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4 Fast Steps to Put a Price Tag on Ecosystem Services

| Friday April 27th, 2012 | 4 Comments

Pavan Sukhdev and Jared Diamond chat onstage at Fortune Brainstorm Green

What’s business if not value creation? Take something that doesn’t cost very much, add value, and sell it for more, creating a profit. It’s only natural that many businesses do so using natural resources like land, trees, water, air, and fossil fuels as their inputs. Those components become the ingredients for the products, or they are the receptacle for waste created in the manufacturing process.

Either way, what was once a common good – air, water, natural resources – is used for private gain. The public good suffers at the expense of private benefit. So what to do about it?

At Fortune Brainstorm Green Jared Diamond, author of Collapse: How Societies Choose to Fail or Succeed and UCLA Professor and Pavan Sukhdev, Fellow, School of Forestry and Environmental Studies at Yale University sat down with Jib Ellison of Blu Skye Consulting to discuss the business case for ecosystem valuation.

Use it or lose it.
Pavan Sukhdev explained the problem pretty bluntly, “We use natural resources because they’re valuable but we lose them because they are free.” Without ecosystem management or valuation, these services will dry up as companies and individuals rush to ‘get theirs’ before the services are gone for good.

Jared Diamond concurred, “You’d think that people that relied on forests for fuel would protect their forests, but there are many examples throughout history of cultures like Easter Island that have chopped down absolutely everything, resulting in societal collapse. That wasn’t a policy decision, it was the decisions of individuals.”

He went on to share examples of locations where ecosystem devaluation is leading to collapse: China where almost all the earthworms are gone due to pesticides, which has lowered agriculture yields by a third and the Panama Canal where deforestation in the hills is limiting the water that flows into the canal. Without adequate water, ships can’t float through the canal. Deforestation is leading directly to putting the country’s biggest revenue source in permanent danger.

Ecosystem valuation for cost savings
So what do we do about it? By costing out the value of these natural resources, or the cost of seeking alternates if they weren’t there, we can save them. The speakers gave a few examples of places near and far where ecosystem valuation by corporate entities has had a direct positive impact on protecting the ecosystem. New York City had a choice: pay $6 billion for water treatment facilities or pay farmers to reduce pesticide use so that the Catskills could continue to provide water treatment for free. The city chose to pay the farmers.

On the other side of the world in Kampala, Uganda, there was talk of draining the Nakivubo wetland to make room for more agriculture. Until one city official decided to calculate the cost of treating all the raw sewerage that was getting dumped into the wetlands. It turns out that the value of the swamp as a natural water treatment facility is around $2 million dollars. The economic value to be gained from converting it to agriculture is about an 8th of that, so the choice was clear and economics and the environment were aligned. “A policy change happened because someone did an economic analysis of the value,” said Sukhdev.

Stop making excuses. 
Many business owners drag their feet on ecosystem valuation, because it sounds like, at the end of the day, they’ll end up having to pay for something that would otherwise be free. Who wants to do that? Sukdev states, “The only time when the internalization will really happen is when it hits policy level and everyone pays equally. So market competitiveness is not a major concern.” Ecosystem valuation is about taking a true-cost accounting of your business, recognizing which parts of what you produce are free and might not always be, and figuring out what the price would be to replace them. Suddenly, the cost of sustainable management practices seems a lot more affordable.

So how do you do it?
Sukdev laid out a short-and-sweet four-step path to ecosystem valuation that can be used by any business:

  1. Discover Make a list of all the ecosystem services your company is using right now, for free or reduced cost
  2. Start measuring Figure out how much you’re using
  3. Monetize Figure out how you’d accomplish the same set of tasks without those free services, and what it would cost you
  4. Disclose The information that you’ve uncovered belongs in a 10-K as an identified risk as well as in the CSR report as an analysis of the company’s environmental performance

Yes, this is easier said than done, but hey, no one used to measure carbon, and now it’s easy enough to do that - the EU is taxing airlines. Plus, PUMA’s doing it. What do you have to lose?

[Image credit: Stuart Islett/Fortune Brainstorm Green]


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  • http://greenandprofitable.com Shel Horowitz-Green Marketer

    Ummm, I don’t think using a wetland as a mass-scale natural sewage treatment plant is long-term sustainable. While I’m glad they didn’t bulldoze the wetland, killing it with sewage is not necessarily the right approach. 
    Shel Horowitz, GreenAndProfitable.com

    • http://www.triplepundit.com Nick Aster

      I don’t know enough about that particular wetland, but it’s entirely possible that the ecosystem services it provides are capable of handling human waste (to a point).   John Todd devised some pretty incredible wetlands treatment systems for various types of waste that work astonishingly well.  Granted, in most of his cases they were artificial wetlands, but well worth reading about :  http://en.wikipedia.org/wiki/John_Todd_(biologist)

    • http://www.masterthismachine.com/ Chris Sequeira

      As Nick implies, the criterion I would use is the wetland’s capacity to absorb a certain amount of sewage. In other words, below a certain point, we might not be killing the wetland.

      As for valuation in general: this article points out a particular method of ecosystem services valuation that’s tied directly to replacement cost for those particular services. It’s only one method of valuation, but it seems somewhat practical from the standpoint of infrastructure projects.

  • http://greenandprofitable.com Shel Horowitz-Green Marketer

    Nick and Chris, thanks for reminding us of John Todd’s amazing work. I actually profile him in my book, Guerrilla Marketing Goes Green. If the wetland is designed according to Todd’s principles, I have no problem with it. But the article implied that it was long-term illegal dumping rather than a carefully engineered system that you’d not normally find in rural Africa.