The 2021 Dasgupta Report provides a much-needed roadmap to correct flawed economic tools by valuing Nature as an asset. A test of whether markets will follow this roadmap involves quickly expanding voluntary carbon sequestration markets.
Editor’s Note: Fundamentally, the Dasgupta Review develops the economics of biodiversity on the understanding that we, and our economies, are embedded within nature- not external to it. There has been an institutional failure to account for the externalities nature provides. One of the solution areas identified by the Review is the need to change our measures of economic success. Moving to inclusive wealth, which measures all capital assets (ie. human capital, produced capital, and natural capital) as the aggregate value of a country’s economic success, is a necessary step that will allow the world to return to a path of prosperity that operates within planetary boundaries. See CEN previous article: https://www.facebook.com/groups/2516109708443374/permalink/3948676611853336 which references Chinese responses.
Markets have been terrible at valuing and pricing nature, in part because tools like GDP used to measure economic progress measure income flows and not the state and fate of nature’s assets. No wonder GDP emerged in the 1930s and 1940s as a tool to maximize supply output in the wake of the Great Depression and Second World War. Certainly GDP has many important uses, yet it is unfit to address the accelerating global ecological crisis in which 70% of the planet’s biodiversity has been destroyed or deeply degraded since the 1950s. This is threatening the economy as we know it – according to the World Economic Forum’s New Nature Economy reports, over half the world’s total GDP is moderately or highly dependent on nature.
For decades, economists like Sir Partha Dasgutpa from Cambridge have argued that GDP needed to be reformed in ways that value nature not merely as an important source of quarterly income, but more importantly as an indispensable asset. The January 2021 release of the Dasgupta Report is immensely important in identifying why and how countries, companies and communities can advance systemic initiatives to value and protect nature.
The Report culminates decades of painstaking, detailed and technical work by economists, national statistical agencies, international bodies like the United Nations, World Bank, OECD and others in reforming GDP.
Since 2015, this work to widen economic progress beyond GDP has accelerated with the adoption of the Sustainable Development Goals and the Paris Climate Agreement. National statistical agencies from Canada, the Netherlands, South Africa, the European Union and others are including different ecological indicators in their annual reports of national economic performance, and sharing practices through the UN Statistical Commission.
Steps by public government agencies to revise the wealth of nations beyond GDP will take years. Markets aren’t waiting. A growing number of companies are looking to replicate trends in climate finance in general, and climate risk disclosure in particular, to expose and choke destructive practices and reward more sustainable practices like no net loss of forests, ecological farming practices and others. The Task Force for Nature-Related Financial Disclosure – supported by UNDP, Global Canopy, UNEP and WWF – is one promising example. Last year, former U.S. Treasury Secretary Henry Paulson argued that companies should value nature as an asset class.
An immediate driver of how well markets will value and price natural assets come from climate action. More than 1,500 major companies have committed to become carbon neutral. While familiar engineering solutions like renewable energy, electric vehicles and other actions will get them partially to carbon neutrality, markets are eyeing the role of carbon sequestration to meet those goals. Science estimates that natural systems like forests, wetlands and grasslands can provide as much as one-third of global mitigation outcomes needed to meet the Paris Climate Agreement.
Accordingly, markets are preparing for a surge of new investments in carbon sequestration. Days before the release of the Dasgupta, a Task Force on Scaling Voluntary Carbon Markets – chaired by Mark Carney – estimated the global market for carbon sequestration is likely to reach between US$5 billion to US$30 billion in the coming decade.
Expanding markets for carbon offset need to move both quickly, but also in a comprehensive way to support actions that not only invest in the carbon sequestration assets of forests and other ecosystems, but equally on the biodiversity, natural disaster risk reduction, human capital and freshwater management systems – to name a few – of the multiple assets contained in forests. The risk is that markets could value large-scale forest plantations that promise high sequestration carbon returns, leading to the introduction of non-native tree species, or a new version of land-grabs to maximize large-scale carbon offsets. There are too many examples of how this can go wrong, including the ongoing devastation of tropical rainforests to produce palm oil as a raw material for European biofuel.
Since the most valuable carbon offsets are located in tropical countries, buyers in London, New York or Shanghai will need to rely on unclear or disjointed accounting systems and third-party certification providers to guarantee carbon offsets are not eroding ecosystem values, or undermining the livelihoods and rights of rural and indigenous peoples that live on these lands.
The Task Force calls for steps to ensure high-quality, high-integrity carbon offset markets. Work among the private sector continues. Yet like any market, clear public policies and regulations are needed, especially to ensure on-the-ground investments support the objectives of the Dasgupta recommendations.
The international architecture of carbon-offset markets awaits the Paris Climate Agreement negotiations in the run-up to the Glasgow Climate Summit. The Paris rulebook and the essential details of market approaches to reach the Paris goals will need to sort out work critical questions like which accounting rules to avoid the double-counting of carbon offset credits, clear rules to ensure offset-based projects provide additional mitigation outcomes that are permanent, and other design features.
Between private markets and pending international rules are national policies needed to break down the separate policy paths of protecting nature on the one hand, and reaching carbon neutrality on the other. Recent actions by China are encouraging. In January 2021, China’s Ministry of Ecology and Environment issued policy guidance on the need for all levels of government to align climate and nature protection policies, standards and regulations. The ministry prioritizes the role of nature-based solutions as one means to reach China’s carbon neutrality commitment, using tools like large-scale spatial planning, mapping and other platforms to get there. China’s focus on identifying the convergence of high value ecosystems with area of important carbon sequestration at the landscape level through the use of its Ecological Redline is an important step.
Companies may now be keen to invest in high-value, high-integrity offset markets, while leaving the details of how that actually works through ecological accounting, biodiversity safeguards or delivering benefits to communities to another day. Given the mounting collapse of critical ecosystems, rules are needed now. Markets are adept at financing low-cost, high-volume carbon offset purchases at a time when – as one commentator noted – ecosystems require practices that support investment in high-hanging fruits.
Source: China Council for International Cooperation on Environment and Development (CCICED), 4 March 2021