Rio+20: A Personal View

I have recently returned from the Rio+20 Summit in Brazil.  I hope you forgive me for writing a short opinion piece here about the event and my assessment of the outcome.

Reading the headlines in the international media, it is easy to be depressed about the outcome of Rio+20 (officially called the UN Conference on Sustainable Development).  Lacking any specific targets, timetables or new financial commitments, the Outcome Document has been described as “weak”, “unambitious” and as “a backward step”, with some even going so far as to nickname the Summit “Rio Minus 20”.  Is this criticism justified?

John Vidal in The Guardian this week reminded us of the comments of prominent environmentalist Richard Sandbrook after the outcome of the original Rio Earth Summit in 1992.  Those outcomes were similarly received and Richard said:

“NGOs always scream murder because it is their job to push governments, pundits exaggerate because they are controversialists, and UN conferences always disappoint because all views must be accommodated.”

Wise words and we would do well to have them in mind when assessing the outcome of any UN or intergovernmental meeting.

Judging international progress on the sustainable development agenda by reading the text of a document alone would be to ignore the substantial advances at the regional, national and local level.

There have been great strides since 1992.  We now have the UN Conventions on Biological Diversity, Climate Change and Desertification and, although many will argue these Conventions have failed to deliver their desired outcomes, there is no doubt that they have helped to focus government attention on these issues and that the world would be in a much worse state without them.  National legislation on climate change is emerging – beginning with the UK in 2008 and now on the statute books in Australia, the EU, Mexico, the Philippines and South Korea to name a few with climate change laws in development in China, Colombia, Chile and others.

At the societal level, there is much greater awareness of the impacts of consumption on the environment and there are now many examples of consumers demanding less environmentally damaging goods and services to which the private sector has necessarily responded.  This activity is only likely to grow.

Similarly, there has been much progress in integrating the environment with the development agenda.  Back in 1992 the World Bank viewed itself as a “development organization, not an environmental organisation”.  Today it sees the fundamental inter-relationship between the environment and development, and tackling climate change and other environmental issues are now central to the Bank’s priorities.

Before we relax, it is clear that all of the major environmental indicators are still flashing red, many redder than in 1992.  For example since 2000, just 12 years ago, forests equivalent to the landmass of Germany have been lost.  Eighty per cent of the world’s fish stocks have either collapsed or are on the brink of collapse.  We know that most if not all of the world’s bread baskets are shrinking rapidly.  The Gobi desert is growing by roughly 10,000 sq km every year.

Despite the increasing gap between where we are and where we need to be, there were some positives at Rio+20.

For me as an economist, one of the most promising features of the Rio+20 Summit was the discussion, and greater understanding, about the concept of valuing natural capital.  To me, this is the “Holy Grail” of sustainable development and fundamental to the systemic change that is required to put the world onto a sustainable path.

The current economic model, including how countries measure wealth, is woefully out of date, partial and not fit for purpose.  It assumes infinite natural resources, measures only income, does not price pollution or any other ‘externality’ and, through use of a ridiculously high ‘discount rate’, vastly undervalues the importance of future generations.

GDP growth rates have become the most important aim of governments and drive almost all government activity.  It’s worth remembering that GDP was first developed by the economist Simon Kuznets in 1934.  He immediately said that it should not be used as a measure of welfare.  And yet, after the Bretton Woods conference in 1944, GDP became the main tool for measuring countries’ economies and has remained so.

GDP is simply an aggregate of the value of all the goods and services produced in a country over a given period.  These goods and services may have been produced through sustainable wealth creation but could just as easily have been produced by using capital, including natural capital, on an unsustainable basis.  Clearly, using capital at a higher rate than it can be replenished is not a sustainable business model and the fact that the global economy is using up natural resources at a rate of around 150 per cent of the Earth’s capacity to replenish suggests that we are headed for a natural resource ‘credit crunch’.

Valuing natural capital is one way to make our economic model more complete.  It is the extension of the traditional economic notion of capital to the natural environment.  It is the stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future.

A simple example can illustrate the importance of valuing natural capital.

Take two farmers, each with a herd of cows.  Farmer A sells half his herd in year one, giving him an income of USD 50,000 and sells the rest of his herd in year two giving him another USD 50,000.  Farmer B sells the milk from his herd for USD 20,000 per year.  Farmer A has the greater “GDP” but this income has been at the expense of his capital.  Farmer B has a lower income but has preserved his capital.  The prospects in year 3 are good for Farmer B but Farmer A has an uncertain future as his business model is unsustainable and he no longer has any capital.

Many countries are in a similar position.  They are using up their natural capital to generate GDP that, although giving the appearance of generating wealth, is actually making them poorer.  Indonesia could be used as an example where the destruction of its rainforests to provide land for palm oil plantations (which will only be productive for a limited time) is creating the illusion of increasing wealth but in reality is making the country poorer.  If a country does not measure its natural capital, it may not be aware that this is happening.

The devastation wrought by Hurricane Katrina on New Orleans in 2005 provides an example of how failure to account for natural capital can backfire.  The US Congress in 1956 authorized construction of the Mississippi River Gulf Outlet (MRGO), a 76-mile shipping channel that cleared about 19,400 acres of wetlands into open water for ships.  The US Army Corps of Engineers project allowed salty water to encroach on surrounding marshes, degrading a further 600,000 acres of wetlands surrounding the city.  The loss of swamps destroyed a buffer for storm surges that had protected New Orleans from hurricanes.  Without the MRGO, the potential for water to breach levees protecting the city would have been cut by 80 percent, according to the study, which put the total economic cost of the channel, including Katrina’s damage, at “hundreds of billions of dollars.”

The concept of valuing natural capital is part of the solution to creating a more holistic approach to measuring and managing our economies.  And let’s be clear; this approach isn’t about creating some green utopia where economic progress is frowned upon, flying banned and everyone skips around happily in daisy-filled meadows.  It’s about managing our economies more efficiently.

However, despite the clear advantages of valuing natural capital and incorporating that value into economic decision making, it is not without risks.  Improper valuation of natural capital could be used to justify development of naturally important sites and it will be important to take into account the full range of benefits and services that ecosystems provide, ideally – but not necessarily – using an internationally agreed formula and based on credible data, in order to provide as accurate as possible accounts of a country’s natural capital.

By the way, you can hear a much more entertaining explanation of Natural Capital by listening to this episode of The Now Show on BBC Radio 4.  Listen from 13:30 minutes.

I am excited at the interest and support that the natural capital approach is generating and I will be following developments, post-Rio+20, very closely.

Before I finish this post, I’d like to make an observation about the language associated with the sustainable agenda.  Proponents often talk about the potential of “Green Growth” or the “Green Economy”.  Having worked with politicians on the climate change agenda for the last 7 years, I find the use of the “Green” label an unnecessary barrier.  Many politicians, particularly – but not only – those on the right side of the political spectrum, have an allergic reaction to anything described as “Green”.  To some it conjures up images of a socialist utopia run by a mass of regulation, a restriction of personal freedoms and a return to the Dark Ages.  This is not helpful.  The real aim here is to run our economies more efficiently, to help governments have more complete information to make the right decisions about where, how and when development takes place in order to maximize the prosperity of its people.  And to do so, not just for the present but for the future, too.  That isn’t just a “green” agenda.  It’s a prosperity agenda and one that everyone, regardless of their political views, should embrace.

If the international community can get this right, the headlines after Rio+40 might just be different.