It’s good that the water debate is starting to take more shape. In the main we have struggled with the idea that we should pay for it and how to construct proper markets around it. Some places meter water and some don’t but as we know it’s hard to manage a resource if you can’t measure it use.

So it’s refreshing to see a piece in The Press  on the need for a water market to be constructed to provide an efficient allocation of this precious resource. As I’ve discussed many times, a resource with no price will be treated as if it is free. For many people water is free and always has been but now there are competing claims on water. In New Zealand this is primarily from agriculture with huge demands for irrigation from the dairy industry, which converts water into milk on an enormous scale.

Initial objections are alway around the issue that water is a necessity for life and should therefore be free.  Well so is food and shelter and they aren’t. We have lived with the false notion that water will always be plentiful and is a constant renewable resource. Tell that to Australian farmers who have suffered a 5 year drought in many areas. Water availability is subject to climatic variation and to overuse. Just look at the state of NZ rivers and lakes which are well known to have experienced a serious decline in quality over the last 20 years of intensive farming.

It’s fairly simple to make sure people are allocated a fair supply of free water to assuage those who believe they shouldn’t pay for it but anything above a basic amount should be paid for just like our energy.

It’s only through the pain of payment that we really focus our efforts on conservation, efficiency and alternatives.

It’s time we got on with this whilst we still have water to charge for.

Finally some research has been done on the effects of bio-fuel crops on the ecosystem. As widely expected the research has shown that bio-fuels can be highly destructive on the environment as well as actually adding carbon into the atmosphere.

So much for being the replacement to fossil fuels.

This a prime example of doing something because it looks like the right or a good thing to be doing. Those people with prescriptive views on how we should live our lives rarely take the trouble to do the sums and that’s where the problem arises.

Until we start to price up environmental externalities and let them flow through the price mechanism we will not get to see the true cost. So we will keep doing things because they feel good to us or they remove some embedded guilt about the way we use the environment.

The market is working in an inefficient manner and the environment continues to suffer because of it. Many environmentalists have a big grudge against the market perceiving it to be a monstrous creation of the capitalist machine. They are sadly mistaken. The market is how we show the real value of the environment to everyone not just those who think humans are a stain upon it.

Now I don’t want to tar all bio-fuels with the same brush. Bio-diesel from algae for example is using a waste stream and an easily grown input. Large swathes of forest don’t need to be cut down for this process.

But until we see the costs flow through the system we just don’t know.

Barely a week passes without a new campaign in the UK around the issue of food miles and NZ produce. Though this has been thoroughly debunked by the report from Lincoln University the story continues to rumble along.

This is just the beginning of a more serious debate on the issue of environmental costs otherwise known as externalities. Food miles is just a simple way of engaging the public and media just as the phrase “think global, buy local” has always done.

We all like to support our local farmers whether in NZ, UK, France, Japan or the US. However we all like to sell as much as our produce into markets where we can achieve a better price (even after taking account of transport costs). NZ is heavily geared towards exporting and with a large productive base and small local market it is more exposed than many other larger countries.

Stepping away from the hype and hysteria we can see that the Food Miles debate is both important and necessary. Consumers should be paying the full price for the goods they buy and that includes the basic inputs of energy and matter as well as ecosystem goods and services.

Whilst food miles comes across as a marketing ploy and is somewhat simplistic in its formulation, it can be seen as the start of a serious attempt to bring Trucost pricing into the mainstream economic system. Of course it makes sense to buy your veggies from the farmer down the road but the supermarket system is all pervasive and has driven costs down so far that they have been able to get away with an international supply chain as well as shipping domestic produce many miles further than necessary.

Pricing ecosystem services in at the primary level would see a vastly different pricing mechanism: one which included the price of nutrient and effluent run off, mining run off, soil depletion, air quality processing, clean water provision and the numerous other services which have enormous economic value.

If this happens then maybe we can relax a bit as the produce in our supermarkets and farmers markets will be priced on the same basis.

Only then will we really know which is really cheaper.

I wrote this article for a business paper here in NZ about 3 years ago. I don’t think alot has changed really though the issue of Food Miles and Carbon Pricing has reared its head. Pricing the ecosystem is an emotive subject but i believe we must recognise its value in monetary terms in order to enable true economic comparisons to be made.

We know in our hearts that we need to consume less and make better. We don’t do it because we are time constrained as we slave away in our jobs to pay off huge mortgages, large rents and all the bills we have incurred in our consumption binge. If we really knew the true cost of our goods and services we may change our behaviour with increased speed.

And yet see the seething anger when petrol prices go up……we may be in position to control and destroy the planet but it may well do that to us first. Anyway this may or may not resonate. See what you think:

March 2004.

‘Greens take us back to the Dark Ages’ screams the Business Round Table. ‘Business doesn’t care about anything apart from money’ whines the Green Party. Sound familiar? This is generally what passes for debate between the official representatives of the economy and the environment. It is reminiscent of a long running stand off between a teenager and parent. Will the environment and business ever resolve their disagreements live together in sustainable harmony?
To answer this question we need to explore how the economy and the environment interact. The word economics is derived from the Greek ‘Oikonomos’ meaning household steward or home economist in modern diction. In ancient times, the household was the central functioning unit of any economy and most economic activity took place within that framework. Now the household is a place where we live and sleep but rarely do we produce anything that is identified as part of the economy, reflected by GDP. Business is now the place where most economic activity takes place and it is now the steward of the environment.
Our technological capabilities have also moved on giving us DVD recorders, microwaves, mobile phones and other similar gadgets but they are still all built from materials taken from the same source as thousands of years ago. As, John Muir, the founder of the modern ecology movement, said “When we try to pick out anything by itself, we find it hitched to everything in the universe”. In simple terms, the economy is simply a subset of the environment, and economics a framework for understanding our transactions with the environment. They are one and the same, not distinct and separate entities as often portrayed in the media.
We have become expert in transforming natures’ goods into new products to satisfy our ever increasing desire for material consumption. At the same time, the waste products from manufacturing, some 90% of actual inputs, are becoming harder to absorb and process. Whilst nature provides obvious goods in the form of wood, minerals and fossil fuels, little attention is paid to the crucial services it provides in acting as a both a source and a sink for economic activity. These services include waste processing, climate regulation, water supply and regulation, soil formation, nutrient cycling, food production, erosion control, pollination and even recreation and cultural values.
The value of these services has been largely ignored by the mainstream economics profession rather like the value of unpaid labour in the economy. A mother who goes out to work and hires a nanny to look after her children suddenly finds out the monetary value of her work in the household. Previously no value was attributed to looking after children but as soon as someone is employed formally then the value is recognized. Of course anyone who has children knows too well the value of unpaid labour in the home.

Whist ecosystem services have always had value they have never been recognized in monetary terms and therefore incorporated into the economic framework. In 1997, a study, led by Robert Costanza at the University of Maryland, attempted to value global ecosystem services. The findings estimated very conservatively the value of ecosystem services to be in the region of 2-3 times global GNP. In 2000, a study into the external costs of UK agriculture by Jules Pretty at the University of Essex, showed a value of ₤2.3bln, based on actual financial costs incurred. This equated to ₤208 per hectare of arable and permanent pasture. Again this was a conservative estimate of all agriculture related externalities.
What these and other studies have shown is that there is a real and attributable value to these services previously taken for granted. If any business has any doubt about the relevance of these costs, they should have another look at their insurance bill. Munich Re, one of the world’s largest re-insurance companies, puts the annual global costs of climate change at US$300bln by 2050. Even the Pentagon, a normally conservative institution, is recognizing the potential security issues of serious environmental changes. One thing Greens need to recognize from their side is that without security, law and order, the issue of environmental damage is likely to be an irrelevance.
Actually incorporating external costs at the company level has proved difficult. However Trucost Plc, a London based but Christchurch born company has designed an external cost calculator and an environmental rating system, which incorporates the externalized costs of any organization into their actual accounts. Initially there was strong resistance from some in the environmental movement, concerned about placing a value on nature. However, now there is an understanding that if you don’t value something then it will be treated as if it has no value. It is an unashamedly anthropocentric view to place a monetary value on nature but one which in the long run will lead to a more sustainable economy. Mainstream economics needs to acknowledge the importance of externalities and not spend so much time pouring over inflation statistics. Economics is fundamental to how society organizes itself and surprisingly can be fun and understood by anyone, as demonstrated by Diane Coyle in her recent book, “Sex, Drugs and Economics”, which succinctly analyses everyday activities in simple language.

Whilst the economics profession needs to wake up, the environmentalists must also acknowledge that expecting society to make a wholesale change of consumption habits without strong financial incentives is naïve. The only way to make them change their current ‘unsustainable’ consumption patterns is for goods and services to properly reflect the externalized costs that make them unsustainable in the first place. The true sustainable business is one which internalizes all its costs, instead of passing them to the taxpayer to pick up at some future date. Therefore, in order to create a sustainable economy, we must recognize the value of the environment in real terms. Then maybe business and the greens can redirect their energies to work out smarter and cheaper ways of living well and enjoying life.