Putting a Price on Nature

The natural world is essential for human existence. It provides us with necessities like food, water and clean air, but often the value of these elements is overlooked simply because we get them for free.

However, this ‘natural capital’ – the world’s stocks of natural assets such as clean air and water, an equable climate, fertile soils, etc. – is still capital in the traditional business sense. These assets have a value and poorly managing them has a cost. Being able to quantify them and measure their value helps businesses and governments to make clearer, better informed decisions about how they interact with the environment.

Ian Bateman OBE, FRSA, FRSB is Professor of Environmental Economics, and Director of the Land, Environment, Economics and Policy Institute (LEEP) at the University of Exeter Business School. His research looks at the relationship between the environment and the economy, and allows us to see all the costs and the benefits of different choices.

Ian said: “We constantly change aspects of the natural environment. All around the world people are building infrastructure, clearing forests for farmland, draining wetlands. These activities can generate valuable income for those involved but they also have both direct costs, such as pollution, and indirect costs by reducing the earth’s ability to provide other resources.

“Some of these trade-offs can seem quite obvious – cutting down a forest to create farmland for example – but others are less so. For example, peat bogs are often drained for alternative

land uses, but these environments are one of the best ways to reduce global warming as they suck carbon out of the atmosphere. They also purify water (which avoids the need for engineered water treatment plants), and by acting like a giant sponge they provide protection against floods downstream. So, even if you fill the land with trees, you are still actually contributing to climate change rather than helping it, plus you’re increasing flood risks and

raising water purification costs.”

Through his work Ian has advised the Secretary of State for the Environment and the Chancellor of the Exchequer on policy. This helped lead to the UK Government’s 25 Year Environment Plan announced by the Prime Minister in 2018. Just as important has been his

contribution to changes in the Treasury’s ‘Green Book’. This document is the official guideline for appraisal of public spending in the UK and is responsible for the allocation of around £40-50 billion annually. Ian helped introduce the concept of natural capital to these guidelines ensuring natural resources are considered when making investments, and requiring that the benefits and costs of the environmental impact of such investments is now central to government decisions.

Ian said: “The guidelines now ensure that, alongside those items that have market prices, investment decisions also have to consider environmental values such as clean air, clean water, outdoor recreation, the conservation of wild species, natural flood defences, even peace and quiet.

“Without the environment, we’re all dead. So really the total value of nature is infinite. So instead of looking at total value we look at changes to that value, seeing whether these are increasing or falling. For example, we can look at reduction in flooding costs, changes in the costs of water treatment, the effect of a decline in pollinators on food production, even looking at what impact another tonne of carbon dioxide will have on the planet or how much it costs to take that CO2 out of the atmosphere.”

This approach requires a holistic view that considers how changes to different aspects of both the environment and economy can influence each other. For example, providing subsidies for the agricultural industry may boost their productivity, but could lead to lower water quality downstream as contaminants from the extra yield pollute the water supply, harming the water industry.

A related example undertaken by LEEP researchers is an assessment of a recent proposal to plant large areas of new woodland in the UK. If only the timber benefits are considered these are less than the costs of foregone agriculture and other planting expenses. However, when the wider benefits that the trees could provide are considered, including recreation, carbon storage and air purification, soil stabilisation, flood prevention, wildlife habitat and so on, then these benefits very considerably exceed costs and the investment provides excellent value for money.

“Some things are easier to value than others,” said Ian. “Valuing biodiversity is more challenging as you have something known as ‘existence value’ – the benefit from simply knowing a species exists. But how do you value it?

“One thing that has been tried is surveying people to ask what they would be prepared to pay in order to preserve species, but that is something that people find very hard to nswer. At the moment instead we impose a requirement that any new development must not negatively impact biodiversity but it is still not ideal. This is the next important stage in our research.”

This next phase is being supported by alumnus Dominic Scriven OBE (Sociology and Law 1985) through the Dragon Capital Chair in Biodiversity Economics. Based in LEEP, this position will lead research into how we can put a value on biodiversity and consider any correlation between biodiversity and the success of the economy. The findings will be used to influence future policy in order to protect both the environment and economic development.