The Economic Costs of Environmental Degradation

Imagine being told that the global economy had lost between $2 trillion and $5 trillion in the last year. Presented with this information, you would probably think immediately of the seemingly ever-worsening economic crisis now sweeping the globe. In fact, that number refers to the annual economic losses attributable to global deforestation. For the record: Wall Street’s losses to date from the current financial crisis are somewhere between $1 trillion and $1.5 trillion.

The numbers on the costs of deforestation come from The Economics of Ecosystems and Biodiversity, a recent report commissioned by the European Union. It says that the economic costs of deforestation are equal to about seven percent of the global GDP, and that the world economy has been taking that hit for a number of years running.

So how does chopping down trees result in economic losses? Wouldn’t it free up land for economically beneficial agricultural? Doesn’t the harvested timber provide raw materials that can be converted into houses and paper and other products that generate economic gain?

It’s true that deforestation results in short-term economic gains. According to the EU report, however, those gains are far outweighed by the values that are foregone when trees are not permitted to remain firmly planted in the ground. As the report points out, the economic value of forests comes from the services they provide, such as filtering non-point source pollution, absorbing carbon dioxide, and preventing soil erosion by anchoring down valuable, nutrient rich soil. (Incidentally, the value of nature’s services is rarely, if ever, taken into account in the cost-benefit analyses performed by federal executive agencies when making regulatory decisions. For example, when approving projects to clear-cut forests, the United States Forest Service does not account for the fact that these forests serve as invaluable sinks for greenhouse gas emissions. This provides yet another example of the methodological shortcomings inherent in the use of cost-benefit analysis.)

The innovation of the recent EU report is to offer the first systematic attempt at estimating the foregone values—what economists would refer to as opportunity costs—that result from annual deforestation. According to the report’s estimates, the trees that are cut down each year would have provided services worth between $2 trillion and $5 trillion. In other words, because these trees have been cut down and are no longer able to provide these services for free, humanity would have to pay around $2 trillion to $5 trillion to replicate these services through such efforts as water filtration plants or underground carbon sequestration projects.

Even in times of crisis—like the current economic one—we must take a step back and appreciate the big picture. The EU report offers perspective on the magnitude of the environmental degradation at a time when it is perhaps needed most. Indeed, numerous reports in recent weeks, including this Associated Press story, have predicted that the pursuit of environmental goals will have to take a backseat (perhaps even more than usual!) to fixing the world’s economic problems. The EU report demonstrates that, at a minimum, the current economic crisis pales in comparison to the ecological crisis resulting from global deforestation. Unfortunately, environmental issues like deforestation will likely continue to receive less attention from policymakers and the media than they deserve.