SECTION III

Encourage a SustainableRelationship between the Economy and the Environment

"...what we need is an understandingthat we can grow the economy and still preserve the environment."

William J. Clinton,8 January 1998

" ...the new economy is morelike an ecosystem, which depends for its health on diversity, nutrients,and its ability to change and evolve and learn and grow."

Albert Gore, Jr.,21 March 1994

Economic development mustoperate within the environment in a way that will allow us to live sustainablyand provide our children with both prosperity and the intact natural heritageon which prosperity is founded. Much of America's prosperity can be tracedto its abundant endowment of natural wealth, a form of capital that thecountry is now drawing upon without replenishment. This depletion of naturalcapital, if continued, will have serious repercussions in terms of economicand environmental security that could jeopardize the well-being of currentand future generations. As explained in the Introduction to this Report,natural capital in the form of ecosystems that provide services must besafeguarded. To achieve this, economic development and environmental conservationmust be reconciled so that the people living within an ecosystem recognizethe economic benefits it provides and take an active role in guarding it.

To gain the needed insights,research must be conducted at the intersection of sociology, economics,and ecology. We gave examples of some mechanisms by which a better relationshipbetween the economy and the environment might be forged in the Introductionto this Report. Yet, there is still a great deal to learn about the mannerin which sociological, economic and political behaviors can be redirectedtoward protecting natural capital without requiring a major shift in Americanlifestyle or philosophy. The research we recommend will enhance the Nation'sability to manage the ecosystems that provide critical services, and thushelp to alleviate economic losses currently resulting from mismanagementbased on inadequate knowledge.

The economic losses causedby the degradation of ecosystem services already amount to billions ofdollars per year, and are likely to grow exponentially in the absence ofgreatly improved tools for managing these systems. The research programrecommended here will provide the understanding needed to stem these losses,and to improve our ability to sustainably manage America's living capital.Failure to do the research needed to develop new economic and social mechanismsto promote stewardship will allow continuation of past practices that haveled to loss of agricultural soils, public health problems of increasingseverity, decline in the recreational value of the environment, and soon.

The research that we recommendhere is novel and fundamental. It focuses on resources and services thatare of immense social and economic value yet are hard to commercialize.This is also an area in which it is difficult to readily establish intellectualproperty rights, yet it is of great significance to all sectors of society.Therefore, the Federal government should provide the impetus and fundingfor such research, while forming public-private partnerships at every opportunity.

This topic is so fundamentalto our society that almost every department of the Federal government andeach of their agencies should be involved in conducting and contributingto the funding of this research. Many of these departments might not ordinarilybe involved in "environmental" research, but in this case they are directlysocially relevant. For example, the Departments of Housing and Urban Development,Education, Health and Human Services, Labor, Commerce, and State shouldall be included because of the social, economic, national security, andinternational implications of the realignment of economics and environment.These players in the social and economic arena should work together withthose departments and agencies that have long cooperated in interagencyactivities concerning the environment (Agriculture, Interior, the EnvironmentalProtection Agency, the National Aeronautics and Space Administration, andothers) within the National Science and Technology Council framework. Thematter of ecosystem services is so encompassing as to rightfully be ofconcern to the entire Administration.

The National Science andTechnology Council should immediately focus on research to discover economicincentives for conservation, and remain committed to overseeing

The total amount of fundingneeded for the research recommended here is $24 million per year over aminimum of five years. This is a vanishingly small percentage of the GrossDomestic Product ($6.9 trillion in 1996), almost all of which has its originsin one way or another in our country's natural wealth. The amount is likewiseminuscule in comparison to the $112 billion of GDP generated by agriculturealone; it is tiny relative to the total science and technology R&Dexpenditures of the Federal government (currently approximately $76 billion).And yet, this modest investment will generate understanding of means bywhich we can sustain America's productivity, while safeguarding the storeof natural capital that makes this productivity possible.

Improve characterizationand economic assessment of biodiversity and ecosystem services.

Research that will enableus to mobilize the full potential of market forces to conserve naturalcapital must include efforts to discover the best ways to estimate thesocial value of ecosystem services. The next step must be to devise meansto convert that social value into economic (cash) value. To do that, wewill have to understand more fully the processes through which ecosystemgoods and services are produced, and how human activity impinges on theseproduction processes. Key research issues are:

Discover workable economic incentivesfor conservation of natural capital.

There are currently someoffices within Federal agencies that deal to a certain extent with economicassessment and incentives for conservation, but only in a tangential way.For instance, the EPA Office of Policy Planning and Evaluation is collaboratingwith the World Resources Institute to work on natural resource accounting,and with The Nature Conservancy to develop Compatible Economic DevelopmentCenters through the Community-Based Environmental Protection program. TheInternational Cooperative Biodiversity Groups program of the National Institutesof Health and the NSF is involved in the creation of mechanisms for puttinga monetary value on natural resources for purposes of reimbursing peoplein areas from which those resources were derived. The NSF and EPA togetherhave a grants program in Decision-Making and Valuation for EnvironmentalResearch, the Water and Watersheds program, which requires investigatorsto include sociological components within their ecological research, andthe two new Urban Long-Term Ecological Research sites that will incorporatestudies of demographic shifts and the effects of urban centers on ecosystems.None of these efforts is specifically geared toward the discovery of realisticmethods of economic assessment of the value of ecosystem goods and servicesand the development of new economic incentives for conservation, whichis why the program we recommend here is sorely needed.

We need to understand thekinds of investments that will be required to preserve or restore the functioningof ecosystems. We then need to discover mechanisms to make these investmentsattractive financially. This will involve realizing as a cash flow to theinvestors a part of the economic and societal value of the services ofthe ecosystems conserved. If the social value of the ecosystem servicescan be transformed into cash, part of which can be paid to those who conserve,then market forces can be harnessed to the goal of conserving our naturalcapital. The extent to which this is possible depends on the particularecosystems involved and the characteristics of the goods and services supplied,in particular whether these are public or private goods—i.e., whether theyare goods or services for which markets can readily yield to the sellera significant fraction of the social value of their product.

Many ecosystems provide severaldifferent goods and services to society. For example, a growing forestmay purify water as a watershed, control floods, sustain biodiversity,sequester carbon, provide timber, or afford recreational opportunities.Its overall economic value is the sum of the values of all of these services,each of which could be rewarded through a separate market. As an illustrationof this approach, the government of Costa Rica has recently initiated asystem under which the agencies managing certain forests are compensatedfor the watershed and carbon sequestration roles of the forests on a perhectare basis, and the government plans to extend the compensation to coverother functions.

Where markets can be usedto manage the provision of ecosystem goods and services, they will automaticallyindicate a value for these via market prices. These prices may not fullyreflect the social values of the services, but will usually provide a goodstarting point in calculating social values. There will always remain somesituations in which markets cannot be used and market prices for ecosystemservices are not available. For such cases, we need ways of appraisingthe value of the services that are not based on market prices. Some suchmethods were mentioned in the Introduction, and need to be developed further.

As noted above, the NationalScience and Technology Council should stimulate intramural and extramuralresearch in these two areas immediately. The first competition for extramuralresearch should occur as soon as the guidelines can be formalized, andthe program should be continued for at least five years but preferablyindefinitely.

Successes of the researchprogram can be measured by

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