Monday, September 10, 2012
The topic of measuring the value of ecosystem services was recently raised in class. The context of the discussion was the inability of consumers to make "environmentally friendly" purchase decisions, because there is no clear accounting for the environmental behavior of producers. Firms can easily present an environmentally friendly appearance in commercials and brochures, but understanding how "green" a firm really is can be a difficult undertaking for the average consumer or investor. Likewise, measures of national, regional or local output most often lack measures of environmental change.
Adding the value of ecosystem goods and services to measures of the bottom line (for a firm, nation, state or municipality) allows for a clearer picture of success, progress and well-being. Likewise, omitting such measures can be misleading. For example, suppose the services of a natural ecosystem such as an estuary are degraded via coastal development. The loss of naturally produced water filtration is not reflected in measures of national output such as GDP. But if a water treatment plant is constructed to replace the lost ecosystem service, the associated market transactions will be reflected in an increase in national GDP. Hence, the nation would appear to be better off as a result of replacing a natural ("free") service with a man-made substitute that is most likely inferior. Changes in GDP can therefore be inaccurate measures of changes in net output as well as changes in well being.
The same is true for firms, though on a different level. Reporting traditional "bottom line" measures like earnings allows investors to make good decisions with regard to financial returns, but some investors also want to support environmental and social progress, and are willing to sacrifice some monetary gains to do so. Similarly, while it is true that all consumers seek to buy products that satisfy their personal wants and needs, some consumers also want to support the greater good, and buy products from firms that are socially and environmentally responsible. How can we measure environmental (and social) outputs so that they can be reported and compared? Is it even possible to create a set of acceptable measures and common reporting standard for non-monetary outputs?
A short piece on the triple bottom line here at The Economist.
The state of Maryland uses something called the Genuine Progress Indicator (GPI), which tracks and measures traditional economic measures as well as those related to the environment and people. Thanks to Nikolai for the link.