The notion that we should value nature seems obvious. That nature should be part of our economy, not so much. Then getting into the specifics of exactly how that could happen well that can hurt your brain and you’re a busy person… Here is one example of how IVE can work:
Let’s Take Lake Tahoe:
I don’t think anyone who has seen Lake Tahoe in person or in pictures doubts it is an amazing natural asset. But looking at Lake Tahoe through the eyes of our economy, the primary way today to participate in the value of the lake is to develop real estate, encourage tourism, build casino’s, hotels, resorts, ski runs, marinas, etc. All of which have negative impacts on the very thing that makes the Tahoe Basin amazing. To protect Lake Tahoe and the quality of life for all residents and visitors, we create regulations or tax policy to reduce/control the activities that have negative repercussions. Simplistically, this pits environmentalists against economic development. What those regulations and taxes are actually trying to do is to value in financial terms (price) Lake Tahoe but in an inefficient and potentially divisive way by forcing a valuation into the market.
So how could things be different?
What if you could invest in Lake Tahoe and its assets as a way to protect them and as an alternative to the traditional ways of creating wealth and jobs in the Tahoe Basin?
But no one owns Lake Tahoe, how can you invest in it?
No one owns Lake Tahoe, we all do and that is a major stumbling block to our traditional view of ownership and wealth creation. We can’t own Lake Tahoe so Lake Tahoe can’t charge for fishing its waters, boating and attracting people to the Basin. If it could, then Lake Tahoe would protect itself, it would hire people to keep boats from carrying in invasive species and keep runoff from reducing water clarity. Since it can’t, it’s left to regulators, advocates, and taxes, which some argue hurts the economy. The debate is understandable, because we designed an economy, way back when, to view Lake Tahoe and its services as “free” and the way to make a living in Tahoe was to harvest, hunt or mine — cutting down all the trees in the basin to make lumber for the mines in Nevada for example. Fortunately, we have come a long way since clear-cutting the basin was considered a good idea. And we realized the value of the lake was far greater than the resources we could extract.
We’ve also come a long way with finance: it used to be that there were no corporations, no futures contracts, derivatives or debt. Today we have these tools and an understanding that many values (environmental and social) that we depend on, like clean water, have been left out of the economic equation. IVE is a way to employ the tools of modern finance in valuing natural assets; to create jobs and wealth without having to pit those that want a healthy economy against those that want a healthy environment.
But how exactly?
There are multiple ways to include Lake Tahoe in our economy:
The first step is the most straightforward. We take a measure, let’s say the clarity of Lake Tahoe’s water and we make that a futures contract. The question we ask is if the clarity of Lake Tahoe’s water (in feet) will be more or less in 2016 than it is today. We have a trading platform (IVE) where people can make bets (by investing) in whether the clarity will be more or less in 2016 than the current measure of 75ft. When people make their bets, we take in a lot of information and distill it into a single data point — price. If that price goes up, we think things we are doing in The Basin are going to improve water quality, if it goes down, then our actions are likely to cause a decrease in clarity.
This information is important and valuable. It predicts, but it also signals to stakeholders that proposed actions are good for or bad for the lake — one step in bringing Lake Tahoe into our economy.
Another step is a way to answer the question, what is Lake Tahoe worth? No one can tell you that let alone if that price is going up or down or why? They can tell you the price of gold exactly but not Lake Tahoe. So the next thing we would want is a financial instrument that allows you to “vote” on the value of Lake Tahoe to get to that price. We can’t sell you a piece of Lake Tahoe, but we can sell you a piece of its value. Derivatives do just that and we are applying that concept to a natural asset. If you buy a corn future or oil future, you buy a piece of that bushel or barrel’s value and how it may change while you hold that contract. We no longer think of delivering that bushel or barrel to the option trader, the contract will be bought and sold many times before the actual physical good is ready for delivery. We buy its value and nothing more.
The very name derivative suggests the tools use; it derives its value from the thing you link it to. In our case we link the value to Lake Tahoe. So when Lake Tahoe shares go up for sale, the market will let us know what the consensus value of Lake Tahoe is. Is that $1.00, $10 Million, $10 Billion?
That valuation has two important effects. First, it translates intrinsic worth, we love Lake Tahoe, into financial worth, which creates wealth and financial value is the currency our economy understands. We have a financial asset now in Lake Tahoe and a store of value — just like gold.
In addition to a deeper understanding of the value of Lake Tahoe, we have the second effect; owners of Lake Tahoe now have a direct financial connection.
If you own $100.00 worth of Lake Tahoe and someone does or proposes something that negatively changes that value, you are not going to be too happy about that. The price went down and you lost money. The opposite is true if something causes the value of Lake Tahoe to go up, you will be very happy with that. When you and your fellow investors voice your opinion as owners with a financial stake, it has a lot more weight than your opinion at a city counsel meeting on in an Op Ed piece.
As your asset appreciates or declines, you are more or less wealthy, will spend more/less as a result and there will be ramifications. Lake Tahoe just got a new form of advocate and a new powerful way to Keep Tahoe Blue. All you have to do is look at the way we react to the ups and downs of the Dow or the Case-Shiller Housing Index to understand the power of this approach.
When we price many natural assets, we can see relative effects on each by actions in the rest of our economy. This view allows us to see a larger picture of where we have not been including the real costs of goods and services. If burning coal for instance, damages water resources, contaminates fish stocks with mercury, and causes air pollution, the affected assets value will reflect a fact — burning coal is a lot more expensive than the cost of mining and delivery. We will have real economic data to prove the flaw in the way we price coal.
If we accomplished these first couple of steps that would be a huge step forward in integrating nature into our economy. We would have a way to value natural assets, create advocacy for them and provide accurate information to individuals, businesses and governments about the effects of policy, new products and the way we live our lives and do so efficiently via the marketplace we all participate in daily.
Going further, if we build in a mechanism to create Lake Tahoe Company (a derivative corporation) and it sells shares in the value of Lake Tahoe, the investors can buy them and a portion of the financial price of Lake Tahoe is reserved for doing things that protect and grow the value of Lake Tahoe, we have a stronger link to the economy we have today. Analogous to investing in gold (in this case the first time gold ever traded) Lake Tahoe would start at zero value as it has no financial value today and people would decide it is worth something more than zero. In the process of deciding on the financial value, capital is formed from converting intrinsic value into financial capital, capital that can be employed elsewhere.
Part of this value creation can be reserved or owned by the Lake Tahoe Company, managed by the lake’s advocates (think executives and board of directors) and it can invest in things that benefit Lake Tahoe. Lake Tahoe Company could invest in re-creating a rail link to Reno and The Bay Area so 300,000 cars don’t need to clog the roadways on busy weekends or solar ferries could move people around the basin or it could invest in improvements to roadways to reduce runoff that harms the lake — or any of a number of ventures could be formed in this new financial ecosystem that in turn creates wealth and jobs not dependent on destructive outdated ways of doing business.
But there is another value of Lake Tahoe that gold doesn’t possess. In addition to being an amazing asset, like gold or silver or a famous painting for that matter, Lake Tahoe provides goods and services, 24/7. It attracts tourists, residents, provides clean water, is a home for wildlife and other natural resources, to name just a few. Lake Tahoe has the intrinsic value of gold and the ongoing revenue stream value of providing services and goods making Lake Tahoe much more like a modern industrial corporation.
We can capture the dual values of Lake Tahoe with creative financial instruments designed for our needs today or we, as a society, may decide that the IVE platform is a great mechanism for Lake Tahoe being valued for its services directly and replace less efficient taxes and regulations and integrate nature into our economy in this way. Either way, the tools of modern finance can be adapted to serve our needs today.