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Written by Matthew Agarwala

Natural capital – The $100 trillion missing from the economy

One hundred trillion US dollars is a lot of money. Enough that failing to account for it would not just be an oversight, but rather would undermine the entire exercise. Yet by ignoring natural capital, standard economic measurement does exactly this.

Dollars

The term natural capital is enjoying a degree of prominence, in environmental economics, corporate sustainability, and increasingly in government policy. Think of it in terms of the following analogy. A car manufacturer’s factory and machines are capital assets that each play a role in production. Maintained over time and combined with other inputs, they can support vehicle production long into the future.

Similarly, nature can be thought of as a suite of natural capital assets that play a role in production. For instance, ecosystems encompassing soil fauna, soil microbes (especially bacteria and fungi), bees and other insects perform nutrient cycling and pollination services, both of which are necessary inputs into agricultural production. Maintained over time and combined with other inputs (labour, seeds, tractors and farmers’ skills), they can support food production long into the future.

In both the car factory and the ‘natural factory’, capital assets can be degraded over time. If they depreciate enough, future output declines. Just as manufacturers need to invest in maintaining physical capital, so too must governments, companies, and indeed all of us dependent on natural capital invest in its maintenance. Nature offers a head start: unlike physical machines, many natural capital assets can self-replenish (so long as they are not over exploited).

But our existing economic statistics largely omit the value of natural capital, which even the most conservative of estimates places at many times more than Gross World Product. The $US 100tr estimate mentioned above comes from the World Bank’s most recent review of natural capital. Even this is a lower-bound estimate, covering only a subset of natural capital (fossil fuels, minerals, agricultural land, forests, and protected areas) for 141 countries.

The good news is that businesses and governments are increasingly aware of the importance of natural capital and are taking steps towards measuring, valuing, and accounting for it. For businesses, the Natural Capital Coalition – an international group of stakeholders ranging from Gucci to UNEP – have developed the Natural Capital Protocol offering guidance on how to embed natural capital into business decision making. Meanwhile, governments are beginning to integrate concerns for natural capital in policy development (e.g in the UK and in New Zealand) and the United Nations has adopted an official statistical standard around environmental accounting.

Given the interest surrounding natural capital, it’s worth considering a commonly repeated assumption, namely that ‘we value what we measure.’ The implication of this is that we leave natural capital out of the macroeconomic statistics simply because we can’t measure it, and if only we could, then our accounts would include it. But this isn’t the whole story. The past quarter century has seen unprecedented improvements in our ability to monitor (think remote sensing and satellite imagery) ecosystem function and service provision. Yet standard economic measurement still hasn’t incorporated the now widely available information.

The fact that we can (and do) measure natural capital and its associated ecosystem services suggests its continued omission from economic statistics requires another explanation.

In Physics and Philosophy, physicist and Nobel Laureate, Werner Heisenberg emphasizes “a subjective element in the description of atomic events, since the measuring device has been constructed by the observer, and we have to remember that what we observe is not nature itself, but nature exposed to our method of questioning.”

Analogous subjective elements exist in the description of economic events, and our measuring devices (accounting systems) – also constructed by observers – fail to reveal the nature of the economy itself. Natural capital accountants seek to improve our method of questioning so that the value of natural assets and their services can be extolled in the stories told by economics accounts.

In her book, GDP: A brief but affectionate history, Diane Coyle explains that ‘what’s in’ and ‘what’s out’ of the national accounts has historically been driven by political, rather than economic interests. Interestingly, it seems that historically, most accounts were constructed to answer the question ‘can this country afford a war?’. The time has come for a new question: ‘can this country behave sustainably?’.

Our research project, The Wealth Economy: Natural and Social Capital seeks to change our method of questioning – and our measuring device – to capture the value of natural capital, bringing economic statistics a little closer to reflecting nature itself.

The Wealth Economy: Natural and Social Capital is funded by LetterOne.

  • About the author

    Matthew Agarwala, Research Leader: The Wealth Economy

    Matthew Agarwala is an environmental economist interested in wealth-based approaches to measuring and delivering sustainable development. The pace of globalisation, innovation, and social, environmental, and economic upheaval leaves no doubt: 20th century statistics can’t capture 21st century progress. Matthew joined the Bennett Institute’s wealth economy ...   Learn more

    Matthew Agarwala