CONVERSABLE ECONOMIST

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Nature as Part of the Stock of Humanity's Wealth Posted: 02 Apr 2021 09:08 AM PDT I despair of writing a blog post that captures a sense of The Economics of Biodiversity: The Dasgupta Review (February 2021) The report is 600 pages. It is a UK government-backed report, technically the "Final Report of the Independent Review on the Economics of Biodiversity led by Professor Sir Partha Dasgupta." If you know Dasgupta or his remarkable output of deeply insightful, nuanced, and humane work, you need no further persuasion to take a look. If not, this is a chance to get acquainted.  The title of the report seems unfortunate to me, because the discussion in the report is broader than the what is usually  meant by biodiversity.  Here, I'll start with a snippet from Dasgupta's preface to the volume, which gives a fuller sense of its purpose. Then I'll try to give a flavor of the discussion by cherry-picking a few of the points that struck me. From Dasgupta's preface (footnotes omitted):  Not so long ago, when the world was very different from what it is now, the economic questions that needed urgent response could be studied most productively by excluding Nature from economic models. At the end of the Second World War, absolute poverty was endemic in much of Africa, Asia, and Latin America; and Europe needed reconstruction. It was natural to focus on the accumulation of produced capital (roads, machines, buildings, factories, and ports) and what we today call human capital (health and education). To introduce Nature, or natural capital, into economic models would have been to add unnecessary luggage to the exercise. Nature entered macroeconomic models of growth and development in the 1970s, but in an inessential form. The thought was that human ingenuity could overcome Nature's scarcity over time, and ultimately (formally, in the limit) allow humanity to be free of Nature's constraints ... . But the practice of building economic models on the backs of those that had most recently been designed meant that the macroeconomics of growth and development continued to be built without Nature's appearance as an essential entity in our economic lives. ... We may have increasingly queried the absence of Nature from official conceptions of economic possibilities, but the worry has been left for Sundays. On week-days, our thinking has remained as usual. ... [I]n order to judge whether the path of economic development we choose to follow is sustainable, nations need to adopt a system of economic accounts that records an inclusive measure of their wealth. The qualifier 'inclusive' says that wealth includes Nature as an asset. The contemporary practice of using Gross Domestic Product (GDP) to judge economic performance is based on a faulty application of economics. GDP is a flow (so many market dollars of output per year), in contrast to inclusive wealth, which is a stock (it is the social worth of the economy's entire portfolio of assets). Relatedly, GDP does not include the depreciation of assets, for example the degradation of the natural environment (we should remember that 'G' in GDP stands for gross output of final goods and services, not output net of depreciation of assets). As a measure of economic activity, GDP is indispensable in short-run macroeconomic analysis and management, but it is wholly unsuitable for appraising investment projects and identifying sustainable development. Nor was GDP intended by economists who fashioned it to be used for those two purposes. An economy could record a high rate of growth of GDP by depreciating its assets, but one would not know that from national statistics. The chapters that follow show that in recent decades eroding natural capital has been precisely the means the world economy has deployed for enjoying what is routinely celebrated as 'economic growth'. The founding father of economics asked after The Wealth of Nations, not the GDP of nations. ... If, as is nearly certain, our global demand continues to increase for several decades, the biosphere is likely to be damaged sufficiently to make future economic prospects a lot dimmer than we like to imagine today. What intellectuals have interpreted as economic success over the past 70 years may thus have been a down payment for future failure. It would look as though we are living at the best of times and the worst of times. Thus, the Dasgupta report calls for estimating the impact of humans and economic development on nature, and comparing it to the rate at which the biosphere can regenerate. The thesis is that human impact greatly exceeds the regenerative rate at present, and the challenge is to bring these into balance. If we work under the assumptions that global population is going to rise for some decades to come (even if it tops out and starts declining later in the 21st century) and also that a higher standard of living for billions of people is desirable, then perhaps the key factor is the efficiency with which an economy draws upon nature to provide an improved standard of living for people. The measures of "efficiency" and "standard of living" should be understood in broad terms, including not just technology, but also institutions and perhaps even how humans choose to define what what will make them feel better off.  The volume dives deeply into these topics. Here are few samples, from smaller to bigger topics. Let's start with "Trade in Vicuña Fibre in South America's Andes Region." For the uninitiated, a vicuña is a member of the camel family, related to llamas and alpacas, living in South America (again, footnotes and citations omitted throughout).  The vicuña, a small member of the camelid family, is one of the most valuable and highly prized sources of animal fibre on the international market. Luxury garments made from vicuña fibre are sold in exclusive fashion houses around the world; a scarf can sell for several thousand pounds. Once hunted to near extinction, the vicuña now thrives in the high-elevation puna grasslands of the Andes. The decision to grant usufructuary rights to communities to shear live vicuña and sell vicuña fibre increased their economic incentive to manage the species sustainably and protect it. As a result, vicuña populations have recovered, and between 2007 and 2016, trade increased by 78% (by volume), and the export value in 2016 was approximately US$3.2 million per annum. Vicuña have become an asset to some of the most isolated and poorest Andean rural communities, rather than being seen as a competitor for pasture with domestic livestock, thus reducing illegal killing and motivating communities to carry out anti-poaching and protection measures. Economic returns from vicuña fibre trade, regulated by CITES, have motivated more communities to start management, extending protection across a large area that central governments could not police effectively. Broader benefits to habitats from decreased grazing have also resulted. However, while this is generally seen as a conservation success story, the equitable distribution of benefits remains a challenge, and communities only receive a small share of the final product value. Efforts are being made to find ways to add value to the fibre that benefits communities. Here's a comment about reforestation. A concern expressed in several places is that while there is a temptation to slap a lot of fast-growing trees and plants into the ground, this may turn out to be counterproductive from the standpoint of a diverse and sustainable natural environment. The IPCC [Intergovernmental Panel on Climate Change] suggests that increasing the total area of the world's forests, woodlands and woody savannahs could store roughly a quarter of atmospheric carbon necessary to limit global warming to 1.5°C. To do so would mean adding an additional 24 million ha of forest every year until 2030. Many countries are responding with restoration plans, but 45% of all commitments involve planting vast monocultures of trees. Reforestation of Eucalyptus and Acacia trees in plantations only offers a temporary solution to carbon storage, as once the trees are harvested, the carbon is released again by the decomposition of plantation waste and products (predominantly paper and woodchip boards). Lewis et al. (2019) calculated carbon uptake under four restoration scenarios that were pledged by 43 countries under the Bonn challenge, which seeks to restore 350 million ha of forest by 2030. They found that natural forests were six times better than agroforestry and 40 times better than plantations at storing carbon. Furthermore, these have greater associated biodiversity and ecosystem services. The pledged mix of natural forest restoration, plantation and agroforestry would sequester only a third of the carbon sequestered by a natural forest restoration scenario. The authors recommended four ways to increase the potential for carbon sequestration by forests: increase the proportion of land restored to forests; prioritise natural regeneration in the Tropics; target degraded forests and partly wooded areas for regeneration; and protect natural forests once they are restored. Finally, here's a comment on  the differences between "White, Black and Green Swans:" 'Black swan' events can take many shapes, from terrorist attacks to disruptive technologies. These events typically fit fat-tailed probability distributions, i.e. they exhibit greater kurtosis than a normal distribution. Unlike other types of risk events which are relatively certain and predictable, such as car accidents and health events ('white swans'), 'black swans' cannot be predicted by relying on backward-looking probabilistic approaches that assume normal distributions. Some in the finance community have adopted this framework of thinking about risks associated with the biosphere, terming them 'green swans' (or environmental black swans). 'Green swans' present many features of typical 'black swans'; in that they are unexpected when they occur by most agents (who regard the past as a good proxy of the future); they feature non-linear propagation; impacts are significant in magnitude and intensity; and they entail large negative externalities at a global level. However, despite several common features, 'black swans' and 'green swans' differ in several key aspects. A key difference is their likelihood of occurrence. 'Green swans' are either likely or quite certain to occur (e.g. increased droughts, water stress, flooding, and heat waves), but their timing and form of occurrence are uncertain. By contrast, 'black swans' do not manifest themselves with high likelihood or quasi-certainty. 'Black swans' are severe and unexpected events that can only be rationalised and explained after their occurrence. While for 'green swans', the likelihood of occurrence means the case for preventative action, despite prevailing uncertainty regarding the timing and nature of impacts of these events, is strong ...  Other differences include who provides the main explanation for the events and their reversibility. Explanation for 'black swans' tend to come from economists and financial analysts, while for 'green swans' understanding comes from ecologists and earth scientists. The impacts of 'green swans' are, in most cases, irreversible, whereas for 'black swan' events –such as typical financial crises – have effects that are persistent, but have the potential to be reversed over time.

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