Nature and Profits

The title The New Economy of Nature seems to promise fresh insight into the economics of conservation. Regrettably, the book does not deliver. Gretchen Daily is an ecologist at Stanford University. Katherine Ellison is a Pulitzer Prize-winning journalist. They are lively and entertaining writers, but they are not economists. This fact does not prevent them from providing serviceable descriptions of some fundamental economic principles. It does, however, keep them from grappling effectively with the key issue in conservation economics: What should government do, and what should be left to the market? Because the authors don’t have a clear answer, the book fizzles to an unsatisfying conclusion. At the end, the reader is left unsure as to the point the authors meant to make–and worrying that, despite their good intentions, their work could do more harm than good in resolving the vexing problems of conservation.

Daily and Ellison accept the most orthodox of economic precepts: Scarcity implies value. This ought to be as true for what Daily in an earlier book called “nature’s services” as it is for petroleum or real estate. When natural ecosystems are in short supply, people will pay more for their services. The next logical development is that entrepreneurs will begin to make money by providing these valuable services.

If Daily and Ellison had intended simply to applaud and encourage entrepreneurs offering eco-friendly goods and services, a shorter version of the book might have succeeded in entertaining and informative fashion. It would also have duplicated a message conveyed by free-market environmentalists such as Terry Anderson and Donald Leal. Yet Daily and Ellison clearly do not share Anderson and Leal’s laissez faire philosophy. They write that “private enterprise cannot substitute for governments . . . we strongly believe that government regulation is called for to kick-start and supervise the profound economic transformation needed.”

What precisely is the role they envision for public policy, then? Daily and Ellison are never clear on what they characterize as this “great unanswered question.” One thing government can and does do is to make things artificially scarce and, therefore, valuable. By restricting the amount of pollution industry is allowed to produce, government can make tradable emission permits valuable. This will, in turn, motivate polluters to economize on emissions. Tradable permits are widely recognized as the least costly way to achieve a given environmental objective. If The New Economy of Nature convinces those in the environmental advocacy community who have still not accepted this logic to embrace market-based incentives, it will have performed a valuable service. But arguments for market-based incentives have been staples of economics textbooks and policy debates for decades. Repeating them does not seem to have been Daily and Ellison’s main purpose.

The emphasis Daily and Ellison devote to one prominent set of would-be permit traders, known as the Katoomba group, is curious. This diverse collection of academics, investors, and conservationists first assembled in Katoomba, Australia, to consider new financial incentives for conservation. One of the chief hopes of the group was that international treaties would motivate a market in carbon emissions trading. (Similar international agreements or national policies could create markets in ecological assets, such as natural habitats that provide water purification.) An agreement such as the Kyoto Protocol would make the right to emit carbon scarce and hence valuable. This would, in turn, create a demand for financial instruments such as carbon futures contracts: a contract guaranteeing its bearer the right to emit a certain quantity of carbon in the future. If an international agreement were passed limiting global carbon emissions and permitting trading in rights, such contract holders would become wealthy.

One would certainly hope that enriching such investors is not the goal of international climate policy, however. Markets in securities such as carbon futures can help ease the burden of regulation by lowering the costs of compliance and spreading risks, but the decision about whether or not to cap global carbon emissions ought to be made on the basis of the underlying costs and benefits of doing so. Daily and Ellison seem to be confusing cause and effect by hailing some Katoomba group players as “visionaries” who “offer up inventions and push governments along.”

Daily and Ellison profile others who are much more effective in pushing governments along. In many of these descriptions, though, it seems that what is being described is not a new economy so much as familiar politics. Chapters of the book are devoted to local land-use choices in Napa, California; King County, Washington; and New York State. The city of Napa had to decide how to manage the river of the same name. Daily and Ellison describe the choice as an instance of “vivid progress toward the establishment of a new economy of Nature, in which the labor of ecosystems is formally respected.” The “labor of ecosystems” is a revealing phrase. Who pays its wage? One could not object if a majority of voters decided to bear the costs of conservation. The citizens of Napa did, in fact, tax themselves for part of the cost of restoring their river. But Daily and Ellison also write that “it looked as if Napa residents would pay much less than half of the total bill,” with the remainder of funds coming from a variety of public programs. Was it appropriate for taxpayers elsewhere in California and the nation to have footed part of the bill, or did backroom deals stick them with subsidizing the citizens of Napa? This is the type of question one would have liked to see Daily and Ellison address more directly.

Skeptical view

The authors should be commended for producing a far more skeptical and even-handed review of New York City’s celebrated Catskill watershed restoration program than have many other authors. New York City began an extensive program of land acquisition and land-use restriction in the watershed serving its Catskills reservoir in order to avoid a U.S. Environmental Protection Agency requirement to build an expensive filtration plant. Some have claimed that the Catskill program saved the city billions while affording fair treatment to all affected landowners. The New Economy of Nature entertains doubts on both assertions. The city believed that the natural landscape could provide sufficient filtration services if it were restored. Although Daily and Ellison agree that this is the most likely outcome, they also note that it is not a sure thing either that the natural system will suffice in the long run or that the cost advantages of the natural approach will always prevail. As for the notion that the program was implemented entirely by voluntary transactions between landowners and city authorities, the reaction the authors ascribe to one local businessman is trenchant: The restrictions imposed on him were in his words “an absolute outrage, a thievery.”

Such careful reporting is the strongest point of the book. Even those who have followed developments in conservation-related markets fairly closely in recent years are likely to learn interesting things from Daily and Ellison. The book is longer on reporting than analysis, though, and the New York City watershed section reemphasizes its frustrating ambiguity. Is this example really an instance of what the book’s subtitle calls the quest to make conservation profitable? So long as we don’t know if those who are receiving the benefits are paying the costs, we can’t tell.

Such issues are nowhere more problematic than in an example offered in the book’s final chapter. Does the new economy of nature encompass dubious tax deductions? Allegheny Power, an electric utility, owned land in the Canaan Valley of West Virginia. With the assistance of Adam Davis, an alumnus of the Katoomba Group, Allegheny had the land appraised for the value of its ecological assets. When the land was sold, Allegheny claimed a $15-million tax write-off, arguing that this was the unrealized value of services such as carbon sequestration and habitat preservation that the land provides. If there really is a market in which the company could sell the land for the price it claims, is it failing in its fiduciary responsibility to shareholders by not holding out for the full value? If there is no such market, should the Internal Revenue Service disallow the tax deduction?

Other chapters detail the efforts of entrepreneurs to make conservation profitable. Daily and Ellison report the efforts of biologist Dan Janzen to use parks in Costa Rica to provide waste recycling and other services. Another chapter follows John Wamsley, a colorful character whose Earth Sanctuaries Limited nature reserves and ecotourism destinations became the first eco-enterprise listed on a major stock exchange. In a third chapter, Daily and Ellison describe how farmers can earn higher profits in the long run by following more ecologically benign practices. Such reports beg questions. The authors are reporting what farmers, wildlife managers, and park authorities have already done to earn more money. Are they suggesting that others could benefit from emulating them? If so, is a book such as The New Economy of Nature sufficient to apprise them of the possibilities, or should government be spreading the word more aggressively? If not, have farmers and park managers largely solved the conservation problem on their own? Again, the reader is left wondering what role Daily and Ellison would have public policy play.

This lack of guidance is especially troublesome, as it is not clear that all the profit-seeking activities the authors report are, in fact, ecologically benign. Consider, for example, William Harper, inventor of a system to deploy genetically modified “designer pollinators” over agricultural fields using a mortar. Daily and Ellison remark simply that his ideas “highlight a growing sense of financial potential in the overall beneficial-bug industry.” Others might question the ecological wisdom of disbursing genetically modified insects widely. In other instances, such as in their discussion of the potential adverse ecological effects of ecotourism, Daily and Ellison do raise similar doubts. However, they never address head-on the pivotal question of whether the appropriate public policy is to take an entirely hands-off attitude, subsidize such ventures, restrain their excesses, or create some combination of the last two.

The New Economy of Nature is engagingly written and thoroughly researched, but ultimately frustrating. It never makes its intentions clear. What exactly is the role Daily and Ellison propose for public policy? The book frequently confuses what can be accomplished in markets with political choices. A more constructive approach would recognize appropriate realms for both economics and politics. When conservation is profitable, markets should not be constrained. Quantitative regulations can be most efficiently implemented with market-based incentives, such as tradable permits. In some instances, however, economics may not provide an answer as to how many permits should be issued. The benefits of environmental improvement may be so uncertain and diffuse as to prevent accurate measurement. In these circumstances, society has to make political choices. Such choices should be made transparently, with the participation of an informed electorate that appreciates the inherent ambiguities. The New Economy of Nature presents some interesting and intriguing examples, but in the final analysis it delivers a garbled message by confusing political and economic considerations.