Natural capital: if we look after the stocks, will the flows look after themselves?

dieterThe notion of ‘natural capital’ is gaining traction among economists and policy makers. To discuss this I was joined by Dieter Helm at the third in our series of economic seminars. Dieter is both an academic and a practitioner, with a substantial record of applied economic policy analysis in fields such as energy and the environment. He also chairs the Natural Capital Committee (although he spoke in a personal capacity and not on behalf of the committee).

Below is a brief overview of our stimulating discussion, with short audio clips . You can also listen to the full discussion (1 hour 4 mins). 

What is natural capital?
I began by asking Dieter for a definition of natural capital (3.54 mins).

In its simplest form, natural capital refers to assets provided by nature that are either non-renewable (eg oil) or renewable (eg fish stocks). Many of the interesting challenges relate to the latter because, although such capital is renewable by definition, there may be thresholds beyond which damage becomes irreversible.  I asked how we should distinguish natural capital from the concept of ecosystem services. (3.55 mins)

Dieter explained that the key distinction is between seeing the environment in terms of stocks of assets or flows of services. The natural capital approach is an asset based approach, which can account for thresholds in renewable capital.

What are the goals of the natural capital approach?
I asked about the goals of the natural capital approach. (4.31 mins)

For Dieter it was a conceptual framework for assessing policy choices relating to the environment. But he also felt that, by protecting against over consumption of natural capital, such a framework would almost certainly lead to better environmental outcomes.

Dieter cited the road built through Twyford Down in the early 1990s as an example of where a natural capital approach would have led to better decision making. (5.51 mins)

In this case the option of building a tunnel, at a cost of up to £90 million, would have made more sense with a natural capital approach. This is because any plausible valuation of the natural capital of Twyford Down would have very likely been in excess of the costs of building a tunnel.

This example provoked considerable interest among our invited audience. One asked what analysis would have convinced decision makers that Twyford Down was worth preserving. (1.50 mins)

Dieter reiterated that it was not necessary to conduct a full valuation, but one just needed to be confident that the benefits were worth more than £90 million. Whilst a natural capital approach would not guarantee that policy makers made the right choices, it would at least “shine a torch” on their decision making.

Can we ensure that natural capital values are maintained?
A more fundamental question related to changes in what is valued over time. Dieter emphasised that, as decisions are made in a democracy, they should reflect the prevailing values. There were also questions over whether people have enough information or understanding to make such decisions. (6.28 mins)

Dieter saw dangers in those who feel they “know better” trying to impose their preferences on the wider society. Rather, he suggested that it would be better to provide information to enable the population to make more informed choices.

Another questioner asked what can be done when damage thresholds are already exceeded and depletion is continuing. (9.34 mins)

Dieter recognised that we may not start from a good place, with a sub-optimal set of natural assets which are deteriorating.  He drew an analogy with the wider economy, where he saw an excessive focus on consumption over investment to maintain assets. There is first a need to maintain the natural capital that we have and then to consider how much restoration is needed. Valuing ecosystem services is important, but there is also a need to take account of asset thresholds and system properties.

The consideration of system properties led to a broader discussion on the limits of marginal policy tools for transformational change. (2.53 mins)

How can natural capital be introduced to the political system?
There was a question about whether the inherently collective nature of natural capital, could fit within a political economy focused on radical individualism. (3.26 mins)

Dieter agreed that many natural capital assets are public goods, but didn’t accept that this meant that everything had to be done by the state. Natural capital can also be managed by independent organisations such as the National Trust and The Wildlife Trusts.

One questioner asked if it was more realistic to maintain ecosystems services rather than assets in every locality. (5.33 mins)

Dieter argued that there was a need to be pragmatic on such questions. He gave the example of grouse moors, where there are ecosystem services, but the moorland asset also contains peat, biodiversity etc. The asset based approach recognises that we bequeath assets – not services – to future generations.

Monetary valuations are unavoidable
I asked how much the concept depended on monetary valuations of natural capital. (6.05 mins) Dieter responded by saying that while such valuations are controversial and problematic, they are unavoidable when making difficult choices concerning the environment.

I then asked how the approach can allow for offsetting, where damage in one area can be offset by improvements in another. I wondered whether destruction would prove easier to achieve than enhancement of natural capital (6.36 mins). Dieter argued that some destruction is unavoidable given economic and social pressures. The only way to maintain or improve the stock of natural capital is to use a framework that requires compensation for damage.

Finally, there was a question about company sustainability reporting and natural capital accounting (2.12 mins). Dieter emphasised that investors will want to know about liabilities, and it is important to be practical about how to do this. The Natural Capital Committee provides templates and case studies which can help businesses.

Also posted, with more images, on Storify

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