Iceland review - 2016, Page 62

60 ICELAND REVIEW
OPINION
PRICING A RESOURCE
But why does it matter whether these
industries pay for the use of a resource?
Isn’t it enough that they provide jobs and
create taxes? Well, it matters for two rea-
sons. Firstly, the owners of a resource are
entitled to rent, which in economics is
defined as the surplus value after all costs
and normal returns have been accounted
for. If you, as a company or an industry,
are using a resource that is valuable and
not paying the owner for the privilege,
your profits are artificially high, and your
investment decisions will be based on the
wrong assumptions. So, this is both about
fairness and efficiency.
Secondly, and related, is the argu-
ment that companies should bear the
full cost of their operations, including
what is called negative externalities. The
license fee charged to salmon farming in
Norway, for example, reflects the even-
tual cost of cleaning up the environment.
When businesses have a negative impact
on the environment and are not forced
to pay for it, unfairness and inefficiency
ensue. A simple example is when land
is sold for an aluminum smelter. The
smelter reduces the value of the sur-
rounding land, but the cost of that is
not borne by the owner of the smelter
but by the owners of the surrounding
land. Another example is salmon farm-
ing, which not only leaves behind waste
that can be cleaned up, but also threatens
genetic pollution in the wild Atlantic
salmon stock in our rivers. This destroys
value for owners of salmon rivers, and
there is also a danger that Iceland’s image
as a clean country will suffer.
CAPTURING ECONOMIC VALUE
The principle can therefore reasonably
be established that resources should be
paid for, but the more difficult question
is how much to charge. In some indus-
tries, like fishing, economists can create
models which calculate what the normal
rates of return should be over a period of
time, and thereby how much the fishing
industry should pay. The same applies
in some cases where there are negative
externalities: it’s relatively simple to value
the reduction in the value of land next to
an aluminum smelter and compensate
the owners accordingly.
The question is more difficult when
it comes to valuing unspoiled nature,
for example when building hydroelectric
power plants in the highlands which cause
irrevocable damage. Kárahnjúkavirkjun,
Iceland’s largest hydro-electric power
plant in the eastern highlands, which was
built to power Fjarðaál, is a case in point.
How do you put a value on that?
Many conservationists oppose putting
a price on nature, arguing that some
things should not be priced. That is a
valid position to hold, but we live in a
democracy and democracy is about noth-
ing if not compromise. One must be will-
ing to engage with those of an opposing