2. Valuing Natural Capital

2.1 Introduction

This section outlines three approaches to integrating the value of natural capital and ecosystem services into policy making; two for improving national accounting and one for policy and project appraisal. None of these methods are perfect, but they are each a considerable improvement on not including the value of the goods and services provided by the natural world. Equally, it is not possible to attribute an economic value to every ecosystem service, so any attempt to value one service will be a conservative estimate of the true benefits provided by the ecosystem.

2.2. Environmental Accounts

Environmental accounts incorporate the value of natural capital into the national accounting framework. The integration of environmental accounts for stocks and flows of natural resources, environmental expenditure and environmental macroaggregates with other economic data in the national accounts allows for detailed analysis of the relationships between the environment and the economy.

By developing comprehensive environmental accounts, natural capital can be included alongside other forms of capital in national income accounts. This approach will highlight to policy makers the relationship between the environment and the economy, and help ensure that natural capital is used in a sustainable way to support the economy over the long term.

2.2.1. System of Environmental and Economic Accounting (SEEA)

An international standardised framework for environmental accounting is currently being developed through an intergovernmental process and is due for completion in 2012. The most recent version of this framework ‘The Handbook of National Accounting - Integrated Environmental and Economic Accounting’, (commonly referred to as the SEEA), was published in 2003 and includes a book of best practices, reflecting country experiences and providing multiple options for environmental accounting.

This new version will be divided into two volumes; firstly a set of standardised methods for environmental accounting that can be integrated with the System National Accounts (SNA), this will cover natural resource asset accounts; flow accounts for materials, pollutants, energy and resources; expenditure on environmental protection and resource management; and environmentally-adjusted macroeconomic indicators. The second volume will cover the areas where there is not yet a standardized methodology, but where numerous approaches have been developed, such as for ecosystem valuation. Although not yet standardised, these methodologies demonstrate that the economic value of ecosystem services can de estimated and used in policymaking.

2.2.2. Wealth Accounting

The other well-known method for incorporating the value of natural capital into estimates of national wealth is the World Bank’s work on ‘wealth accounting’. This approach emphasises the importance of including changes in natural and social capital within the annual measure of national wealth. This will allow changes in natural capital to be reflected in the macro-level aggregate indicators that describe the state of the economy. Within this approach, the measurement of natural capital includes the valuation of agricultural land, subsoil assets, timber and non-timber forest products. The latest natural capital estimates from the World Bank in 2003 do not include the valuation of ecosystem services, however, this process is ongoing and the valuation methodologies are being updated.

2.3 Economic Appraisal

In addition to developing environmental accounts, the economic appraisal of government policies and projects needs to be made more comprehensive to ensure that the true value of the natural capital and ecosystem services is considered when deciding upon the most cost effective option that achieves the desired objectives. There are a broad range of methodologies that can be used to put an economic value on ecosystem services, however, they have primarily been applied at a landscape or regional scale and vary according to their reliability, accuracy and sophistication.

In addition, obtaining consistent and precise ecosystem valuations can be expensive and time consuming. One approach that minimizes the cost and time of valuing of environmental costs and benefits is to use the ‘value transfer’ method, also known as ‘benefits transfer’. This approach allows information from previous economic valuations to be applied to a new context. For example, the flood protection benefits of a wetland may be calculated using existing estimates of flood protection value
that were derived in a similar context.

2.4 How to Avoid Paralysis by Analysis

The lack of a recognised and consistent approach to valuing natural capital is often quoted as the reason that the true value of the natural environment is not fully integrated into policy and accounting frameworks. However, we believe that there are a number of relatively simple tools and methodologies that can be adopted immediately to ensure that policy decisions better reflect the role that ecosystems play in underpinning our economy and society. Chapter 3 of the GLOBE Natural Capital Action Plan looks at the role of legislators in achieving this transition.

2.5 Sequencing

It will be important for governments and legislators to sequence the introduction of the measures outlined in this paper. We believe that we know enough for action to be taken now, but that as politicians move to implementation and legislation, it will be important for governments and legislators to sequence the interventions. Clearly the decisions involved in this will be different for each government. Most importantly, however, and based on the experience of many GLOBE legislators, it is clear that it is important to begin the process of advancing legislation rather than crafting perfection which will only ever delay action.