MAC: Mines and Communities

London Calling warns against "costing" mining's socio-environmental destruction

Published by MAC on 2010-06-11
Source: Business Specatator

Five years ago, a World Bank study entitled "Where is the Wealth of Nations?" raised a basic question: have most models, previously marshalled to assess the value of mineral wealth, been fatally flawed because they didn't account for irreversible socio-ecological impacts, reaching into all our biospheres? (See:

The report was widely ignored. But now its key premise is being seized upon by the United Nations and, not least, by some of those whose core activities are at the heart of these damaging processes.

Renewed interest in calculating  the "true cost" of sacrificing our natural capital has undoubtedly been stimulated by the massive oil eruptions, caused by BP in the Gulf of Mexico. So far these calculations were tied predominantly to assessing the adverse economic consequences of  climate change caused by burning fossil fuels.

Next month sees a conference in London, ostensibly dedicated to discussing "The Economy of Ecosystems and Biodiversity", which holds out the promise of going further - by evaluating monetary losses across a broader spectrum of industrial activities.

However, just consider the track record of some of those behind this exercise - Deutsche Bank, Rio Tinto and Lafarge, the world's biggest cement producer, among them. It's surely impossible to suppress the thought that (as with past self-justifications  by  tobacco manufacturers and Big Oil)  the foxes aren't, once again, trying to take up residence in the chicken house.

Back in 2005, the fundamental import of "Where is the Wealth of Nations?" was that no realistic price can be set on many environmental losses. Any attempt to monetarise our eco-systems is doomed to failure; after all, what is priceless, ipso facto, should not be priced.

More dangerously, this initiative is almost certain to justify further egregious "trade-offs" (like the fraudulent carbon emissions market) between industrial activities and the preservation of vital biodiversity.

- As if the one could, or should, conceivably be evaluated on a par with the other.  

Putting the 'eco' back in economy

Giles Parkinson

Business Specatator

8 June 2010

The catastrophic oil spill in the Gulf of Mexico has sparked all sorts of speculation about its impact on the future of BP - until recently the UK's largest listed company - and whether Barack Obama can use the issue as leverage to push through his climate change and clean energy policies.

But the implications may yet be broader than that. It may just be used to hasten a push to reassess the way the world measures economic growth, and by extension corporate profits, by including hitherto unmeasured indicators such as environmental costs, and giving value to other assets such as biodiversity.

There are a bunch of videos doing the rounds on YouTube that highlight the greatest miss-hits of the now-vilified BP CEO Tony Hayward. The one where he says he wants to get his life back is popular, but the most relevant one to BP shareholders is the speech he made to a bunch of graduates from Stanford University last year.

It was when he lamented how BP, under the 'Beyond Petroleum' moniker championed by his predecessor, Lord Browne, had become so infested with people focused on environmental issues and "working to save the world" that they had lost track of the fact that "our primary purpose in life is to create value for shareholders."

In retrospect, BP shareholders might have wished that Hayward paid rather more attention to those environmental issues, or at least to some basic risk management. It emerges that BP was unprepared for an oil spill because it had not contemplated the possibility that one might occur.

It's an attitude of breathtaking arrogance and stupidity that the business world has not seen the like of since, well, nearly two years ago and the outbreak of the GFC. The prospect of repairing the environment it has damaged, and making good the losses of other industries, has already cost BP shareholders some $US70 billion in lost market value in just six weeks, and might cost them a whole lot more in cold hard cash.

But to borrow another of Hayward's unfortunate post-spill remarks, that is just a drop in the ocean. An interim report by the consultancy group Trucost estimated the costs on the environment from the activities of the world's 3,000 biggest public companies in the year 2008 was at least $US2.2 trillion, or around one third of their profits for that year. This only included the likely climate change impacts, so the final estimate may be considerably higher. The BP oil spill may be a particularly dramatic and horrifying event, but environmental damage occurs on a much broader scale all the time, and it is not taken into account.

The Trucost report is part of the UN's Green Economy Initiative, which will report in October. It seeks to analyse 10 different industries and include recommendations and idea on how to value the natural world, and how measurements of sustainability and bio-diversity can be incorporated into mainstream accounting and measurements of economic growth, and how it can reflect its true impact on the economy.

China has already had a crack at this. In 2008, a vice minister from the state's environment protection agency, released a preliminary estimate of the impact of environmental damage on GDP, suggesting it had reduced it by 3 per cent and possibly as much as 10 per cent in 2004.

This was an issue brought up in a recent round-table discussion I hosted for The Australian magazine The Deal. Oliver Yates, the head of Macquarie Group's utilities and climate change practice, said current measurements of GNP and GDP were inadequate because it gave no value to environmental and other impacts.

"It is creating a false economy," Yates said. "If I go for example and slaughter a rain forest in Indonesia, it increases the Indonesian GNP, and everybody claps, the economy is progressing. No one says that actually there is a debit to every credit. What is my net GNP growth? What am I taking away? What is that cost of production?"

The UN Green Economy initiative is being led by Deutsche Bank investment banker Pavan Sukhdev (apparently the owner of an eco-resort in north Queensland), who is also leading a study know as TEEB, The Economy of Ecosystems and Biodiversity, which is due to deliver its final report and its recommendations for business at a conference in London next month - an event sponsored by Rio Tinto and the cement group Lafarge, among others.

"We value what we price," Sukhdev wrote in an article published in the UK earlier this year, "but nature's services - providing clean air, fresh water, soil fertility, flood prevention, drought control, climate stability, etc - are, mostly, not traded in any markets and not priced. These so-called "ecosystem services" are all "public goods" provided free. Our tendency to value private wealth creation over improving public wealth - creating a healthier natural world, for example - doesn't help."

Sukhdev argues that the developed world is so disconnected from nature that it struggles to find its value. Yet, an interim TEEB report suggests that $US45 billion invested annually in increasing protected areas would deliver benefits in species protection worth $US4-$US5 trillion a year. Many other programs to conserve ecosystems and biodiversity would deliver ratios of costs to benefits ranging from 1:10, 1:25, 1:60 and 1:100.

"They are all big ratios: I'd do business on those ratios...I'm fine with 1:10," Sukhdev says. He adds that TEEB is compiling, building and making a compelling economics case for the conservation of ecosystems and biodiversity. "We have the opportunity to reframe economics and policy for the 21st Century."

Sukhdev notes that countries need to set different policy directions, change incentive structures, reduce or phase out perverse subsidies, and engage business leaders in a vision for a new economy.

The first step might be made as early as the G20 meeting in Toronto this month, which will host further discussions on the pledge last year to cut subsidies to fossil fuels. Last year, those subsidies were estimated to be worth more than $US300 billion, but a report from the International Energy Agency suggests it totals more than $US557 billion a year.

Removing subsidies was a policy that could change the energy game "quickly and substantially", the IEA noted. And the BP oil disaster will not strengthen arguments against it.

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