We can’t put a price on clean air

Bretton

In July of 1944, as the end of the Second World War approached, representatives from forty-four countries met for three weeks in a hotel at the foot of Mount Washington in New Hampshire and created economic history.

They drafted a blueprint for postwar financial stability that has become known as the Bretton Woods Agreement.

From that agreement came the International Bank for Reconstruction and Development and the International Monetary Fund — and they ensured that markets were able to recover, currencies remained stable, and conditions that had led to the Great Depression didn’t reappear.

The success of Bretton Woods also served as an inspiration to national governments, impelling them to systematize and standardize how they did their nations’ bookkeeping, so that economic activity around the world could be analyzed from a base of comparable information.

In the late eighties, another event occurred which has provided a similar, and equally important, inspiration. It was the 1987 report of the United Nations’ commission on environment and development, known after its chairperson as the Brundtland Report.

It called on all nations to report annually on changes in environmental quality, and changes in their « stock of environmental resource assets.’’ In the language of economists « resource assets’’ became known as a nation’s natural capital.

Only when measures of natural capital are combined with measures of economic activity (such as the gross domestic product — GDP) is it possible « to obtain an accurate picture of the true health and wealth of the national economy, and to assess progress toward sustainable development,’’ the report said.

The idea of calculating natural capital has caught hold. Most of the nations that have the ability are hard at work trying to come up with ways to catalogue their « resource assets.’’ The main problem is, how do you put a price tag on all the various parts of the environment. What’s clean air worth in dollars, for instance? What monetary value do you put on biodiversity? On preventing global warming?

Some things are relatively easy to value such as energy reserves, or timber supplies, even though collecting the data can be daunting. What’s happening is that countries are biting off what they can chew: cataloguing what they can, attaching values where markets have indicated economic worth, and trying to estimate worth where there is no market.

One thing that tumbles out of the concept of natural capital is the ability to calculate environmental deficits. If we poison the air, if we destroy species, if we create health problems, we run down our natural capital and, in the balancing of books that economists demand, we create a deficit.

We know we’re running a huge deficit. The problem is, we don’t know what the price tag for eliminating it will be.

Around the idea of treating the environment as capital, a lot of intellectual scurrying is going on. All of it is based on the conviction that the real wealth of nations can only be assessed, and the process of economic growth can only be understood, when thinking is shaped by the combined concepts of:
•      natural capital (the environment);
•      produced capital (human-made capital such as buildings, roads, and machinery);
•      human capital (the pool of individual skills that takes into account such things as education and health); and
•      social capital (how people organize and interact, including such things as political and legal systems).

As things stand now, the way we measure economic health is foolhardy because we treat the damage we do to the environment, and depletion of natural resources, as income.

Our main measure of prosperity is the GDP, but all it measures is economic activity — how much money, for instance, we make by fishing for cod. When we come to balance the national books, we don’t take damage or depletion into account. The result is, we can be going broke while the GDP still looks rosy.

It’s as if  you mortgaged your house, treated the money you got as income, and ignored the debt you owed. If you ignore your debt when you’re figuring out how to handle your affairs, sooner or later someone hammers a foreclosure notice on your front door.

 

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