In my first lesson of economics nine years ago, we read a tale that conveyed Adam Smith’s underlying ideas behind the “Invisible Hand.” The morale of the story, as you probably know, is that free markets can make everyone better off.
At Rio+20 the story is often told differently. Markets need to be tamed, incentives need to be rectified, and policy makers need to establish legislation that internalizes the negative environmental externalities. Hence, free markets are more often regarded as the problem, rather than as the solution. So what’s the right version of the tale when it comes to saving the environment?
I attempted to find an answer at two Rio+20 side events. The first one was hosted by Mr. Ivo Havinga, Chief of the Economic Statistics Branch at the United Nations. His main message was that after 20 years of work (i.e. since the Rio Earth Summit in 1992), the establishment of the “Central Framework” as the first international standard for environmental-economic accounting represents a major breakthrough in the field. According to Mr. Havinga “what doesn’t get measured, doesn’t get done.” Hence, he believes that the System of Environmental-Economic Accounts (SEEA) will not only advance the macroeconomic debate on sustainability towards a more solution-oriented one, since the statistics will now be internationally comparable, but also that the economic quantification of environmental impacts will enable market-based approaches to be significantly more effective. The SEEA framework is especially powerful because it follows a similar accounting structure as the System of National Accounts (SNA) in order to facilitate the integration of environmental and economic statistics. It represents a significant step towards a new economic paradigm in which the success of a country is no longer measured purely in terms of its GDP growth but also in terms of its environmental performance.
Panelists at a side-event hosted by FORES, a Swedish think tank, shared a similar view. Two issues lay at the core of their discussion. On the one hand, they discussed the challenge of accurately evaluating the environmental costs associated with the degradation of ecosystem services. On the other hand, they also debated the equally, if not more complex task of implementing the right economic incentives in order for a market of ecosystem services (ES) to function properly. Ecosystem services attempt to put a market value on the services that the environment provides, such as a wetland’s flood control value, or a forests’ air pollution absorption value. It is a potential solution to the free markets’ failure to account for environmental value.
According to the recently released FORES report, Using Markets to Supply Ecosystem Services: How to Make it Happen?, free markets for ES don’t just work. In fact, the current trends show that more than two thirds of all ecosystem services are in decline. Evidently, the “invisible hand” needs a bit of “visible help.” The report argues that a sustainable market equilibrium, at which human consumption of ES is in harmony with the planet’s natural supply capacity, can be, at least in part, achieved through a market-based mechanism if the right pre-conditions for a free market have been established at the outset. These pre-conditions are threefold:
- Measurability of the ecosystem service
- Divisibility of the ecosystem service
- Ability to assign and enforce property rights
Once these pre-conditions have been established, there are only two more things policy makers need to understand: when to act and when to get out of the way. To aid in that process, the FORES report puts forward ten recommendations for governments. For example, the authors suggest that governments should reduce transaction costs faced by buyers and sellers by establishing quality assurance programs so buyers are confident that they get what they pay for and can define a common currency for key ES, such as grams CO2 equivalent for carbon sequestration (for further recommendations see page 53).
Hence, in the 21st century, the tale of the invisible hand involves one that’s not so invisible. It might be best understood if you imagine it as the hand of an infant. When the market place is straightforward, it learns fast. Just ask an eight-year old to take care of a market stand that sells apples. Would you trust the child in understanding the market mechanism? Yes. What if, however, the eight-year-old was given the task to deal with a market stand that sells the ecosystem service provided by clean air? Would you trust the child that it could understand the market mechanism? Consider the pricing, for example. How would he know where to set the price of clean air? This is precisely where the invisible hand has trouble, too. And that’s why governments need to hold the market’s invisible hand for ecosystem services, especially in the beginning, so that the market can grow in a responsible manner. Once it is old enough, the government should let the hand go. Just like a well-brought-up child, the young market will then mature into an independent and powerful force of good that makes people and the planet better off.
Since Rio+20 is about precisely that — making people and the planet better off — policy makers need to recognize, integrate, and where necessary, create market opportunities that account for the environment and the value of its services to mankind.