Actuality

Manipulating externalities

Luis Díaz Balteiro
Professor of Forest Planning and Agricultural Valuation in the Department of Forest Engineering and Environmental Management at the Polytechnic University of Madrid.
Reproduction of the article published in https://www.balteiro.com/

For more than a century, celebrated economists such as Marshall and Pigou introduced or developed a concept for identifying certain market failures arising from the consequences of one economic agent's actions on another, which do not have a market price. In a nutshell, this is the idea of an externality. This concept is useful for highlighting aspects such as pollution (the cost of polluting is not always borne by the agent who caused it), which gives rise to negative externalities. These have been addressed with great attention because there was a demand for governments to adopt measures to internalise these external costs that were not initially accounted for. However, there are also positive externalities (or, if you will, external benefits) that are talked about much less, and where forest systems are clear examples of providing society with a range of ecosystem services at a cost of more or less zero. On the other hand, in this environment anticipating a new financial taxonomy, it is worth remembering that these externalities are not reflected in companies' accounts.

Let this introduction serve to focus on the positive externalities so closely linked to forest cover. The initial reality shows that aspects such as carbon capture, biodiversity conservation, regulation of the water cycle, etc., are often not properly measured or valued, as they are considered public goods and, therefore, the system of property rights becomes imperfect. This leads to the price mechanism, which normally governs economic relations, not functioning as it should. Theory tells us that, in these cases of market failure, government institutions should take measures to mitigate this problem. For example, one way to mitigate negative externalities is to invoke the principle of “polluter pays” and regulate accordingly. However, for positive externalities there is, as far as I know, no reciprocal principle: “beneficiary pays (at least monetarily)”. Although it would be impractical to apply it indiscriminately in some cases (for example, when enjoying a forest landscape, you cannot exclude those who do not enjoy it), it would, however, make sense when there are underlying monetary flows that can be made explicit.

Without aiming to be exhaustive, let us look at some cases. The first is that of carbon sequestration. It is well known that forest stands, in the absence of disturbances, accumulate carbon annually as long as they continue to grow. The internationally accepted way of accounting for this carbon is, and this is not usually mentioned, rather stingy towards forest systems. Well, despite only a portion of the carbon they actually sequester being included in the official accounting, the latest statistics (2019) we are informed that the LULUCF sector (“land use, land use change and forestry”) in Spain has a net balance of more than 37.5 million tonnes of CO₂.₂ equivalents. Which is the same as saying it offsets around 121 TP3T of the country's emissions. The question would be: how much do the owners of these forest lands (plantations established after 1990) receive for this positive externality? The answer is very simple: zero €. That is to say, the government is appropriating a public good produced, at least in part, on private land (so far, it has taken care not to provide any statistics on the matter), and without any hint of internalising (that is, compensating landowners) this market failure. I am not going to resort to demagogic arguments by multiplying those millions of tonnes by the current price of carbon on the emissions markets, but it is worth remembering that this carbon has a market value. One only needs to recall what Spain invested at the end of the first commitment period of the Kyoto Protocol to purchase emission reduction units under joint implementation mechanisms to realise that this avoided cost could be a minimum threshold that could be used for a hypothetical compensation. However, despite this evidence, which gives a notable value to this ecosystem service, some mouthpieces still persist in proposing that the cost of firefighting should be borne by forest owners. By the way, since this environmental accounting is being discussed, it is worth remembering that carbon emissions from agriculture (and livestock farming) amount to 37.8 million tonnes of CO₂ equivalent. That is to say, however much they may wish to divide it institutionally, the rural world or agricultural sector (agriculture, livestock farming and forestry) is currently almost neutral in terms of its balance of greenhouse gas emissions and removals. I believe this fact is highly relevant to the rural world, and is very frequently overlooked.

And since we're talking about the rural world, the recent controversy over the failure to consider the wolf As a non-game species, it has in reality meant directing the negative externalities of this decision not at society as a whole, but at a very small segment: the inhabitants of rural areas. In other words, the government has decided that if a rural area harbours a wolf population, these wolves must be left untouched because a positive externality is being generated there. However, the costs associated with this measure (negative externalities) are not distributed evenly: only those who live in those areas suffer them (or endure them with much greater intensity than inhabitants of non-wolf areas). And they suffer doubly, because we are all familiar with the problems associated with hindsight subsidies, and because the only way to control the populations has been eliminated (i.e., costs will increase in the future). All this is for the greater glory of city-dwellers who are poorly empathetic with the rural world.

There are many more examples, but what strikes me is that one of the initial steps to try to reverse these problems would be to value these ecosystem services in order to then design a fair system of compensation for these positive externalities where deemed appropriate. Well, the manipulation (in this case by omission) of public authorities here is due to not publicising or not allowing free access to initiatives paid for with the taxes of all Spaniards and which lie dormant somewhere official. I am referring to the value maps of the “Vanity” and “Millennium Ecosystem Assessment“which compile value maps for many ecosystem services across Spain. This could serve as a basis for supporting payment-for-ecosystem-services initiatives (plausible measures to internalise these positive externalities), but it seems clear that it is not a priority for the Ministry. These organic dysfunctions also occur at more aggregated scales. I have been struck by the fact that the recent European Forest Strategy does not explicitly mention the positive externalities generated by forest stands, while it does address the possible negative externalities linked to the use of forest biomass as an energy source. However much they insist on the need for payments for environmental services, referring only to the questionable negative externalities of forest systems does not seem the fairest approach in a forest strategy.

Finally, note that property rights are closely linked to the situations discussed. Unfortunately, in Spain many people believe that forest systems have no owner and that they can do whatever they like whenever they wish. This neocolonialism It advances driven by certain public policies, and encouraged by many unlettered and subsidised riff-raff. However, sometimes a black swan appears. I am referring to the recent buy, rather than the expropriation, of the Cabeza de Hierro mountain. That amount paid effectively includes an assessment of certain positive externalities. Any owner already has a starting point for claiming compensation, by whichever means they deem appropriate, when their rights to use and enjoy their property are curtailed, or when they seek to be compensated for the positive externalities associated with it.