Chart of the Day, 6 Feb 2015: Is Natural Capital a Helpful Concept?

Although David Cameron has come under criticism for his previous boast about running “the greenest government ever” in the UK, the coalition should be given credit for bringing some fresh thinking to the field of environmental economics. In particular, the concept of natural capital – the different elements of nature that provide value for people – has been lifted into the limelight (click for larger image).

Natural Capital jpeg

The idea of natural capital first popped up in E.F. Schumacher’s 1970s eco classic “Small Is Beautiful”. Only recently, however, has it migrated from academia to economic policy-making, most noticeably taking centre stage in the 2011 government white paper “The Natural Choice: Securing the Value of Nature”.

This white paper, in turn, gave birth to the Natural Capital Committee, chaired by the Oxford economist Dieter Helm, which has produced a series of three reports under the common title “The State of Natural Capital” (here).

So is this all “green crap” (the phrase attributed to PM Cameron when talking about energy bills)? At first glance, it looks eminently sensibly from a business perspective; that is, subjecting nature’s assets to the discipline of accrual accounting. Firms are comfortable with the concept that capital depreciates and that this is a cost. For a company to remain an ongoing concern, it can’t trash its balance sheet to the benefit of the income statement–at least not for long. Similarly, if we erode our soil or pollute our air, the benefits from these resources will gradually diminish.

Yet there are many problems. While we can sometimes back out the value of complex assets like shore-line ecosystems in terms of their functioning as flood defence, extending this approach to intangibles such as a picnic in a park is problematic.

Further, if we wish to prevent natural capital eroding, then we have to assign costs. Much natural capital suffers from the tragedy of the commons (certain economic actors secure profits but dump the costs associated with these profits on society as a whole), and getting the Office of National Statistics to compile natural capital accounts will be meaningless if enforcement isn’t given teeth. The record on climate change isn’t encouraging here. The economics profession is almost unanimous in recommending a carbon tax to make CO2 polluters pay, but few governments have thad the guts to implement one in the face of vocal opposition from vested interests.

Finally, natural capital accounting will live or die by how much you discount the future compared to the present. If we assign a high discount rate, then there is a rationale for gutting our children’s future in order to consume now. A low rate implies we care about coming generations. After the May elections, the incoming government will get to show how much it cares.

 

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