Economic compass

Pavan Sukhdev currently heads up the UN Environment Programme's Green Economy Initiative. He led the groundbreaking study "The Economics of Ecosystems and Biodiversity," or TEEB, which was launched by Germany and the European Commission in 2007. The last of the study's volumes was delivered at this year's biodiversity summit in Nagoya, Japan, which wrapped up on Oct. 29, 2010. The report laid out "opportunities for solutions" on accounting for biodiversity.

Deutsche Welle: Pavan Sukhdev, you describe your study results and recommendations for accounting for biodiversity as 'opportunities.' But I'm sure that in these stretched economic times, a lot of businesses might be thinking, 'I don't want more regulations, more contingencies to cope with.' How would you answer them?

Pavan Sukhdev: One of the main problems with biodiversity is that because it's nature, its many services are delivered free. I call this 'the economic invisibility of nature.'

Because of this, we have a tendency not to value what we receive from them – be it clean air, fresh water, or nutrients that come from forests to the fields, or some other benefit, like pollination. I mean, you never see a bee sending you an invoice, or a tree sending you an invoice, either for pollination or for air cleaning, but that's what they do. These are valuable economic services. Without pollination from insects, you'd be out of pocket perhaps 200 billion dollars per annum if you tried to do these things manually.

So you need to recognize the reality that our economic compass is defective. It's partial; it looks at some things and not at others. It looks mainly at goods and services that are traded and priced in markets, but not those which are not traded and priced in markets. And almost everything that comes from nature is neither traded nor priced in markets.

Specifically, how would a sector or industry start incorporating biodiversity into their accounts?

The reality is that today's corporation is not compelled to do anything. They only have to optimize shareholder benefits and profits. And unless they see things from a long-term perspective, then the drive to externalize costs isn't very strong.

But when you have a long term perspective, then it becomes a relationship with your shareholders, your customers, your local society, your local governments.

And when you take that longer term perspective on business, that's when you begin to say: "Aha… Well we do have cost externalities."

Could you explain externalities?

That is the economic term for the costs to a third party of an economic transaction between two other parties. If I sell you a car, then there are costs, in terms of carbon emissions and maybe air pollution, suffered by third parties.

Who do you believe should bear these external costs?

Ideally, a combination of you and me. I made the car, you drove the car. So somewhere there is a line between you and me who should be internalizing the costs. But as of today with our current economic system, and with its compass, which does not measure externalities, neither of us is paying for this.

So you are talking about a radical shakeup of the economics of how businesses look at profit and loss, really.

Yes, we are talking about a radical shakeup of how they look at third-party costs.

Today they don't need to look at it because regulations don't require it. What we're saying in TEEB is that there is a long-term self interest here, for businesses, in terms of shareholders, looking towards customers, and effectively getting a social license to operate as a business.

The Coca Cola Corporation has already decided that by 2020, they are going to be freshwater neutral. And for a them - for whom fresh water is a key resource input into production - that is a huge decision. I see the economic wisdom in that, because at the end f the day, they are effectively saying: 'Look, we are aware of the risk of freshwater scarcity. We know that the pricing of freshwater is going to be changed. Let us design our product in a way that it makes itself freshwater neutral. Let us already anticipate the future risks to our business so that we can survive and make profits into the future. '

Well, Coke is an enormous multinational. What about smaller companies?

All we are saying, is: Be aware of it. Be conscious of it. And what we hope will happen is that some companies will take leadership and start quantifying their externalities, and then start managing them.

Take Rio Tinto, a mining company. They're an international company. They've got a five stage plan where, location by location, they are looking at how to first mitigate their impact on biodiversity, then offset them, or also avoid certain cases - you can just decide not mine in a certain area if you know it to be bio-diversely rich - and to educating their staff and other people.

Their intention is by 2015, to be biodiversity positive. They are among the first signatories to this concept of net positive impact on biodiversity. It's a positive thinking strategy.

Lets look at how countries will deal with this idea. The strategic plan that is part of Cop 10 contains a clause about incorporating biodiversity loss into international accounts in the future. What should countries be ready to do by 2020?

I think they should get the important aspects of natural capital into national accounts. ....

Currently, every country in the world does not report or disclose its biggest asset - natural capital. National balance sheets are based on a system of accounts which do not capture natural capital. And this is a defect in the way that we have designed the accounts of society.

The irony is that the designers - James Mead and Richard Stone, who designed the system of national accounts for the post-War years and the Marshall Plan years…acknowledged 25 years ago, that they hadn't finished their work. They wanted to look at social dimensions and environmental dimensions, and of course production dimensions. But they only ever had time to look at the production dimensions.

And now, 25 years later, you and I are still having this discussion: Should we or shouldn't we? Come on, we have to! It has to be done.

Continue reading Deutsche Welle's interview with economist Pavan Sukhdev

TEEB has now released its final report. Where does the work go from here?

TEEB is a project, but its also a kind of approach we have designed. We hope countries will adopt that approach. Countries like Brazil and India have already endorsed this … also, the European Union is interested in moving this forward. And I just learned that the ADB is interested in supporting an Asian TEEB implementation.

But I think what is interesting is to see what needs to be done. National accounting is one of our recommendations. And I hope that donor countries (present in Nagoya) will be able to support building capacity in developing countries where it doesn't exist.

What do you mean exactly, when you say 'building capacity'?

Capacity as in, human capacity. To have TEEB type research, environmental economics. And capacity as in, data collection and gathering and analysis. These capacities have to be built in countries, and people have to support that.

Finally, and most importantly, I believe there is a need for a TEEB foundation, whose main purpose is to research and establish externalities of corporations, sector by sector.

To show that this is possible, we in TEEB have already done the calculations for the construction sector in China and its impacts on forests. And for the cotton industry in Central Asia and its impacts on the Aral Sea.

But of course we need 500 to 1000 such studies, because you need it literally in every big country or in every big biome for every major sector. The TEEB foundation should work closely with the individual national accountancy bodies, and the International Accounting Standards Board, to work out methodologies and standardizing them.

This would enable leading corporations to actually disclose these in their annual reports and accounts. That is the end game - the Holy Grail. But we need to start working toward this now.

Author: Robin Powell
Editor: Nathan Witkop