Shaking the money pot to protect nature

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25 July 2017

Nature gives us a lot: water, timber, minerals, biodiversity, food, clean air… But the perception that natural capital is endless and free leads to overuse and under-investment – and we constantly hear that there's not enough money to invest in the environment. A recent conference asked how we can shake the piggy bank to give something back to nature.

The morning fish auction at Mumbai's Ferry Wharf. Thousands of boats fish along the coast, putting acute pressure on fish stocks (Photo: lecercle, Creative Commons via Flickr)

According to Markus Lehmann, from the Convention on Biological Diversity, implementing the 20 Aichi biodiversity targets by 2020 – such as addressing underlying causes of biodiversity loss and safeguarding ecosystems, species and genetic diversity – will deliver substantial benefits to people and economies, but requires massive resource mobilisation.

Initial estimates place this cost in the region of US$130 billion to $440 billion per year globally (PDF), and will require significant mobilisation of international and domestic public resources.  

Already under high fiscal pressure, this is a challenging request for ministers of finance, who face the burden of having to provide for short-term (and more politically visual) demands such as schools, roads, dams and water pipes. But it does not always have to be about "either-or" and penny pinching, but being a bit cannier on managing that purse.

Poverty, biodiversity and natural capital 

The 22nd meeting of the Poverty Environment Partnership (PEP22) brought together more than 60 participants from 41 organisations and 12 countries to talk about natural capital investments in relation to environmental and social commitments, such as the Aichi targets, the Paris Agreement on climate change, and the Sustainable Development Goals (SDG).

I joined a selected panel with Eike Meyer (GIZ), Katia Karousakis (OECD) and Robert Repetto (International Institute for Sustainable Development (IISD), as well as policymakers from Uganda, South Africa and Nepal to discuss how fiscal reform can help governments step up to the challenge. 

Rethinking biodiversity finance strategies

The good news is that much can already be achieved by mainstreaming biodiversity into existing expenditures for development, environmental protection and natural resource management. The Biodiversity Finance Strategy (BIOFIN), for example, encourages a strategic approach to biodiversity finance to look at how well governments spend our money.

This means understanding linkages, prioritising needs, and realigning existing expenditures to meet financing gaps. The focus, it says, is not only about new and more resources but on changing the narrative and the dialogue around nature.    
  
The urgency for the change in narrative and action is critical. A new study from the OECD shows the imbalance of investments in nature: for every positive investment action (e.g. payments for ecosystem services) there are 10 negative ones (e.g. fuel subsidies that contribute to overfishing and over-extraction of water). 

Cheap but not cheerful…

Governments constantly use subsidies to make things cheap: to buy or to produce. While they distort market prices, subsidies are powerful levers to influence groups.

Agriculture is a haven for subsidies. The UK spends £3 billion per year on subsidies, many for wealthy landowners in rather inefficient ways. In February this year, the government of Nepal announced a 50 per cent subsidy to farmers using modern farming technologies. Bhutan gives free, or very low cost, electricity to rural households to reduce the use of firewood. Subsidies to improve fleet capacity, or reduce the cost of fuel, are commonly used in fisheries in the European Union, China and the United States.

But all this giving away has a cost, and someone is paying the bill. Fossil fuel subsidies in Nepal discourage investments in renewable electricity, and reduce the cost of water extractions for irrigation, leading to waste, reduced water tables and increased water salinity.

India's generous subsidies (e.g. to rice, railways, kerosene, electricity and fertilisers) cost the nation about 4.24 per cent of its 2015 GDP. Subsidies to the fishing industry amount to $35 billion annually worldwide, and are causing such havoc in fish stocks that the 2017 Ocean Conference has urgently called for an end to perverse subsidies.

Fertiliser subsidies (PDF) for food production, such as cereal crops, has been linked to soil degradation and water pollution in China, with direct impacts on people's health. The overall scale of water subsidies through public utilities is very high ($456 billion per year), limiting cost-recovery options and disproportionally benefiting upper-income groups. 

Changing narratives through pricing and subsidy reform 

Relinquishing or reducing such subsidies, introducing water pricing or taxing waste are often rejected on the grounds of their impacts on the poor. Yet, in reality, the opposite is often true: subsidies benefit the rich more than the poor and reforming subsidies actually mobilises financial resources that can be used for more targeted support to low-income households.

Eike illustrated experiences from Indonesia and Vietnam, where sound ex-ante impact assessment of energy pricing reforms helped carefully identify the affected business sectors and income groups, and formed the basis for the design of targeted exemptions and compensation measures.  

Better pricing of natural capital can help send signals to encourage a more sustainable use of resources, reduce waste, mobilise revenues and balance out budgets to enable actions towards the Aichi targets and the SDGs.

At PEP22, participants agreed that for such pricing and subsidy reform to gain traction three actions are needed:

  1. A combined effort to gather evidence and identify winners and losers ahead of reform
  2. A more explicit approach to understand the linkages between environment and people and to disentangle real from perceived impacts, and 
  3. A serious effort to improve communication, to declutter economic jargon and to make the case for reform an intuitively viable option. 

This is not an easy task. The risk to revert policies may be too high for governments. But the risks of inaction are piling up and can no longer be ignored. 

Ina Porras (Ina.Porras@iied.org) is a senior researcher (environmental economics), in IIED's Shaping Sustainable Markets research group. This blog was first published on the Green Fiscal Policy Network website

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