NATURAL CAPITAL: PUTTING A PRICE TAG ON NATURE
One of the greatest challenges in evaluating sustainability and in making sustainable decisions
is the lack of a reliable mechanism to value nature. More and more economists and policy-makers are arguing that natural resources are in fact capital assets.
Often defined as the world's stocks of natural assets such as soil, air, water and all living things, Natural Capital, provides humans with a wide range of services, often called ecosystem services, which make human life possible. The most obvious ecosystem services include the food we eat, the water we drink and the plant materials we use for fuel, building materials and medicines.
But up until now "pricing of natural capital has remained elusive, with the result that its value is often ignored, and expenditures on conservation are treated as costs rather than investments," said Eli Fenichel, assistant professor at the Yale School of Forestry and Environmental Studies and lead author of a recent study that puts a price on groundwater and other natural capital.
Writing in the Proceedings of the National Academy of Sciences, the authors demonstrate how to price natural capital using the example of the Kansas High Plains' groundwater aquifer — a critical natural resource that supports the region's agriculture-based economy. According to their analysis, groundwater extraction and changes in aquifer management policies, driven largely by subsidies and new technology, reduced the state's total wealth held in groundwater by $110 million per year between 1996 and 2005. That is a total of $1.1 billion.
Measuring the value of natural capital can allow governments and business to redefine conservation expenditures as "investments," said Fenichel. "The idea that we can actually measure changes in the value of natural capital is really important," he said. "It shows that in places like Kansas, where groundwater is a critically important asset, there is a way to measure and keep tabs on these resources as part of a larger portfolio. And in a world where data is more and more available, it should be possible to do this more often. I think that bodes well for guiding policies aimed at maintaining all of society's wealth."
The study's authors say that achieving sustainability requires that wealth — including the value of natural capital, human capital, as well as more traditional contributors to wealth — not decline over time. Indeed, such ideas have been advanced by the United Nations and the World Bank.
The United Nations' inclusive wealth index measures the wealth of nations by carrying out a comprehensive analysis of a country's productive base; measuring all of the assets from which human well-being is derived, including manufactured, human and natural capital. In this, it measures a nation's capacity to create and maintain human well-being over time.
The World Bank's comprehensive approach is based on the premise that Gross Domestic Product (GDP) looks at only one part of economic performance—income, but says nothing about wealth and assets that underlie this income. For example, when a country exploits its minerals, it is actually depleting wealth. The same holds true for over-exploiting fisheries or degrading water resources. These declining assets are invisible in GDP and so, are not measured.
However a problem with measuring such "inclusive" or "comprehensive" wealth has been measuring the prices of natural capital.
The authors of Measuring the value of groundwater and other forms of natural capital - an interdisciplinary research team from Yale, Arizona State University, California State
University at Chico, Michigan State University,
and NOAA, led by Eli Fenichel - hope to change this shortcoming in valuing
One of the major caveats to valuing natural capital that comes to mind is that few natural capital assets have been measured. How do you apply a value to an aquifer if you have no idea of its depth, how much water is withdrawn from it and how much water returns to it? And although the authors say that the framework is applicable to the full range of natural capital assets, one would think that the lack of data on a particular natural asset might be a significant roadblock.
"Kansas has done a pretty good job and they have the longest data set
of monitoring and measuring the amount of water being
withdrawn at every well that taps into the aquifer," says Fenichel. "And part of the reason we chose Kansas
is the system's relatively simple, so we thought it was sort of good
pedagogically. You know, in a place like California, a lot of the groundwater goes
to residential use or to industrial use, consequently you have a way more complicated data set of how that water is used."
It is because the amount of groundwater used for irrigation in Kansas is well documented, that the team's researchers were able to pinpoint what the state's loss in groundwater wealth amounted to, and that this was largely due to subsidies and new technology.
"My colleague Lisa Pfeiffer, who is a co-author on this study, has
previously published work that showed that in Kansas when they
brought in these new low-flow irrigation nozzles, what actually might
have been happening was that farmers under the illusion that there was now more water, added
more acres to the irrigation and shifted from lower water-intensive
crops like wheat to higher intensive water crops like alfalfa and corn," said Fenichel.
Another caveat that comes to our (admittedly jaundiced) mind regarding the valuation of natural capital is that no matter how compelling a case you make for preserving natural capital and choosing long term benefits over short term gains, oftentimes the powers that be don't seem to care much about sustainability.
"Look I think at the end of the day
different people care about different things. But I think you're hard
pressed to find any policymaker who will tell you that they don't care
about the future. They might care about a different future. They might want to ignore
certain facts or they might want to accentuate other facts. But the
problem right now is we run our policy based on very short run
indicators like GDP," he said
"I've talked to hedge fund managers about this; I've talked to
conservationists about this; I've talked to policymakers about this. Nobody
disagrees. I think when you sort of frame it the way we have in this study, we can all get
behind the idea that we should be at least thinking about sustainability."