Ideological Cynicism with Environmental Markets

“What is a cynic? A man who knows the price of everything and the value of nothing… ”.
Oscar Wilde, in Lady Windermere's Fan (1892)

Sometimes, an ideological conflict engulfs me. Being a strong believer of the market mechanism, I have always been attempting to propagate that the market is the most important institution that has ever existed, and has the capacity of being the panacea of various ills. However, a recent debate placed me in some kind of a doubt. The critical question is related to markets for environments, and my concern is: can markets really help in combating pollution and climate change?

It is a fact that there has been a worldwide call for the development of markets for environmental services. This call, at the initial face value, is based on the faith that markets will help solve the problems of environmental pollution at various forms. The recent expansions of markets for environmental services suggest that they may rapidly become a central point of sustainable development financing that could be tens of billions of dollars annually within the next 10 to 15 years. The enthusiasm has been picking up to the extent that even commodity exchange promoters have been thinking of trading natural capital on derivative exchange platforms.
All these moves toward markets have been triggered by two major drivers that include conscious national environmental policy movements toward market-based instruments, and rising demand for environmental goods and services from public authorities, private entities, and consumers. On the one hand, there are new public regulations along with the establishment of market-based instruments, and on the other, it has become quite lucrative and fashionable for private players to show initiatives toward efforts of biodiversity protection. Consumer demand for derivatives of healthy ecosystems, such as organic foods, fair trade products, and eco-tourism, has also increased over time. Interestingly, most of these changes have primarily been noted in the developed nations. Developing nations have also been gearing up to institutionalise some of the changes, as they find that there exists a demand for certain environment-related products and services in the developed world. One such example is eco-tourism initiatives in Africa and Asia, where a large number of tourists visit the tourism spot from EU and USA.
There are several proposals that have been put forward in favour of environmental markets, entailing the overarching objective of controlling pollution. First, it has been stated that markets will help in raising funds for sustainable development financing. As a result, CDM markets have emerged through “cap and trade” mechanisms, where carbon credits are transacted. Payments for Ecosystem Services (PES) mechanisms have emerged to look after local level sustainable development issues, where beneficiaries from ecosystem services are made to pay to the local communities for the service rendered. Second, market institutions are supposed to make the common man understand the value of the services that the ecosystem provides to the economy as a whole, the incidence of economic activity on the ecosystem, and finally, its possible repercussions on the quality of life. This dictates the supply-side phenomenon of an economy, including human health, welfare, and eventually, labour markets. Third, it is felt that the price realised in the market mechanism will result in efficient allocation of resources, as market equilibrium leads to efficiency.
My concern, however, has arisen primarily from the third point. Ideally, the price of a commodity in the market should have reflected the scarcity value of the commodity. This logic emerges from the marginal utility theory and its corollary, the demand theory. It is known that marginal utility (which is the “utility” or satisfaction derived from consuming the last unit of a “good”—a “good” being anything that offers positive “utility” through consumption) is a diminishing function of availability of a commodity: more the availability, less the marginal utility, though the total utility might increase. Any consumer will consume a commodity till the point where the price of the commodity is equivalent to the marginal utility of the commodity – this is the result that emerges from the utility maximisation exercise subject to the budget constraint of the consumer. As a result, effectively, it is the one-to-one correspondence of the marginal utility “tuple” with the price “tuple” for each level of quantity, which gives rise to the demand function. On the other hand, there is a well-specified supply function, which is the marginal cost function for the firm. Finally, the market interaction between the demand and the supply forces leads to the equilibrium prices.
There is an important assumption that is taken into consideration here. This is related to the fact that the consumer is aware of the “utility” of the commodity. When I go and buy a watch from a retail store, I might pay few “extras” from my pocket if there is an underlying “big brand” producing it. This “big brand” phenomenon enhances my marginal utility by leaps and bounds. By all means, I am aware of almost every type of service that the watch will render me with. I pay extra amount as the “scarcity value” of the brand, which yields me the utility. This is true for all the commodities covered in the market framework.
The situation is, however, a bit difficult for environment as a commodity. As stated earlier, the efficient market price should ideally reflect the scarcity value of the resource. However, while value of the resource precisely emanates from its use value, scarcity value emanates from the value loss due to the existing scarcity. Under perfect market conditions, prices become equal to the scarcity value. Incidentally, the assumption out here is that the consumer is aware of what he is losing out by not consuming the resource. In the context of the environmental market, the information or knowledge is the missing element. So far, even ecological scientists have failed to decipher the range of the ecosystem services provided by nature. There is clear lack of knowledge among the general public about what will be the entire range of impacts from transboundary air or water pollution. Under these circumstances, it is difficult for the market prices to reflect the true scarcity value.
It has been argued in some quarters that during the recent financial meltdown, the CER prices came down, and that is precisely because the demand for CER, as a commodity in the consumer’s utility bundle, diminished. My concern is: does that mean that the value of environmental damage has diminished? Of course not! Pollution keeps on doing the same damage during recession, as it does during the times of prosperity. This means that there is a clear divorce between prices and value when it comes to environment. This is because buyers of environmental services are only aware of a minuscule portion of the entire range of services that the ecosystem can offer. It is only this minuscule portion that enters their utility bundle, and gets realised in the market prices.
Let us now look at the supply side of the environmental market. Ecosystem services of nature, more often than not, are independent of the environmental market phenomenon. Their supply is not contingent upon rising market prices. Nature will continue with its provision of ecosystem goods and services of gas regulation, waste treatment, climate regulation, biological control, water control and regulation, pollination, food production, soil formation, nutrient cycling, and other functions, unless disturbed by extreme anthropogenic forces or other external stimuli. Hence, supply might seem perfectly inelastic under such circumstances.
Hence, the prices are demand-determined. Unfortunately, due to arguments stated above, the entire problem is with the demand function of the environmental services. This demand schedule is formed with minuscule information. Here, I differentiate between the economic services and the ecosystem services of nature. I define the economic services as those goods and services that are directly realised by the economy, and hence finds a price in the market framework. Ecosystem services of nature also affect our economy as realised by critical ecosystem-livelihoods linkages (e.g. mangrove forests help in fishery production, storm controls, etc.), but, often these services are not taken into the fold of the market framework. The criticism against existing market frameworks also arises from the perspective that by putting a monetary value to the ecosystem we are not only putting a use-value to it, but by putting an exchange-value we are also ignoring the irreversibility of ecosystem losses. This element emerges from sheer ignorance about ecosystem, and nothing else! As a result, the entire element of scarcity value gets lost from the price realized in the market.

Concluding Remarks
Readers should not get me wrong! I am a proponent and a strong believer of the market forces. I still believe that markets can solve several problems. It is amazingly recalcitrant yet buoyant, unbridled yet resilient, ruthless yet rewarding! This essay of mine is solely based on my concerns about the present day working of the environmental markets. Markets are meant to solve problems, and therefore, there is a need to identify where its problem lies. In this case, the problem lies with information and knowledge. Market participants participate in environmental markets not merely for the sake of saving the environment. Neither is it expected that only environmentalists should participate in such markets! Without adequate speculators and investors in such markets, the market mechanism will stop functioning. The problem is that there has not been adequate information placed in public place by governments and market makers.
Let me urge yet again… there is nothing wrong with the institution of market. The wrongness lies in what we make markets to be.

A Tale of Love and Survival

The summer of 2005 witnessed the end of the fairy tale of my life that I started writing in the summer of 2000. Well, that’s how it ends! My doctoral dissertation at IIM-C was submitted, and I took up a moderate-paying yet “prestigious” (according to many) job as an economist at The Energy and Resources Institute (TERI)(1), New Delhi. The hangover of the doctoral days at IIM-C with its liberal research ambience, generous research grants, ample time in the world to waste, think and do research, was still not gone. And what happened to me was what was destined to happen—the research culture in TERI was no less than a “shocker”—it was more oriented towards funding than publications. This was clearly in conflict with what I perceived research was! Yet, I survived in that system, and that too with quite a bit of success. TERI opened my eyes to a different form of research, which the corporate world often calls “consultancy projects”. Importantly, it opened a new world for me for international donor organizations for funded research and multilaterals, which were always ready with their money to fund research projects for TERI. Of course, the biggest factor in this entire “karmayogya” was a phenomenon known as Dr. R.K. Pachauri, who, by himself, stood as an institution and the biggest motivating factor in TERI’s big strides.

Pachauri was instrumental in the formation of the erstwhile TERI School of Advanced Studies (a deemed university), which later came to be known as TERI University (TU). At that point in time, I always felt that I was better suited to a more academic set up than TERI. Only after joining TERI, the erstwhile School approached me to teach a course in applied econometrics. At IIM-C, some students or doctoral candidates of my time or prior to that might remember the lucidity with which Prof. Negi Reddy taught econometrics, and how application oriented he used to make it. Of course, Prof. Reddy’s course was not my first course in econometrics, as my specialization in my Masters’ level was with econometrics only. Yet, at the School, I followed the pedagogical style of Prof. Reddy while teaching econometrics to the students of Masters’ and PhD programmes. I started enjoying teaching, though ideally my prime activity was research. Eventually, in the summer of 2006, I shifted my base to erstwhile TERI School as a faculty, becoming a member of its Academic Council, and chairperson of its M.A. (Public Policy and Sustainable Development) programme (2). It was in 2006 that the name of TERI School of Advanced Studies was changed to TERI University.

We were a small group of faculty members at TU, enjoying unparalleled camaraderie with each other and unprecedented restrictions from the senior management, who were also on the learning curve on how to run an academic set up. This was because the University was new and emerging with few programmes. It was a marked contrast from what I had witnessed at IIM-C, where the system was highly evolved, and the faculty members and research scholars enjoyed a whole lot of academic freedom and time to think, waste, teach, and publish (of course, for the highly motivated ones).
Eventually, after two years at the TERI set-ups, in May 2007, I made a move to Multi Commodity Exchange (MCX) of India Limited, Mumbai, as Senior Vice President, to look after their academic research initiatives created through Takshashila Academia of Economic Research (TAER) Limited, under the stewardship of Dr Madhoo Pavaskar, an eminent economist who is considered as the “father of commodity research” in India. TAER, though promoted by Financial Technologies (I) Limited (the promoter of MCX), is mandated to conduct objective, independent research, without being swayed by any partisan views. This is where I am now.

Interestingly, the corporate sector did not place any restriction on me to publish independently in scientific journals, and offered me more time to experiment with newer ideas of the market phenomenon. Prof. Arkadev Chatterjea (3) (whom I fondly call Arka-da), now with Kenan-Flagler Business School, The University of North Carolina at Chapel Hill, once said, “Research is a love and survival story.” In a decade of research career, which started in 1999 with my first job as a Research Associate at the erstwhile Bengal Engineering College, I have also perceived the same. Of course, both of us might vary in the way the phrase will be construed. At certain points in time, it appeared to me that many of us have entered the world of academic research and related consultancy, not merely by choice but by compulsion. Probably, there would not have been anything better that we could have done for ourselves. We all start doing research for the inherent glamour it entails, fall in love with it, and then it can become our bread-earner, only if we survive for long in this world. This survival is not an easy story. It requires independent thinking, tenacity, institutional support, funding, resulting finally in publications in peer-reviewed cherished journals. In a majority of organisations in India, the argument that think-tanks should be supported primarily to perform this function requires regular reiteration. Almost the same goes with universities and management institutes that are bogged into teaching several programs, providing faculty minimum time to concentrate on research.

Be that as it may, the very seed of doing research was planted in me while I was at IIM-C. The association still continues. This has particularly lasted long due to my extensive research collaboration with Prof. Jayanta Bandyopadhyay. This association was initiated almost a decade back, when Prof. Ram Prasad Sengupta asked me to meet Jayanta-babu, when I was taking Prof. Sengupta’s course on “Economics of Environment and Natural Resources” during the winter of 2000. I cherish every bit of my association with IIM-C, whether with my teacher Prof. Annapurna Shaw, or with my friends and colleagues Prof. Biswatosh Saha, Prof. Bhaskar Chakrabarty, Prof. Partha Pratim Pal, and many others. Along with this association continues my saga of love and survival.
______________________________________________________________
Notes

1. Previously, Tata Energy Research Institute.
2. Programme for training mid-career civil servants.
3. Prof. Chatterjea was the Chair of Fellow Programmes and Research during 2001–03, and I was the representative of FP and R, along with Rajanish Dass, now faculty at IIM Ahmedabad, during his tenure.

Mosaics of the Wonderland

He was merely twenty-three – hardly qualified to be called a “man”. But, they felt that he was the one! He was vibrantly frivolous in his intellectual proclivities till his late teens and flirted between Sanskrit, Mathematics and Physics, before settling for the eccentric charms of Economics. Yet, they felt that even at twenty-three, he can adorn the chair of the Economics department of the newly formed Jadavpur University (JU). Storm of protest, naturally, followed. Yet, he survived and flourished. For a span of two years, his footsteps vibrated on the floors of the Department of Economics, with a peer group consisting of Mrinal Datta Chaudhuri, Paramesh Roy, Anita Banerji, and Ajit Dasgupta providing him the intellectual stimulation. He was intrigued by the immensely talented Ranajit Guha, who later initiated the "subaltern studies" – a highly influential school of colonial and post-colonial history. Well, this was the beginning of a story of a legend called Sen, who once thought “otherwise”; and his “otherwise” thinking brought around a change in the way in which we perceive economics today in the era of Elinor Ostrom. This is also the story of a new University and one of its emerging Departments, – a story which probably is written in the pages of history beginning from the 1950s.

Almost four decades after Sen romped on the floors of the Department, 30-odd starry eyed freshmen(1) joined the Department, — with aspirations of becoming economists. There was nothing exceptional in it (as freshmen joined every year since the inception of the Department) excepting the fact that I was one of those starry eyed freshmen. Freshmen and sophomores mixed well with each other. Sophomores used to ask freshmen to indulge in silly antics which were popularly coined in a collective noun – “ragging” (2)! And, that was the time, when I was a freshman, and then graduated to be a sophomore at the Economics Department at JU – yet, wanted to classify myself as an “egghead” of the era, with a lot of cerebral affectation that dominated the mindset of the students’ community of the 90s in JU. “I belong to the Austrian School”, - used to be a form of scholarly cataloguing. Yet, there was fun! Considering the fact that English, Bengali and Comparative Literature departments (infested with human species of fairer sex) were in the same building as that of Economics, the Econ guys had the immense opportunity to experiment their destinies with the felinity of the feminine charm.

It was difficult to resist the irresistible temptation of the lobby(3) of the Arts Faculty building just as one entered through the Bengal Lamp gate. The source of sheer irresistibility of lobby lay not only in its emergence as rendezvous of “addabaaj bangali” of JU, but also in its surfacing as the hub of all those smitten with the cupid’s arrow. Hence, what prevailed in the lobby was “intellectualism” starting from Sartre to Jibonananda, music ranging from Nikhil Banerji to Pink Floyd, “adda” consisting of “dogging”(4) and “bitching”, leg-pulling, smoking, “lebu-chaa with hajmi guli”, and a host of hugs, kisses and smooches (and even beyond) at one remote corner that the cupid’s followers apparently misconstrued as being out of public eye. This made the lobby a colourful place and many a guy and many a girl revealed their preference to spend their days, months, years and probably even life there. The lobby evoked a “religious” faith, and just as devout Hindus visit temple once or twice a day, devout Arts Faculty JU-ites visited lobby, as and when they get a chance. Lately, I came to know that Mahmud of Ghazni has taken a rebirth, with a vengeance to destroy all religious places, and in the process, this place of worship known as the lobby has been destroyed with minimum traces of its relics.

There were three faculty members in JU who attracted my rapt attention. They were Sourin Bhattacharya, Ajitava Raychaudhuri and Bhaswar Moitra. Of them, Sourin-babu somehow emitted a charismatic intellect with his “Bangali Bhadrolok” appearance, lectures in the finest of “Benglish”(5) consisting of immaculate English and flowing Bengali, and deep insights on construing the riddles of the Marxian framework that otherwise seemed insurmountable to be traversed in the simple linear configuration of human thought process. The critical element about Sourin babu’s lectures was simplicity. With that arcane simplicity, he easily transcended disciplines in his lectures. Even at an undergraduate level, he could make students understand the trans-disciplinary scaffold of political economy by combining knowledge from philosophy and political science. Sourin-babu was a first-generation student of Sen. Sourin-babu’s research, reflected in many books and papers that he wrote, revealed the influence that Sen’s thoughts had on him. I was enamoured by his Unnayan: Onyo Bichaar (Development: another Perspective). Contrary to the dominant neoclassicism ruling the economists’ thought processes, Sourin-babu’s approach was mega-qualitative. In certain senses, I get the same feeling on reading Elinor Ostrom’s Understanding Institutional Diversity at times – though Ostrom was much more empirical and the two domains are completely different.

On the other hand, Ajitava-babu and Bhaswar-babu were highly “neoclassical” and were highly “popular” among the “good” ones and “unpopular” among those who did not attend their lectures, and could rarely make out much by attending them once in a while. Both of them were trained in US Universities, and had quite a solid foundation of quantitative methods. They had their own styles of lecturing, which used to have a long-lasting impact on the young minds. Later on, as I entered the academic profession during the first few years after my doctorate, I often attempted to emulate their teaching style, along with the styles of many others whom I met in course of my doctoral studies, as also in course of visiting foreign universities as visiting faculty.
I presume that for years, in all the descriptions of JU, a few issues have featured time and again – Amenity Centre Canteen, Milan-da’s dhop, “jheel” and Ashirbaad’s G4. In any case, they did entail something special for all of us in those days. As I visited JU Eco department after almost a decade in 2007, I found that a few faculty faces have changed. My batch-mate, Rajen Kundu, had become a faculty in the Eco department by then, just like a few other faces whom I used to regularly find in various seminars and conferences in Delhi, like Saikat Sinha Roy (previously with RIS, Delhi, and then ADB). I presume that Rajen has already exited from JU system, and is now donning a position at JNU.

What has changed in JU over time? I failed to make out. The lobby was gone, but that has not deterred the cupid to smite the young vulnerable heart; neither has the spirit of adda gone, nor has the “lebu-chaa with hajmi-guli”! Milan-da’s dhop and Ashirbaad’s G4 have still remained sources of “gastronomic” delight. It appeared that JU has not yet called off its tradition of thinking, debating, and wasting a lot of time. My research collaborator, Political Scientist Emil Uddhammar once stated over a pitcher of beer in a pub in Vaxjo, Sweden, “... In India, you rarely have time to relax. We work hard during the day, so that we can relax after 4 pm”. During that discussion, we reached the conclusion that one must know how to “waste” time, and I agree that it is the “wastage” of time (often classified as “leisure” by economists) that enhances “well-being”. That is why, Scandinavian nations feature at the top of “Human Happiness Index” (HHI) listing. My contention is: so are the JU-ites (faculty as well as students)! Historically, they have wasted time and enjoyed leisure, and the tradition continues.

Memories become obscure over time. This story has to end here with all those vague memories of the Wonderland (called JU) where luminaries like Sen once romped through. Despite his brilliance in academics and the immense responsibility of setting up a new department, he could not evade falling for a girl in her pristine 20, a first-year student of Comparative Literature in the university in 1956. Such is the magic of the Wonderland! The arcane mosaic of the Wonderland continues to prevail unfazed!
__________________________________________________
Notes:
(1) Feminists, let us assume, for the time being, that this is a gender-neutral expression.

(2)Readers need not be horrified! Those who perceive this as similar to what Shyam faced in Chetan Bhagat’s Five Point Someone will be way away from the focal point. “Ragging”, in the Department of Economics, is defined as a harmless, clueless, focus-less, inordinate “time-pass” that has been driven across generations of sophomores and freshmen, with the sole motivation to find an alibi for “bunking” more lectures, which otherwise were somewhat “non-existent” particularly in months when examinations were far from being in the horizon. If the rare species called “lectures” made their presence felt at times, they were either “boring” or “tangential”, as per the popular proverb in the Department.

(3) A venerated pile of bricks, adorned with cement and stone-chips that were made to look like two steps of a staircase.

(4)Readers don’t take this literally! I could not find a better term of the phenomenon when males “bitch”!

(5)Benglish = Bengali + English