The Biden Administration released draft guidance last week on accounting for “ecosystem services” in regulatory cost-benefit analysis. The guidance aims to improve how environment-related costs and benefits are captured in federal cost-benefit analyses of regulations. However, the new guidance, as well as the larger effort it is part of to expand the use of “green accounting” in government, is a misguided endeavor. Pricing the priceless probably only degrades nature while simultaneously leading to inefficient and even irrational public policy decisions.
The new guidance is the first of its kind and was developed jointly by the Office of Information and Regulatory Affairs (OIRA) and the Office of Science and Technology Policy (OSTP) to fulfill directives in an executive order from last year on strengthening forests and communities facing stress from wildfires and climate change. The document serves as a complement to other ongoing efforts by the Biden Administration, such as a strategy to develop environmental statistics for inclusion in national economic accounts.
Natural capital refers to the stock of natural resources that society is endowed with, which provides a range of benefits that contribute to human well-being. These benefits come in three basic forms. First are fleeting, temporary pleasures, like a sunset or a birdcall. Second are enduring non-monetary benefits that can be appreciated day after day, such as the Grand Canyon’s awe-inspiring vista. Third are financial gains from commercialized resources like timber. This last category of benefit is fundamentally different than the first two. Since money can be reinvested, returns magnify over time in a compounding fashion, however you can’t reinvest a scenic view or a birdcall.
As should be evident, the benefit stream a natural capital asset generates looks very different over time depending on whether its returns involve money. This distinction is rarely accounted for properly in government economic analysis. For example, under a separate cost-benefit analysis update from OIRA, the agency fails to distinguish these different types of capital returns. Even consumption and investment are treated virtually identically by OIRA.
This is absurd. Investments tend to have a higher opportunity cost than an equivalent dollar amount of consumption, and assets generating financial returns tend to have higher opportunity costs than those that don’t, by virtue of the ability to reinvest returns. The White House’s ecosystem services guidance displays some grasp of these issues, but it falls far short of being satisfactory as it fails to account for differing opportunity costs across the different classes of natural capital.
One set of obvious questions about this document relate to why it is even needed. If OIRA already has regulatory analysis guidance, what value does further guidance related to “ecosystem services” add? Are more such documents planned? OIRA’s regulatory guidance has recently ballooned from 48 to 91 pages. The ecosystem manual adds another 76, including the various appendices. This all leaves one to ask: is all this paperwork really necessary?
In essence what seems to be afflicting the authors of the ecosystem guidance is a form of “anthropomorphic bias,” which refers to the tendency of people to attribute human-like characteristics to non-human entities. An individual might value a beautiful sunset more than an investment yielding a low one percent annual return. Why? Due to his finite lifespan and the natural human propensity toward impatience, the individual might not be willing to wait around for the low-yielding investment to pay off.
The same cannot be said for society, however, which exhibits no human tendency for time preference, nor—short of human extinction—a finite lifespan. Society can always wait for the low-yielding investments to pay their dividends. Thus, when taking a broad social perspective, as government economic analyses do, the analysis should not equate assets generating compounding financial returns with short-term consumption or even many sustained benefits derived from nature.
The Biden Administration is looking to incorporate natural capital accounting into the national economic statistics by 2036, essentially inserting it as an add-on to GDP. This makes no sense when current approaches to valuing the environment leave so much to be desired. The best solution is likely to quantify aspects of nature—including natural capital stocks and flows and our impact on them—but to avoid the monetization exercise unless what is actually being evaluated is money.
If the Biden Administration is so concerned with monetizing nature, it should instead consider privatizing some of the vast land resources under federal control. Beyond that, cost-benefit analysis can help guide sound policy when used judiciously. But we must also not fetishize monetization or believe equating incommensurable things reveals some deeper truth. Rather than continuing to resort to accounting gimmicks that have no sound basis in economics, OIRA and OSTP should go back to basics. Our ecology, as well as our pocketbooks, might well hang in the balance.
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