Chapter 11 Natural Capital

Joe Grice and Peter Sinclair

What is natural capital and why is it important?

Can we measure natural capital and, if so, how?

What are the problems that have to be addressed in doing so?

How can natural capital help analyse climate change and other environmental challenges?

How can natural capital help to find well-based responses to climate change and other environmental challenges?

“We the undersigned financial institutions wish to acknowledge and re-affirm the importance of natural capital in maintaining a sustainable global economy.” This is the opening sentence of The Natural Capital Declaration, a document issued by the United Nations Environmental Program (UNEP), following the United Nations Conference on Sustainable Development in 2012.¹ It was signed by more than 50 countries and 86 private companies, including Wal-Mart, Woolworths Holdings, Unilever and Standard Chartered.

Conferences often end with declarations, many of which are soon forgotten. This, however, set out a project to “develop new metrics and tools, and support the development of accounting, disclosure and reporting frameworks”.

natural capital

The stock of renewable and non-renewable resources—such as plants, animals, air, water, soils and minerals—that combine to yield a flow of benefits to people.

Nick Clegg, the then Deputy Prime Minister of the UK, told the conference that “National governments must move beyond a narrow understanding of wealth”, and called “on business and governments to commit to natural capital accounting”.

The signatories committed to:

• Strengthen the implementation of natural capital accounting.
• Develop science-based methodologies for natural capital accounting as a complement to GDP and corporate performance measurements.
• Pilot and demonstrate the economic, social and environmental aspects of scaled up and integrated approaches to natural capital accounting.

We have only one planet on which we all live. So what is happening to our environment and what we, as humankind, are doing to it, are certainly big questions.

Some of these questions relate to climate change. To what extent is global warming occurring and what are its effects? What is causing this phenomenon, and what can we do to deal with the ‘climate emergency’ that many are concerned by? This is obviously really important. But questions about the state of our environment go beyond this.

• What are we doing to our natural resources? Are we growing as shown by traditional measures—such as GDP—but only by virtue of depleting resources—such as forestry or fish stocks—in a way which is unsustainable?
• What are we doing to biodiversity? Are our practices leading to a reduction in the number of species in a way which is not only undesirable in itself, but ultimately is also unsustainable? A world with few or no bees could be disastrous.
• What are we doing with our stewardship of the planet? Are we helping nature to thrive? Or are we damaging it, at least temporarily, if not beyond repair?

These are all supremely important issues. To come to grips with them, it is important to have a conceptual framework that can help us shape the questions and work out what and how we ought to be measuring.

The conceptual framework that has proven increasingly useful in this regard over the last few decades is based on this concept of natural capital.

11.1 What is natural capital?

The definition of natural capital suggests that natural capital can be defined as the stock of nature’s assets that benefit humanity.

11.1.1 Natural capital is both the state of the asset, and its benefit to us

To unpack this a little, and get behind the jargon, we are dealing with the assets nature provides to us, in its multiplicity of dimensions. We are concerned, for example, with matters such as the extent and condition of our woodlands. What is the state of our atmosphere? How polluted or potentially harmful is it? Is the situation improving or deteriorating? What is the state of our fish stocks? What is the condition of our peatlands? (Peat is one of the largest natural carbon traps, so the condition of the peatlands has a major bearing on climate change.)

In all these cases, we are interested, not only in the state of the natural asset itself, but also in the flow of benefits that the asset generates for us. These benefits may themselves come in a variety of forms. Trees, for example, can provide wood; but they also provide recreational and cultural benefits as part of a wider woodland setting. They remove carbon and many atmospheric pollutants. They may have a role as part of a wider eco-system in flood prevention, and they may confer both mental and physical health benefits.

Even without the ‘big questions’, natural capital has a key part even in the traditional story of economic production. The assets that natural capital represents can play just as important a role in generating goods and services, as do economic inputs, such as labour and physical capital. Some of these services are directly captured in measured GDP: for example, the value of food produced by land and the rest of our environment. Others—such as the amenity value of having attractive urban spaces or the recreational value of our countryside—are not usually caught by GDP measures, but are no less relevant to our welfare than those benefits that are included in GDP.

To summarise, natural capital may be regarded as one of the most important ‘missing capitals’. It would be misleading to think of natural capital, in concept or measurement, as outside the scope of economics. Rather, by systematically understanding the natural world and the services it provides, we can develop a framework for understanding its value. In addition, we can use the tools of economics to shape strategies for protecting and enhancing the environment.

We therefore need evidence to tell us reliably what is happening to the stock of natural assets and what flow of benefits or services we are obtaining from those assets. One purpose is to provide an objective guide for policymaking and for civil decision making—to provide the evidence to underpin well-based decisions. We also need to be able to hold the politicians and other decision makers to account. It is easy enough to be generally in favour of nature and the environment; but we need the evidence on whether such aspirations and commitments are being met—or not.

It is also important to recognise that the interaction between the environment and the ‘traditional’ economy. Some economic activity depends directly on natural capital, such as farming, fishing, and mineral and energy extraction. Conversely, that activity can affect the performance of the economy: for example, pollution can affect the health and, therefore, the effectiveness of the labour force.

There is clearly a strong case for why measuring natural capital is relevant and important to some of the biggest issues currently facing us; but it is a far from trivial task.

11.1.2 Previous attempts to measure natural capital

The way in which we measure the value of natural assets has a long history in economic thought.

stock

A quantity existing and measured at a particular point in time, say on New Year’s Day 2021.

flow

A flow is an amount measured over a particular period, say a quarter or a year.

exhaustible natural capital

All natural capitals are ultimately exhaustible, since they can be exploited at a rate faster than the basic resource can naturally replenish. Non-renewable natural capitals are a special case, as the natural rate of replenishment is on a timescale (often thousands or tens of thousands of years) that makes very long-term sustainable use impossible.

renewable natural capital

A renewable natural capital asset is one that can recover from human exploitation in a time period commensurate with long-term economic use, to enable maintenance of productive capacity at a steady rate.

• Natural capital is both a stock and a flow—William Petty: Petty was a mid-seventeenth-century polymath who invented the concept we today call GDP. Among other achievements, Petty was a Professor of Medicine, a composer of poetry in Latin, an ingenious inventor, as well as Ireland’s first geographer and industrialist. For him, land and farm labour were the foundation of income and wealth. It was also Petty who first computed the present value of farmland as the discounted stream of anticipated rents. This valuation relationship, linking the stocks to service flows, lies at the heart of the economics of natural capital.
• We draw conclusions from what we see around us—François Quesnay: In the eighteenth century, Quesnay was a leading member of a school of economists known as physiocrats. Physiocracy comes from a Greek word, meaning the ‘rule of natural things’, and Quesnay stressed ‘the primacy of land’. Like Petty, he stressed the practical importance of gathering data and establishing the statistical facts; both relied on numerical examples to illustrate their thinking.
• There is a finite amount of some resources—Thomas Robert Malthus: Malthus famously gave a key role to land, but in a rather pessimistic way. For him, land was in fixed supply and so, therefore, was the food that could be produced from it. That would constrain both real incomes per head and ultimately the sustainable population, too.
• Growth increases the price of finite natural assets—Leon Walras: Walras, who was the main inventor of the economic theory of general equilibrium, shared this pessimism. Land could only climb in price as economic growth proceeded, Walras thought. Later events have surely proved him right on that.
• Exhaustible and renewable natural capital—Stanley Jevons: Walras’s near-contemporary worried about a different natural capital asset—coal. He believed the finiteness of coal stocks was an even more serious obstacle to economic progress than land. Mining it, Jevons emphasised, meant that its physical stock could only decline over time. Jevons was the first to highlight the distinction between renewable and exhaustible natural resources. He worried that coal would run out at some point, and eventually drag the British economy down as it did so.

11.2 What natural capital is (and is not)

Before we cover how natural capital can be—and is—measured, it is worth being a bit more precise about what natural capital consists of, and some of the considerations that measuring it has to take into account.

In the UK, we order natural assets according to eight ‘habitats’ into which they fall (these are also divided into a number of subcategories):

• woodlands
• enclosed farmland
• semi-natural grassland
• open water, wetlands and floodplains
• mountains, moorlands and heaths
• marine
• coastal margins
• urban and suburban

But we need to put a bit of flesh on these bare bones. Actually, there is an ancient Greek framework—due to Empedocles—that serves to order the discussion quite nicely. The Greeks distinguished between four elements: earth, air, water and fire. Fire has much to do with minerals: many precious and base metals need refinement at very high temperatures. Fossil fuels are burnt, whether to generate electricity, drive machinery, or alter temperatures. So ‘fire’ may act as shorthand for metals and fuels of many kinds.

Earth, air, water and fire can each have blurred boundaries. What about a beach, or a riverbed, that is sometimes dry and sometimes covered by water? Which is lightning—air or fire? Nonetheless, they are nearly always quite distinct. Like the return on other assets, the flow of services that they provide, whether of direct or indirect benefit to humanity, and whether positive or occasionally negative, should be viewed as the yield of the stocks of natural capital.

11.2.1 Earth

This refers mainly to soil. Soil is important, not least because it is the basis for the vast bulk of the world’s food supply.²

Soil has the two dimensions of surface, and a critical (and easily neglected) third dimension, of depth. If the topsoil is too thin, it is unlikely to grow anything and could easily just blow away. There is actually a fourth dimension to soil as well. This is its quality. How fertile is it? Is it too sandy to grow anything? Is it in danger of turning into desert? Has it been degraded or poisoned for instance by rising levels of salt—or contaminated by artificial fertilisers—chemical additives of many kinds—that might boost its productivity today while lowering it, perhaps disastrously, later on?

Information about the chemical composition of soil is invaluable. This is a key determinant of its productivity: nitrogen, phosphorus and potassium are pluses, while sodium is a big minus, for example. Stoichiometry is a venerable technique, first used in 1792, for providing such information through studying the consequences of reactions.³

Digital soil mapping is, by contrast, a recent technique that offers considerable promise in appraising soil quality. Comparing current with previous maps tells us about the extent and nature of any degradation.⁴

11.2.2 Air

The air that surrounds the surface of our planet is self-evidently necessary to sustain life. The main issues are much less a matter of volume, than of purity. One aspect of air quality relates to contaminants. Diesel particulates, for example, have a clear medical link to conditions such as asthma. Carbon dioxide (CO₂) is another major issue. Its concentration reached 0.042% of the Earth’s atmosphere in 2020. Although it is now known to have swung between lower and far higher levels over the previous million years, it has jumped by half in the past 260 years. The burning of fossil fuels, especially coal, looks strongly implicated. So, too, does deforestation, in fact twice over. Forests are often cleared by burning, generating CO₂; but, further, live trees absorb CO₂; dead ones certainly do not.

11.2.3 Water

Most water is found in six places: marshes and bogs; lakes and rivers; underground aquifers; ice sheets in mountain glaciers and near the poles; in clouds, containing evaporated water; and in the oceans. Like many rivers, seawater has started to suffer from serious degradation due to increasing amounts of plastic refuse and other contaminants. Another issue is that the oceans currently absorb a third or more of CO₂ emissions. In itself, this is helpful, but one unwelcome side effect is acidification of the ocean

Climate change is causing sea levels to rise. For one thing, water expands slightly as it warms up. Higher temperatures are also melting glaciers. This is already causing sea levels to rise. Research published in 2018 estimates the current rate of increase at about 3.4 millimetres a year. Under admittedly pessimistic assumptions about the course of future developments, that would imply the rise by the end of the century could be as much as two feet. An increase on that scale would render many current coastal areas uninhabitable.⁵

11.2.4 Fire

As we saw, fire could embrace both carbon fuels and metals. One issue here is that these resources are more or less non-renewable. Today’s fossil fuels are mainly the residue of forests that grew some 300 million years ago. The timescale for the formation of metals can run back into the billions of years. There is inevitably a lot of uncertainty about the extent of such resources that remain. For one thing, geologists have yet to explore vast areas of land and the seabed. Where detailed exploration has occurred—and signs of mineral deposits have been positive—there remains the question as to whether they are recoverable reserves, or whether the costs of recovery render them uneconomic. That, too, might change with future changes in technology and future price movements. There are question marks aplenty.

Another key aspect of ‘fire’ is that we have an ongoing need for energy: heating, lighting, powering industry, transporting goods and people, and so on. Much of this need has been fulfilled historically by burning fossil fuels, such as oil and gas. But that, as we know, has the serious downside of injecting unsustainable levels of carbon into the atmosphere, with serious consequences for climate change. It is possible that technological advances might in future allow carbon to be captured, rather than emitted into the atmosphere. That would not turn carbon fuels into renewable resources, but it would lessen their effect on climate change.

11.2.5 The biosphere

The ancient Greeks’ fourfold classification of elements is only part of the natural capital story. Those four elements are all inanimate. What about the living ones? The universe of living things is known as the biosphere. The main distinction here lies between vegetable and animal, and in turn this translates into a three part categorisation:

• Vegetable natural capital: This includes everything from grassland to tropical forests, temperate woodlands and shrubs, to coral reefs, mosses, ferns and wildflowers.
• Animal natural capital: This embraces stocks of marine and riverine fish, birds, insects, worms, and land-based animals of almost all kinds.
• Humans: Often, this category is taken to include farm animals and pets, whose existence and functions depend strongly on human involvement.

Farm animals or not, humankind is flourishing. There has been an enormous rise in numbers. The world’s population has jumped from barely two billion in 1950 to over eight billion in a mere seven decades. Just as remarkable, the proportion of humans deemed to fall into severe poverty has tumbled in the last forty years: a startling decline of some 75% has taken place. Much of this improvement has occurred in East and South Asia, where governments have strengthened production incentives to farmers and removed numerous barriers to economic progress.

But this flourishing of mankind has come at a cost. Have humankind’s population explosion and newfound increased prosperity been shared by other living organisms? A few perhaps: at least the numbers of pets, chicken and cattle will surely have swelled. Opportunities for a richer diet of leftovers may well have expanded the global population of rats. Unfortunately, however, the general picture is the exact opposite. If the assessment by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) is correct, our era could see the greatest mass extinction of species since the one after the Yucatan meteorite collision 65 million years ago.

IPBES estimates the total inventory of species now at 8.7 million. This is based on many years’ work by 145 experts in 50 countries. IPBES’s Global Assessment Report estimates that no less than one million of the planet’s species are in imminent danger of extinction. A quarter of the total are regarded as threatened. The ranges of both flora and fauna are said to be in retreat almost everywhere. Our present century’s rate of biodiversity collapse is “between tens and hundreds of times greater than the average of the past million years.”

11.2.6 Climate change

Humans’ impact on biodiversity is one major topic of interest and concern. Another is humankind’s contribution to climate change. Greenhouse gas emissions (GGE) are known to be a crucial factor. GGE are dominated by carbon dioxide (CO₂), but also include methane (CH₄), nitrous oxide (N₂O), sulphur hexafluoride (SF₆) and chloro- and hydro-fluorocarbons. OECD data reveal substantial falls for most member countries, whether in absolute terms, or relative to population or national income, over the period 2000 to 2012.

Interested readers may want to consult the OECD report ‘Air and GHG emissions’ for more detail on countries’ relative performance and trends over time.

• Among the EU members of the OECD, only three saw total emissions rise in these years: Poland (1%), Estonia (12%) and Luxembourg (21%).
• Outside the EU, Korea, Mexico and Turkey display an even more depressing record than Luxembourg. But most of the others saw emissions drop.
• On GGE per unit of national income, Estonia comes out highest, at double the OECD average, but this largely reflects its legacy of dirty industries, inherited from the imperfect economic and environmental management during the Soviet period.
• GGE per head are highest in the Middle East and Australia, closely followed by Luxembourg; these are about double the OECD average, and some two and a half times greater than GGE from the UK, or the average in OECD-Europe.

An OECD chart depicting GGE per head among its members in 2017 is shown here.

Australia emitted nearly five times more per head than Sweden. The US and Canada were not far behind Australia. The UK had emissions per head less than half those of the OECD average, but half again as much as in Sweden.

11.3 Measuring natural capital

So far, we have focused on what natural capital is, why it is important, and the various immensely important ways in which it has been relevant to economists for hundreds of years.

The first use of the term natural capital was in Ernst Schumacher’s 1973 book Small is Beautiful: A Study of Economics as if People Mattered, a title that still has important undertones.⁶

11.3.1 A system of natural accounts

Realising the potential power of the concept to help analyse increasingly important issues, many prominent economists—David Pearce, Geoffrey Heal, Partha Dasgupta, Joseph Stiglitz, Nicholas Stern and Martin Weitzman among them—added to the case for exploiting this potential by analysing and measuring natural capital.

Responding to such interest, the Statistical Department of the United Nations developed the System of Environmental and Economic Accounting (SEEA).

The System of Environmental and Economic Accounting covers eight key areas: agriculture, forestry and fishing; air emissions; energy; ecosystem accounts; environmental activity accounts; land accounts; material flow accounts; and water.

This was the equivalent of the System of National Accounts (SNA) which, as we saw in Chapter 2, gives definitive international guidance on the construction of national accounts. A key point is that the SEEA and the SNA are fully consistent—in the jargon that the two sets of accounts articulate—so they can be considered side by side. The first version was promulgated in 1993 and there have been successive updates since.

To apply the natural capital concept in the context of the issues discussed earlier, we are interested in both a stock and a flow dimension.

11.3.2 Measuring the stock of natural capital

The stock tells us about sustainability. If it is falling, it tells us that we are using up our natural assets more quickly than they are being re-created. Of course, some natural assets—non-renewables, such as oil and gas reserves—are not re-created at all, except possibly over millions of years. But others—such as woodland, fish stocks or river assets—naturally renew themselves, at least with good stewardship.

So the first task is to measure the physical extent and condition of our natural assets. For example, how much woodland do we have? What is its type and condition? How much arable land— or peatland or wetlands—does the UK have?

There are a variety of administrative sources that can help us estimate items such as remaining oil and gas reserves. For other items, however, we have in the past been reliant upon the periodic UK land cover maps (LCMs).

The UK land cover maps are comprehensive, fine-resolution maps of the UK, broken down into 21 habitat types, such as urban grassland, arable, broad-leaved and coniferous woodland, and so on. They are produced by the UK Centre for Ecology and Hydrology and updated periodically. The latest version, LCM2021, relates to the UK’s land cover in 2021.

Earth observation data

The gathering of information about physical or biological features and systems on our planet. In recent years, advances in technology have meant that satellites have become a potent means of collecting such information, but Earth observation data also include what can be assembled by other means, such as road sensors, or even CCTV.

This requires large-scale surveying exercises. In practice, this is a herculean task, but fortunately, exciting technological developments are beginning to help, principally satellite and other so-called Earth observation data. Since 2017, the LCM has been released annually and from 2020 onwards at a higher resolution that allows for more detail to be captured.

This can be collected and processed, to give an accurate picture of the UK’s natural assets as of a few days ago, rather than with a lag of several years. It is also a much more manageable exercise than a large programme of surveying. Not all of the technical issues involved in using Earth observation as the source data are yet fully resolved, but rapid progress is being made.

11.3.3 Measuring the flow of benefits of natural capital

The flow tells us about the benefits we are receiving from whatever stock of natural assets we do have.

Let’s consider the value of a woodland.

To do this we need to measure the value of natural assets in monetary terms, so that we can compare changes in that value through time with changes in more traditional economic variables. So if we know how many acres of woodland the UK possesses, what is the monetary value?

One immediate answer would be to say, we know the market price of an acre of woodland, so why not just multiply the price and the quantity together? But this would be wrong or, at least incomplete. As discussed earlier, natural assets such as woodland convey a whole range of ecosystem services: recreation and cultural value, flood protection, carbon capture, and so on. The value of such benefits needs to be included alongside the direct market value.

There is growing evidence, for example, that natural assets can have great physical and mental health benefits but only, of course, if these assets are being managed in a way that such benefits can be reaped. A woodland many miles from any centre of population will give fewer health benefits that one much closer to where most people live.

We can observe the market price to let us calculate market value but there is no directly observable price to allow us to value these wider benefits.

11.3.4 Using stated and revealed preference to value the flows of benefits from natural capital

This problem has already been faced in traditional national accounts for non-market items, such as free public services like the NHS, where there is usually no market price either. So well-tried techniques are available to us.

stated preference

A systematic way of asking people for their willingness to pay for the benefit of some asset or service for which there is no market price.

One is use of stated preference.

In this case, how much would an average member of society be prepared to pay for the benefit of access to nearby woodland (or, alternatively, for having a clean river, or less air pollution)? The answer gives us the implicit price with which we can value the benefits from the particular natural asset concerned.

Stated preference has the advantage of giving us the information we need. But organising matters so that the stated preferences of those consulted represents an unbiased view of society as a whole, is not straightforward. It is resource intensive, too.

revealed preference

Assessing willingness to pay from people’s observed behaviour, for example how much time and cost people seem to be prepared to incur to gain benefit from a non-market asset or service.

It also leaves open whether what people say they would pay corresponds with what they would actually pay. So a more widely used technique is based on revealed preference.

We can use revealed preference to estimate how much we are willing to pay to reap the recreational benefits of enjoying woodland or other benefits from our natural environment. This needs to be done with care, but many techniques have been developed over the years to help obtain reliable estimates. Estimates from both stated and revealed preference are obviously subject to a margin of uncertainty. But to quote the old adage, better to be approximately right, rather than to assume the value of these benefits is zero—and thus be precisely wrong.

How it’s done Measuring the flow of benefits from natural capital

To provide a more practical example of measuring natural capital we will use the example of the UK’s woodlands. Woodlands have many different benefits:

• They supply timber: it can be used as a material in construction of buildings and consumer goods
• They supply fuel: wood pellets, for example
• They absorb carbon dioxide: This is an important contributor to offsetting the economic impact of climate change
• They absorb toxic air pollutants: These would otherwise damage people’s health;
• Woodlands are a natural barrier to flooding: The importance of this role has been underlined by recent floods in rural parts of the UK
• Woodlands provide cooling at times of heatwave in urban environments: this has a health benefit, as well as making for pleasant surroundings
• They provide urban noise reduction.
• They are a place for recreation.

The value of timber is easily determined by its market price, but the other elements can also be quantified economically.

For example, the amount of carbon dioxide removed can be determined by scientific study and a price of carbon dioxide identified by looking at the abatement costs—for example, what would be the alternative way of reducing carbon dioxide emissions?

For toxic pollutants, scientific studies also identify the amount absorbed by trees, but can also tell us the relationship between pollution and reduced health in terms of lost ‘quality-adjusted life years’ or ‘QALYs’ (or similar concepts).

The reduction in lost QALYs can then be turned into a monetary amount by considering an appropriate value for each QALY (for the UK, the Government currently estimates this as £60,000 a year).

Finally, we can look at the value of recreation by using techniques such as the cost people incur in travelling to visit woodlands. As people must value the benefit they derive as more than the cost of travelling (otherwise why would they do it?), the cost of travel is an estimate of the (lower bound) value they derive from their visit.

Quantification of all these benefits, together with a description of methodologies used to calculate them, are provided in regular ONS bulletins, the latest of which provides information for 2021.

A QALY is a measure of health status used extensively by medical staff and health economists. The quality of health is assessed on a scale of between 1—perfect health and 0—dead.

One year lived in perfect health scores as 1 QALY, while one year lived in impaired health assessed as 0.5 on the scale would score as 0.5 QALYs.

In this instance, the use would be to assess how much higher aggregate QALYs would be in the absence of toxic pollutants, as compared with the actual aggregate QALYs, given the level of toxic pollutants.

Figure 11.2 shows the ONS’s estimated benefits from woodlands in 2020.

ONS Resource

The ‘Woodland natural capital accounts, UK: 2022’ demonstrate why compiling natural capital accounts requires a multidisciplinary approach: expertise in forestry, as well as economic, scientific, ecological, statistical and accounting disciplines. As well as providing more detail on the numbers summarised here, it contains a range of useful information about, for example, trends in forest fires and in woodland butterfly and bat populations.

These figures suggest that woodlands gave us total benefits in 2020 worth £8.9 billion. That is more than 31 times the value of timber production alone. It provides a very good example of how focusing only on market production would miss much or most of the story.

11.3.5 Measuring the discounted present value of natural capital

Note that these techniques are often better at indicating the value of the flow of services than the monetary value of the assets themselves.

To get a value of the stock of a natural asset, we can capitalise the value of the flow of non-market services provided by it. As Petty first showed, the flow of yield and the value of stock are linked by the rates of interest or discount.

discount rate

Discounting is a standard approach in economics to representing time preference where costs and benefits are incurred or accrued over different time periods. Assuming that there is a preference to receive benefits now rather than in the future, a discount rate reflects the scale of that preference and reduces the value of a future cost or benefit accordingly. A more detailed description of discounting, as often used in natural capital accounting, can be found in HMT Green Book.

In our context, the value of the natural asset will be discounted present value of the stream of current and expected future benefits that it yields.

To do this, we need to select an appropriate discount rate. This is an issue across all types of capital, not just natural capital. Any form of investment—capital formation—today brings a future gain, but also has a set of opportunity costs—whether in terms of consumption postponed, debt charges raised, or other potential investment precluded. The discount rate attempts to put present and future costs and gains into a common currency.

An article by David Henderson, later the Chief Economist at both the World Bank and the OECD, discusses the main issues relating to choice of the discount rate. Henderson, P.D (1965) ‘Notes on public investment criteria in the United Kingdom’. Bulletin of the Oxford University Institute of Economics and Statistics volume 27.

Balancing the present and the future is a major question across much of economics and many articles and books have been devoted to it. When compiling the natural capital estimates, the discount rate that has been used is based on a presumed rate of social time preference. This has been set at 3.5% to discount flows in the immediate future, with progressively lower rates for expected flows of benefits stretching into the far future. This is also consistent with the assumed rate of social opportunity cost that the UK Treasury now mandates for assessing the balance of costs and benefits of government policies and projects.

The choice of discount rate is hugely important for the topics discussed in this chapter. The ‘Stern Report on climate change’ illustrates this. The report shows how the present value of future climate change costs turns on the assumed rate of social time preference. Harmful effects of climate change are expected to manifest themselves over coming decades. The higher we value the present compared to the future, the lower the weight given to these anticipated future costs.

Environmental accounts

Environmental accounts are related to natural capital accounts, and another tool covered by the United Nations SEEA guidance. In the UK, these have been published annually for many years.

Many other countries—more than 100—also publish them, though large countries that currently do not compile them include the US, Japan, Thailand, Turkey and Argentina.

As we saw, the natural capital accounts are intended to indicate what is happening to the stock of natural assets as well as the flow of services people value that flow from those assets. By contrast, the environmental accounts have a more specific purpose. They show what impact the economy is having on the environment, for better or worse. So while the natural capital accounts aim to record the overall position for natural assets, as a consequence of all the factors that influence this, the environmental accounts focus specifically on the effect of our economic activities.

11.4 UK natural capital and environmental statistics

ONS Resource

THE ONS publishes the official UK Environmental Accounts and, alongside, a set of capital accounts.

11.4.1 Natural capital accounts

The UK National Accounts have been produced since 1948 but work to develop equivalent natural capital accounts began in 2011, with the aim of a regular annual publication achieved in 2019. Figure 11.3 shows the total value of UK natural capital assets and its main components in 2020.

The Blue Book is ONS’s annual publication, usually in the late summer or autumn, that sets out the national accounts. Publishing the natural capital accounts together with the national accounts is therefore a major landmark. Because the two sets of accounts are compiled within consistent frameworks, they can be used for a richer understanding of what has been happening, not just within the economy but to natural assets and the economy together.

Some people express surprise at the levels implied by these figures, suggesting they look low. Although £1.8 trillion may seem a very large amount, it represents less than one year’s value of the UK’s national output. So, are we saying the total value of our natural assets equals only’ 11 months’ worth of GDP?

There are, however, factors that explain the surprise:

• Not all ecosystem services are included in the accounts: alhough the most important ones are.
• Some natural assets are already included in the national accounts: Chief amongst these is the land upon which houses are built. This might itself amount to at least two trillion pounds in value. Provided double counting is avoided, there may be a case for including this item within the published natural capital accounts.
• The estimates are made at so-called exchange values: Techniques such as stated preference or revealed preference essentially reveal how much value people place on assets, given their current availability. So we are essentially picking up, for example, what is the marginal value of an extra gallon of fresh water, given the current availability of water. If available water reduced in volume, the value placed on a marginal gallon would doubtless increase.

Adam Smith raised the issue of exchange values in The Wealth of Nations, as had Plato, almost 2,000 years earlier. How come, they asked, that a diamond is so much more valuable than water, when the former has few real uses while the latter is essential to life itself?

Neither Plato nor Smith answered this question fully. But part of the answer could reflect this difference between total and marginal (exchange) value. If you were down to your last cup of water in a large arid desert, you might well value the next drop of water more highly than an equivalent diamond.

Biodiversity is not included in the estimates reported Figure 11.3. Further work is needed on it. All of the casual evidence is that people place a good deal of value on this. But in practical terms, it is not easy to estimate that value using techniques like stated preference. Most people would find it difficult to respond to a question: How much would you be prepared to pay to avoid having the number of insect species declining from 1,600,000 to 1,200,000?

But equally, it is hard to see what the behavioural evidence would be that would allow revealed preference to be reasonably deduced. Nevertheless, valuing biodiversity cannot be ignored and further thinking is clearly essential. In 2019, the UK Treasury asked Sir Partha Dasgupta to lead a review of the economics of biodiversity.

This review on the economics of biodiversity was announced by the Chancellor of the Exchequer in March 2019. It is tasked with:

• assessing the economic benefits of biodiversity globally
• assessing the economic costs and risks of biodiversity loss
• identifying a range of actions that can simultaneously enhance biodiversity and deliver economic prosperity

The final report published in August 2021 can be found at Final Report – The Economics of Biodiversity: The Dasgupta Review – GOV.UK (www.gov.uk).

11.4.2 The environmental accounts

Many of the tables and charts the environmental accounts contain relate to the economy’s impact on our natural assets or on the environment more generally. A direct example is operations in the North Sea to extract oil. Figure 11.4 shows discovered definite reserves as well as the slightly higher total, maximum reserves, which includes reserves which are very probably, but not quite certainly, available.

We can see:

• A continuing decline in discovered oil: The definite volume of oil and gas reserves decreases, as extractions have continued.
• A similar decline in maximum reserves: New discoveries or technological innovations have allowed extraction of reserves which would not previously have been economic. So maximum reserves have continued to exceed discovered ones but with a similar declining trend.

A second, and topical, example relates to greenhouse gas emissions, long implicated as one of the main factors underpinning climate change. Figure 11.5 shows how these emissions have changed over the years. For reference, it also shows the annual average temperature in the UK indexed at 100 on its level in 1990.

There are several interesting stories in Figure 11.5.

• Little trend in the average temperature in the UK: Some years, like 2014, have been hotter than in 1990, and some cooler, but on average there has not been much either way. The Meteorological Office figures for 2010 showed the average temperature in that year was much lower than in 1990 and slightly higher in 2020 than in 1990.
• Total emissions have fallen: Since 1990, the economy has grown nearly 30%, but total emissions, when compared to the last full year without COVID-19 restrictions in 2019, to less than two-thirds of 1990 levels. It would be natural enough to ascribe this to a general improvement in technology which has allowed increased levels of economic activity to be accompanied by less need to emit harmful greenhouse gases. But Figure 11.5 also reveals rather different trends in the patterns for the main emitter sections of the economy. While the manufacturing and energy sectors have become more efficient (largely due to a switch in fuels from coal to gas, as well as more efficient methods), this also reflects the UK’s transition towards a more service-based economy.
• Households now account for the largest share of total emissions: In 2019, household emissions of greenhouse gases were only marginally lower than in 1990 while the population has grown over this period by around 8%. Emissions of greenhouse gases fell more significantly in 2020 largely reflecting travel restrictions related to the COVID-19 pandemic. Despite this, households accounted for more than a quarter of all greenhouse gas emissions in that year, a larger contribution than any single industry.
• Other sectors have shown larger falls: Back in 1990, the energy supply industry was responsible for the largest share of emissions. However, by 2020, its emissions had fallen by nearly two-thirds relative to 1990 levels. The major cause has been the switch away from use of coal to generate electricity, in favour of other means of generation, including renewables which have less harmful side effects on the environment. In fact, coal use by the energy supply industry in 2022 was a small fraction of what it was in 1990 as it is increasingly edged-out by renewables in electricity generation. A report by the National Grid concluded that 2022 was one of the greenest years on record for electricity generation – second only to 2020, where several lockdowns helped reduce carbon consumption drastically.⁷
• Positive trends in the manufacturing sector: In 1990, the emissions from this sector were a little smaller than those in the electricity industry. But from these initial high levels, there has been a decline to less than half. That said, most of the steep reduction took place in the years to 2010 or so. Since then, progress has been slower. Part of the reason for the overall decline has been production switching to more energy-efficient technologies. But it has also reflected changes in the composition of UK manufacturing. The share of heavy industries such as iron and steel making, where heavy use of energy is inherent to the nature of the business, has fallen markedly.
• Less progress in the transport and storage industries: The sharp fall in emissions in 2020 was almost certainly COVID-related, but prior to that in 2019 were still 30% higher than in 1990. Note that we are talking here about commercial transport: emissions resulting from domestic travel are included under the figures for households.

So in summary, the picture shows substantial overall reductions in greenhouse gas emissions but with very different outcomes in the various parts of our economy. This is a mixed performance.

Another consideration should prevent our taking excessive comfort from these figures. The emissions represented in Figure 11.5 are flows. They are the new emissions made each year, each adding to the impact of those from preceding years. For the impact of greenhouse gas emission on the atmosphere and other dimensions of the environment, it is the stock of past and present emissions that is relevant, whether the result of past or current flows. Many greenhouse gases, carbon dioxide especially, decay very slowly indeed.

Some of the effects of the past flows dissipate, as the environment absorbs their effects. The question then is to what extent and how quickly might this occur. The environmental accounts also provide information on this. In 2017, our vegetation is estimated to have absorbed some 28 million tonnes of CO₂ equivalent. This sounds a lot and indeed it is. However, relative to total emissions of around 560 million tonnes in 2017, it represents approximately 5%.

The Committee on Climate Change is an independent body but with a statutory responsibility to advise the UK Parliament and government on matters relating to climate change. The recommendation of zero-net emissions by 2050, was made in the committee’s reports.

In 2019, the UK Government accepted the recommendation of the Committee on Climate Change that net carbon emissions—total emissions less vegetative removal—should reach zero by 2050. No doubt fulfilling this ambition will be helped by continuing improvements in technology that allow reduced gross emissions, increased carbon capture and other forms of removal. Nevertheless, the basic arithmetic represented by the starting point underlines the extent of the challenge involved.

11.5 Using the environmental and natural capital accounts

Like all economic statistics and accounts, the environmental and natural capital accounts have to be judged by their usefulness, in two ways.

1. Do they help us to monitor and understand the current situation?
2. Do they improve our decision making?

For example, are we on the necessary path to meet the zero net emissions target by 2050? Our discussion of environmental accounts has already shown the role they can play in checking progress. They can indicate where the problem areas are, and therefore where attention needs to be directed.

11.5.1 Holding policymakers to account

In 2018 the UK Government published its ‘25 year plan to improve the environment’; strictly speaking, this is a plan for England only, but other UK devolved administrations have expressed interest.⁸

It also announced the intention to set up an independent Office for Environmental Protection (OEP) to compare its progress with the plan. Later, the Department for Environment, Food and Rural Affairs (Defra) published a set of proposed indicators that the OEP could use for this purpose.⁹

These indicators have been designed to be consistent with the natural capital accounts. More broadly, the accounts themselves will reveal the progress made against the bottom line. In 2010, the incoming Cameron Government declared its wish to be the first administration in living memory to have handed natural assets on in a better state than they had inherited. Reference to Figure 11.3 can show how well this objective was achieved. The verdict is probably best described as a no-score draw. Natural capital had not declined, until 2015 at least. But neither had it improved.

Aside from their use in monitoring and holding to account, the environmental and natural capital accounts can help to underpin better decision making directly. In government, decisions about how and where to spend money are intended to be informed by policy and project appraisal. A key part of this is assessing the costs and benefits associated with proposals, to identify the courses with the most favourable balance between these.

Historically, this aspiration was not always met. Difficulties in quantifying benefits often meant that undue weight was placed on minimising costs, which could be directly measured. Even where benefits were measurable benefits, they were often given in a market context, such as commercial returns, which were easier to quantify. So non-market costs and benefits, such as the impact of courses of action on our natural assets, did not always receive the attention they deserved.

11.5.2 Changes to the Green Book

The accounts and statistics described in this chapter can help fill in this gap, making it easier to include quantified environmental costs and benefits within the appraisal calculations and thus ensure they are given full weight.

The authoritative guide to appraisal and evaluation in government is called the Green Book.¹⁰

The Treasury, which mandates its usage, issued a new edition in 2022. This differed only a little from the previous 2003 edition, but one of the main differences was inclusion of detailed guidance on how natural capital information should be included in decision making. The material discussed in this chapter provides much of the information that is needed.

It is also worth remembering that the national aggregates in the environmental and natural capital accounts are themselves built up from detailed local information. This same material is therefore available to support local decision making and improve the evidence base against which they are taken. Some of the earliest examples of use of natural capital information have been in this domain: for example, in the national parks to help their managements achieve the fullest benefits for us from these major natural assets.

11.6 Can natural capital be measured and quantified at all?

For some people, Nature is literally beyond price. Consider an analogy. Putting a value on human life could look like sanctioning trade in individuals. That activity could open the door to slavery, which we would all regard with abhorrence. In many people’s view, human beings have an unqualified moral obligation to prevent extinctions. Such an overriding duty, they would claim, that any monetary number is transcended. As William Wordsworth put it:

“Give all thou canst: high Heaven rejects the lore

Of nicely-calculated less or more”.

11.6.1 Are lexicographic preferences feasible?

lexicographic preferences

Comparative preferences where an economic agent prefers any amount of one good to any amount of another. In other words, there is no trade-off between them.

In economists’ language, Wordsworth is saying that society’s preference for public policy should be treated as a lexicographic preference: that is, no trade-offs should be accepted if they harm nature, no matter how much they provide other sorts of benefits. Preserving natural assets should be paramount. So there should be no comparing monetary valuations, nor making compromises, they would argue. Nature simply comes first.

This position is clear-cut. It has undoubted appeal, but it is open to objections.

First, could there be trade-offs between extinction prevention, and, for example, medical treatment for the gravely ill? Education, national defence, help for the destitute, justice—all these worthy objectives compete for scarce funding from government. So must we be prepared to cut back sharply on all these heads of expenditure in order to preserve every subspecies of animal or plant?

On the other hand, why should we not try to balance the needs of species defence against other important public goods? And if we do decide to take that route, how are we to weigh up the costs and benefits of each, including species defence, without some quantitative basis?

Balancing public spending on nature with expenditure on other public goods, does not imply that nature has to get a bad deal. All that would be needed is merely a rational basis for taking the relevant decisions. Without accurate data, such decisions would just be blind gambles. Without natural capital accounts to guide us, making the necessary trade-offs will be no better than fumbling in the dark.

How can we identify a tipping point, or range of points, where a species moves from peril to imminent risk of extinction? How can we try to quantify that risk?

A lexicographic ordering will suggest that a slight risk should be taken every bit as seriously as a bigger one. Furthermore, are all subspecies to be weighed equally, and to be treated the same? Even the poor antipodean cane toad? Does a worm that cleanses the soil, or a pollinating bee, not matter a great deal more than a bacterium? Pinpointing the point at which species preservation becomes urgent, and which species to defend at almost any cost, will never be easy. But assigning values to the different constituents of natural capital will surely help.

11.6.2 Natural capital and growth

Some observers and policymakers imagine that concerns about natural capital impede economic progress. On the contrary, Tony Juniper declares that “without Nature’s services, the economy is nowhere”. He estimated that in 2013, the services provided by pollinators such as bees was worth US$190 billion.¹¹

Given the opposite trends in insect and human populations in the intervening years, and the low-price elasticities of demand for the products of arable crops and vegetables that pollinators help to provide, we might well want to double this figure for today.

11.7 Summary

Our environment is a central concern for all of us. Climate change is a key issue. So, too, are wider questions about the conservation of our natural assets. This chapter has discussed the economic and statistical aspects of the nature that surrounds us. Obtaining a well-based, comprehensive, statistically supported picture of our situation and how it is changing, are absolute essentials. No less are the resource-allocation decisions made by government, households and firms. Understanding how the economy and nature interact is crucial. Detailed evidence is indispensable. Hence the vital role played by the accounts and the other concepts and statistics discussed and examined in this chapter.

What needs to happen now to take maximum advantage of the natural capital concept and the metrics relating to it that are coming on stream? One necessity is that the work to further improve the estimates of natural capital, to fill in gaps and to reinforce methodologies, clearly needs to continue. ONS’s publication of the UK Natural Capital Accounts is a significant landmark, as noted earlier; but it is only a staging post and certainly not the end of the journey.

Second, an informed commentariat needs to come together to help shape the narrative arising from the national accounts and the natural capital accounts. For many years, the UK has had a strong band of informed commentators and users of the national accounts. The need now is for similarly informed use of the joint accounts. It would be a poor outcome if bifurcation took place, with traditional commentators continuing to concern themselves only with the national accounts, while only the “environmental” community took interest in natural capital. In contradiction to Kipling, we need “the twain to meet”.

Third, and perhaps most importantly, the increased information needs to be understood and used to inform better decision making. A promising sign here is the latest revision of the Green Book, which, as noted earlier, contains detailed guidance on how information about natural capital should be used in decision making within government. But issuing guidance is one thing; ensuring its proper usage is the ongoing task.

11.8 Further reading

• Bright, G., Connors, E., Grice, J. (2019) ‘Measuring natural capital: Towards accounts for the UK and a basis for informed decision-making’, Oxford Review of Economic Policy volume 35 issue 1 Spring 2019
• Dasgupta, P. (2007) ‘Nature and the economy’, Journal of Applied Ecology volume 44 issue 3 June 2007
• Helm, D. (2015), Natural Capital: Valuing the Planet, Yale University Press
• Her Majesty’s Treasury (2019) ‘The Green Book: Appraisal and Evaluation in Central Government’
• International Institute for Sustainable Development (2018) ‘Comprehensive wealth in Canada-2018: Measuring what matters in the long term’
• Natural Capital Committee (2017) ‘How to do it: A natural capital workbook’
• ONS. Net zero and the different official measures of the UK’s greenhouse gas emissions

Notes