The last post in the series of the article “Low carbon dioxide in land use: interdependence is the name of the game”, Roberto S. Waack, CEO of the Renova Foundation, addressed the Brazilian potential related to a new trend in the low-carbon economy. Today’s post discusses the relationship between land use in Brazil and the externalities of production processes. Continue reading.
THE ECONOMIC RATIONALITY OF EXTERNALITIES MANAGEMENT
“What is a cynic? A cynic is a man who knows the price of everything, and the value of nothing” Oscar Wilde
The further various dimensions of sustainability and low-carbon economy are advancing, the more definitions are being consolidated. One of them is the idea of externality, particularly relevant in the agribusiness and its relation to conservation. The concept is very simple: externalities are “indirect effects, negative or positive, of the production of goods or services, transferred to individuals and/or entities not involved in the production process; environmental pollution is an example of negative externality”. This is a quote from the document Environmental Markets: A New Asset Class, published by the CFA Institute, which brings together investment professionals and is considered one of the most renowned entities of the financial world.
This clear positioning indicates that the subject is no longer limited to the world of non-governmental organizations (NGOs) dedicated to the environment or social matters. Few segments incorporate the subject of externalities as profoundly as agribusiness, especially in Brazil. Deforestation is the prime example, and its relationship with water resource issues reinforces its practical relevance. There are stimulating nuances in the definition of the term. Ricardo Abramovay, of the Department of Economics of the University of São Paulo, depicts the central issue, the monetization of externalities, i.e. “everything that produces any negative or positive impact on someone and which is not part of the price system”.
Carlos Eduardo Frickmann Young, of the Economics Institute of the Federal University of Rio de Janeiro, follows the same line: “it means that instead of the everyone picking up the slack, the one who should pick up the slack is the one responsible for it.” This means that, identifying, qualifying, quantifying and, if possible, monetizing externalities has become a challenge for the business world. Attempts of quantification and valuation have proliferated: “The value of all that mother earth provides mankind, free of charge, is estimated at US $ 124.8 billion per year, which corresponds approximately to double the global GDP”, writes Robert Costanza, professor at the Australian National University.
The CFA Institute shows that 40% of worldwide deaths are the result of environmental factors, including side effects of environmental degradation and the spread of diseases. He also cites pollution, which in northern China is causing a human lifespan cutback of 5 years per person. The Principle of Responsible Investments estimates that the annual cost of environmental damage caused by human activity reaches US $ 6.6 trillion, or 11% of the global GDP, and one third of that cost is caused by the 3000 largest companies in the world.
In the book Big World, Small Planet, Johan Rockstrom presents alarming complementary statistics on the increased CO2 concentration on the planet. They include the exponential increase of impacts due to the “great acceleration of human activity” from mid-twentieth century on. Atmospheric concentrations of nitrogen dioxide (NO2) and methane (CH4) doubled or almost tripled, resulting in acidification of oceans, forest loss and degradation of the biosphere.
Numerous analyses show that the limit of pressure on the planet’s natural capital has been exceeded. Several organizations are dedicating themselves to defining those values, with widely varying and often conflicting numbers. This signals that the current stage is not so much focused on precision but on the development of methodologies. Moreover, they point out responsibilities that affect the reputation of industries and the economic value of companies.
Use of technology in planting. | Photo: Leo Drumond / NITRO
The reputation of food producers in Brazil suffers significant commercial damage because of the association of these companies with deforestation. The debate over who should pay the bill of externalities relates directly to the emissions of greenhouse gases, harm to water resources, biodiversity loss, soil degradation and a variety of social impacts. On the other hand, certain discussions on the compensation for resulting environmental services, such as forest conservation, are advancing.
The effective implementation of the Brazilian Forest Code seems to depend on the balance between these two aspects of externalities, negative and positive. In-depth understanding of the social and environmental effects of legal reserves and permanent preservation areas, establishing metrics, is one of the great challenges that land use in Brazil will have to face.
Society puts a price on externalities, although still with great imperfection. This discussion has stimulated the debate on actual costs and prices. After all, how to embed in the cost of a product any damage caused by their production? The subject is complex and controversial.
Can it be assumed that all externalities are monetizable? The activist and biologist Jutta Kill, of the World Rainforest Movement, published the book Economic Valuation of Nature, questioning the monetization of externalities as an alternative so that its value can be considered by society: “Calculating the economic value is not the same as putting a price label on nature”.
One of the main leaders of this debate, the Indian economist Pavan Sukhdev, defiantly argues that the economic invisibility of nature must end. “We use nature because it has value, but we lose nature because it is priceless. Currently, no one pays for ecosystem services. At the same time, incentives to do things right are missing… You need to create a market”.
In contrast, Geoffrey Heal argues that “if our concern is to conserve ecosystem services, valuation is largely irrelevant… Valuation is neither necessary nor sufficient for conservation. We conserve a lot of what we don’t value, and we don’t conserve what we value”. This debate revolves around the payment for environmental services, which in some cases legitimates economic exploitation of natural resources and the emission of pollutants.
The carbon credit trading models follow that direction, with transferable permits of the right to pollute, that is, establishing a price for that right. Alternatives such as carbon tax are widely discussed and, in relevant cases, implemented in several countries around the world. There is a fierce dispute about if the creation of an externalities market would be an acceptable option.
The future points to a structure in which externalities should be indicated in a transparent way, verified and certified by independent mechanisms, with multi-stakeholder governances, affecting the value of organizations to a broad extent (not only in economic terms), defining measures with metrics far more accurately than the current, with structured markets for some categories. Certainly, not all shall be monetized or priced, but they shall have a recognized value.
NEXT POST
The discussion on low carbon dioxide emission land use will continue next Friday, March 31. Follow how Roberto S. Waack, CEO of the Renova Foundation, discusses the concept of dynamic capabilities.