Accounting for Ecological Capital

Edward B. Barbier

An important contribution of natural resource economics has been to treat the environment as a form of capital asset, or natural capital. But we should not restrict this concept just to those natural resources, such as minerals, fossil fuels, forests, agricultural land and fisheries, that supply the raw material and energy inputs to our economies.  Nor should we consider the capacity of the natural environment to assimilate waste and pollution the only valuable “service” that it performs.

Instead, natural capital is much broader, encompassing the whole range of goods and services that the environment provides. Many have long been considered beneficial to humans, such as nature-based recreation, eco-tourism, fishing and hunting, wildlife viewing, and enjoyment of nature’s beauty.  Natural capital should also comprise those ecosystems that through their natural functioning and habitats provide important goods and services to the economy.  Such ecological capital is a unique and important component of the entire natural endowment that supports, protects and is used by economic systems

However, there are several crucial features of ecosystems that distinguish them from other economic assets.

First, unlike skills, education, machines, tools and other types of human-made capital, we do not have to manufacture ecological capital; nature provides it for free.  Second, the provision of goods and services by many ecosystems is poorly understood, and their values are often not marketed. These include many important benefits, such as natural hazard protection, nutrient uptake, erosion control, water purification and carbon sequestration.  Thirdly, although ecosystems can be restored, most are declining rapidly through depletion or degradation, e.g. from habitat destruction, land conversion, pollution impacts and biological invasion.  Finally, stressed ecosystems are vulnerable to unexpected and sudden collapse, which substantially impacts the quantity and quality of benefits provided.

As a result, we tend to “undervalue” ecosystem assets and the various goods and services they provide.  The consequence is overexploitation of ecological capital in the pursuit of economic development, growth and progress.  Over time, as ecological impacts and associated economic losses become apparent, the costs of irreversible ecosystem conversion, overexploitation and the risk of collapse may be significant.

Although in recent years, substantial progress has been made in valuing many ecosystem goods and services, our knowledge of many values is still limited.  For example, for marine systems, we have routinely estimated only a few ecosystem benefits, such as recreation, coastal habitat-fishery linkages, and raw materials and food production.  In recent years, a handful of more reliable estimates of the storm protection service of coastal wetlands have also emerged.  But for a number of important services, such as erosion control, water purification, carbon sequestration and temperature maintenance, very few or no valuation studies exist.

When any form of wealth of an economy declines, it is the poor that suffer disproportionately more.  The same is true for the continuing decline in ecological capital worldwide.  In my book, Scarcity and Frontiers: How Economies Have Developed Through Natural Resource Scarcity, I argue that the world is entering a new era, the “Age of Ecological Scarcity”.  The main development challenge of this era is the implications for global poverty.  Exacerbating the problem is that, compared to past eras in human history, economic growth through exploiting abundant “frontiers” of land and natural resources will no longer be the means to improve the livelihoods of the poorest human populations.

What is therefore urgently required is better measurement of the contribution of ecological capital to current and future economic well-being.  One approach is to adopt the methodology endorsed by the International Human Dimensions Programme on Global Environmental Change’s 2012 Inclusive Wealth Report, and use it to adjust net domestic product (NDP) for the different welfare impacts of ecological capital as well as the risk of ecological collapse.  These various contributions of ecological capital to wealth accounts can be illustrated with the example of mangroves in Thailand over 1970 to 2009.

Thailand is estimated to have lost around a third of its mangroves since the 1960s, mainly to shrimp farming expansion and other coastal development. Based on estimates of four mangrove ecosystem benefits – collected products, habitat-fishery linkages, storm protection and carbon sequestration – the Thailand case study illustrates the methodology of adjusting NDP additionally for the value of the direct benefits provided by the current stock of ecosystems, and any capital revaluation that occurs as a result of ecosystem conversion to other land uses.

The resulting per capita wealth accounting estimates for Thailand’s mangroves from 1970 to 2009 are instructive.  Average annual mangrove loss has fallen steadily in every decade since the 1970s.  Nevertheless, because mangroves were deforested heavily from 1970 to 2009, whereas Thailand’s population nearly doubled, the current per capita benefits of mangroves has halved since the 1970s, from $0.57 to $0.28 per person. Deforestation has caused this ecological asset to decline in value, and its benefits are spread over more and more people.

But deforestation of Thailand’s mangroves also affects the risk of ecological collapse, which rises as mangroves disappear.  For example, over 2000 to 2009, the increased threat of collapse had reduced the average annual net value of mangroves per capita from $0.25 to $0.17.

As the Thailand mangrove case study illustrates, accounting for ecological ecological can indicate how its decline (or improvement) can impact per capita economic wealth, and how such benefits may affected further by any threat of ecological collapse. Better measurement of such contributions of ecological capital to current and future economic well-being is an important research agenda, if we are to avoid the present and growing crisis in ecological capital worldwide.

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