The EU needs to move faster on valuing nature

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The writer is Europe’s Futures fellow of the Institute for Human Sciences-IWM and non-resident fellow at Bruegel

The European Commission last week launched an economic security strategy for the continent, responding to threats ranging from Russia’s war in Ukraine to competition for critical raw materials.

The EU’s 27 members still have different views on how to operationalise it, with debates raging over industrial policy and trade restrictions. But Europe’s recognition of the costs of non-diversification and the downsides of interdependence is a decisive turn away from 30 years of “Wandel durch Handel” (transformation through trade), and 70 years of pursuing economic integration as its central security strategy. 

Yet the biggest threats to economic security are not being addressed by political leaders. For many decades, as prosperity rose, we not only ignored the risks of our suppliers weaponising dependence, but also the costs of this economic model in destroying nature, both internally and in the countries where goods destined for European markets are produced.

The enormous cost of losing ecosystem services such as pollination, soil genesis and water and air detoxification was set out by Cambridge economist Partha Dasgupta in his landmark 2021 report on how to bring ecological externalities into economics. However, attempts to develop methods of valuing nature and quantifying climate risk have moved very slowly since.

The EU has developed a carbon market through its emissions trading scheme, and the huge business opportunities in producing low-carbon energy are driving investment. But it is hard to turn a profit from improving biodiversity in a system that overvalues productive capital, undervalues human capital and fails to value natural capital at all.

There are still no market mechanisms to protect the oceans and forests, which are profitable to destroy but not to keep as carbon sinks and biodiversity reserves. The “tragedy of the commons” is that they are not accounted for in measures of economic performance.

Work on addressing these longer-term, systemic risks is slowly reaching the EU policy agenda. On June 28, the European External Action Service and the commission are due to produce their first joint paper on climate security, a holistic overview of all the new threats from environmental degradation and climate change to European security.

Meanwhile, the European Central Bank is studying how to account for nature-related risks building up in the financial system due to the impact of environmental degradation on production processes, and hence on the creditworthiness of 4.2mn European companies accounting for more than €4.2tn in corporate loans. In the euro area, nearly three-quarters of companies are highly dependent on at least one ecosystem service, leading the ECB to argue that nature loss needs to be built into financial risk models.

Some economists ask whether the ECB should be worrying about future risks when issues such as inflation need immediate attention. But the real problem is not that European institutions are extending their mandates to recognise environmental impacts, but that national governments’ mandates are too limited — both geographically and temporally. It is hard for governments to propose paying for climate issues. The immediate cost of the green transition falls on their electorate now, whereas the benefits of avoiding more expensive problems will be enjoyed by future citizens.

Climate degradation is exactly the kind of long-term, transnational problem that EU institutions were established to manage. It is a complex, long-term policy issue that affects the welfare of all Europeans — and no one government can address it on its own. That is why European-level institutions need to bring environmental risk fully into their mandates.

Currently, implementation of policies to mitigate climate risk comes down to the national level, causing a blame game. Political leaders express support for the European Green Deal and agree to EU-level common targets. But as soon as their farmers and coalminers complain, they blame Brussels.

In explaining why we have to address these huge security threats, it would help if political leaders spelt out the costs of inaction. Voters need to see why investments in natural security — such as decarbonisation, dematerialisation and nature preservation — are less costly than cleaning up after floods and wildfires, and trying to restore biodiversity after it collapses. That requires a timescale that extends beyond the next election, which is difficult in democracies. But every European institution has to take responsibility for environmental impacts, and the sooner the better.