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.


Dr. Peter Schuhmann said...

More here from RFF:

George Miranda said...

I really like the triple bottom line and how it moves away from the traditional bottom line of the company being as profitable as possible and moving toward worrying about the environment and customer satisfaction also. It would be nice to see every company move towards this. How could this happen though especially in the capitalistic system of the U.S.? It's also good to point out how companies try and say that they are environmentally friendly and then are some of the biggest contributors to destroying the environment. Especially in commercials it's easy to get sucked into a company trying to say they care when they are actually just mimicking the fact that they care.

Craig Y said...

In theory, it sounds great but my worry is this would only increase the number of super large companies that can afford to change their manufacturing procedures and hamper the creation of new companies that might not have the capital to use more environmentally safe products. The article mentioned Nike as a company that is starting to pay closer attention their procedures but not every company is Nike. Nike can afford to spend a little more money and possibly not deflect all the expense to the consumer because of the size and following the company has. Can other smaller or newer companies do the same and will the majority of consumers be willing to pay more? I could be wrong but that is my conscern.

Catherine Mauch said...

The article by Hecht points out that several countries have taken the initiative towards environmental accounting. Methods such as natural resource accounts (data on stocks of natural resources and the changes in stocks from natural or man-made causes) or including the values of non-marketed environment goods and services in the GDP. The article points out that there is controversy with the methods of environmental accounting. However, it does better harm than good because it helps towards evaluating tradeoffs between economic and environmental objectives. Hecht gives an example of a country that accounts for the harvests of forests. The harvesting will produce an increase in income, yet the destruction of the natural resource will not be presented. The Philippines is one country that has utilized environmental accounting, in this case they would include the loss value of the forests. The true value of natural resources may be disputed--but including the estimated monetary values of natural resources will give a more accurate picture of the costs of environmental degradation on nations’ economies.