For a keynote speaker at a conference on wilderness conservation, Pavan Sukhdev possessed a strange job title: banker. Sukhdev, a high-ranking executive of Deutsche Bank who helped build India's modern financial markets, had a fiscal message to deliver. The loss of forests is costing the global economy between $2.5 trillion and $4.5 trillion a year, he said. Many trillions more in costs arise from the loss of vegetation to filter water, bees to pollinate crops, microbes to break down toxins, and dozens of other "ecosystem services."
For centuries, economies have risen and collapsed based on the market value of the products extracted from nature—timber, coal, metals, game. And yet the value of much of what nature supplies hasn't been reflected in the numbers. A new movement now seeks to put this right by attaching an economic value to the services nature provides. The idea is predicated on the notion that since a paper mill, say, needs water as well as trees, there should be some kind of economic mechanism whereby it pays to help keep the water flowing. The same is true for dozens of other ecosystem services across a wide range of industries. There's scarcely a business in the world that doesn't rely in some way on natural features that help control flooding, disseminate seeds, fend off pests, and hold soil in place. According to a study Sukhdev is conducting for the United Nations, protecting and restoring damaged ecosystems can deliver extraordinarily high rates of return on investment—40, 50, even 80 percent. "People need to start thinking of 'ecological infrastructure' as something they can and should invest in," Sukdhev said at the conference.
It sounds radical even to talk about nature in the language of finance, but it's quickly becoming a mainstream practice. One of the few tangible achievements expected from the climate talks in Copenhagen this month is agreement on a program called REDD, or Reducing Emissions From Deforestation and Forest Degradation, a complex set of regulations that would help developing countries keep their rainforests standing by turning their carbon-storing capacity into a source of income. Trees, after all, absorb carbon dioxide from the air, which can be seen as a service that offsets tailpipe and smokestack emissions. REDD would establish a market in which wealthy countries can pay countries with old-growth forests, such as Brazil, Indonesia, and Guyana, for their carbon stocks, thereby creating an economic incentive to preserve the jungle.
Carbon storage is only one of many services that could enter the global economy in the next few years. Watershed protection is already generating revenue. The Nature Conservancy, a conservation group, has set up "water funds" in the Southwestern U.S. and parts of South America. Urban water utilities, hydroelectric-power providers, and other users that rely on regular flows of clean water downstream pay into the funds to finance watershed protection upstream. Elsewhere in the U.S., federal environmental laws have enabled thriving markets for wetland and endangered-species habitat conservation. Under the Clean Water Act, developers who plan to drain or fill in wetlands must create an equal amount of wetlands within the same watershed to conform to a policy of "no net loss." For-profit companies like Wildlands, based in Rocklin, California, preserve, restore, or create wetlands that function as "mitigation banks," in which developers purchase credits to offset destruction they cause. Conservation banks function in a similar way, preserving habitats for listed species. Mitigation banking alone has grown to a $3 billion-a-year industry.
The next step is to turn ecosystem services into a viable portfolio option for large investors—such as pension funds—and to generate the capital needed to carry out large-scale conservation efforts. Experts are looking into bundling different services together into financial instruments. One former bond trader is building a private exchange that would make it easier for investors to identify ecosystem projects and trade credits.
Not everyone thinks using market mechanisms is a good idea. Critics say that REDD, for instance, could protect one rainforest from clear-cutting merely by sending the logging trucks to a different forest. There's also a worry that carbon credits could easily be faked. In Papua New Guinea, government officials and foreign firms are already embroiled in a scandal involving duped locals and bogus projects.
The potential upside of markets, though, may be too significant to ignore. "There's this inherent feeling that there's something unethical about a market, that it's permission to pollute," says Tom Lovejoy, bio-diversity chair at the Heinz Center in Washington, D.C. "But at the moment there's nothing else on the table that deals with this at a big-enough scale." Whole, functioning ecosystems have never been worth as much as their disassembled parts. Turning that equation around may be the best hope for keeping ecosystems intact.