TEEB: point & counter-point

Two recent opinion pieces for and against The Economics of Ecosystems and Biodiversity (TEEB).

Jennifer Morris of Conservation International is in favour:

I would describe it as the Rosetta Stone for natural capital —the key to understanding the benefits and services that biodiversity and ecosystems provide to people. TEEB is a tool that finally has enabled the environmental and the financial communities to start speaking the same language about how to value nature— an increasingly important issue that stands to affect every person on this planet.

CI see a huge benefit in the proper valuation of natural capital, and incorporation into business plans and accounts. In particular, they want to take environmental concerns out of the CSR and HSE departments, and into the heart of a business’s DNA, as overseen by the CEO and CFO. I agree. This kind of shift in how we assess the viability of business propositions cannot come soon enough.

Pavan Sukhdev, the father of TEEB, and now a board member of CI, has called for the cessation of “profit maximization at the cost of everything else”, but that is precisely what Frederick Kaufman, writing in Nature, fears will happen all over again with water:

Some environmentalists argue that putting a price on fresh water may be our best bet to save the planet’s supply. The more it costs, the less we will waste. In fact, the financialization of precious resources underlies the Economics of Ecosystems and Biodiversity (TEEB)

Lots of experts predict serious fresh water shortages in coming decades, and even some water wars. (Which, arguably, the Darfur conflict is.) Certainly Kaufman’s not short of a bit of doom-mongery. But rather than seeing economic valuation as the solution, he sees that heaping more misery upon us water users:

Investors of all stripes adore the apocalyptic vibe. Within the interstices of violence and chaos there will be money to be made. These days, the biggest profits do not come from buying or selling actual things (such as houses or wheat or cars), but from the manipulation of ethereal concepts like risk and collateralized debt. Wealth flows from financial instruments that are one step away from reality.

Making money come out of the tap means that fresh water must be given a price anywhere it is traded — a global price that can be arbitraged across the continents. Those in Mumbai or midtown Manhattan who understand the increasing value of water in the world economy will speculate on this undervalued ‘asset’, and their investments will drive up the cost everywhere. A water calamity in China or India — and the food inflation, political instability and humanitarian crisis that will surely follow — will reverberate in price spikes from London to Sydney. This is how bankers will profit.

The reverberations of a global water futures market can hardly be imagined. This much is clear: a water betting game will leave crops thirsting and push the global price of food far beyond the peaks of the past five years.

For what it’s worth, Kaufman does not object to the valuation process, just the commoditisation of a vital part of nature into just another asset class, complete with assorted derivatives, that will attract speculators chasing the latest opportunity for out-sized returns with little interest in its underlying nature. The Economist has repeatedly pooh-poohed the impact of speculators on global food prices (citing fundamental mismatches between supply and demand), and economists in general will point out that where shortages are anticipated in future, derivative markets are an excellent way of attracting the necessary investment today to offset that. The problem is the volatility, but that’s hardly unique to water. Not sure yet where I stand on this one.

Hat Tip: Alex Evans @ Global Dashboard

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