How much is nature worth? It’s complicated

Recognizing the economic value of natural resources helps to make the case for conserving them. As two of my McKinsey colleagues put it: “Conservation will always include difficult tradeoffs, but better methodologies to assess the value of conservation will improve resource allocation when decision makers face those tradeoffs.” That sounds wonky. So be it. It was wonks who designed the successful sulphur dioxide/nitrous oxide trading system in the United States and the fisheries management system in New Zealand (image above)—both of which embed economic principles into sound environmental practice.

That is the case for wonkiness and economic analysis. And that brings me to a new McKinsey report that exemplifies both, as its title implies: “Valuing nature conservation: A methodology for quantifying the benefits of protecting the planet’s natural capital.” Long, detailed—and yes, wonky—the report is based on dividing the earth’s land into 5 kilometer by 5 kilometer “pixels” (and the sea into 30k by 30k pixels), then overlaying this map with “spatial data layers” looking at subjects such as biodiversity and carbon stock.

Here are some highlights:

Achieving the goal of protecting 30 percent of the earth, nearly double today’s level, could help to create or sustain up to 30 million jobs in ecotourism, fishing, and conservation, and $470 billion in global economic activity, while cutting greenhouse-gas emissions by as much as 2.6 gigatons a year by 2030—or 6 percent of all human-caused CO2 emissions. Economists would call this a “non-trivial” effect.

Natural capital helps to mitigate extreme weather events and to slow climate change—and damage to it does the opposite. Deforestation, for example, releases an estimated 5.5 gigatons of CO2 each year—approximately 14 percent of global emissions.

Human-made alternatives are less effective and more expensive. Building an artificial breakwater can cost 15 times as much as protecting natural reefs—and that does not consider their benefits, such as their potential for eco-tourism and sheer beauty. (Global reef tourism is estimated to be worth $36 billion a year.) Another example: Each hectare of mangrove creates tens of thousands of dollars in value in the form of services (water and air purification), recreation, tourism, and carbon sequestration. Most important, though, they are a natural barrier against cyclones, waves, and other natural disasters that would cost billions in adaptation. So it’s troubling that mangrove cover has declined by half since 1950, while the ability of the remaining tropical forests to absorb carbon has declined by a third just since the 1990s.

Better conservation and natural capital policies could reduce the risk of “zoonotic diseases”—meaning  viruses hosted by animals. The evidence is still being evaluated but it appears that the more contact between people and wildlife, the greater the risk of zoonotic diseases occurring in humans. It may also be the case that as biodiversity declines, species that thrive while close to people, such as bats and rats, proliferate. These have already been implicated in several disease outbreaks. One estimate is that about half of new zoonotic diseases since 1940 are the result of changes in land use, farming, and hunting.

About $24 billion is spent on global conservation. Depending on the scenario, to get to 30 percent by 2030, that figure would need to increase between $20 billion to $45 billion a year. That’s not chump change, but it’s not impossible, considering that the US pet food market is about what current spending is. It would also require smart regulatory and institutional frameworks, which might be even more difficult to do than finding the money. One problem is that of uneven returns--those who invest in conservation may have to share the benefits with those who didn’t bother. This can be the case locally, nationally, and globally.

Direct financial mechanisms, paid for by recipients of natural capital services, can be used to promote conservation. Examples include farmers investing in upstream water catchment areas, insurance funds to protect coral reefs, and forest resilience bonds.

Cultural benefits could also be substantial. Rainforest areas in the Amazon, New Guinea, and the Congo Basin, for example, contain an estimated 25 percent of the world’s languages, and indigenous peoples account for more than a third (37 percent) of the world’s remaining natural land. Their cultural survival depends on the survival of this land.

Pavan Sukhdev, an environmental economist, once mused: ““When did the bees last send you an invoice for pollination?” They don’t, but without their services, much of the agricultural economy would go under—and that makes a strong case for protecting bees. (And, in fact, “habitat exchanges” that pay farmers and ranchers to protect wildlife do something like that.) A 2010 study, The Economics of Ecosystems and Biodiversity, launched under the auspices of the UN and the European Commission, estimated that for $45 billion, ecosystem services worth about $5 trillion a year could be preserved. The study is a decade old, and was controversial at the time, but it does give an idea of the scale. And the underlying insight is the same as the report’s: economics may be known as “the dismal science” but it can also be a source of insight, and hope, for the future of the environment.

All views are mine and not those of McKinsey & Company.