Stop Killing Economic Valuation

Unter dem etwas reißerischen Titel verbirgt sich mein Kommentar zu einer von der Heinrich-Böll-Stiftung veröffentlichten Kritik der ökonomischen Bewertung von Frau Jutta Kill. Leider ignorierte Frau Kill alle kritischen Kommentare in ihrer anschließenden Antwort und bezog sich lediglich auf die wohlwollenden… Wie dem auch sei, hier mein Kommentar nochmal, für die künftigen Generationen:

Let us start with the positive. Jutta Kill is right in pointing out that we are facing daunting ecological and social challenges that hit “places where those affected have contributed least to causing the crisis and where local livelihoods and ways of life are closely tied to – even an integral part of – the nature that is being destroyed.” It is true as well that economic valuation and market-based instruments are not THE solution to the multiple ecological crises we face, and there is much to criticise about especially the application of these economic concepts. Alas, this is about all that I can say in favour of Mrs Kill’s paper. But since it would be tedious to delve into every single misconception, exaggeration and assertion she makes in her contribution, I will focus on those that hurt her argument most.

First, there are the explicit and implicit premises, some of which have to be read between the lines, because it is often unclear where description ends and where normative evaluation begins (e.g., “Only in the case of offset PES schemes do the contracts have to include legal obligations that last beyond the period over which payments are received.” – is it bad, is it good or is it neutral?). The first premise is implicit but relatively clear: all corporations and many international institutions (e.g., the World Bank) are bad. Moreover, it seems that to Mrs Kill, this is a bidirectional relationship: all that is bad is due to these culprits. In fact, as an economist I am clearly on the wrong side of the frontline, as suggested by the line on “the language of economists and corporations” – obviously I belong together with the Nestlés and Monsantos of this world. The second, equally important yet explicit premise is that command-and-control mechanisms are “effective but not sufficient,” which seems to mean that we don’t need economic instruments, as we do have all the powerful policy measures needed for change. It’s puzzling, however, that these command-and-control mechanisms are in place, according to Mrs Kill, since the 1960’s – and yet the environmental crises haven’t been solved. What does “effective but not sufficient” mean, anyway? What is it that is preventing command-and-control from successfully solving all environmental problems (other than the bad economic instruments, which are, however, a relatively recent phenomenon)? Last but not least, there is a third, semi-explicit premise: it is either only command-and-control or only market-based instruments. A combination of both seems impossible. But why? And does this not contradict repeated calls in the paper for a policy mix?

These premises are the source of most problems that follow in the text. First, there is a classic: economic valuation is equalled to market-based policy instruments. In fact, very little is said in the paper about economic valuation theory or practice – the term is invoked from time to time, but in effect Mrs Kill focuses almost entirely on market-based instruments (PES, emissions trading and biodiversity offsets). In fact, she is aware of that, as she acknowledges that “economic valuation of nature does not necessarily imply pricing and trading offset credits or setting up biodiversity banks,” but goes on to argue that “the particular political and economic context and the balance of power among its proponents is likely to lead to an application of ‘economic valuation of nature’ through pricing and offset trading mechanisms” and that “for many proponents, price discovery through market transactions is an important objective of economic valuation.” This is nothing else than an unsubstantiated assertion, which seems to hinge to a large extent on the claim that biodiversity offset schemes use economic valuation studies as basis for identification of “offsetting habitats” – which is incorrect, to my knowledge. Furthermore, the generalising link from economic valuation to market-based mechanisms is complete nonsense from an economic point of view: whether the use of an environmental good is best regulated by means of command-and-control-mechanisms, taxes, offsets schemes etc., depends heavily on the characteristics of these goods. Are they non-excludable public goods (or common-pool resources) or can they be assigned private property rights? Are they homogenous goods, such as CO2, or heterogenous ones, such as nature monuments? Environmental economics is by no means as simplistic as suggested in Mrs Kill’s paper.

Which leads us to another central misconception: command-and-control mechanisms are not per se better than cap-and-trade schemes (such as EU ETS), just as the converse is not true. And the latter are not the same as offset schemes. Mrs Kill repeatedly refers to “exceeding legal limits” in one place by offsetting elsewhere as a main “bad” of market-based instruments. But there is a need to differentiate. First, cap-and-trade schemes are called CAP-and-trade schemes because they are based on a cap – a total amount of certificates/emissions that cannot be exceeded within the scheme. This is, by the way, something command-and-control cannot secure – it can regulate the amount emitted by particular plants/producers, but not the overall number of plants. Accordingly, the total amount of emissions cannot be directly regulated via command-and-control – quite in contrast to cap-and-trade schemes. And in the case of CO2, a perfectly homogenous pollutant, this is all that counts – the total sum of emissions. It is completely irrelevant, regarding their climatic effect, where these emissions originate. What a cap-and-trade scheme does, is then a) secure the cap (which has to be set politically, and that is often a problem – but command-and-control has this problem just as well) and b) allocate efficiently the burden of reaching it.

The matter is different with biodiversity offsets – here, we do not have a perfectly homogenous pollutant, but rather habitats, which can be argued to be more or less unique: “Nature’s complexity, interconnectedness and uniqueness mean that no two places are the same.” Nonetheless, this hardly can mean that we should (and can) protect everything. And in cases where infrastructure projects are really necessary, the ‘no net loss’ strategy can have much merit, depending, as it does, on such issues as real additionality of offset projects (i.e., the offset mustn’t be a project that would have taken place anyway) and as much equivalence between the old and the new habitat as possible (Santos et al., 2015). An important component of sensible biodiversity offset schemes is that it is attempted to avoid habitat degradation, minimise it if it cannot be avoided and compensate only if the former two strategies have not worked. Do we need economic valuation for all this? Not necessarily (although it would be an option), and to my knowledge offsetting is in reality mostly based on biophysical indicators.

Sparsely as she does, Jutta Kill mentions economic valuation in its actual sense now and then. But she seems to misunderstand some of its basic premises. For instance, economic valuation is about changes in quantity/quality of environmental goods, which implies that relationships between different parts of ecosystems are relevant and must be taken into account, because they drive changes (she claims that they are obscured). Also, she criticises that “Crucially, these ecosystems were shown to provide a series of ecological functions that were essential to human well-being – and which were not yet valued economically,” obscuring the fact that the problem was no valuation (i.e., value attribution, implicit or explicit) at all – economic valuation is one among many possible ways to demonstrate that ecosystems do have value! Similarly, it is not true that there is an inherent link between economic valuation and the growth paradigm – this is particularly untrue of ecological economists, a heterodox school of economic thought which rejects the infinite growth paradigm, while at the same time engaging in economic valuation. Citing George Monbiot, Mrs Kill accuses economic valuation because “demonstrating value in money terms does not change power imbalances.” Well, it also does not cook and clean. Sorry for that. But wasn’t it her who called for a policy mix instead of all-purpose instruments (which is a great idea, by the way, and supported by many environmental economists, both in the context of biodiversity conservation and climate mitigation (Lehmann and Gawel, 2013; Ring and Schröter-Schlaack, 2015))? I guess, power imbalances have to be tackled by other instruments. Furthermore, a proper economic valuation study necessitates the identification of winners and losers of an environmental change – thus at least highlighting who is profiting and who is losing. To summarise the points on economic valuation: Mrs Kill asks “What if ‘we must calculate the true cost of nature’s destruction’ merely paves the way for ‘now we know the price of destruction and can plan accordingly’?” and I have to ask back: what’s wrong with that? Some destruction will be unavoidable and it is a good thing to know how much we lose (beyond purely biophysical information and/or fuzzy gut feelings) if we decide to destroy a particular ecosystem.

Generally, it seems that Jutta Kill’s rejection of economic valuation and market-based mechanisms is less based on an analysis of these concepts, but rather has ideological reasons. This is particularly obvious when one reads her three conclusions – I must admit that I was asking myself what the purpose of the previous 18 pages was if the conclusions were not based on the arguments developed there, but on assertions, namely that: a) “capitalism is dependent on creating externalities, on always internalizing unevenly and always only partially” (for such crucial and controversial an argument it does not suffice to refer to Moore’s book!); b) “providing economic figures derived from the new techniques of valuing ‘ecosystem services’ risks reducing the discussion over the nature of the fine or compensation to a matter of settling an amount for a monetary payment with which the company responsible for the damage can settle the case once and for all” (any evidence for that? also, the suggestion that “applying new ‘ecosystem service’ valuation methodologies may not be of much use to judges involved in setting penalties for polluters whose actions have permanently damaged a fishery upon which a community has always depended” seems bizarre – is it better to set fines 100% arbitrarily?); and c) the already discussed claim that economic valuation “is likely to lead to an application of […] pricing and offset trading mechanisms.”

This is not to say that economic valuation and market-based instruments for conservation policy are all perfect. Quite the contrary, there is much to criticise about their theory and, especially, practice. But the relevant arguments can hardly be found in Jutta Kill’s paper.

Lehmann, P., Gawel, E., 2013. Why should support schemes for renewable electricity complement the EU emissions trading scheme? Energy Policy, Special Section: Transition Pathways to a Low Carbon Economy 52, 597–607. doi:10.1016/j.enpol.2012.10.018
Ring, I., Schröter-Schlaack, C., 2015. Policy mixes for biodiversity conservation and ecosystem service management, in: Grunewald, K., Bastian, O. (Eds.), Ecosystem Services – Concept, Methods and Case Studies. Springer, Berlin Heidelberg, pp. 146–155.
Santos, R., Schröter-Schlaack, C., Antunes, P., Ring, I., Clemente, P., 2015. Reviewing the role of habitat banking and tradable development rights in the conservation policy mix. Environmental Conservation 42, 294–305. doi:10.1017/S0376892915000089

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2 Gedanken zu “Stop Killing Economic Valuation

  1. Ich kann dem Text von Frau Kill auch nicht viel abgewinnen – ihr Verständnis von umweltpolitischen Instrumenten scheint mir unzureichend zu sein. Allerdings vermute ich mal, dass der doch recht offensive Ton deiner Kritik der Motivation von Frau Kill, dir zu antworten, nicht unbedingt zuträglich war. In Kombination mit der Länge deines Textes und der Komplexität deiner Argumente vermute ich, dass deine Leserschaft generell eher begrenzt war. Mit ein bisschen mehr Fingerspitzengefühl und den Pulitzer-Grundwerten* könntest du deinen guten Argumenten sicher mehr Aufmerksamkeit verschaffen…

    * „Was immer Du schreibst – schreibe kurz, und sie werden es lesen, schreibe klar, und sie werden es verstehen, schreibe bildhaft, und sie werden es im Gedächtnis behalten.“

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    • Ich weiß nicht… Der offensive Ton war der Qualität des Kommentierten entsprechend. Und kurz war es, glaub mir, ich hätte problemlos doppelt so viel schreiben können, weil da so viel Kritikwürdiges drin stand.

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