Should we put a price on nature?

Why do economists recommend putting a price on nature?

The destruction and preservation of nature are not taken into account by our accounting tools.

Our accounting tools have not been designed to take into account the destruction of nature, whether at macro-economic level (as we explain in the module on GDP) or at company level (as we explain in the module on accounting).

What these tools account for is always an estimate (generally derived from the result of a monetary exchange) of the human contribution to the production chain. Costs in accounting consist of a pile of human income, either in the form of wages or “profits” (dividends and other non-wage income, including annuities).

We use water, soil, metals and energy, but the price of the constitution (by nature) of these resources never appears on our bills. We only pay for the labor and rents involved in extracting, transporting, processing, marketing and advertising them, but never the price of the quantity of resources used, i.e., in fine, the price of their scarcity, which our use accentuates.

Similarly, we pay nothing for the water cycle, the stability of the climate, the existence of a life-supporting ocean, or for the action of bees and other pollinators essential to the reproduction of many plants, the basis of our diet.

Our economic reasoning therefore does not spontaneously take into account the use and destruction of natural resources, nor the destabilization of natural balances, such as the climate. Consequently, it is inevitable that individual decisions based on this reasoning will, if we have the means to do so (which is what science and technology provide), lead to excessive pressure on nature.

The impacts of economic activities on the environment are considered externalities.

Faced with this situation, economists have turned to the concept of externality. This term refers to the positive or negative repercussions of an economic agent’s activity on other agents, with no “spontaneous” monetary market counterpart. Externalities do not only concern the environment.

As early as the beginning of the ^19th century, Alfred Marshall spoke of the fact that companies, through their geographical location, benefit from external economies which “result from the general progress of the industrial environment” or which “are linked to the growth of knowledge and technical progress”. ¹

In the environmental sphere, a negative externality can be the result of pollution: for example, a factory whose discharges pollute a river and harm people living downstream, or a coal-fired power plant that emits noxious particles into the air. It can also be the consequence of the over-exploitation of natural resources or spaces that have no price in themselves (air or water quality, for example), or whose price reflects only part of the services rendered to human societies.

Thus, the market value of a forest does not generally reflect the fact that it stores carbon, is home to a wide variety of living creatures, protects against soil erosion and flooding, is a place for walking, contributes to the beauty of a landscape, and so on.

Putting a price on nature means “internalizing” negative externalities

In his book The Economics of Welfare (1920), economist Arthur C. Pigou develops the idea that externalities are market failures. Pigou develops the idea that externalities are market failures, because the price does not represent all the costs and benefits generated by economic activity.

In the case of a factory polluting a river, the private cost of operating the factory (borne by the owner) is lower than the social cost (borne by society as a whole), because the factory does not include the pollution it generates in its costs.

One of the major characteristics of these externalities is that they are outside the market, and therefore outside the price system on which economic agents base their decisions.

To remedy this market failure, we need to “internalize externalities”, i.e. introduce external costs or benefits into the decisions taken by economic agents. This can take the form of standards and regulations (e.g. prohibiting or limiting the level of pollutant discharges into a river) or the introduction of a price, the solution favored by economists.

The price materializes the externality and makes it possible to distribute social costs between the agents who cause them and those who suffer them. This raises two questions: how to price nature, and what mechanisms should be put in place to internalize externalities.

What methods do economists use to assess the economic value of nature?

How can we assess what pollution (or overexploitation) degrades or destroys, given that, by definition, most of nature’s elements are non-marketable?

Let’s take the example of the river polluted by the factory. This pollution not only degrades the quality of the water for those who consume it, but also makes the area unsuitable for bathing, kills off some of the living creatures living in the river, and possibly makes navigation more difficult. The river thus provides numerous market and non-market services to society and, beyond that, to all living beings. How can we determine their value?

The table below summarizes the different types of value that economists attempt to measure. In particular, they distinguish between use and non-use values to obtain total economic value.

Economists have developed numerous methods to try and assess this total economic value.

Methods based on replacement costs or avoided damage

For example, a forest may have a commercial function linked to timber harvesting, but it also contributes to water purification, soil protection against erosion, protection against flooding and landslides or avalanches in the mountains, carbon sequestration, or welcoming the public. They are also home to many living creatures.

To attempt to assess the total economic value of this forest, we reason by imagining that the forest is no longer there (for example, it has been clear-cut to exploit the timber), and we can then adopt several approaches.

• What would be the cost of replacing one or more of the functions performed by the forest by human constructions (water treatment plant, construction of recreation areas, etc.)?

This method comes up against the fact that not all the functions of the forest are necessarily known, and that many of them cannot be replaced by technical works: you can’t replace extinct species or the beauty of a landscape. These assessments are therefore necessarily partial.

• How much would it cost to materialize the damage prevented by the forest (avalanches in the mountains, soil erosion, flooding, loss of well-being for local residents)?

This method suffers from the fact that many damages are not based on observable costs. Considered at a global level, it sometimes leads to aberrant results. Economist William Nordhaus, for example, was awarded the Bank of Sweden Prize in memory of Alfred Nobel, in recognition of his work in which he wrote that the impact of a 6°C rise in global temperature would lead to a worldwide loss of GDP of less than 10% (for further explanations, see Global warming: what impact on growth? ).

• How much would it cost to restore the forest to its original state?

It’s no longer a question of assigning a value to an element of nature, but of estimating the cost of repair. For example, in the case of a polluted river or soil, the aim would be to assess not the value lost, but the cost of cleaning it up. This method may be relevant in certain cases (e.g. to clean up a river or polluted soil), but it comes up against the irreversibility of certain ecological phenomena: we can’t recreate an ecosystem or a species that has disappeared, any more than we can restore climate stability.

Methods for assessing the recreational or aesthetic value of nature

• The hedonic pricing method consists in deducing the value of the recreational service of an exceptional natural site by measuring the difference between the price of properties with a view of the site in question and the price of those located nearby but without a view.
• The transportation cost method consists in estimating the recreational value that users place on a natural site as being at least equal to the price they are willing to pay to get there. This method is not conducive to the development of public transport, walking or cycling!

Survey-based methods

Unlike their predecessors, these methods are not based on more or less observable costs, but on the stated preferences of players.

This is the case, for example, with contingent valuation, which consists of asking a sample of people the following question: “How much would you be prepared to pay to preserve such and such an element of nature or such and such a characteristic?

This method poses a number of problems: the results are biased according to the income of the people questioned (a forest located near a rich area will be valued more highly than one near a poor area) or their lack of knowledge of the services they derive from the natural area in question.

As we can see, all these methods present significant, if not insurmountable, methodological problems. In any case, they fail to capture all of nature’s values, if only because nature has an intrinsic value that cannot be translated via the monetary standard.

The value of nature goes far beyond its supposed economic value

The monetarization of nature is a source of controversy. Nature is priceless, and its value clearly transcends the purely economic sphere: it is a source of life, of psychological, cultural and spiritual benefits. Assessing the value of all the services that humans derive from it free of charge is already proving impossible. Yet nature also has a value that goes far beyond what it brings to human beings alone.

Three arguments are often put forward to justify putting a price on nature. Let’s see how these three arguments fall short of the mark.

Giving nature a prize would be “better than nothing”.

Without a price tag, nature doesn’t count in economic calculations. This is not wrong in theory. Unfortunately, in practice, this reasoning is dangerous.

In 2009, the working group chaired by Bernard Chevassus at Le Louis submitted a report to the French government in which it attempted to evaluate ecosystem services in monetary terms. ² In this 350-page report, the authors propose an average value of 970 euros/year for a hectare of forest, ranging from 500 to 2,000 euros/ha/year depending on the importance of the various services (carbon storage, tourism and recreation, etc.).

Compared with the value of a property yield, should the forest become suitable for building, this amount is clearly insufficient. A narrowly economic trade-off would therefore lead to its destruction, while being justified by the creation of economic value. Putting an economic value on biodiversity would therefore appear to be an inadequate bulwark against protecting it. In our example, it is much more the regulatory dimension, i.e. placing the forest in a non-constructible zone, that helps to protect it.

Putting an economic value on nature would raise awareness of its importance and lead to action.

It is this argument that has prompted a number of studies aimed at quantifying the total economic value of biodiversity: the importance of these figures and the media coverage they receive would be a source of awareness and action.

A case in point is the TEEB (The Economics of Ecosystems and Biodiversity) initiative, launched in 2007 by the European Commission and Germany in response to a request from the G8 environment ministers. Initially coordinated by Indian economist Pavan Sukdhev, the aim was to study the economic impact of biodiversity loss.

Published in 2010, the summary report highlights some of the ecosystem services quantified in academic research. For example, in a 2009 study ³ insect pollination is estimated at 153 billion euros; a 2008 study ⁴ estimates that halving the rate of deforestation by 2030 would avert an estimated $3,700 billion in global warming-related damage.

Pavan Sukhdev introduces the interim report published in 2008 with these words:

What is very useful (water, for example) is not always very valuable, and what is very valuable (diamonds, for example) is not necessarily very useful. Nature is an important source of value in our daily lives, but it hardly ever appears on the market, escapes pricing and represents a challenge for valuation. We are now realizing that this lack of valuation is an underlying cause of the observed degradation of ecosystems and loss of biodiversity.

Pavan Sukhdev

The economic value of the bee pollination service in France, for example, has been estimated at between 2.3 and 5.3 billion euros. ⁵ The method used (and generalized worldwide, in the IPBES pollination report ⁶ ) consists in assessing the economic value of plant production intended for food and dependent on this pollination. However, the ecological functions of bees go far beyond the pollination of food plants.

Moreover, as Aurore Lalucq and Jean Gadrey rightly point out, economists could, based on similar economic logic, retort: “Dear friends, your calculations may be correct, but we have others. If we replaced your pollinating bees with human pollination, which already exists, it would create thousands of jobs, high added value, it would be much better for the GDP than your unfortunate X billion!” ⁷

Finally, it has to be said that these valuations have little practical impact. On the one hand, as we saw in part 2, they are debatable due to the methods used to produce them, which makes any quantification questionable. Secondly, they have no impact as such on concrete economic decisions. No one needs these kinds of figures to make any kind of decision. It should be pointed out that we are talking here about global figures designed to give economic importance to ecosystem services. On the other hand, the monetarization of nature, like that of carbon (see below), is used in cost-benefit analyses carried out by public administrations, despite the limitations and dangers of this method (which we’ll present in a later section).

We would already be implicitly putting a price on nature

Indeed, we are willing to pay to use energy, a raw material, to see a landscape. But we are not prepared to pay an infinite price. So, in effect, we place a finite value on nature. This is the same reasoning that justifies the notion of the value of human life and its use in the inevitable trade-offs of public health spending.

Economists Christian Gollier and James Hammitt:

“Because we are not prepared to sacrifice everything to increase our life expectancy, this means that our life has a value, and that this value is finite.” This reasoning is based on the neoclassical theory of value: the value of a good or service (market or not) is a function of its utility. ⁸ (see our fact sheet on the notion of utility in economics ).

But if we believe that the “value” of nature is unrelated to the utility we derive from the goods and services we get from it, the conclusion is self-evident: we can’t prove that we implicitly give nature a value, let alone legitimize the calculations to put a figure on it, which are based on this theory of value.

What are the mechanisms for introducing the “price of nature” into the economy?

Even if nature is priceless, the fact remains that economic players react to “price signals”. If consuming nature is expensive, they will make efforts to reduce it. Policies designed to make the use of natural resources more expensive, or to make pollution more costly, may therefore be appropriate, without claiming to have established the value of nature.

Moreover, such policies must necessarily be accompanied by other types of measures (standards, regulations, public investment, land-use planning). Introducing a price signal can never be “the” solution to ecological problems.

Mechanisms used to increase the consumption of natural resources or put a price on pollution

There are a number of different mechanisms for introducing a price for consumption or pollution of nature into the economic calculations of the players involved. We will confine ourselves here to presenting the different tools, without insisting on their advantages and disadvantages, which will be the subject of detailed fact sheets.

Taxation (in the broadest sense, including taxes and fees)

They may be based on the consumption of nature (energy or water taxes) or on pollution (taxes on greenhouse gas emissions, such as carbon taxes in France, or on waste, such as TGAP in France). As we shall see later, most of these taxes were not originally designed for environmental objectives (and therefore based on an assessment of the price of nature), but rather to cover the costs of the public services concerned, while meeting the social objectives of access to essential goods.

Rights (or quotas or permits) markets

These markets are based on the creation of rights (or permits or quotas) to emit pollutants (_CO2, sulfur oxide, etc.) or to take a resource (e.g. fish), where previously there were no limits. Pollution or resource extraction was a state of affairs.

The total of these rights is capped: the public authorities set a maximum quantity of pollutants that can be released into the environment. This ceiling can be lowered over time to gradually reduce the pollution concerned. Finally, these rights are allocated to the various economic players concerned. They can then trade these rights (or quotas) on a market. A company that doesn’t have enough can buy them from another that has too much (because it has invested in less polluting equipment, for example).

The price of allowances is determined by comparing supply and demand on the market. In Europe’s _CO2 quota market, the public authorities (in this case, the European Commission) allocate rights (free or paying) to identified emitters, which to date have been heavy industry (steel, cement, chemicals, paper, power generation and airlines).

Remuneration for an ecosystem service provided by nature

This is the symmetrical mechanism of the two previous cases: instead of charging for the use of a natural resource or for pollution, we reward actions that benefit nature.

Payments for Environmental Services (PES) are incentive-based instruments that offer remuneration in return for the adoption of environmentally-friendly practices. They are based on contractual arrangements that may involve private players (landowners, companies, associations, etc.) and public players (State, local authorities, etc.). They represent an interesting way forward for environmental policies, but their effective implementation requires a legal framework.

Claire Etrillard ¹⁰

In the case of agriculture, for example, PES remunerates farmers for actions that contribute to restoring or maintaining ecosystems, from which society derives benefits (preservation of water quality, carbon storage, protection of landscape and biodiversity, etc.).

For a fuller understanding of the tool, take a look at the educational article on payments for environmental services by economist Alain Karsenty on The Conversation.

Accounting regulations

Accounting regulations could also be a mechanism for introducing nature into the economic calculations of players, if they were to oblige them (which is not the case at present) to preserve the natural capital they use and to make the necessary expenditure to replenish it. In this case, monetization does not result from the setting of a price, nor even less from a value, but from a cost for the actor concerned. This is the approach proposed by the CARE accounting method.

The legal route

The trial that followed the Erika oil spill is a good example.

On December 12, 1999, the Erika, an oil tanker chartered by Total, sank off the coast of Brittany, causing an oil slick covering almost 400 km of coastline from Finistère to Charente-Maritime. In January 2008, the Paris Criminal Court found the Total Group guilty of gross negligence. ¹¹ . The Group was ordered to pay the maximum corporate fine (375,000 euros) and to pay 192 million euros in damages to the civil parties. Of this amount, 13 million euros are due for ecological damage.

This principle, recognized for the first time in case law (although not yet in law), means that compensation for environmental damage goes further than just the cost of cleaning up and restoring the polluted site, or the economic compensation resulting from a drop in sales or tourist numbers.

Some examples of how environmental taxes are set

For each of the mechanisms described above, it is necessary to set a price. To do this, it is possible to use the methods detailed in part 2, but this is far from always the case. For example, many public pricing policies are aimed more at covering the costs of public services than at valuing nature. What’s more, when they have a specifically environmental objective, these policies are often based primarily on physical efficiency targets (e.g. not exceeding a given level of greenhouse gas emissions) rather than on economic evaluation alone.

Finally, in all cases, public authorities have to cope with pressure from the various economic players involved, while taking account of the social dimension, which is particularly acute in the case of access to essential goods such as water, energy and food. To illustrate this, we provide a few examples of how environmental taxes are set.

Reflecting the cost of the public service provided

In the case of waste, for example, the amount of the tax may be based on the cost of collection and treatment, which is then passed on to users in full or in part. For social or political reasons, public authorities may decide not to pass on this cost to the nearest euro. It is also possible to introduce mechanisms to encourage lower waste production, by varying the amount of the tax according to physical values (weight, number of garbage can bags, for example).

Another example: water taxation can be set to take into account the costs of abstraction, delivery to users and wastewater treatment. Social, economic and political considerations may also come into play. In France, for example, farmers pay much less for water than households. The increase in droughts has also rekindled debate on the idea of increasing the “price of water”. ¹² to encourage savings.

The CSPE ( Contribution au Service Public d’Electricité, one of the taxes levied on electricity in France) is intended to cover the cost of certain industrial and social public policies: support for the development of renewable energies, additional production costs in areas not interconnected to the mainland electricity grid (islands), and the cost of social measures for the most disadvantaged households.

As can be seen in these different cases, the objective of limiting impacts on nature does not appear to take precedence over other public policy issues, and in particular that of covering the costs to public finances.

The introduction of carbon taxes in various countries around the world follows a slightly different logic.

Carbon taxation: the difficulty of economic evaluation

Unlike the taxes mentioned above, the carbon tax has an environmental objective from the outset. It is designed to send a “price signal” to economic players, encouraging them to reduce their greenhouse gas emissions. The question of how to allocate revenues to climate policies or social objectives comes later.

Two main methods have been developed:

The first method aims to establish a social value for carbon

The social cost (or value) of carbon is the cost, in today’s euros ¹³ of the future damage caused by the current emission of one tonne of carbon. To determine this value, economists use economic models known as “cost-benefit AMI”, which enable them to determine a trajectory where the expenditure made today to limit global warming is offset by the cost of the future damage linked to the warming that these investments have made it possible to avoid.

This social value of carbon can then be used either to determine the amount of a tax, or in calculations by public administrations or private companies. In 2016, for example, the Obama administration used this type of calculation to adopt a social cost of carbon of €51 per tonne of_CO2, in order to inform its thinking on the climate policies to be implemented. ¹⁴

The second method is based on a cost-effectiveness approach

Public authorities begin by adopting quantitative targets for reducing_CO2 emissions. This is what France has done, for example, by establishing carbon budgets (i.e. maximum levels of annual emissions) in its national low-carbon strategy (SNBC). The monetary value of a tonne of_CO2 must then be set to help meet the carbon budgets, taking into account all other existing climate policy measures (standards, regulations and others). This can only be done empirically.

To this end, a commission of experts chaired by Alain Quinet was convened in 2009. Their work, supported by economists using models, led to a first version, updated in 2019. ¹⁵ of recommended carbon price trajectories up to 2050. This work did not seek to give carbon an intrinsic value (a social value), but a price level necessary to meet France’s climate objectives. An important point of discussion is that the carbon price level needed to meet carbon budgets is necessarily different from one sector to another, both because “price sensitivity” depends on the sector and because other constraints (regulations and standards in particular) vary from one sector to another.