We need a new economic approach – reflections on the Dasgupta Review

Subsequent archaeological evidence showed that the beleaguered population had over the previous century or so, suffered the ravages of overusing the natural resources of the island in building the statues. Contact with the European visitors cemented this decline resulting, among other things, in outbreaks of new diseases.

To the author of this week’s landmark biodiversity review, Professor Sir Partha Dasgupta, the story of Rapa Nui is a microcosm of the acute challenge facing the planet’s ecosystems and biodiversity.

The statistics are eyewatering. Since 1970, animal populations have dropped by an average of 68%. Destruction of wildlife habitats continues at a pace. 11,088 sq. km (4,281 sq. miles) of Amazonian rainforest were destroyed from August 2019 to July 2020, an area the size of Wales every two years. Incredibly, only 4% of the world’s mammals are wild, massively outnumbered by us and our livestock.

The review commissioned by HM Treasury could not be timelier, as we find ourselves in the middle of a global pandemic that appears to be linked to the sale of exotic species and the destruction of their habitats. The costs of environmental degradation are now very tangible to all of us.

The central message of the review is that we need a radically different economic approach to natural resources. At a planetary level, we are living well beyond our means. The demands on the planet from consumption and the industries that support it is outstripping nature’s supply. The simple monetary analogy is that we are spending more than what we earn, and there is a limit to how much we can run down our wealth.

An essential part of our wealth are our natural capital assets. These are comprehensive and include stocks of fish, forests, marine and terrestrial environments and habitats, soil, and air quality, to name but a few. Running down this capital is unsustainable. Some estimate that the Net Primary Product (NPP), the physical units of biomass reproduced annually in the biosphere, is over 170% exploited. This is leading to dramatic declines in natural capital, manifesting in the high extinction rates, degraded habitats, and the loss of ecosystems.

The hope is that the Dasgupta Review will have a similar effect on biodiversity policy and international debate as the Stern Review had on climate change. It frames the conversation in a way that Ministries of Finance, Central Banks, banks, investment funds, not to mention households, will relate to and understand. Biodiversity is an essential asset; it is a form of capital with returns.

Indeed, one of the review’s key points is that the well-being of societies depends on the portfolio of assets at our disposal: not just financial but man-made, human, social, and natural. These assets are not optimised in their holdings at present. Rates of returns for natural renewable capital outstrip returns from man-made capital. A resetting of this portfolio is required, towards those assets with higher social returns. Natural capital is too scarce. There are strong arguments, therefore, for not just stopping the decline but reversing it, and restoring biodiversity and natural capital. This is especially as the services that natural capital provides are free ecological processes.

Many of the Dasgupta Review’s concepts have by-passed mainstream growth theory, which has tended to emphasise technological change and the role of institutions. This is despite the field of environmental and resource economics having taken the natural capital view for nearly 50 years. Sadly, the idea that the economy is dependent on the environment has taken years to filter through to action. Environmental accounting remains ‘experimental’ in the UN accounting framework (SEEA) and the idea of sustainable economic development has, with a few exceptions, remained at the fringes of economic policy. Ecological economics, which more clearly embeds the economy in the biosphere, has always been dubbed, negatively, as ‘heterodox’ as opposed to orthodox by the mainstream.

Crucially, the natural capital approach and the embeddedness idea is central to the Dasgupta Review. The environment is key to sustainable economic activity. Sustainability is a primary economic objective. This may seem obvious, but to many Finance Ministries and economists it is not.

Of course, technological change will help decouple planetary demands on NPP, but this is unlikely to be the magic bullet in the long term for the imbalance between supply and demand. Over time, even new technologies draw upon NPP. In short, the planetary limits of NPP mean there are limits on growth. Growth can only take place if the checks and balances are in place for the demands on the biosphere and its supply. This is an important departure from mainstream economic theories of growth.

Some decoupling of growth from the environment will occur. Yet it remains to be seen precisely what the technological fix to biodiversity loss is. What is the equivalent of renewable energy? Whatever it is, it will probably lie in more sustainable agriculture, the sector chiefly responsible for land use change and habitat loss. This must come alongside proper pricing of natural resources to guide Research and Development, and macro-economic measures of performance that reflect sustainability, and constraints on the conversion of the biosphere.

The comparison with the Stern Review is irresistible. The UK now has a climate act and a net zero target for 2050, with interim targets to stop the can being kicked down the street. The hope is surely the same for the Dasgupta Review on the economics of biodiversity. It should become the source of information for policy makers and speak to the institutions that can coordinate change: Finance ministries, Central Banks, investment funds and international organisations in the run up to the COP15 of the Convention on Biodiversity Economics.

The review does not provide easy answers, but it comes not a moment too soon. We must change radically the way we use, and account for the planet’s assets.

Author

Professor Ben Groom, Dragon Capital Chair in Biodiversity Economics, University of Exeter.