Econ 101 vs. The Environmentalist
Econ 101 was my favorite course in university, not because I enjoyed it very much, but because I was kicked out of the lecture theatre on the first day.
In the first half of the first lecture of every year the professor would host an AMA — Ask Me Anything — and was honor-bound to answer each question honestly. The usual suspects were present: why are you a professor, how much money do you make, what’s your favorite beer, do you have children, why does your ex-wife have sole custody, and so on.
Keen for my moment in the limelight, but also equally a total keener (Canadian slang for teacher’s pet), I asked him if he was going to talk about the environment since the models in his textbook didn’t include it in any fashion.
I’d silenced the lecture hall. All the business school first-years were annoyed with me. I was proud of myself.
Like any good academic, the professor answers this question with another question: “Are you in any way referring to Herman Daly?”
“Yes,” I replied, emanating a hubris even Icarus would envy.
“Then you might as well leave my class.”
The godfather of ecological economics, Herman Daly, frequently preached doomsday rhetorics; that is if you believe constant growth is necessary to sustain development. The core of Daly’s work, presented in this interview just before his death, was that constant growth is dangerous and unattainable due to the fact that it ignores costs associated with resource depletion and pollution. Fundamentally, this boils down to the claim that growth and development are not synonymous; that the future of sustainable development is dependent on an ugly divorce from growth.
The idea that we should be less captivated with growth is not a modern one. Daly just passed away in 2022 and had been collaborating in this field since the 1960’s. However, the political traction behind this concept is far more novel. Domestic carbon pricing and international “cap and trade” systems are examples of such political manifestation.
Essentially, as practiced today, to limit growth there must be a way to put a price on limitless growth.
Life-Cycle Assessment
A more technical demonstration of internalizing the environment into financial thinking is the use of Life-Cycle Assessment (LCA). LCA’s are analytical tools that seek to quantify environmental impact across normalized metrics of an operation. It does so by attaching the value of a functional unit of output, say one tonne of copper ore, to the emissions produced in making this output.
This can be used for anything from an open-pit mine to planting a tree. The breadth of applicability of such a tool includes an equally broad series of categories under which impact is measured. These categories include carbon emission equivalents, acidification, and land use just to name a few. It is slowly becoming an invaluable tool in many worlds such as environmental consulting, impact analysis, and process engineering.
Growing a Tree at the New York Stock Exchange
Let’s take the example of planting a tree. The United States Department of Agriculture Forestry Service has an LCA-based tool for natural asset managers to calculate the value of trees, iTree. iTree measures the dollar value of total canopy growth of trees through your web browser and compounds this value over time.
Obviously, this places more value in forests than singular trees, but I want to conduct a thought experiment. Using iTree’s tool for calculating the value of a single tree, MyTree, I speculatively furthered the eco-terrorist agenda and planted my favorite tree in front of the New York Stock Exchange Building. Apparently, a weeping willow on 18 Broad St generates US$3,662.51 of value over 20 years. The image below is a breakdown of this pricing. For context, the same tree over the same timeframe in its native habitat of northern China is worth US$109.27.
The novelty behind LCA is that it allows us to put a price behind every unit of emissions released and stored. Yet, despite its utility, LCA still does not explicitly place value in maintaining environments.
It is a useful tool for holding growth accountable and for managing ecological spaces. MyTree is an example of such. It calculates the value of a tree using metrics like carbon sequestration, stormwater management and energy saved through the provision of shade. Yet, industries primarily dealing in the destruction of habitats will view this as a price, not the intrinsic value of leaving something alone.
This is compounded by the fact that there is more value in the consumption and selling of a tree than its role in an ecosystem. According to MyTree, the Douglas Fir from my childhood backyard, affectionately named Big Doug, would only be worth around $800 over 20 years. Yet, when it was cut down for a housing development, its lumber was sold for $2,400. Inherently the value of consuming Big Doug was triple that of leaving it be.
Why is There More Value in Cutting Down the Tree?
This brings us to the holy grail of mainstream economics: added value. How can we ensure the added value of letting a tree grow is greater than the value of cutting it down? And how does pricing nature in such a way impact sustainable development?
Herman Daly’s answers to these questions are responsible for the entirety of modern applications of LCA. Daly proposed a new economic model to address these questions in 1996 with his book Beyond Growth: The Economics of Sustainable Development. Kate Raworth, another trailblazing economist who authored Doughnut Economics (and this Twitter thread homage to Daly), labels it the “most radical act of 21st century economics.”
Source: https://www.kateraworth.com/2014/05/23/pluralism/
With just a few circles and lines, Daly managed to piss off almost every member of the World Bank. And my Econ 101 prof.
Instead of rooting economic efficiency in the conventional “Invisible Hand,” this model places the question of economic efficiency within the ecosystem surrounding an economy.
Traditional “Supply & Demand” economics would consider the environment an externality that needs to be independently priced but is still external to core economic activity. Using models like this encourage us to quantify our ecosystems differently by seeking value in capital that is not solely man-made.
By looking at growth as if it were occurring in a world where ecological value is taken into account, i.e. a “full world,” we arrive at the conclusion that economic activity cannot occur in a theoretical vacuum and, thus, has limits.
But, where are these limits? If someone were to calculate the value of every individual tree in the world, would that contribute in the search to identify just one limit to growth?
As tools for development analytics, LCAs are very useful. They are useful because they give an objective value for something as banal as a single tree. Yet their great utility lies in the fact that they speaks in currency, undermining some of the human-centric tenants of sustainable development.
I would encourage readers to think of ways we can expand the value of natural capital beyond a fiscal amount — or to engage with why it should/can/will not be done!
The key theme underlying the necessity to do so, though, is humanity’s relationship with growth. As we are experiencing firsthand, there are natural limits to growth and further limits we can self-impose. Life-Cycle Assessment is just one way of expanding Daly’s shaded rectangle of the world economy to address the value of our environment and identify these limits. How we discover the other ways depends on the renegotiation of our understanding of the concept of growth.
