Good morning from New Economy Brief.
Increasing concern about the economic impacts of climate change is well documented. But when we start to talk about nature, it feels as though we are moving further away from hard economics. It’s rare to hear ecosystems mentioned in the same sentence as GDP, for example. Chancellors don’t talk about biodiversity at the despatch box.
However, an extensive new report led by the Green Finance Institute argues that this needs to change. The paper, which was co-written by a number of leading academics and policy experts, finds that biodiversity loss and environmental degradation pose major risks to the UK economy and financial sector – maybe even as much as climate change. This week’s New Economy Brief explores how much damaging nature could ultimately cost us, and what, if anything, we can do about it.
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How big is the problem?
Nature degradation (in other words, harm to the natural environment) domestically and internationally could do more damage to the UK economy than either the global financial crisis or Covid-19, with losses of up to 12% of GDP. Human drivers like land-use change, pollution, extraction of minerals, abstraction of water and climate change have severely compromised nature across much of the globe. According to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), half of all natural ecosystems worldwide have declined relative to their earliest estimated states. While this global destruction will affect the UK economy severely, we have the problem in homegrown form, too. 75% of the United Kingdom is covered by at least one “hotspot of natural capital depletion”, and 25% by two or more.
The risks. Using a Nature-related Risk Inventory (NRRI) (which the authors argue could complement the government’s National Security Risk Assessment (NSRA) and the Climate Change Risk Assessment (CCRA)), the report ranks 29 risks by their likelihood and impact on the economy. Risks range from livestock disease to threats to tourism from nature damage. The four risks seen as both very damaging and as highly likely to happen are: soil health decline (both domestic and international), antimicrobial resistance (AMR), zoonotic disease and reductions in global food security.
Chronic vs. shock risks. The dangers identified encompass both chronic, long-term threats and acute event-driven risks or shocks. The report finds that gradual (chronic) year-to-year environmental degradation does as much harm as climate change – perhaps even more. The immediate effects of damaging the natural environment will cost around 3% of GDP in lost growth over the next decade. But degrading the ecosystems around us also makes us more vulnerable to acute climate or health shocks, which could do even more economic harm.
Part of the climate crisis. Though the paper aims to highlight the impact of biodiversity loss and nature degradation, it emphasises the inextricable links between these issues and climate change. It argues that the “strong feedback effects” between the two could lead to a 14% loss in GDP in “an extreme scenario of an ecologically-driven health crisis combined with climate change”.
Sectoral risks. The report finds that the agriculture, manufacturing and construction industries will be worst affected. The utilities sector is also at risk due to its dependency on surface water for cooling power stations, with any drop in water supplies potentially reducing production and raising energy prices. However, the report also claims that nature degradation will have a “material financial impact on banks and other financial institutions”. It estimates that some banks could see the value of their domestic portfolios fall by as much as 4–5%.
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What does this mean for policy makers?
The recommendations of the report are wide-ranging and include improving disclosure of nature-related risks to the UK, building capacity to assess risks in financial firms and incorporating nature within regulatory frameworks, such as new green taxonomies and transition plans. Naturally, there is also a call for government to do more to make sure its spending helps protect and restore nature rather than polluting and degrading it. On one hand, this feels optimistic at a time when politicians of most stripes bind themselves with ‘fiscal rules’ which do not take into account longer term risks such as nature degradation (a subject we have covered extensively in New Economy Brief). On the other, if the threats that our treatment of wild ecosystems poses to the country’s economic health are really so bleak, then we should reconsider what really counts as sustainable fiscal policy.
Austerity emboldens the far-right. Former UK Prime Minister Gordon Brown’s explains that a low-growth economy and restrictive fiscal rules create a ‘doom-loop’ that leads to increased support for far-right parties, centring Europe as an example: “The problem Europe now faces is that the very measures it must adopt to escape this doom loop…are being rendered impossible by its policy of fiscal retrenchment… Unless something gives, a low-growth Europe will remain stuck in its rut – and the populist xenophobes will triumph.” (Read this paper for empirical evidence on ‘The Political Costs of Austerity’).
“No decade of national renewal” without tax rises. Andrew O’Brien from Demos makes the case for an economic policy modelled on the 1945 Atlee Government: “one that focused on limiting household consumption to create the financial space to invest in public services, public infrastructure and the country’s productive capacity”. He emphasises the fiscal benefits of raising taxes now to boost growth over the long term by investing in infrastructure, improving the health and productivity of the workforce and supporting industries to exploit export potential.
International support for global wealth tax. The Finance Ministers of Germany, Brazil, South Africa and Spain have written a joint article in favour of a 2% global wealth tax on 3,000 of the world's billionaires to raise $250bn a year to fund solutions to reduce inequality and climate change.
‘New Deal for the North Sea’. Uplift has published a plan for securing a just transition for the oil and gas sector in the North Sea. They argue that the current North Sea Transition Deal is being led by the oil and gas industry, who have a “commercial disinterest” in driving the transition to clean energy and are failing to prioritise the needs of workers and communities.
Fiscal benefits of a Central Bank Digital Currency.Positive Money’s latest research has found that the government could gain an additional £30bn a year in ‘seigniorage benefits’ if the Bank of England issues a digital pound - “a digital equivalent of cash, to complement but not replace, the physical version”, returning money creation to a public body, rather than through private banks.
