Tag: Valuing Nature Explainer Series

Harnessing Natural Capital Accounting for Sustainable Development

Insights gained from natural capital accounting can guide the design of projects and public policies.

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Introduction

Although GDP is an important indicator that reveals the economic performance and income growth of a nation, it fails to indicate how natural resources have been utilized to achieve such growth. In many countries, substantial GDP growth has come at the expense of natural capital loss, yet this loss has never been officially and systematically measured. The lack of information regarding changes in the stock and flow of natural resources and ecosystems has resulted in misleading behaviors that sacrifice natural capital in exchange for an increase in GDP.

Natural capital accounting (NCA) is a practical tool that recognizes natural capital as an asset that should be measured alongside financial, human, and social capital. It has been increasingly adopted to complement GDP by reflecting the interdependent relationship between the economy and natural capital. Many countries have implemented natural capital accounting practices, and some advanced countries have established official accounts for several ecosystems in their national statistics, alongside other economic and social accounts.

What is natural capital accounting?

Natural capital accounting systematically quantifies the total stocks and flows of natural resources for a given ecosystem or a region. It collates both physical and economic measurements of ecosystems including their extent, condition, and the flows of services they provide to humans. Natural capital accounts provide an integrated view of the interdependence between the environment, the economy, and society.

Accounting practices can be conducted for: (i) individual environmental assets or resources such as timber, energy, water; (ii) entire ecosystem assets such as forest and wetlands; and (iii) biodiversity and ecosystem services such as air pollutant absorption, water retention, and recreation, among others. Currently, the System of Environmental-Economic Accounting (SEEA) is the official approach for conducting NCA, adopted by the United Nations Statistical Commissions (UNSC) in 2012. SEEA comprises five different accounts categorized into two types: physical accounts, which measure the extent and condition of ecosystems and the annual flow of ecosystem services, and the monetary accounts, which assign monetary values to ecosystem services and record the overall value of natural assets in terms of their capacity to produce future flows of services.

How does economic valuation of ecosystem services contribute to natural capital accounting?

The economic valuation of ecosystem services plays a crucial role in natural capital accounting, particularly in monetary accounts. It addresses a critical challenge: many ecosystem benefits are intangible and thus overlooked in decision-making processes. Economic valuation methods step in to quantify these non-market benefits and seamlessly incorporate them into monetary natural capital accounts. This integration enhances our understanding of the economic significance of these services.

Furthermore, ecosystems come in diverse forms, each with unique physical unit value. Water, energy, and soil, for instance, are distinct entities. Here, the economic valuation of ecosystem services in monetary natural capital accounts performs a unifying role by assigning a homogeneous unit value—dollar value—to this array of physical units. This standardized valuation approach allows for meaningful comparisons across different ecosystem types and between ecosystems conservation and economic activities.

What are the implications of natural capital accounting?

Information from natural capital accounting can have many implications in supporting the design of projects and public policies at all stages of the policy cycle. It can be used for ex-ante analysis to inform strategic upstream planning, prioritize investments, and, in conjunction with other tools, design policies and regulations needed to implement such plans. For example, investments can be prioritized in areas where the ecosystem account has high value or in specific ecosystems that are degrading.

NCA can also be used in interim or ex-post monitoring and impact evaluation of policies and regulations through a macro environmental-economic indicator. The physical accounts can assess and allocate resources across sectors more sustainably, while the monetary accounts can be used for cost-benefit analyses to identify trade-offs between economic and environmental outcomes.

Early and strategic thinking about natural capital frames the dependence on nature as a fundamental financial sustainability issue, thus switching the focus from improving environmentally friendly practices to truly safeguarding the stock and flow of natural capital.

What is the progress of NCA so far?

Natural capital accounting has been more advanced in several developed countries. The Netherlands and the United Kingdom are the two pioneers. These countries have successfully integrated natural capital accounting into their national accounting systems and facilitated the implications of natural capital accounts in government policy decisions and business actions.

For example, NCA was used in the transport sector in the UK to inform the development zones and infrastructure planning. Private companies are incorporating natural capital assessments into their sustainability reporting. Nestle is trading natural capital benefits generated from its sustainable farming practices. In the Netherlands, monetary environmental accounts are used to develop a green growth indicator to measure policy instruments. Other countries such as Australia, New Zealand, and USA are progressively catching up with many national policy actions and strategies to facilitate the implementation and implications of natural capital accounting across sectors and stakeholders.

Developing countries have made progress in piloting NCA practices. For example, the People’s Republic of China (PRC) has developed a Gross Ecosystem Product (GEP) indicator based on SEEA approach and piloted it in more than 150 counties. The government has promoted GEP implications in several areas including spatial land-use planning, governance performance evaluation, eco-compensation scheme designing and evaluation, and ecological product development. In the Philippines, initial progress has been achieved in developing accounts for mangrove ecosystems and regional ecosystem accounts. Indonesia has leveraged NCA data to improve national spatial planning and inform the country’s Intended Nationally Determined Contributions.

How to increase the implementation of NCA in developing countries?

While developed countries possess both technical and financial capacity to advance natural capital accounting, developing countries may require additional assistance. Regional and global initiatives play a crucial role in expanding NCA practices in these countries. Initiatives such as WAVEs and the Natural Capital Lab have achieved initial success in introducing and piloting NCA in several developing countries. Establishing a knowledge-sharing platform to disseminate evidence and lessons from peers facilitates the replication of NCA practices in similar geographic contexts. In addition, capacity building, technical support, training programs, and investments in data monitoring technology are essential for scaling up the successful outcomes of NCA and integrating them into decision-making processes.

This article is the third installment of the “valuing nature” explainer series. It is ideal to read the first and second pieces before proceeding with this one.

Lan N. Le

Lan N. Le

Environmental Economist, Agriculture, Food, Nature, and Rural Development Sector Office, Sectors Group, Asian Development Bank

Christian Fischer

Christian Fischer

Knowledge Management Specialist (Consultant)

Narayan Iyer

Narayan Iyer

Senior Natural Resources and Agriculture Specialist, Agriculture, Food, Nature, and Rural Development Sector Office, Sector Group, ADB

This blog is reproduced from Development Asia. 

Harnessing Natural Capital Accounting for Sustainable Development – Regional Knowledge Sharing Initiative

How to Assign Value to Ecosystem Services

Vital functions such as air and water purification, climate regulation, and pollination are non-market regulating services provided by the environment. Photo credit: ADB.

Valuation approaches include cost-based, revealed preference, stated preference and benefit transfer.

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Introduction

Recognizing the value of nature is crucial in fostering healthy and resilient ecosystems—essential for ensuring the long-term well-being of the ever-growing global population. It is imperative to understand and acknowledge the true worth of natural assets, not only for the present but also for future generations.

One of the primary challenges stems from the intrinsic non-market nature of many ecosystem goods and services. Nature provides an array of benefits, often intangible and challenging to quantify economically, yet they are fundamental for quality of life.

Various methodologies exist to evaluate the value of these non-commercial ecosystem benefits effectively, providing key insights for making informed decisions and promoting sustainable environmental management.

What are the non-marketed ecosystem goods and services?

Non-marketed ecosystem goods and services are the benefits derived from natural ecosystems that are not typically traded in traditional markets. These services encompass regulating, cultural, and supporting services.

Regulating services include vital functions such as air and water purification, climate regulation, and pollination, all of which maintain the balance of the natural environment.

Cultural services encompass non-material benefits such as recreational spaces, spiritual and educational experiences, and aesthetic appreciation, enriching our cultural life and well-being.

Supporting services form the foundation of ecosystem productivity, including soil formation, nutrient cycling, and primary production. These services often lack a direct market value, making their preservation and appreciation a challenge. Understanding and acknowledging the significance of these non-marketed ecosystem goods and services is crucial for sustainable environmental management and policymaking.

How can one assign a monetary value to non-marketed ecosystem goods and services?

Ecosystem services, integral for the environment and well-being, can be appraised using various valuation methods. These methods utilize market price data or derive insights from consumer preferences though a range of non-market valuation techniques.

  • Cost-based approaches estimate the expenses associated with replicating ecosystem services using human-made methods (replacement cost) or preventing negative environmental impacts (defensive expenditure). For instance, the cost of constructing and maintaining a water treatment plant reflects the value of the water purification service provided by wetlands. However, accurately determining these costs presents a key challenge due to the complexity of ecosystem services.
  • Revealed preference approaches use market data to infer the value of services that are not directly traded in markets. Prominent examples include the “travel cost” method and the “hedonic pricing” model. The travel cost method relies on data such as travel expenses to recreation sites—covering transportation costs, time, entrance fees—to establish demand curves and gauge willingness to pay for access. For example, significant travel and expenses incurred by visitors to a national park suggest a high value for its recreational experience. On the other hand, the hedonic pricing model uses real estate transaction data to estimate the value of environmental features, such as air quality or the impact of noise pollution. For instance, the higher value of houses located near wetlands, compared to those farther away, helps quantify the wetland’s implicit value. 
  • Stated preference approaches employ survey methods to directly gather data from individuals regarding their valuation of various environmental aspects. These encompass two primary methods: contingent valuation (CV) and choice experiments (CE). CV surveys ask about individuals’ willingness to pay for preserving specific ecosystem services. In CE, respondents select their preferred option from a range of scenarios, each presenting different environmental attributes and associated costs. For instance, in the evaluation of wetlands, a choice set might offer options representing varying levels of benefits such as water regulation, purification, recreation, and biodiversity maintenance. Analyzing these choices and trade-offs helps assign monetary values to each benefit. Stated preference approaches are especially useful for valuing environmental benefits not directly bought or sold in the marketplace.
  • Benefit transfer is a practical method for valuing ecosystem services, whereby an estimated value from one location is applied to another with similar characteristics. This approach proves beneficial when faced with constraints such as limited time, resources, or data availability.

While often considered as less precise due to the variability in ecological and socio-economic conditions across sites, its simplicity and ease of use make it a popular choice for rapid assessments. For instance, if a study in one region quantifies the value of a wetland for water purification, benefit transfer enables policy makers in another region with similar wetlands to use this figure as a baseline. This proves particularly helpful for swift, preliminary decision-making.

However, it’s crucial to carefully consider contextual differences between the study area and the application area to ensure the most accurate value transfer possible.

When to Use Which Valuation Approaches

The selection of an appropriate method for valuing specific ecosystem services is not straightforward and heavily depends on the context. Several factors need consideration, including the complexity and significance of the ecosystem service in question, the availability of data, the technical expertise of the analysts involved, and the constraints of time and resources.

Cost-based approaches, while easier to apply, may not fully encapsulate the entire value of a service. On the other hand, revealed preference approaches, though increasingly common, are typically employed in research studies or for analyzing large and complex projects rather than standard project analyses. Meanwhile, stated preference approaches, despite being the preferred method to capture some non-use values of ecosystem services, often face scrutiny due to their subjective nature.

For complex investment projects affecting diverse ecosystems, it is vital to include site-specific studies to accurately assess the benefits and costs of ecosystem services. Integrating environmental impact assessments with economic analysis is crucial to fully understand and value the true worth of nature. This approach ensures decisions are informed by a thorough comprehension of both ecological and economic impacts.

A significant challenge in assessing ecosystem values is the scarcity of data, often leading to the frequent use of benefit transfer methods due to their convenience. To enhance the effectiveness of this technique, the creation of an ecosystem database tool is becoming increasingly essential. This tool would compile reliable, peer-reviewed values from different regions, aiding in the selection of fitting values for benefit transfer purposes. Given the dynamic nature of ecosystem services, the database would require regular updates to reflect changing values, establishing it as a dependable, more streamlined, and precise resource for valuation. The development of such a tool would represent a significant advancement in environmental economics.

This article is the second installment of the “valuing nature” explainer series. It is ideal to read the first piece before proceeding with this one.

The third article in this series will discuss natural capital accounting, a practical tool that provides an integrated view of the interdependence between the environment, the economy, and society.

Authors

Jindra Nuella Samson

Jindra Nuella Samson

Senior Economics Officer, Economic Research and Development Impact Department, Asian Development Bank

Martino Pelli

Martino Pelli

Senior Economist, Economic Research and Development Impact Department, Asian Development Bank

Lan N. Le

Lan N. Le

Environmental Economist, Agriculture, Food, Nature, and Rural Development Sector Office, Sectors Group, Asian Development Bank

This blog is reproduced from Development Asia. 

From Exploitation to Conservation: Recognizing the Value of Natural Assets

Globally, natural assets are believed to contribute benefits worth at least $125 trillion every year. Photo credit: ADB.

Without proper valuation, natural assets' scarcity remains economically invisible, leading to their exploitation for short term gains.

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Introduction

For centuries, humanity has exploited Earth’s natural resources, and, for the most part, has been aware of the ensuing global impacts such as climate change, biodiversity loss, disrupted ecosystems, land degradation, and public health emergencies, including novel pandemics. These results in massive economic losses, reduced nature benefits, the loss of natural beauty, and risks to people’s health and well-being. Despite this awareness, the global community has often overlooked scientific guidance and undervalued the importance of nature.

Policy formulation and decision-making processes must align with sustainable, safe, and resilient resource allocation mechanisms. It is critical for policy makers to recognize the natural environment and ecosystems as valuable cultural and capital assets, alongside physical, human, social, and intellectual capital.

What are the values of nature?

Nature and ecosystems provide various goods and services categorized into four main types: (i) provision services (e.g., food, timber, fresh water, medicinal plants); (ii) regulating services (e.g., pollination, purification, climate regulation, flood protection); (iii) cultural services (e.g., recreation, spiritual and aesthetic, education); and (iv) supporting services (e.g., soil formation, nutrient cycling).

Based on these services, the values of nature can be classified into use and non-use values. Use values can be direct or indirect. Direct use values are provided by provisional services such as foods, crops, fish, and water directly consumed by people. These values are often priced in markets. Indirect use values are mostly attributed to regulating and supporting services. These values may not be experienced immediately by people but provide functions without which human life and society cannot sustain.

In addition to use values, natural systems also generate non-use values, mostly derived from cultural services, categorized into bequest value and existence value. Bequest value refers to the knowledge that future generations can benefit from natural systems, while existence value is related to the knowledge that ecosystems and biodiversity exist. These non-use values are more abstract and rely on human perspective. For example, a person does not need to use or see an ecosystem (e.g., wetland, lake), but its existence may still bring satisfaction and contribute to the person’s welfare.

Why didn’t society value nature before, and why is it critical to do so now?

Until a few centuries ago, humans enjoyed and harvested abundant natural resources without witnessing any major repercussions of their activities. At the time, the demand for and use of nature had not exceeded its capacity for regeneration. Moreover, the loss of habitats or ecosystems could take a lifetime to become noticeable due to time lags, contributing to ignorance of natural assets. For many centuries, it was mistakenly believed that nature could never be irreversibly degraded.

The rapid growth of the global population in a limited environment has transformed natural resources from plentiful to scarce. In times of abundance, the marginal values of these resources are minimal. Adam Smith’s well-known diamond-water paradox highlights how people historically undervalued water compared to diamonds. Now, however, in an era where water is increasingly scarce, it’s crucial to reevaluate this perspective. The marginal value of water is likely to soar as its availability diminishes. When society harms nature to the point where it can’t support basic human needs or regenerate itself, the marginal value of nature, or the cost of losing even a single unit of it, could become immeasurable.

Valuing nature is challenging due to the complexity of assigning monetary values. While direct use values of ecosystem services have clear market prices, many goods and services from nature lack market value. Various methods, ranging from simple to complex, exist to quantify these non-market values of ecosystem services. It’s essential to include all use and non-use values in the total valuation of nature, encompassing non-market aspects such as life support functions, spiritual, emotional, and cultural values.

The failure to accurately value nature has exposed the planet to extreme risks, evidenced by the increasing frequency of climate-related disasters, shifts in agricultural productivity due to weather changes, and pandemics such as COVID-19. Previous notions like “nature is priceless” or “you can’t put a price on nature” once considered respectful, now inadvertently contribute to environmental degradation. Without proper valuation, natural assets’ scarcity remains economically invisible, leading to their exploitation for short-term gains and economic growth. This approach results in actions like forest destruction for industrial crops, disregarding forests’ protective role against soil erosion, landslides, and floods. Similarly, water mismanagement—through canalization, pollution, extraction, and rerouting—has resulted in dead fish, dying vegetation, undrinkable water, and the collapse of entire ecosystems.

Despite the dependence of many economic activities on natural resources, sustainable utilization remains uncommon due to frequent oversight of nature’s value in policymaking. For example, in Western Australia, acknowledging the impact of agricultural water extraction on wetlands and vegetation would require reducing groundwater allocation for agriculture by up to 38%. In New Zealand, Lake Rotorua and its ecosystem services are estimated to be worth as much as $48 million annually. Globally, natural assets are believed to contribute benefits worth at least $125 trillion every year. Emphasizing these figures in policy formulation could lead to improved environmental outcomes.

How to reconcile agriculture and industry that have relied on natural resources beyond sustainable and safe limits?

Programs like REDD+ and Payment for Ecosystem Services (PES) use monetary values of ecosystem services, such as carbon sequestration and water purification, to incentivize (re)forestation. Countries like Australia and the USA have implemented biodiversity offset and wetland mitigation banking schemes, enabling private businesses to purchase credits from restoration and conservation projects to offset their economic activities. The values of ecosystem services provided by such projects are crucial for credit verification and quantification.

In 2012, the United Nations officially adopted the System of Environmental Economic Accounting (SEEA) to integrate environmental and economic factors into a common framework. Despite some controversial arguments about the method, this framework has been accepted as the standard for natural capital accounts by other international organizations, including the ADB, EU, IMF, OECD, and World Bank.

What are the key considerations for adopting nature valuation frameworks?

The recent “Make Nature Count” event at COP15 emphasized the urgent need for national frameworks to promote greener, more sustainable decision-making. Ecosystems valuation and SEEA methods have been implemented in 11 EU member countries, with pilot programs underway in developing nations like Brazil, India, Mexico, South Africa, and the People’s Republic of China. However, other countries may require additional support to adopt such frameworks, tailored to their unique local cultures and ecosystems.

Valuing nature extends beyond pricing ecosystem services for market trade. It entails recognizing nature’s significance as a cultural, economic, and intrinsic asset. Using monetary values offers policy makers and businesses crucial guidance, emphasizing the prioritization of public health and natural capital over private wealth and physical capital. Furthermore, integrating nature’s values into environmental markets and policies can promote more efficient and sustainable natural resource utilization.

This article is the first installment of the “valuing nature” explainer series. 

The second and third articles in this series will introduce various approaches to measuring nature and its global implications.

Authors

Lan N. Le

Lan N. Le

Environmental Economist, Agriculture, Food, Nature, and Rural Development Sector Office, Sectors Group, Asian Development Bank

Christian Fischer

Christian Fischer

Knowledge Management Specialist (Consultant)

Thomas Panella

Thomas Panella

Director, Agriculture, Food, Nature, and Rural Development Sector Office, Sectors Group, Asian Development Bank

Lei Lei Song

Lei Lei Song

Director, ADB Economic Analysis and Operational Support Division, Economic Research and Development Impact Department

This blog is reproduced from Development Asia. 

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