Why natural capital will transform the 21st century global economy

April 4, 2012

By Adam Matthews, Secretary-General of Global Legislators Organisation (GLOBE). The opinions expressed are his own.

One of the great advances in the past century in economics is the understanding that there is such a thing as human, social and intellectual capital.  We have come to realise that a well functioning judicial system and an excellent education system are as much a part of the wealth of a nation as its roads, ports and factories. The irony is that economists and economies have not caught up with the most important capital of all — natural capital – upon which we all depend.

In a nutshell, natural capital is the extension of the economic notion of capital to goods and services relating to the natural environment. It is thus the stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future.

Taking this one stage further, the concept of natural capital accounting involves valuing natural resources as accurately as possible, and including in national accounts the costs and benefits of conserving versus destroying them.  So what would a country that incorporated the valuation of natural capital and ecosystem services into its framework of national accounting look like?

Principally, it would make explicit and visible the estimated value of nature’s multiple and complex benefits.  By incorporating that value into their procedures of decision making and cost-benefit analysis, the country would provide a more complete evidence base through which to improve outcomes.  Factors previously regarded as externalities (such as pollution, water shed management etc) would become essential elements of increased efficiency in policy design.
An example might help here.

A Government may sell a large timber concession to a logging company. It will secure for that land only the measure of value for the logs or fuel wood, plus any alternative land use. The logging company, perhaps being afraid of political instability in the country, may not even cut the logs into timber in the country itself. Instead, it exports them to a neighbouring state where it has a production factory that cuts the logs and produces furniture for export.

It is important to note that no one in this example has done anything wrong or corrupt. The Government has increased their export sales by the value of the logs and has seen a corresponding rise in GDP. The logging company has paid the market price for its logging concession and made a rational business decision about the management of the company’s risk.

The neighbouring country happily welcomed the jobs and economic growth that comes from the re-export of those logs as much more valuable furniture, but the original country is poorer. The value of the ecosystem services that it has lost is far greater than the value of economic GDP growth that it has achieved.

Rather than being the sole preserve of environmentalists, this concept of natural capital is proving enormously influential in senior Government circles both here in the United Kingdom and abroad.  Last week, for instance, the UK Government announced the appointment of Professor Dieter Helm to become the first chairman of the UK’s new Natural Capital Committee.

This new committee has been established to ensure that the Government has a better informed understanding of the value of Natural Capital, and will help it to prioritise actions to support and improve the UK’s natural assets. Significantly, by reporting into the Economic Affairs Committee and the Chancellor of the Exchequer, this new body has the opportunity to truly influence the economic policy of the UK for the good of the natural environment and a more sophisticated understanding of our GDP growth.

And, it is not just in the UK that Natural Capital has gained a major foothold.  Indeed, the concept will have a central role in the forthcoming Rio+20 and World Summit of Legislators (WSL) process in Brazil (on the 20th anniversary of the Earth Summit).

A key aim of these meetings, as is emerging here in the UK, is to define a clear and targeted set of international actions for Governments and legislators to ensure the true value of natural capital is integrated into national accounts and economic policy making.

To this end, Global Legislators Organisation (GLOBE), the organisation which is organising WSL, and for which I am Secretary-General, released a new Rio+20 Natural Capital Action Plan.  This plan has been adopted by 120 legislators from over 35 countries, including Lord Deben, former UK Secretary of State for the Environment, Barry Gardiner MP, former Environment Minister, and Zac Goldsmith MP, here in the United Kingdom.

The action plan contains the following international recommendations:

•       Incorporate the valuation of natural capital into the framework of government accounts,
•       Instruct all government departments to prepare inventories of the natural capital and ecosystems that fall within their ambit or are affected by their policy decisions,
•       Create a ministerial position within the Finance Ministry to work with the department of environment in assessing the value of natural capital in departmental inventories and regulating the use of the country’s natural wealth,
•       Ensure that the national Finance Ministry develops a set of Natural Capital Accounts that is accompanied by an annual report that outlines the status of biodiversity, ecosystem services and natural capital, as appropriate, and
•       Encourage national audit offices to adopt the natural capital approach when examining the effectiveness and efficiency by which government departments use their resources and apply cost benefit analyses.

Unquestionably, there is still a long way to go before Natural Capital is mainstreamed within our national accounting across the world.  However, the direction of travel is clear:  this concept has the potential to transform the global economy in the 21st century for the good of mankind.

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And DEFRA has to-day given a concrete example of optimising the result/impact relation by using catch quota management in fisheries. Full catch accoutability focus industry efforts on optimisation and entail a regime shift from command and control to result based management, DEFRA news 10th april: http://www.defra.gov.uk/news/2012/04/10/ discards-trial-success/

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