Notes on the “Financialisation of Nature and Carbon Markets”

One of my favourite cartoons is of a man addressing a shareholder meeting saying “And so, while the end of the world will be full of unimaginable horrors, the pre-end period will be full of unprecedented opportunities for profit”. Actually I am not sure whether that is true of “the pre-end period” but it is certainly the hope of part of the elite that is driving the “financialisation of nature”.

To put it as succinctly as possible, over a couple of hundred years corporate interests have rapaciously drained the world of a large part of its fossil fuels to supercharge a consumer economy, creating climate change and a biodiversity crisis. The corporations have grabbed enormous parts of the planet for plantations, mines, oil and gas fields as well as vast monocultures sustained by petrochemicals. Now at least a part of the tiny number of people who own and run this juggernaut have had to acknowledge that life on the planet is in danger. They seek to reassure us that they have a plan for rescuing it.

This plan involves thinking of nature as “environmental goods” which will be valued and tradable on the financial markets, “Nature” will become “natural capital” and be thought of as an asset.

And, here is the most important thing of all. “Natural capital” will become tradable on the financial markets and will thus become the property of the corporations. And we will have to pay them to protect it.

When you think about this, it does make perfect sense doesn’t it? The solution of the environmental crisis is to pay more money to the people who are destroying the environment so that they protect nature instead.

So how do they justify this grab?

According to these corporations and their tame economists the problem is that we have been over-using “natural capital” because we have not had to pay for it. Corporations and economic actors have used it for free and not protected it.

This is their take on a story in which around the world vast tracks of forests, wetland and savanah have been declared empty and for the taking – despite the fact that communities often lived on the land and used it in a low intensity way that did not exhaust its ability to nourish their future generations. Such communities were declared “primitive” . They were not part of the market society and not participating in the consumption orgy so they were in need of help to “develop” the landscape in which they lived. They also had the wrong attitudes – they thought that they belonged to the land, were part of it rather than thinking that the land belonged to them. They used it cautiously rather than taking risks with it.

They did not have titles to the land which therefore belonged to no one so the white men might as well take it and develop it to bring wealth and progress.

You can dress that up how you like but I think that means that the money junkies stole it just as they stole common lands in Britain and Europe over several centuries during the enclosures.

Then, using fossil fuel powered machinery they have imposed inappropriate monocultures like vast fields of grain or monoculture tree plantations in a land use change that automatically wipes out other species whose habitat disappears because only one crop is wanted over huge areas. What is the biodiversity crisis but a mechanised agriculture that creates monocultures and defines anything else that is not intended market crop as a pest or a weed and marks them to be wiped out.

Spreading monocultures – the role of economists



If you want the intellectual justification for this you can trace this back to mainstream economists. Adam Smith praised the production potential of specialisation and the division of labour and this had implications for the specialisation of huge areas of land. That idea was praised by Ricardo who argued that nations should concentrate on what they produce best and then trade with each other.

The expansion of trade in a world market was an argument for an international division of labour. And the international division of labour inevitably entailed an international specialisation in land uses. It involved scaling up some kinds of land use and reducing other land uses. Putting that in a different way, the variety of land uses was reduced. This was only possible through the mechanisation of agriculture and the mechanisation of shipping and transport to carry the cash crops to distant markets – and it requires fossil fuels. 

The problem is that most species need to survive in a habitat in which there is localised diversity – at a scale far below the large-scale monocultures focused on distant markets that fossil fuel powered mechanisation makes possible.

It’s not all about agriculture either – mining, the development of oil and gas fields and general industrial development has become much more rapacious. Urbanisation is another process putting greater areas under concrete and tarmac.

The collapse in biodiversity is as serious or more so than climate change and exacerbates its impacts. The point here is that monocultures, putting large areas under one crop defines other species as competitors, as pests or weeds. Yet natural species diversity is necessary to provide a variety of ecological functions – for example pollination, for example, keeping pests down, for example as soil organisms for healthy soils, for example, ways of stabilising the ground, retaining moisture and carbon in the soil so that it a healthy growing medium, so as to provide wind breaks, so that the soil does not blow away.

It is no surprise then that UN sponsored scientific assessments are telling us that the ecological crisis is getting dramatically worse. In addition to climate change the massive decline in biodiversity means that a million species are threatened with extinction. The global population has doubled since 1970 while the global economy has increased 4 times.

It has all be accompanied and facilitated by massive land use change with global forests, particularly tropical forests being cleared for cattle ranching and palm oil and other plantations. The process threatens one quarter of all plant and animal species. There has been a replacement of grassland with intensive crops, woodland with plantation forests. There is particularly a demand for meat and fish – which is also driving overfishing and the collapse of fish stocks.

Add to this the pollution crisis as the land and sea is awash in plastic and you have now have an emergency that threatens humanity as well as every other species.

Differing elite responses to the ecological crisis

At last part of the ruling elite have partially woken up. They are not all disinterested and hostile to action on climate change and biodiversity collapse. Certainly there are vested interests in the fossil fuel industry and the petro-chemical complex that are hostile to environmental science and put a lot of money into toxic PR campaigns to sew doubt and complacency about very worrying developments. However, another wing of the elite acknowledges the need to do something – and even appears to believe that action on climate and biodiversity collapse can be a means to accelerating dwindling economic growth.

But what are the mechanisms that this part of the elite wants to use to mitigate climate change and biodiversity collapse? In a nutshell what we are talking about are arrangements to make nature conservation and action on climate change pay in money terms. Conversely the arrangements are about making sure that if nature conservation and action on climate change is not taken into account during economic decision making then it will cost in money terms.

Business interests make the decisions that lead to emissions and drive species to extinction so the financialisation of nature is about addressing things in their language and in concepts and ways of doing things that are familiar to them – that seem natural to them. Many of these approaches have been pioneered by economists.

If our company protects species, if it acts on climate change – what’s in it for us? This is the question. One economist, Robert Costanza, puts it like this, “I do not agree that more progress will be made by appealing to people’s hearts rather than their wallets.”[1]

So how do you integrate “nature” into the financial markets? The answer is that you think of nature as so called “Natural Capital” that provides a variety of “ecological system services” for which people have preferences of various strengths and which they are prepared to pay money to keep functioning.

For example let’s say that a developer wants to put buildings on an area of woodland where there are rare and threatened species of plants, insects, small animals and birds. The buildings have a money value to the developer but the woodland and its species need to be cleared in order to construct the buildings. By putting a money value on the species that will disappear if development takes place a number of responses appear possible.

One is to say that if the developer clears the land then he or she must also pay a sum of money equal to the money value of those species. Now if that sum of money is high enough it may stop the development taking place at all. Alternatively, if it does take place the money might be used to protect a nature conservation project elsewhere – which is so called offsetting.

On the surface giving money valuations to nature’s “services” might appear to be an eminently sensible and reasonable compromise between economic development and nature conservation. But let us look deeper…

Market preferences and institutions – political preferences and institutions – and ethics

For a start if, in this example, the aim is to protect biodiversity an offsetting arrangement is unlikely to work practically. If you could fund another area with an equal money valuation to the valuation put on species lost, would this mean that biodiversity had actually been protected? Not at all because biodiversity is an ecological feature and a money valuation is an economic one. They are not the same and they are not commensurable.

The prices and money values put on ecological features depend on the strength of preferences for them by whoever is making the decision. But how do you value so called “environmental goods”? I can imagine lots of people would feel amenable to paying to protect pandas but not to protect snakes and spiders. Yet snakes and spiders are important parts of eco-systems. An ecological system must be diverse. You can’t have pandas without bamboo to feed them.

And who values so called “environmental goods” – is it to be well informed people from a Wildlife Trust or just the general public. If it is the general public what will they be told? My experience of real life environmental decisions is that companies often seek to suppress information or organise PR to mislead about the environmental implications of their actions. Getting and presenting the information on which valuations are made is not straightforward and the issues are likely to be contested. Economists make a claim to organise decisions in issues like this in their language but ought to be disqualified by the sheer naivety with which they assume that accurate information is readily available for all parties when it is anything but.

Nor are these the only questions – there is the question of whether the organisation that wants to destroy natural processes must pay the humans who are harmed (compensate the enthusiasts in a Wildlife Trust) – or whether, as in my example, if you want to stop the wooded area and its species being destroyed is it to be up to a Wildlife Trust to offer money to the developer to abandon their plans.

Even more fundamental there is a decision, which should come first, of whether it is appropriate to value nature in this way at all. Is it appropriate to take decisions like this on the basis of how much money people are prepared to bid? These are, after all, ethical issues.

Let me illustrate this point by way of an analogy – should decisions about abortion be based on cash calculations? I am not making a point for or against abortions; I am making a point about deciding on this issue based on who is prepared to bid the most money. Most people think that ethical issues should not be based on who offers the most cash. Surely ethical issues like the right, or not, to have an abortion are the kind of issues that should be based on a public debate and deliberation and then decided in some kind of political process of decision making.

Should this not also be the case for decisions about preserving natural processes and bio-diversity? There used to be a system of commons in Britain and other countries where communities of people looked after communities of species. Then the elite grabbed the commons for their private use. However – a land planning system had to be later established because it was recognised that the ways land was used concerned many people and had to be regulated in a wider public interest.

So you can protect nature through the land planning system rather than market mechanisms and phony market valuations rigged by economists. 

What is wrong with using the system of land planning decided by local politicians under the influence of planning guidance, after debate with local people? Sure, there is a tendency for rich people and corporations to get their way – as well as for government to write planning guidance that favours business interests. But if decisions about land use that affect everyone and other species are being made then there is this alternative way of taking these decisions. Communities can use a political process based on various principles. These principles could be written to try to correct the playing field in which moneyed interests get their way.

These principles might be like those those adopted in Bolivia – where the constitution enshrines the rights of mother earth. In Bolivia and in fact around the globe indigenous people have an attitude to nature that is very different from our urbanised community society. Nature is not thought of as a resource store that belongs to humans that can be taken from as we wish to develop production. It is “Mother Earth” – the living process of biodiverse nature is where we come from and we are dependent on it. Nature is thought of as being like our kin.

If we think of Nature as kin, as being like our mother, then the idea of making bids and charging to preserve eco-system services is inappropriate and offensive. Sure our mothers do “provide parental services” but they don’t give us an invoice when we are 18 for bearing us and bringing us up. If the love and respect between parents and children is lost then offering cash to repair the relationship is not going to work.

Financialising Nature, reversing means and ends – an avalanche of frauds and scams

Simply on a practical level we already know that the financialisation of nature will not work – and we already have evidence for this. The schemes work for money making but they don’t work for the environment. 

That they work for money making is entirely to be expected – because that is how the schemes are designed. The means and ends relationship is upside down and back to front. People acting in natural capital markets or carbon markets are involved to make money. By the means of nature protection and reducing carbon emissions they make money. Nature protection is the means, making more money is the end.

That anyway is the theory dreamed up by academic economists but it is not what happens. When the ultimate motive is to make money even more money can be made by gaming the system and cosying up to the people who administer the system.

Before the financial system crashed in 2007-2008 a professor or economics and criminology, William K Black calculated that the US finance system committed a half a million felonies when they lent money to people with no incomes, no assets and no jobs. They did it for the fees that were earned with each loan. They then packaged these “liars loans” up and rated some AAA and sold them to pension funds across the world. This was a sector for which rampant criminality is now the norm. Yet we are supposed to trust people like this trading in natural systems and carbon emissions when the future of the planet depends on it.

It comes as no surprise therefore that carbon markets and natural capital markets have already shown themselves to be riddled with corruption. For example, under the Kyoto Protocol there was an arrangement called the “Clean Development Mechanism”. Companies outside of Europe in so called “developing countries” could earn carbon credits for reducing carbon emissions. These could be sold in the EU carbon markets. But studies showed that many credits were earned for things that these companies were going to do anyway and which therefore were not really reducing carbon emissions in an additional way. Even worse there were companies that set up equipment to make hydrofluorocarbons – a very powerful greenhouse gas – because they were then able to earn large sums of money by closing them down again.

These scams also happened in schemes which are supposedly to protect against deforestation. This is supposed to happen through a scheme called REDD+ which stands for Reduction of Emissions through Deforestation and Forest Degradation. The “+” is to distinguish it from the original idea for the REDD programme and is supposed to include further actions to conserve, sustainably manage and enhance forest carbon stocks. This has been touted as a win win for biodiversity, carbon sequestration and for local livelihoods – well that is the theory. But what has happened in practice?

First of all the way the REDD has been set up involves a perverse system of incentives. Countries like Brazil, Indonesia and India get carbon credits which they can sell on carbon markets to countries in the global north that entitle companies to emit carbon. How is it calculated how many carbon credits they get? The answer is to project a predicted rate of deforestation and reward rates of deforestation that are lower than the predicted rate with carbon credits. If ever a system was set up for scams this is it. What happens is that countries predict very high rates and then, surprise surprise manage to achieve lower rates in practice. Even so deforestation is still happening.

That’s not all. Unlike Brazil and Indonesia, India claims that “tree cover” (whatever that is) is not falling in India. That’s why there was a “+” scheme added – incentivising “conservation”, “sustainable management” and “enhanced carbon stocks”. But who, exactly gets the money from these incentives? India is supposed to have systems that share the benefits but that is not what happens in real life. In real life India’s forests are conflict zones – and there is a reason that dates back to British colonialism. 

The British designated vast areas as “forests” to plant trees on for timber or to reserve the right to plant trees on in the future. The Forestry Service then and now is part of the government and the beneficiary is the government and whichever crony network of contractors are linked to forestry service local officials. The British state imposed these areas with their draconian laws on already existing communities who wanted to use those areas for their own purposes. This has driven many communities into resistance. Things have not changed in this regard. Planting trees in those areas, now incentivised by international carbon mitigation schemes, fans the flames of already simmering conflict in many areas. 



And does this trouble actually achieve a genuine form of carbon mitigation? It is doubtful! When companies in the global north buy the right to emit and thus delay taking action they are burning fossil fuels that have been in the ground for millions of years and are now dug up and put in the atmosphere. When trees in India and elsewhere sequester carbon – they do so slowly and then sequester in trees that are vulnerable to fire and tree death in the relative short term. 

What’s more there is plenty of evidence that tree plantations do not sequester carbon in the same way that natural forests do, nor do they protect bio-diversity. Tree plantations are another mono-culture. Planting them involves rooting up existing vegetation that exposes soils to the air and oxygenates it. This is from my book “Credo” on page 405

:

“Reviewing no less than 86 studies that have taken place over two decades, researchers have concluded that tree plantations have failed to function as carbon sinks as was originally intended. They do accumulate carbon in the trees themselves but the land conversion, in setting them up, typically leads to a massive loss of soil carbon. The rate of uptake of methane in soils falls too and there is a loss of stored C as ecological system degradation takes place. (Liao, Luo, Fang, & Li, 2010: https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0010867 )”

You can watch this very informative explanation which explains what has gone wrong in India: https://www.downtoearth.org.in/video/redd-and-redd–an-overview-2367

Carbon markets like the European emissions trading system have not worked because the fossil fuel interests have too much influence and too many carbon credits have been given out to the companies. In fact it was already understood very early on that the EU emissions trading system would not work because it was designed like a prototype for carbon trading devised by British Petroleum. The BP scheme did not work and was criticised in the UK Parliament – yet such was the power of BP in the British Labour Government at the turn of the century that its scheme was adopted by the European Union anyway.

Conclusion

To conclude – the answer is not to financialise natural processes but to do the reverse. It is vital to take natural processes out of the market and put them under the democratic and well informed governance of communities that understand how their local eco-systems work. Effort must be put into increasing the knowledge of communities about their local environments so they know what and how to protect where they live. And the criteria to use in governing eco-systems is that used for centuries – accommodating the needs of different species and different human uses to protect diversity and not privilege powerful interests so that they over use resources. What is needed is an approach called commoning – the idea that we all share responsibility. We are all are entitled to share natural resources– but only so far as use is made at a sustainable scale.

Of course we mostly do not operate in commons but we can try to use and reform planning systems to re-assert collective control over the things we share on sustainable principles. The principles guiding us need to include things like not burdening the eco-system with particular domesticated species that humans wish to consume. Above all it will be vital to take the pressure off eco-systems by reducing use down to sustainable levels to help a diversity of species to flourish. This is also necessary so as to be able to recreate biomass and soils to draw down an excess of carbon in the atmosphere into sinks so as to help avert a climate catastrophe.

Brian Davey

Endnote

1. Costanza, R. (2006, October 19th). Letter: Nature: ecosystems without commodifying them.

The following chapters in Credo cover most of the issues in this article

Indigenous societies protecting bio-diversity Chapter 14, 16 and 17

“Improvement” through bio-diversity collapse – mono-cultures – Chapter 20

“Valuing” and “financialising” nature and the alternatives – Chapters 26 and 27

Climate economics and carbon markets – Chapters 45 and 46

Land use change and deforestation Chapter 47



Credo can be downloaded from http://www.credoeconomics.com/wp-content/uploads/2017/02/credo.pdf

Featured image: https://www.freeimages.com/photo/obey-9-1481630