Pricing the priceless

During an appearance before a Congressional Committee in autumn 2008 the former chair of the Federal Reserve Alan Greenspan made a notable, if partial, admission as to the cause of the financial crisis that was engulfing the world, incinerating livelihoods, and torching the foundations of the financial system. "I have found a flaw," he said, in reference to his laissez faire economic philosophy and favouring of gossamer-touch regulation. "I don't know how significant or permanent it is. But I have been very distressed by that fact."

And what was that distressing flaw? "I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms," he explained.

As taxpayers bailed out the banking system only to be rewarded with years of austerity and flatlining living standards, the reaction to Greenspan's admission ranged from the generous ''tis better a sinner repenteth' to the less forgiving 'no sh*t, Sherlock'. But there was a broad hope that the realisation amongst top policymakers that their theories didn't quite add up might trigger a fundamental reassessment of all the ways in which mainstream economic thinking was flawed.

Because flawed it demonstrably is, and not just in the narrow field of financial regulation. I still remember a school lesson where the concept of polluting externalities and market failures were explained, before the class then quickly moved on to a curriculum which largely glossed over how almost everything we were being taught was basically broken by these unaccounted for external factors.

So much of mainstream economics - even after the entire financial system teetered on the brink of collapse - is still like that A-level course: briefly acknowledging that all the carefully constructed equations exclude critical costs and benefits, before shrugging shoulders and hoping for the best. The problem is particularly acute in Treasuries, where officials and Ministers adhere to a combination of orthodoxy and short termism that, to borrow journalist James Ball's brilliant phrase, routinely puts "accounting before economics".

However, there are belated signs that change could finally be afoot. William Nordhaus and Paul Romer won their Nobel Prizes for work on carbon pricing and innovation. Mariana Mazzucato and Kate Raworth have won deserved plaudits for their vital analysis of the role of the state and the contested question of what we should value. Meanwhile, the idea that GDP is a poor measure of economic success has moved from fringe obsession to become the subject of formal government reviews. Even the Treasury is looking at rewriting its Green Book to better account for environmental considerations.

More than a decade after the financial crash are we finally starting to wrestle with a flaw so big it makes Greenspan's "mistake" look like a typo? Namely, the ongoing failure of economic models to properly account for both the polluting externalities heating the planet and the environmental impacts obliterating the biosphere.

It is in this context that this week's highly contentious but hugely wide-ranging Dasgupta Review of the Economics of Biodiversity might just become the breakthrough moment that is so desperately needed.

As befits a 600 page report from a Cambridge University economist, there is a lot to consider in Sir Partha Dasgupta's review, including plenty to agree with and a fair few points of controversy. Some of the criticism aimed at the report has considerable merit. There are legitimate concerns that the focus on natural capital accounting and the embrace of the approach by governments and businesses could simply enable the continued exploitation of nature through badly run offset schemes or dubious national accounting exercises. Similarly, there is a strong argument that a more radical rethink of what we value is required along the lines of Raworth's Doughnut Economics model.

But any suggestion the report is narrowly and counter-productively obsessed with natural capital accounting and does not understand the risks and limitations of such an approach is unfair. Headlines may have been generated by proposals for market based mechanisms to pay countries to protect rainforests or charge rent for access to fisheries, but the Review also highlights the importance of non-market based mechanisms for protecting and enhancing nature, such as properly funded and policed Protected Areas. It even talks of the intrinsic "sacredness" of nature. There are good reasons why the review has been broadly welcomed by interests that are not always natural bedfellows.

Philosophical debates about the merits and pitfalls of putting a price on nature are unlikely to be resolved any time soon. There is something faintly ridiculous about any attempt to suggest clean air or forests or soils are worth £xbn a year, when without them civilisation is essentially doomed. But it is worth noting that attempting to put a price on things that are deemed priceless is not an unprecedented activity. We do it with great works of art and history all the time. More pertinently, we do it with human life when trying to calculate how to assign healthcare resources or value insurance policies - that does not suddenly make it legal or morally acceptable to neglect a patient or hire a hitman. Putting a price on the intangible is morally delicate territory, but there is a compelling utilitarian case for trying to navigate it.

It is possible to see our relationship with nature through a similar lens. Pricing and accounting can have a role to play, but only as one part of a toolkit alongside the laws, policing, innovation, institutions, and cultural factors that also have a critical role to play. As with carbon pricing, natural capital accounting is a useful framework if used effectively, but no one should regard it as a panacea.

For me, the risk with the Dasgupta Review comes not from its stance on natural capital, but more from ideologically-motivated policy makers who could embrace its market-based proposals while ignoring the various other policies and safeguards that should be introduced alongside them.

However, there is still a huge opportunity here. Because while some of the report's recommendations have sparked intense, even angry, debate, there are also encouraging areas of broad agreement. There is now widespread understanding, even in the Treasury, that the current system is not working. That the level of biodiversity loss and nature degradation cannot continue indefinitely without severe and potentially catastrophic repercussions. There may be disagreement on how to value nature, but there is an acceptance that not valuing it at all is proving disastrous for everyone.

It would be great if the crisis in nature could be corrected through moral choices, but as a number of commentators have pointed out there are powerful precedents for using financial levers to try and tackle moral catastrophes. Slavery is the prime example, where payments to slaveowners were hard to justify on any moral level but they still played an integral role in securing abolition and advancing the long and still uncompleted journey towards equality.

Paying people not to illegally chop down rainforests might feel like a protection racket, just as rewarding already rich landowners to simply behave responsibly may prove to be a mechanism for consolidating wealth and power. But with environmental damage continuing at catastrophic rates, is there a risk of making the perfect the enemy of, if not the good, then perhaps the pragmatically effective?

The Dasgupta Review owes a debt to the 2006 Stern Review on the Economics of Climate Change and it is informative to consider the impact of that report over the ensuing decade and a half. Not everyone agreed with the Stern Review and many of its recommendations remain unrealised. You would be hard pressed to argue the Treasury suddenly adopted a climate hawk mentality in the wake of its publication. But the Review did help shape the political discourse on climate change and it established something of a new economic orthodoxy. That in turn provided the foundations for both the Paris Agreement and the wave of decarbonisation policies that have helped drive emissions reductions over the past decade.

It remains to be seen if the Dasgupta Review can have a similar impact (Chancellor Rishi Sunak's muted response to the report does not exactly bode well), but at a time when public and investor awareness of biodiversity loss has never been higher policymakers and business leaders should consider that a turning point could be upon us.

The balance between natural capital and alternative approaches remains up for grabs, but there does seem to be a growing recognition that the currently flawed system cannot be allowed to bulldoze its way forward indefinitely. Reforms - potentially substantive and global reforms - are being seriously considered. They might not be adopted as quickly and as effectively as is required, but at least we have belatedly spotted our mistake.

A version of this article originally appeared in the BusinessGreen Overnight Briefing newsletter, which is available to all BusinessGreen subscribers.