Brave New Economics: Hold all the Earth Summits you want, we'll never achieve sustainable development without developing new economics that value natural capital

The Prime Minister is being congratulated for his twin announcements at the World Summit on Sustainable Development at Johannesburg. Putting the Kyoto climate change agreement to a Parliamentary ratification vote and establishing 15 new national parks indeed establishes an environmental legacy.

As important as they are, the real legacy may be less in the two initiatives themselves than in what they represent - which is no less than the beginning of a brave new era in which we value nature and call it by its true economic name: natural capital.

We need new economics that value and in many cases gives a dollar value to natural capital. New economics begins by recognizing that the world's natural capital provides us with both services and products and has a net worth.

Natural capital's services make life possible on a biological level. These services include air and water purification, productive soils, wildlife, climate regulation, flood control, and pollination of crops. Yet we take them for granted economically and typically assign no dollar value.

Natural capital "products" enrich us economically. They go well beyond natural resources like ores and oil. For millennia we have been filling our medicine cabinets with remedies found in nature. Penicillin is produced by a mould. Codeine is obtained from poppies. Nature also inspires technological innovation. Engineers have developed a substance stronger than steel by studying spider webs. The common field burr was the model for Velcro.

Much of our economic activity is financed by the DNA Bank of Nature, where the accumulated capital of 500 million years of evolution is on deposit. Yet we do not take nature's value into account in decision-making. As the old business adage goes, you can't manage what you don't measure.

To make real progress we have to learn how to count. We haven't learned to count the cost of paving over streams, or burning fossil fuels, or vacuuming the ocean floors. Similarly, we haven't learned to count the value of the opportunities afforded us by our natural heritage.

Monetizing some of this natural capital is a prerequisite to accurately measuring economic activity. It is also a prerequisite to informed decision-making that takes into account the measured limits of the Earth's carrying capacity.

One risk is that we could be significantly depleting our natural capital without even being aware of it. We do not now account for the true and full costs and benefits of economic decisions, either because these costs and benefits are not currently monetized, or because they are borne by parties outside the transaction. Such "externalized costs" lead to inefficient and inappropriate decisions - market failures.

An example of a market failure born of externalized costs is burning coal to generate electricity. That economic activity contaminates the air - natural capital - with smog pollutants, and it damages people's health. The Ontario Medical Association estimates that provincial health care costs associated with smog pollutants are in the order of $500 million each year. The resulting worker sick days add a $500 million charge to the province's employers. But when it comes to the impact on the value of our air per se, it's not accounted for.

The electricity generator doesn't pay for damaged air quality or the ensuing health care costs and sick days - those costs are external to the company's bills. So acting as a perfectly rational individual economic player in an imperfectly designed economic system, the polluter ignores health impacts that deplete other people's budgets and buys the "cheapest" fuel.

We have to factor the costs to and benefits of natural capital if we are going to change these rational individual - but irrational social - decisions, and make our economic behavior more sustainable.

How do we move forward?

First, we must recognize the value of our natural capital, and when appropriate assign a dollar value to it. If Kyoto is ratified by enough countries to come into effect, its single greatest influence may be to monetize carbon in the international emissions-trading market that will quickly follow adoption. When market forces place a dollar value on the act of reducing carbon emissions, our economic system will be positioned to solve an environmental problem in the normal course of business.

The monetization and trading of carbon reduction credits also presents us with an economic efficiency opportunity. Those emitters who can reduce most cheaply will find it profitable to "over-reduce" and sell their surplus reductions to emitters whose cost of cleaning up is higher. This gives society the chance to achieve the necessary emission reductions at a lower cost. In fact, the costs of implementing Kyoto in Canada could be cut by more than half with an emissions-trading program, a study done for the National Round Table on the Environment and the Economy found.

Second, we must develop ways to measure and track natural capital, so that we can eventually reflect in an honest, intelligent fashion the true health and wealth of our country. This is why the Round Table is developing a set of indicators and national accounts for natural capital.

The Parliamentary vote on Kyoto ratification will involve a serious national debate about the true costs and benefits of addressing climate change - or not.

The coming debate on Kyoto is truly welcome. For, in part, it will tell us whether Canada is ready to move to the new economics that give value to natural capital, and integrate the environment and the economy.

David J. McGuinty is President and CEO of the National Round Table on the Environment and the Economy.

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