forest is valued by the costs you would make to rebuild it elsewhere if it disappears. In a CBA such rebuilding efforts could be part of your policy alternative, and the CBA will inform you on the merits of that choice. In NCA, however, you would have to assume that the forest would be rebuilt no matter what.

Cost-benefit analysis is done in incremental terms. As rightly pointed out by Monbiot (and, actually, many economists), it is silly to assume that the total value of a biome is equal to its marginal value times its area. In fact, economists developing methods to value natural capital are aware of this, so what they do is to account for the value of natural capital in a way that is consistent with how we calculate GDP. Nevertheless, the very act of valuing all forest in a country yields numbers that are very difficult to interpret, and therefore prone to misinterpretation. In a CBA, both alternatives are defined by a proper storyline and a delineation.

Cost-benefit analysis has a context. CBA is usually done to inform a concrete policy decision, and most of the time it is an input into a wider decision-making process that involves multiple stakeholders. Also, in this process many other values are considered besides economic value, such as social impacts, aesthetics, ethical considerations. Non-market valuation of ecosystem services can be part of this, but one can also choose not to monetize those values, and leave them to a wider debate that can also include other considerations. (I’m currently reading up on taboo trade-offs and the IPBES theoretical framework – exciting stuff!) At best, the valuations done within NCA are included in satellite accounts that also list biophysical parameters such as species richness, forest cover, and air quality. But the wide range of considerations that will feature in the public debate will still be reduced to a set of statistics.