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How Earth’s value is being left off the balance sheet

The international system of accounts that tallies the economic and financial costs of global warming fails to include one vital asset: the environment itself.

FILE PHOTO: A child embraces a globe shaped balloon during a rally held ahead of the start of the 2015 Paris World Climate Change Conference in Rome
FILE PHOTO: A child embraces a globe shaped balloon during a rally held ahead of the start of the 2015 Paris World Climate Change Conference in Rome (REUTERS)

By Mark Buchanan, Bloomberg Opinion

The U.K.'s outlook for lowering greenhouse-gas emissions is adding to the general skepticism about the prospects for action at COP26, the ongoing UN Climate Change Conference. The British treasury's interim report, which reviews plans for the U.K. to achieve net-zero emissions by 2050, has been criticized as unduly pessimistic. It repeatedly stresses the short-term economic costs of acting on climate — ranging from renewable energy investments to lost fuel taxes — yet barely mentions the dreadful consequences of inaction, or the long-term benefits of preserving our environment. Indeed, the report mentions 'environment' only four times, while drumming 'costs' into readers' heads more than 40 times.

This bias isn't so surprising coming from the U.K. Treasury, staffed as it is mostly by people with backgrounds in economics and finance. But it reflects a serious intellectual problem at the very root of our failure to address planetary warming. Countries rely on an accepted international system of accounts to guide planning on economic and financial matters, and these accounts naturally emphasize financial assets. No similarly accepted system of environmental accounting exists to help us measure and preserve — or even properly see the value of — the environment and the services we draw from it.

Also read: Decoding India's big net zero pledge at COP26

As a result, the enormous value of the natural environment mostly remains off the books for planning purposes. Until that changes — and there are some hopeful developments that desperately need to be nurtured — upfront costs and other narrowly conceived economic quantities will continue to get undue attention.

The System of National Accounts is an internationally agreed-upon standard set of recommendations on how to compile measures of economic activity. First established in the aftermath of World War II, these accounts cover financial budgets, debts and expected tax revenue, and many other details of a nation’s economic situation. Government technicians and elected leaders use these to analyze nations’ current economic standing and future prospects.

Unfortunately, nothing in these accounts mention things like climate change, ocean acidification, or the loss of rainforests and valuable topsoils. The national accounts neglect any information about natural capital as embodied in the many resources we rely on: plants, animals, rivers, air, water, soils and minerals, as well as patterns of relatively stable weather and climate. These can all be systematically depleted or otherwise disturbed, with no blemish left in the accounts. A more complete accounting system would make such losses clear, highlighting the longer-term costs we’re imposing on ourselves by extracting short-term economic value now.

Many people are working to correct this problem — perhaps most notably by aiming for the establishment of institutions called natural capital banks. These would be closely akin to today’s national central banks, but with a parallel and explicit environmental focus. Whereas national central banks today issue currency, control the supply of money and manage inflation, ensure financial stability, and carry out a variety of related tasks, natural capital central banks would supervise existing governmental institutions with the aim of ensuring environmental protection and properly valuing and preserving natural capital on behalf of society.

Their focus would be on a different set of assets: not financial assets, but the natural assets vital to the long-term continued functioning of economies and society.

Is it a pipe dream to think governments might move in this direction? Not necessarily. Under the leadership of the United Nations, some 89 countries participated in the development of principles for the System of Environmental Economic Accounting, which the UN adopted as a global framework in March of this year. Being established as a UN standard doesn’t mean the SEEA has been adopted for use by governments, but many are moving in that direction.

The system of accounts we’ve become accustomed to has only existed for 70 years. It’s taken for granted by governments and businesses the world over, and largely sets the boundaries for acceptable economic planning. Yet it’s become increasingly clear just how incomplete this set of accounts is — and how much of the real value of the Earth system it quite arbitrarily ignores.

Judging a nation’s situation by its economic accounts alone is rather like judging a household by its bank balance. The owner might build up a healthy cash balance in the bank by selling off the heating system, roof and floorboards, and turning the bed into BBQ kindling, thereby dismantling the house as a functioning unit. The financial accounts only look great because they're very partial accounts.

Michael Vardon of the Australian National University, one of the leaders behind the movement for environmental accounting, told me in an email about the prospects for success — and whether he had encountered any entrenched resistance. The situation, he suggested, is much as it is with efforts to address climate change: plenty of good words, less action.

“These standards aren’t yet normalized” in the same way financial accounting has been normalized, he said. “There’s no active resistance to building the information system, and everyone is saying the right thing. But words into action is the issue.”

It may be too much to hope COP26 will deliver any historical breakthroughs on climate. But some elements of the SEEA on improved carbon accounting have been put forth for consideration by government representatives during the meeting. It would be encouraging if nations took some real steps toward adopting standards for valuing the natural world.

Mark Buchanan, a physicist and science writer, is the author of the book 'Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics.'

Also read: COP26: All you need to know about the climate change summit

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