Natural Capital: Valuing and Valuating The Earth

A Brief Introduction to the Concept of Capital

The word “capital” has many meanings – its specific definition depends on the context in which it’s used. According to classical economics, capital is one of the three inputs (alongside land and labor) used in the production economy to produce goods and services. The notion of capital, which at the time included financial capital and the factors of production, has continuously expanded over time within economic theory. Today it’s possible to classify capital as financial, natural, social, intellectual, public and human concepts.

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Ecosystem Services. Image via Bteam.org

Defining Natural Capital

The World Forum on Natural Capital defines natural capital as “the world’s stocks of natural assets which include geology, soil, air, water and all living things.” These assets have huge importance because they provide essential “ecosystem services” for the planet and its inhabitants. To get an idea about the relevance of the services provided, just think about where the water we drink comes from and how much the climate affects plants and wildlife.

In addition, the global ecosystem has a key relevance as it absorbs a large quantity of global pollution and provides natural recovery functions. Therefore, the value of these services is a more-than-sufficient reason to enhance protection for the Earth’s natural capital.

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Environment, society and economy. Image via C.S. Sterner

Three Economic Issues of Natural Capital

This article will provide an analysis of three key macro-aspects of the natural capital debate, all of which are useful to emphasize why the global ecosystem needs protection.

1. Optimizing the Use of Natural Capital

When we spend financial capital, the impact of our decision is economic in nature – it affects our personal wealth and the wealth of companies we support. When we use natural capital, the impacts of our actions affect not only us but the entire biosphere. Moreover, high pressure on a natural resource can deplete it or compromise its reproduction capacity.

Therefore, policy makers must consider these risks when they manage natural capital, and they must optimize its use (for example, with fishing authorization or source extraction policies).

2. The Problem of Externalities

Natural capital, like common good, often has no allocated property rights. In addition, the impacts on natural capital are mostly outside the mechanisms of pricing. Hence, there’s technically no cost to pay for the utilization of our ecosystems. These problems, called “environmental externalities,” are estimated to be worth $7.3 trillion, and can lead to market failures if not managed correctly.

With this said, policy makers can adopt many strategies to counteract externalities. They can draw policies and laws to regulate the sector (for example, to recover the resources), account for the externalities using taxes (such as carbon taxes) and subsidies, and assign property rights (such as emission rights) to natural assets, effectively giving a them a price value.

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Environmental Externalities. Image via World Forum on Natural Capital.

3. Environmental Protection Versus Growth

Especially for emerging economies, the potential to use natural assets – as much as they lack financial value – is important to foster growth. It’s possible that a country may have to choose whether to pursue its development or to pursue environmental protection. This happens more often than one might think, and a clear example can be found in the carbon emissions debate.

Those aspects involve many issues of international cooperation, which involve a nation’s freedom to act, and the understanding that their decisions have not a local but a global effect on our ecosystems. Therefore, international agreements are essential to develop solutions that accommodate both a country’s growth needs and the need for environmental protection.

An attractive solution to this problem has been provided by the nobel prize winner J. Stiglitz. In his 2005 article in the Financial Times, he argued that developed economies should compensate emerging countries for the environmental services they provide. This solution, though guaranteeing more equality, has not been implemented in international negotiations.

The Value of Natural Capital

As said, natural capital is difficult to valuate and is much bigger than the market value of a natural resource. For example, as shown in the following infographic, the economic value of wood is only $0.4 trillion, while the benefits of trees to the world ecosystem are worth $3.7 trillion.

Value of Trees. Image via: World Forum on Natural Capital.

According to a report by the Corporate Eco Forum (CEF), “Business Imperative: Valuing Natural Capital,” every year our planet produces $72 trillion worth of free assets essential to the well-functioning of the global economy.

The UNEP, in the Universal Ownership Report, estimates that the collective mismanagement of natural assets currently costs $6.6 trillion a year and that it will grow to $28 trillion by 2050 if things remain at the status quo.

The absolute relevance of these numbers justify why many large companies have committed their businesses to reducing their environmental impacts and moving towards sustainability.

The 24 firms who signed the aforementioned CEF report highlighted how, by prioritizing our planet’s ecosystems in business planning and investments, companies can benefit in four ways:

1. Reduce risks
2. Cut expenses
3. Enhance brand recognition
4. Fuel company growth

Significative in that sense is a quote by Robert A. Iger, Chairman and CEO of Walt Disney, who said, “restoring forest ecosystems is an important part of Disney’s commitment to minimize our impact on the environment and protect it for future generations. Investing in forests is a natural solution to help us reach our goal of net zero direct carbon emissions, while also protecting valuable watersheds and habitats that wildlife and communities depend upon.”

Ursula Burns, Chairman and CEO of Xerox, is of the same mindset. She claimed, “nurturing a greener world through sustainable innovation and development saves money, creates value and helps develop new markets.”

Everyone’s Responsibility

To better the protection of our natural capital and maintain its safety, it’s important that more companies will follow the example of these “sustainability pacesetters,” and that us, as consumers, weigh more their efforts. That being said, it’s everyone’s responsibility to act towards reducing our impact on the natural planet.

Featured Image: A Honey Bee Providing Essential Ecological Functions. Image via Flickr.

Copyediting by Daniel Cordero

About The Author

Adriano Pilloni
Adriano, 25 years old, is a Master Graduate in Environmental Economics and Development from Rome Three University (Italy). During his education he developed a deep knowledge on Economics and a keen interest on Economic Theory with particular regard to energy markets, sustainability, environmental and agricultural issues. He has been proactive during his university time doing many projects and being elected by the students as Advisor of the Economics Dept. of his University. With two other students he developed a project on Food Sustainability which has been selected in the top 30 of the international Barilla contest "BCFN YES! 2013". He did the 2014 European edition of Extreme Blue, IBM's premier internship program for both graduate and undergraduate students. Now he is working as Junior Power and Gas Analyst at GDF SUEZ Italy.