Nature Finance & the Scarcity Shift

Why nature scarcity presents a unique opportunity to get humanity to pay for nature. Give me a chance to explain myself...

Please forgive the provocative title.

No, nature becoming a scarce resource is definitely not a good thing. But, it does present a unique set of conditions that might allow us to make much more rapid progress on internalizing the value of nature into the economy.

The past two days I was at a workshop in DC with some of the world’s leading thinkers on nature finance (still scratching my head as to how I got invited but you can be the judge of that worthiness). And while we often toss around the term “finance”, the discussion was more so, how do we get humanity to value nature properly and therefore protect and restore it associated with it’s true value to society. How do we internalize the externality.

I could write 10 different blog posts on the great ideas and interesting challenges that we discussed during the workshop, but we were under chatham house rules and most of the ideas need a bit more time baking before coming out of the oven. But rest assured, there are many brilliant and passionate folks that are rolling up their sleeves in the kitchen.

Ok, enough of the preamble, let’s jump into nature & scarcity and why that realization struck me like a lightning bolt.

Nature’s Scarcity Era

From the beginning of human presence on Earth until today, we’ve been able to take nature for granted. Our footprint was too small to affect ecological function. And, when we did affect ecological function, we just went elsewhere.

Now, for the first time in human history, at planetary scale, there is no where else to run.

For the first time in human history, we have pushed nature into it’s scarcity era.

For the first time in history, the ecosystem services and biodiversity underpinning those services that we took for granted, are starting to fail.

From chocolate in West Africa to soy in the Brazilian Cerrado, our land use practices have pushed ecosystems beyond the brink. Not to mention the global forcing function that is climate change and it’s associated feedback loops.

So, why do I say this is a good thing for valuing nature? Well, for the first time in humanity, if we don’t value it, then we’ll use it. Most of the “nature valuation” studies have been an economic exercise, but not a willingness to pay. For example, I can say that this forest supports $10M of economic activity in the city downstream. But that is a very different exercise from going to the private and public actors in that city and asking how much are you willing to pay to not lose the services that forest provides?

And I think this is one key piece of the puzzle to value nature. As we enter this scarcity paradigm, there is economic value acutely at risk. And if we don’t pay to protect it, we will lose it.

Nature’s Ultimatum & Gmail

I imagine many of you have a Gmail or an associated free email app that maybe you also use as for it’s calendar. How many aspects of your life are linked to your gmail account and the associated passwords, communications, etc? And if you’re like me, without that calendar, you’d be lost.

When you starting using Gmail, did you need to pay for it? No, you got it for free. It provides immense value to you, but your not just going to voluntarily pay for it!

But what if tomorrow, Google said you need to start paying for Gmail or they are going to take it away? How much would you be willing to pay to keep it? For me, I’d say it’s at least a hundred dollars per year, maybe more. And what if Gmail was the only service provider in the world for those services? Now we’re talking thousands.

Well, nature is your gmail. For the last couple of million years, we’ve gotten nature for free. Why would we pay for it if it gave itself to us without asking anything in return?

But, for the first time in human history, at planetary scale, if we don’t start paying for the services that nature provides, then those services will stop. How much are you willing to pay now?

Now is probably a good time to highlight loss aversion. Loss aversion is a cognitive bias that suggests that for individuals the pain of losing is psychologically twice as powerful as the pleasure of gaining.

As nature moves into a scarcity era, the question for governments, business and everyday people is… how much are you willing to pay to not lose nature’s services that you are dependent on?

And unlike gmail, for ecosystem services, there is no alternative. As much as humanity might not want to believe it…

Nature has a monopoly on ecosystem services.

This is how we can get businesses to start paying for nature voluntarily and individuals to start voting for policies that fund nature. Not by asking what is nature worth to you? But by asking what are you (business, person, government) willing to pay to not lose clean water, to be able to grow food, to be able to operate your mine?

Nature is finally giving us it’s ultimatum, pay for me or I won’t provide what you need to survive.

Economics of Scarcity

**Caveat: I am not an economist and some folks will likely be able to come up with very good examples that counter my following statements**

As far as I can discern, under our current economic system, scarcity is required for something to have value. If there were unlimited dollars in the world, they would have no value. If there were unlimited bitcoins they would have no value. If there were unlimited Mona Lisa’s in the world, it would have no value. You get the point.

Scarcity is in the fundemental design of the predominant global economic system. Now, this is part of the reason why nature hasn’t been valued before within our economic system. And we should look at how to re-design our economic system such that scarcity is not a prerequisite for value, but this is a conversation for another day.

Under the current economic paradigm, nature becoming scarce means that nature is likely to be valued in ways that it never was before. We don’t want nature to be scarce forever and we don’t want an economic system that only values nature when it is scarce, but we must make the most of the current scarcity era to start to value nature as we work towards an economic structure that doesn’t require that scarcity.

Let me re-emphasize an important point, I do believe that we need to shift towards an economic relationship with nature and earth systems such that it doesn’t take scarcity to drive our willingness to value it within the economy. I hope one day we can shift into an economy that is designed to deliver for human and non-human life in balance with each other.

So what?

Let’s look at a few emerging sources of payments for nature now that we’ve shifted into a scarcity paradigm. The first three are lower hanging fruit, and the last is reaching.

Corporate Value Chain Resilience

If you trying to get paid for nature protection or restoration near a value chain, what ecosystem services are coming from your area that a corporates value chain depends on? What is the business value associated with those value chains? What is the risk that those ecosystem services fail if that area is not protected/restored? What is the business-value-at-risk and what are corporates willing to pay to secure those ecosystem services continue to flow?

Note that traceability is a big issue here, if corporates don’t know where they are sourcing, then they can’t begin to understand where they are dependent on nature and how much it’s worth to them.

Another challenge is shifting supply chains, how do we get corporates to invest in place instead of going somewhere else? Part of this is macro studies that more and more will show there is no where else to run.

Avoiding Stranded Physical Assets

Where companies have physical assets such as processing facilities, what are the ecosystem services that those facilities depend on for their operations? What is the risk that those ecosystem services fail if that area is not protected/restored? What is the business-value-at-risk and what are corporates willing to pay to secure those ecosystem services continue to flow?

Water Utilities Resilience

This is nothing new, both TNC’s water funds and Blue Forest have leveraged water utilities dependence on watershed to get utilities to pay for protecting and restoring ecosystems.

Gov’t to Gov’t

Ecosystem services operate from micro to quite macro scales. For example, Bogotá, the capital of Colombia gets 40% of water supply due to rainfall coming from the Amazon. One could envision transjurisdictional payment mechanisms between countries that can group thousands of private and public sector actors to ensure those dependencies stay intact.

Note, this is one critical role of government. Getting many actors to jointly take action out of a shared interest that is near impossible to achieve collective action on without government.

This is an example of the biggest challenge in my mind that we face in translating scarcity to new payments for nature, the freerider challenge.

For many ecosystem services, especially relative to the collective action required to address climate change, there are a small number of actors that depend on that service and have an incentive to pay to keep it intact. Recognizing that climate will be a factor in the function of many ecosystem services which is where the local action needs to link up with the global action for us to reach a sustainable steady-state. And I do not have a solution for overcoming the tragedy of the commons challenge for climate change.

But I believe that for many nature dependency contexts, we can overcome the freerider challenge by creating mechanisms that enable private entities to commit together, often in partnership with public entities, to pay to not lose a shared ecosystem service. There are many ways to structure these mechanisms, another future blog post…

Now a quick note to you.

This blog has been and continues to be a process and outlet to organize my thoughts. To get them out in the world and see if they hold any water. These are continually evolving hypotheses and ways of framing and angling to get the value of nature internalized into our economy. Thanks for joining me on these thought exercises and for giving me the grace to tinker and continue to form my rough thoughts into something more chiseled and able to go out in the world to make the big changes we want to see.

- Eric