An economy that recognizes, measures, and assigns value to the natural capital

Symbiotic cities will not be possible without us first moving to a “whole-system” economy that “internalizes” the costs and benefits of maintaining and increasing natural capital that are now “externalized” from most economies worldwide. Natural capital comprises all of the biospheric and geospheric systems that naturally generate the ecosystem services (for example, the production of oxygen by plants; water purification and storm water management by wetlands; pollination by insects, absorption of carbon dioxide by ocean water, and carbon sequestration by forest ecosystems).  An economy that recognizes, measures, and assigns value to the natural capital and ecosystem services it generates will be integral to creating and sustainably maintaining symbiotic cities. This will be absolutely critical to driving all of the other symbiotic city transformations described in the website. Transforming the existing economic structure will obviously not be an easy task, but the terrible ecological, social and long-term economic costs of maintaining the status quo are urgent and compelling reasons for change. Indeed, the rapidly increasing destruction of wetlands, forests, coral reefs, and many other ecosystems around the world, because their value is considered “external” to our economic calculations, clearly demonstrates how urgently change is required. 

The future economic and social costs of Climate Change are good examples of what happens when the environment is externalized from our economy. Estimates vary, but most economic studies calculate that moderate temperature increases will result in a loss of 1 to 1.5% of GDP in developed countries. The worst consequences of climate change, however, will be felt most heavily in developing countries that typically happen to fall within equatorial zones. A study by the Intergovernmental Panel on Climate Change predicted that a 2.5°C temperature increase would cause a 2–9% drop in GDP in developing nations. 

WHY?

Although all of the key transformations that we have described on this website are possible within the structure of our current economic system, their implementation would require significant top-down government regulation, and bottom-up grassroots pressure. If, however, we can internalize the value of natural capital into how we measure and account for economic activity - so that the costs of damaging or destroying natural capital, as well as the value of maintaining and growing our natural capital are accurately accounted for - then most of the key transformations we have discussed on this website will happen simply as a logical response to natural capital being valued. 

For example, if the extraction of resources like iron ore, bauxite and wood have to account for the damages done to natural capital to obtain them, then there will be a huge end-price incentive for any participant in the economy to find ways to reduce harm to natural capital while obtaining natural resources in order to reduce the extraction and manufacturing costs of their product or service. This would also mean that any material that could be recycled would be, as it would be far less costly to recycle than to extract raw resources and internalize the costs of doing so without causing any damages to the environment.     

Another good example would be the impact of internalizing natural capital costs on carbon dioxide emissions. If the impact of carbon dioxide emissions on increasing atmospheric warming was priced, then suddenly energy produced from carbon-releasing fossil fuels would be much more costly to use than energy from non-carbon-releasing renewable energy sources such as solar and wind.  

Similarly, the containment of suburban sprawl, and a shift toward increased urban density would be driven by internalization of value of natural capital into economic calculations. As has been demonstrated by Geoffrey West, and Edward Glaeser, dense urban habitation is far more environmentally sustainable than low-density suburban sprawl. Urban sprawl chews up a tremendous amount of natural capital per capita, and would lose its economic rationale if the value of natural capital was internal to economic calculations.

Then there is the building industry. The production and use of building materials that either produced no negative environmental impacts, or, better still, increase natural capital – for example, sustainably harvested wood – would all of a sudden make economic sense and be much more profitable to developers than materials that had natural capital costs associated with them. Obviously, the same logic applies to the urban food and ecosystem infrastructure transformations.

So though there will be tremendously difficult hurdles to overcome in order to transform our current economy into a whole-system economy that internalizes the value of natural capital, it’s clear that its current logic of externalizing environmental costs is simply not compatible with creating symbiotic cities, a long-term sustainable economy, and long-term sustainable natural systems.

HOW?

Retooling our economy into a whole-system economy that “internalizes” environmental costs and benefits will require three mutually reinforcing sets of actions: First, we will need to build awareness and create a better and broader understanding by both experts and non-experts of the why internalizing natural capital into our economic calculations will have such an important positive impact our relationship with natural systems. Second, we will need to develop the means of effectively measuring and accounting for the value of natural capital and the ecosystem services it generates. Third, we will need to change attitudes by leveraging the increasing awareness of the value of natural capital, and how it could and should be integrated into our economy to drive economic policy change at all levels of government, including at an international treaty level.  Attitudes drive action, in this case through the transformation of popular opinion and resulting shift in political will.

1.  Awareness Building:
The phrases “ecosystem services”, “natural capital” and “whole system economics” are not familiar concepts to many people, let alone well understood.  We will need to build awareness and to make clear why they are important to our collective futures.  One of the reasons we created this website was to be part of that awareness building. Both connecting interested persons and holding awareness-raising idea competitions are integral parts of awareness building. 

2.  Measurement of Value and Service:
We must develop effective methods and tools for measuring the value of natural capital and the ecosystem services it generates. These methods and tools are critically important to implementing an economic transformation that properly integrates the value of natural capital into our economy. Being able to measure this value provides us with a foundation for making key economic decisions that can internalize the value of natural capital. One of the world’s leaders in exploring how this might be most effectively done is the Natural Capital Project [http://www.naturalcapitalproject.org]. The Natural Capital Project (NatCap) aims to integrate the value of nature capital into all major decisions affecting the environment and human well-being. Its ultimate objective is to improve the state of biodiversity and human well-being by motivating greater and more cost-effective investments in both. NatCap develops simple, use-driven approaches to valuing nature, works closely with decision makers, and provides free, open source ecosystem service software tools to a broad community of users.

Accounting for value of natural capital will allow cities to understand the value of investing in long-term natural capital solutions to various environmental problems they will face in future, such as the increased frequency and intensity of flooding.  It will also allow cities to better balance the investment in hard infrastructure, like storm sewers and physical flood control systems, versus investing in green infrastructure, such as natural storm water management through forest and wetland ecosystem development and management. 

The yardstick by which most countries in the world currently measure the health and wealth of their economies is gross domestic product (GDP). Although this measure is a reasonably effective means of measuring the production of goods and services in an economy, it completely ignores the value of natural and human capital. A more effective tool for measuring the wealth and economic health of nations and cities is needed to account for the integral relationship between our economy and the natural systems it functions within.  And such a measurement tool will be essential for determining and justifying the necessary future investments in policies, programs, and technologies required to generate the long-term health of the natural environment, and the environment’s ability to keep supporting our economic health. 

Indeed, the shortcomings of GDP suggest that we must adopt more inclusive measures of economic success that consider quality of life and environmental indicators. A comprehensive system would also expose the inefficiencies in the current economic framework, such as negative externalities. A good example of an “externality” that needs to be internalized in our economy is the problem of unsustainable greenhouse gas emissions.  Releasing greenhouse gases like carbon dioxide and methane into the atmosphere is an example of a negative externality whereby the damage is inflicted by one economic actor, but the consequences of that action are born by everyone on a global scale. A common economic remedy to this market distortion is to levy a per-unit tax on pollutants. A carbon tax would internalize the costs of GHG emissions, thereby increasing the cost of polluting and reducing demand for the product or service that was causing the pollution. The tax revenue could then be used to invest in renewable energy technologies that could eventually render fossil fuels obsolete.

The costs of pollution are invisible in the current marketplace, but so too is the value of services provided by natural ecosystems. By regulating the atmosphere and sequestering more carbon than any other biome on the planet, the Canadian boreal forest contributes an estimated $93 billion worth of ecosystem services each year. Treated as a capital asset, the boreal forest is 2.5 times more valuable than the annual market value of resource extraction. Services provided by other ecosystems such as wetlands include storm and flood protection, climate stabilization, water filtration, and nutrient cycling. These services make life on earth viable, yet they exist entirely outside of global markets. The GDP’s exclusive concern with physical and financial assets means that there are no prices attributed to natural capital produced by the environment.

3.  Change Attitudes:  
In addition to be increasing the awareness of the value of natural capital, and developing effective tools for measuring its value, we also need to change attitudes. Cities have a long-term vested interest in supporting natural capital, and would probably do so if the economy valued and supported it. But attitudes about what is  valued and how it is measured in an economy must be shifted to support internalizing the value of natural capital and the life-giving ecosystem services it generates.  While developing a whole-systems economy for the Symbiotic City will not be easy, adapting our lives to the inevitable consequences of climate change and continued environmental degradation will be much harder. John de Graaf and David Batker, authors of What’s the Economy for, Anyway?, offer valuable perspective in stating, “It is easier to reduce carbon dioxide emissions than to defend ourselves against ever-larger hurricanes, floods, and droughts. It is less costly to manage better what we best understand and control: the economy.” Following this logic, investing in real solutions that protect valuable ecosystem services and internalize the costs of irresponsible economic behaviour is a bargain. Transforming the economy to match the objectives of the Symbiotic City is a project we can’t afford to ignore.

Once this is achieved, it will be possible to implement the second vital step, which is the creation of policies that force the internalization of the costs of economic actions that destroy or degrade natural capital. 

 


Resources

  1. What’s the Economy for, Anyway? by John de Graaf and David K. Batker http://www.eartheconomics.org/WTEFA.aspx
  2. Ecological Economics, Second Edition by Herman E. Daly and Joshua Farley http://www.islandpress.org/ip/books/book/islandpress/E/bo8052974.html  
  3. The Economics of Global Climate Change by Jonathan M. Harris and Brian Roach https://www.economicsnetwork.ac.uk/sites/default/files/Brian%20Roach/The_Economics_of_Global_Climate_Change.pdf
  4. Monetising Natural Capital through Environmental Profit & Loss for Decentralised Energy Assets by Utilyx http://www.utilyx.com/documents/pdf/natural-capital-report.pdf
  5. TGEink: The Magazine of the Green Economy http://tgeink.com/monetizing-natural-capital
  6. The Natural Capital Project http://www.naturalcapitalproject.org/