What is the Earth Worth?

One of the virtues of a commons-based economics is that it would help sweep aside some of the foundational fallacies of neoclassical economics.

Currently, the actual value of the Earth as an input to market activity (raw materials) and as a waste dump for market activity (the air, water and soil) is generally ignored. The hidden subsidies and the noxious “externalities” (as economists primly call them) are secondary to the main action of “wealth creation,” market exchange. By the reckoning of economists, all the value that resides in the commons doesn’t really seem to matter — and the costs of subsidies and pollution somehow never get properly tabulated on the balance sheets of corporations and in the Gross Domestic Product.

Now the United Nations Environment Program is taking steps to estimate just how big the environmental externalities of the world’s largest corporations really are. In conjunction with the Principles of Responsible Investment initiative, the UN has commissioned a report that looked at the environmental impact of the world’s 3,000 largest public companies.

As reported in The Guardian, the estimated combined damage to the environment caused by these firms was $2.2 trillion in 2008. This sum is greater than the GDP of all but seven countries in the world for that year.

The study was conducted by London-based consulting firm, Trucost, which calculates that this amount of environmental harm (as measured in U.S. dollars) represents about one-third of the profits of those firms, on average. In other words, one third of the profits funneled to investors represent a direct liquidation of the Earth — a monetization of that which is meant to be shared by humankind now and by posterity.

The Guardian reports:

“What we’re talking about is a completely new paradigm,” said Richard Mattison, Trucost’s chief operating officer and leader of the report team. “Externalities of this scale and nature pose a major risk to the global economy and markets are not fully aware of these risks, nor do they know how to deal with them.”

The biggest single impact on the $2.2tn estimate, accounting for more than half of the total, was emissions of greenhouse gases blamed for climate change. Other major “costs” were local air pollution such as particulates, and the damage caused by the over-use and pollution of freshwater.

The true figure is likely to be even higher because the $2.2tn does not include damage caused by household and government consumption of goods and services, such as energy used to power appliances or waste; the “social impacts” such as the migration of people driven out of affected areas, or the long-term effects of any damage other than that from climate change. The final report will also include a higher total estimate which includes those long-term effects of problems such as toxic waste.

I’ve always regarded the monetization of things like the Earth as a bit nutty. How do you set an accurate price for a stable, clean atmosphere, for example? There is no functional market for it, and there are lots of intangible, subjective values — not to mention unknown ecological services — that cannot be reflected in a single number. The discount rates for the future value of the resource are equally slippery.

Still, if such exercises can cause CEOs and investors to sit up and take notice — and perhaps induce policymakers and tort lawyers to instigate new pressures on companies — then a project of this sort can’t be a bad thing.

A persistent moral failure of economics has been its willingness to posit the category of externalities — and then show indifference toward making companies actually internalize their costs. The profession knows, but doesn’t really care, that market prices are inaccurate — and therefore that inefficiencies and harm result.

The unspoken message is: "We know the atmosphere is finite and cannot absorb unlimited quantities of carbon emissions, and we know that the atmosphere has great value to companies as a free waste dump. But we also don’t really support the ‘polluter pays’ principle that would force those costs to be internalized and reflected in reliable market places."

It is not surprising that buyers and sellers take market prices at face value and regard the finite, degraded resources of nature as more plentiful and clean than they really are. I’ve never understood why reputable economists sanction this scam.

Two cheers for the UN Environment Program and Trucost, therefore. It may begin a long-overdue conversation about the value of nature.

Only two cheers, however, because Trucost is not actually measuring true costs. We cannot begin to presume that a sum like $2.2 trillion can actually reflect the value of environmental damage to the Earth. The Earth is priceless, and at some point all the petty fictions that we use in the marketplace begin to perpetrate a giant hoax. We endangered humans need to find some new metrics of valuation and new methods of resource management to reflect this fact. The market has its many virtues, but it also has its distinct limits.