Ecosystem Services as Currency for Environmental Actions

Ecosystem services are a relatively new concept which tries to quantify in economic terms the impact the environment has on human life and societies. In particular, it is possible to extend them as a new theoretical tool to the realm of international relations to have an unambiguous measure of environmental efforts. This brief article will thus explore the possibility to use ecosystem services as a global tool for regulating environmental intervention and will propose their usage in relation to the Fukushima Daiichi Nuclear Disaster. The analysis will start with a description of the concept of ecosystem services, then argue how this can be used as global currency and finally present the case for Japan.

Ecosystem Services

As mentioned above, ecosystem services are a relatively young concept. Their birth can indeed be traced to the seminal 2005 “Millennium Ecosystem Assessment”, but the idea behind, that humankind depends on the ecosystem, has been implicitly discussed for decades, if not centuries. As a matter of fact, it is not difficult to identify the four categories in which ecosystem services are grouped: provisioning (i.e.: water), regulating (i.e.: prevention of erosion), supporting (i.e.: crop pollination) and cultural (i.e.: eco-tourism). Nevertheless, today’s debate has made a significant intellectual breakthrough by translating the biological aspects of ecosystems in economic terms, especially through the categories of externalities and social return. It is thus possible to attach a monetary value to all the ecosystem services, based on avoided costs, hedonic value and enhancement of income among the others.

Although still controversial, this approach is extremely useful for policy-makers, who act on behalf of the whole society and can internalise all externalities, while private investors care only about their own return. Namely, through this tool they can value the impact of projects in order to maximise the return on the investments to rehabilitate, preserve and enhance ecosystem services. Even more important, they can also assess the trade-off between ecosystem services and rival development projects which damage the environment. Indeed, in a world with limited capital, different projects become mutually exclusive as they all consume capital. Therefore, while traditionally the investment decision by Governments would have been done through a holistic approach or through a political process, ecosystem services allow comparing projects along a single dimension, their net present value, which is calculated through market mechanisms. Maximising the total net present value in turn makes possible to unambiguously maximise societal utility based on the revealed preferences of the society itself.

 A tool for international relations

Having seen how the use of ecosystem services allows a better allocation of funds among environmental projects, it would be an unnecessary restriction to limit investments within a narrow geographical area. On the contrary, the larger this is, the more efficient is the capital allocation because capital can choose among more projects. Bringing this to the limit and ceteribus paribus, the maximum efficiency is reached when the portfolio of available projects is on the global scale and includes all possible projects.

Nevertheless, policy-makers care only about their own constituencies because their mandate is limited to them and because their approval, and confirmation in power, is based on the benefits they bring to them. Logically, policy-makers aim at maximising the utility of their own constituency and are indifferent to the others. It hence appears that incentives are not properly aligned for an efficient distribution of resources because of this geographical constraint. It is thus necessary to remove it.

To achieve this, it is possible to borrow some concepts from the carbon emission trading schemes. Namely, these allow the single firms to trade at market prices their emissions, or better their avoided emissions. Each firm can thus freely choose how to organise its production processes based on what is more profitable: to abate emissions or to do business as usual. The overall effect is a higher efficiency in resource allocation through price mechanisms.

 The same reasoning can then be applied with ecosystem services as well. The different constituencies can indeed be seen as the different firms which have to decide between abatement and emissions. This means, they can be seen as firms abating emissions either with internal investments or through investments in other companies. Similarly, policy-makers can decide to invest in ecosystem services in their own constituency or abroad, but the current incentive scheme does not reward the second option.

It is therefore useful to take a second tool for carbon trading, meaning the concept of scarcity. Indeed, an initial amount of emission permits is allocated by the Government and others are generated de facto by abatement investments. They are thus a limited resource which firms have an incentive to hold, since the Government requires so. This triple combination, incentives, authority and a limited resource, creates the scarcity and makes emission permits a de facto currency for a specific market which has then an equally specific exchange rate with the legal tender (i.e.: Euros).

Since in this case the agents trading are Governments themselves, it is necessary to have the incentives imposed by a superior authority, which could be a UN convention. On the other side, ecosystem services are already a limited resource which is expensive to produce. Leaving aside the precise choice of the superior authority, it remains to understand how this can impose the scarcity, meaning which incentive scheme can be used. The imposition of predefined quantities of ecosystem services to be generated, like in emission trading, should be ruled out since societies choose this quantity based on their revealed preferences. However, a better solution is to create a global bank account under the superior authority denominated in a universal currency (i.e.: IFC drawing rights). Every time policy-makers in a country reduce value of ecosystem services the superior authority will tax that country in equal amount and deposit the money in this bank account. Against this money, the authority will then print its own notes. Consequently, whenever a country increases the value of ecosystem services in any part of the world the authority will reward it in equal amount with its own notes. Clearly, for these notes to have value the authority must impose that they are considered outside money, like gold, and redeemable at par. With this scheme, policy-makers will look for investments affecting ecosystem services in any part of the world as a direct cost or revenue for their country.

A Practical Example with the Fukushima Daiichi Nuclear Disaster

Having explained the theoretical framework, it is useful to see how this could be deployed in practice. It has thus been chosen to present briefly a hypothetical case involving the Fukushima Daiichi Nuclear Disaster. This indeed allows seeing both the destruction and the recreation of ecosystem services, namely both legs of the scheme.

On the first hand, the Disaster reduced considerably the value of ecosystem services in a large area. Because this is a scheme at Government level, Japan as a country would have to pay to the superior authority an amount equal to the services that have been destroyed. In turn then, Japan could finance this amount in several ways, like taxing TEPCO, which operated the plant, but this is beyond the current goal. The authority would then deposit the amount in its account and issue notes against it.

At this point, a European country, for example France, could realise having the competencies to restore those ecosystem services either in its public or private sectors. It could thus ask the authority to make a preliminary assessment of the value of an intervention, meaning the value of the restored ecosystem services and the size of the financial reward. If then the reward delivers an acceptable profit, France could go on with the project, assemble a consortium and finally increase the value of ecosystem services. The authority would then pay the French Government for the value of restored services with the new notes. These would then be deposited as outside money at the European Central Bank in this case which would give back Euros to the French Government. After paying all the costs for the project, France would still end up with a profit which can be invested to increase France utility.

Conclusion

This short article showed how ecosystem services can be used as a tool in international relation. After defining them, it has been seen how this valuation method makes explicit the value of environment for societies and can guide policy-makers in their investment decisions. It has then be described an international settlement system which rewards and punishes countries as they improve or destroy ecosystem services. Finally the Fukushima Daiichi case showed how this could work in practice. In conclusion, ecosystem service can become a useful tool to improve and regulate investments for the environment.

Authors: Luca Vanzini, written with Tatsuya Nobori