On Value and Price of Environmental Resources

On Value and Price of Environmental Resources

DOI: 10.4018/978-1-4666-4995-8.ch002


This chapter talks of the inherent problems on why markets on environment and natural resources and the associated ecosystem services may fail, or have failed in some of the recent instances. The fundamental reason for this, as stated in this chapter, is the divergence of the market prices from the value of the environmental resource. As argued here, the problem essentially lies in the fact that prices discovered in the market framework do not reflect the true scarcity value of the resource under consideration.
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The emergence and failure of the carbon markets have been talked of recently in various circles. Despite the initial successes of environmental markets, certain contentions have contested the setting up of such markets like that of emissions trading, and have admonished them for lacking even basic safeguards against fraud, and not really resulting in emissions reductions. The international carbon markets have further been criticised for failing to provide incentives for low-carbon innovation often proposed by economists and politicians (Schleich and Betz, 2005). The question is: are carbon markets merely coincidental with institutional failures, or are they symptomatic exhibits of a more fundamental problem? This chapter attempts a response to this query.

In that sense, this essay should not be treated as a cynic’s treatise on markets. In course of this discussion, as it seems, one may argue that the institutional failures of the environmental markets were inevitable: more so because of certain fundamental problems. In course of development of any other asset market, one critical element arises in the context of valuation. The contentions for the environmental markets have been triggered by a long-standing deliberations on concerns of valuation methods, problems of efficient working of institutions, and the way in which market as an institution for resolving environmental problems is construed and being made to work. Let us agree that the prime objective for criticising the present working of the markets is more of a positive concern of making markets efficient, so as to promote a cleaner environment, and a sustainable natural resource management regime.

Before we launch into a more detailed discussion, at the very outset it is fair to declare that this chapter does not make any distinction between “environmental services” and “ecosystem services,” for the sake of simplicity. Often the two terms have been used indistinguishably. The indistinguishable usage, however, in no way, takes away the moot point that this chapter intends to make. In fact, controlling environmental pollution is one of the important ecosystem services, which might get impeded due to excessive anthropogenic intervention in the eco-hydrological cycle. Hence, “ecosystem services” subsume all sorts of services provided by the environment.

There has been a worldwide call for the development of markets for environmental services, with the objective to help solve the problems of environmental pollution and degradation in various forms. The massive growth of such environmental markets over the last one and half decades indicated the massive potential of such institutions to strongly emerge as the most important source of sustainable development financing—that could be tens of billions of dollars annually—within the next 10 to 15 years. Enthusiasm grew rapidly, to the extent that even commodity exchange promoters contemplated the trading of natural capital on derivative exchange platforms.

What essentially triggered this drive? There were primarily two major drivers of this phenomenon: a> conscious national environmental policy movements toward market-based instruments, and b> rising demand for environmental goods and services from public authorities, private entities, and consumers. On the one hand, there are new public regulations along with the establishment of market-based instruments, and on the other, it has become quite lucrative and fashionable for private players to show initiatives toward the protection of biodiversity (often as part of their corporate social responsibility initiatives or otherwise). Consumer demand for derivatives of healthy ecosystems, such as organic foods, fair trade products, and eco-tourism, has also increased over time. Interestingly, most of these changes have primarily been noted in the developed nations. Developing nations have also been gearing up to institutionalize some of the changes, as they find that there exists a demand for certain environment-related products and services in the developed world. One such example is eco-tourism initiatives in Africa and Asia where a large number of tourists from the E.U. and the U.S. visit a tourist spot. As such, developing nations are getting richer, and there are already signs of demand of eco-friendly products from urban high net-worth individuals, with organic food demand (for which a premium has to be paid) being a point in case.

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