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Business

Loss of Natural Capital Costs More Than Bank Crisis, Says Expert

As the EU discusses the affordability of its carbon-reduction targets, economist Pavan Sukhdev told DW-WORLD.DE that the best things in life are free, but not for much longer. The nature crunch could prove costly.

A forest

The financial crisis has left us unable to see the wood for the trees

Once described as an "economist by profession and an ecologist at heart," Pavan Sukhdev holds the chair of Deutsche Bank's Global Market Center and is director of the Green Accounting for Indian States Project, a study on the economic significance of biodiversity in India. He also heads an ongoing global report funded by the German Ministry for the Environment and the European Commission on "The Economics of Ecosystems & Biodiversity" (TEEB), and is among the architects of the Green New Deal, spearheaded by the United Nations Environment Program, which will be unveiled in London on Oct. 22.

DW-WORLD.DE: You said at the World Conservation Congress in Barcelona last week that the economic burden of environmentally hostile practices like deforestation outweighs that of the bank crisis.

Pavan Sukhdev: The capital loss to financial firms in the City and Wall Street has been estimated as $1 trillion to $1.5 trillion. In TEEB's first phase report which we presented in May, we looked at the extent of losses taking place as a result of deforestation and degradation. We estimated the loss in human welfare as a capital item, and worked out that this was $2 to $4.5 trillion per year, every year, for the last several years.

And it will continue, if we carry on with business as usual. Why is it that a one-off loss of $1.5 trillion in financial capital to a group of Wall Street firms attracts so much attention, whereas the ongoing loss per annum of twice this amount of natural capital is barely reported?

We've seen governments bail out the economy -- what would a "bailout" for the environment look like?

It would be comparatively modest. Let me give you a few indicating benchmarks. Today we have something like 100,000 conservation areas, covering some 10-11 percent of the earth's land surface. The TEEB team believes that we are spending some $40-50 billion too little on making that conservation effective. According to various estimates, these conservation areas produce some $4-5 trillion of utility per year.

Today, spending on protected areas globally is less than $20 billion, and all we're suggesting is an increase of another $50 billion a year to ensure the continuation of the benefits of these protected areas. We're not talking about a massive amount of money -- single institutions have lost more than that in the current financial chaos. But for various reasons it doesn’t get allocated.

Pavan Sukhdev

Pavan Sukhdev

What are these reasons?

For one, the loss of natural capital is a loss of public wealth. Eco-system services are public benefits that are pretty much free. It is not individuals' or shareholders' wealth at stake, although it is, if you like, global shareholders' wealth. But it's not private ownership, it's public ownership. These are things that are there for all to enjoy: We would dearly miss their absence and we would pay the earth to get them back, but right now, they're free. So the public nature of these goods and services is one reason.

To understand the second reason why loss of natural capital doesn't grab headlines, we need to think of the frog analogy used by Al Gore in his book "An Inconvenient Truth": If you put a frog in a beaker of water and gradually raise the temperature, it won't notice any change. Similarly, what is happening to us is happening continuously. Every year we lose forest, the climate gets worse, poor people's water supplies and field nutrients decline. But we see these losses so gradually that we don't realize that things are getting worse. Whereas in the case of the financial markets it's one short, sharp shock.

Nonetheless, a lot of smart money has started to flow into environmental investment. In North America, the percentage of venture capital spent on clean technology used to be around 2 percent in 2002, but had risen to 17 percent by 2007.

Is there a risk that environmental concerns will be abandoned given the current slowdown in the global economy?

I don't think so, because people are beginning to get the message. I never have to explain myself twice any more. Even two years ago, people's eyes would glaze over. Now people want to know what needs to be done. Of course, the cost of the financial crisis means there will now be increased distributional pressure on how much can be allocated to solving environmental problems. But my point is that this money is not much, considering how much is spent on other sectors. There's no need to think about it too much. The time is now.

How viable is a rescue plan like this during a recession, which is what we're facing right now?

A $45 billion gap per annum is not the end of the world. Look at how much has been lost and how much is being allocated individually by governments in the US and Europe -- up to $700 billion. To put things in context, the investment per annum of the EU in conservation areas is about 6 billion euros. These are modest sums.

So economic disaster doesn't necessarily have to mean ecological disaster too?

A Wall Street trader holds his head in his hands

The financial crisis is reported extensively -- the environmental one isn't

No. Venture capitalists have understood something that the world, generally, has not. As other businesses begin using the technology into which venture capital has been invested, they will find amazing and sizeable opportunities. I predict a tectonic shift in the way things are done. Renewable energy is an extraordinary opportunity if you use it not just to fix the supply that comes to you and me in Berlin and London, but to fix the supply needed by the world's 2 billion who don't have an energy supply -- the poorest people in the world who do not actually have energy coming to their homes in the form of oil, coal or electricity.

There are vast opportunities here, in countries like India and China, Africa and Latin America, to apply well-researched technologies which provide, for example, modular solutions to bring light into the poor home. Just imagine what kind of change you could see -- education coming down to a village level, children staying up in order to read. Think of the tectonic shift than can be achieved just by shifting focus and providing micro-finance to villagers to implement renewable energy solutions. And look at the number of people who can benefit from that. These are the sort of things that smart business is looking at. There is money in making more efficient equipment and implementing more efficient processes.

Does the credit crunch make people more aware that being careful with natural capital is important too?

Yes. As the saying goes, a crisis is a terrible thing to waste.

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