- What is natural capital?
The term natural capital is attributed to economist E.F. Schumacher, who presented the concept in his 1973 book Small is Beautiful. There are many definitions of the term. A typical example is the one developed by the Natural Capital Coalition after a long consultative process:
“Natural capital is another term for the stock of renewable and non-renewable resources (e.g. plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people."
The concept of natural capital extends beyond nature as a source of raw materials for production (e.g. timber) to include the role of the environment and ecosystems in supporting human well-being through the supply of such important goods and services as clean water, fertile soils and valuable genetic resources.
Importantly, natural capital is often “invisible” in that it is not captured by markets. As a result, the actual contribution of natural capital to the economy is unclear, as well as the cost of its loss.
- Why does natural capital matter for economic growth?
Gross Domestic Product (GDP) measures the value of goods and services produced over one year. This is an incomplete assessment of a country’s economic wellbeing because GDP only looks at one part of economic performance—output— but tells us nothing about income in the long term. GDP does not take into account the wealth underpinning this output. For example, when a country exploits its minerals, it is actually using up its finite mineral wealth.
A full picture of a country’s wealth – obtained through a methodology called ‘wealth accounting’ – includes all assets that contribute to our economic wellbeing, from buildings and factory machines, to infrastructure, human and social capital, and natural capital.
Natural capital is especially important to many developing countries because it makes up a large share of their total wealth and the livelihoods of many subsistence communities depend directly on healthy ecosystems. But currently GDP ignores natural capital. In forestry, for example, timber resources are counted, but forest carbon sequestration is not. Other services, like water regulation that benefits crop irrigation, are hidden and the value is (wrongly) attributed to agriculture in a country’s GDP.
- What is natural capital accounting?
Natural capital accounting (NCA) is an umbrella term covering efforts to use an accounting framework to provide a systematic way to measure and report on stocks and flows of natural capital. Its underlying premise is that since the environment is important to society and the economy, it should be recognized as an asset that must be maintained and managed, and its contributions (services) be better integrated into commonly used frameworks like the System of National Accounts.
NCA covers accounting for individual environmental assets or resources, both biotic and abiotic (such as water, minerals, energy, timber, fish), as well as accounting for ecosystem assets (e.g. forests; wetlands), biodiversity and ecosystem services.
The System of Environmental Economic Accounting (SEEA) is the accepted international standard for environmental-economic accounting, providing a framework for organizing and presenting statistics on the environment and its relationship with the economy. It brings together economic and environmental information in an internationally agreed set of standard concepts, definitions, classifications, accounting rules and tables to produce internationally comparable statistics.
- What is ecosystem accounting?
Ecosystem accounting is a coherent framework for integrating measures of ecosystems and the flows of services from them with measures of economic and other human activity. Ecosystem accounting complements, and builds on, the accounting for environmental assets as described in the System of Environmental-Economic Accounting (SEEA) Central Framework (e.g. water resources, soil resources). In ecosystem accounting as described in the SEEA Experimental Ecosystem Accounting (SEEA EEA), the accounting approach recognizes that these individual resources function in combination within a broader system and within a given spatial area.
It is an approach that can help answer questions such as:
- What is the contribution of ecosystems and their services to the economy, social wellbeing, jobs and livelihoods?
- How is the condition, health and integrity of ecosystems and biodiversity changing over time and where are the main areas of degradation and enhancement?
- How can natural resources and ecosystems be best managed to ensure continued services and benefits such as energy, food supply, water supply, flood control, carbon storage and recreational opportunities?
- What are the trade-offs among different land uses (e.g. for agriculture, mining, housing development, habitat conservation, recreation) to achieve long-term sustainability and equity?”
Ecosystem accounting does this by integrating biophysical and economic data using standard accounting principles and accounts to produce detailed measurements of the linkages between ecosystems and economic and other human activity.
Because an ecosystem’s contribution to human well-being is dependent on its location (for example, its proximity to human settlements), ecosystem accounts are inherently spatial.
- What kind of information is contained in ecosystem accounts?
Ecosystem accounting can produce information on the extent of ecosystems, their condition based on selected indicators, and the flow of ecosystem services. Because of the spatial nature of ecosystem accounting, maps are a common method of presenting information. The links between an ecosystem and the economy can be presented in both physical and monetary terms, often via combined presentations that show both kinds of data together, noting that monetary valuation is not a necessary feature of all accounts.
SEEA Experimental Ecosystem Accounting (SEEA EEA) is an integrated statistical framework for organizing biophysical data, measuring ecosystem services, tracking changes in ecosystem assets and linking this information to economic and other human activity. It comprises a set of accounts that collectively present a coherent and comprehensive view of ecosystems:
- Ecosystem extent account: This account serves as a common starting point for ecosystem accounting. It organizes information on the extent of different ecosystem types (e.g. forests, wetlands, agricultural areas, marine areas) within a country in terms of area.
- Ecosystem condition account: This account measures the overall quality of an ecosystem asset and captures, in a set of key indicators, the state or functioning of the ecosystem in relation to both its naturalness and its potential to supply ecosystem services.
- Ecosystem services accounts: This set of ecosystem accounts measures the supply of ecosystem services as well as their corresponding users and beneficiaries, classified by broad national accounting categories or other groupings of economic units.
- Monetary asset account: This account records the monetary value of opening and closing stocks of all ecosystem assets within an ecosystem accounting area and additions and reduction to those stocks.
- Thematic accounts: This set of accounts, which cover accounts for land, water, carbon and biodiversity, are standalone accounts on topics of importance in their own right for policy and analysis but also of direct relevance in the compilation of ecosystem accounts.
More information on forest, land and water accounts can be found in a series of brief papers developed by the World Bank’s Wealth Accounting and the Valuation of Ecosystem Services (WAVES).
- What are ecosystem services?
In SEEA Experimental Ecosystem Accounting, ecosystem services are defined as “the contributions of ecosystems to benefits used in economic and other human activity.”
SEEA EEA uses the following three broadly agreed categories of ecosystem services:
- Provisioning services, which represent the material and energy contributions generated by or in an ecosystem, for example, fish or plants with pharmaceutical properties;
- Regulating services, which result from the capacity of ecosystems to regulate climate, hydrologic and biochemical cycles, Earth surface processes and a variety of biological processes. These services often have an important spatial aspect. For instance, the flood control service of an upper watershed forest is relevant only in the flood zone downstream of the forest;
- Cultural services, which are generated from the physical settings, locations or situations that give rise to intellectual and symbolic benefits obtained by people from ecosystems through recreation, knowledge development, relaxation and spiritual reflection.
- What are ecosystem assets?
Ecosystems are considered assets because they are the source of services that support well‐being, health and security. Examples of ecosystem assets include forests, wetlands, agricultural areas, rivers and coral reefs. Their measurement is taken from two perspectives: 1) ecosystem condition and ecosystem extent; and 2) the basket of ecosystem services flows that they generate.
- Are monetary values a necessary part of natural capital accounts?
Monetary valuation is possible but by no means required when doing natural capital accounting. There is a significant amount of information in physical terms that can be organized within an accounting framework to support analysis, monitoring and decision making. A key feature of natural capital accounting using the SEEA framework is the organization of information in physical terms to facilitate comparisons with economic data even without monetary valuation.
Information concerning indicators of ecosystem condition may be compiled to provide important information related to quantitative changes in ecosystem condition. The river accounts developed for South Africa that showed a 10% reduction in river health from 1999 to 2011 are an example of how natural capital accounting can generate important information to guide decision making without resorting to monetary valuation.
The issue of monetary valuation raises a range of important ethical and cultural considerations. Attempts to place values on ecosystems in monetary terms may be considered inappropriate and the valuation of ecosystems and the estimated valuations themselves commonly generate the most contention among all measurement issues. Some argue that environmental valuation when market data is limited requires a number of assumptions and hence might be considered outside the domain of official statistics.
Notwithstanding these concerns, there are applications where valuation is seen as supplying useful information for decisionmakers. These include the assessment of specific policies and projects using a benefit-cost framework, the development of environmentally adjusted economic aggregates and raising awareness around the economic contributions of ecosystems, particularly in settings where ecosystems have traditionally been assigned an implicit value of zero. Importantly, while a valuation may be appropriate for one specific decision context, it may be very misleading if applied to others. Therefore, care must be taken in interpreting and communicating valuation estimates to avoid overgeneralizing results.
- Does monetary valuation amount to putting a price on nature?
No. As noted above, monetary valuations are developed within specific decision contexts. For starters, almost no (if any) proponent of valuation believes economic considerations are the only reason to commit to preserving and protecting the natural world. There are ethical and other considerations concerning human beings’ relationship to nature that lie beyond the realm of economic analysis. Furthermore, even within the framework of economics, monetary valuations are generally limited in their scope. Rather than placing a price on nature, valuations are limited to providing an estimate of the economic value of a limited number of services at a time.
Despite its limitations, monetary valuation can in certain contexts help put the preservation of nature on an equal footing with its development, thereby helping decisionmakers more clearly understand attendant trade-offs.
- How does natural capital accounting relate to private sector efforts like the Natural Capital Protocol?
The Natural Capital Protocol (NCP) is a decision-making framework that enables organizations to identify, measure and value their direct and indirect impacts and dependencies on natural capital.
The NCP emerged in the private sector and was initially developed with an orientation toward users looking at the firm or project level. It consists of a series of questions or steps to be integrated into existing business operations. It is therefore best understood as a process for incorporating natural concerns into decision-making rather than as a set of accounting principles.
As the practice of natural capital accounting has grown in both the private and public sectors worldwide, there has been growing convergence and increasing opportunities for and interest in collaboration between the NCP and SEEA communities. For example, the SEEA offers a framework that can provide useful data for businesses and can serve as a model as the private sector seeks to move toward greater standardisation of methodology. Conversely, the NCP can be an effective tool for a country’s efforts to implement and expand its environmental economic accounting programmes.