Natural capital – The New Accounting System

Cian White

On how the environment can be sustainably managed by placing a value on nature’s services.

Back in the fifties the psychologist Abraham Maslow, who was concerned with the nature of human experience, proposed his hierarchy of needs. His idea lays out the fundamental needs that all humans have, and the hierarchy in which those needs are organised. According to the theory, the higher level needs can only be fulfilled if all the needs below it are satisfied. At the base of the pyramid are the physiological needs of the body; water, food, sleep etc. This is followed by the need for safety, love/belonging, and esteem, with self actualisation being at the top of the pyramid.

Maslows-Hierarchy-of-Needs
Maslow’s Hierarchy of Needs Image Source

This theory had an important impact on psychology and education but now can be used to frame an exciting concept: Natural Capital. This is an ecological concept that marries economics and the environment in a conceptual framework to ensure a sustainable future. By placing a value on the services provisioning the most basic of human needs, the need

Maslows-Hierarchy-of-Needs edited
Cian’s Hierarchy Edited from source

for oxygen, clean water, shelter, food, medicine, fuel, nutrient cycling and pollination services, and by integrating them into a accounting system, the essential services that we obtain from nature can be sustainably managed. In Maslow’s Hierarchy, the need for a suitable environment in which to live would be placed below physiological needs, propping up the entire pyramid.

Definitions_of_Natural_Capital_and_Ecosystem_Services_(3)
Source

Nature being Ignored

Ecosystems provide services, which up until now have been overlooked and ignored by economics and accounting. The reason: the people who laid down the foundations of modern economic principles assumed that humans could, through ingenuity, science and technology, sustain infinite economic growth on a finite planet. Continuous growth ultimately means that resources are being converted from one form to another.  Here, we

Definitions_of_Natural_Capital_and_Ecosystem_Services_(1)
Source

are talking about the fundamental laws of thermodynamics, the most important in this context being that energy (or matter) cannot be created nor destroyed but only converted from one form into another.

 

The fundamentals of modern economics haven’t changed much since Adam Smith published The Wealth of Nations in 1776. However, much else has changed in that time. The human population of one billion in the 18th century has now grown to 7.3 billion in the 21st.(1,2) The steam engine had not yet been invented when Smith’s book was published, but now there are more than 1.2 billion vehicles on the world’s roads.3

 

Definitions_of_Natural_Capital_and_Ecosystem_Services_(2)
Source

Economics is concerned with the allocation of scarce resources for competing desirable aims. The resource is traditionally financial capital with the ultimate aim of economic growth. However as the global economy has grown, and as the study of ecology was born, it was realised that the economy and environment are connected, with the global economy being a subset of the environment.

 

 

Valuing Nature

So when a forest is cut down to make way for agriculture, the conversion processes of energy and matter are changed. The forest service’s of flood mitigation, carbon sequestration, oxygen production and water storage have been changed to agricultures service of producing food and goods. At the moment only the food and goods that agriculture provides are accounted for in a country’s economics. Natural capital seeks to put a value (monetary and/or species richness per area) on the forest service’s, as at the moment they are regarded as free. In the current economic model  when a forest is destroyed and replaced with a farm, wealth is spontaneously generated. This is not sustainable on a planet that may well reach its human carrying capacity within our generation. In the an economic model incorporating natural capital, the essential services provided by a forest would appear on the balance sheets, accounting for their loss as well as for the new services provided by a farm.

All ecosystems have natural capital and provide humanity with vital services. By placing a value on them it allows cost benefit analysis to take place. Is it more valuable to drain a bog for turf, or leave it intact to act as a water reservoir and filter, storing carbon and providing habitat for numerous endemic Irish species? At the moment the latter option is not considered by regulating authorities…yet!

See more at Natural Capital Ireland

References

  1. Gilbert G. (2005) World Population, A Reference Handbook, 2nd edition, ABC-CLIO, Oxford.
  2. Voelcker J. (2014) Green Car Reports, available at http://www.greencarreports.com/news
  3. United Nations (2014) World Urbanization Prospects, UN DESA’s Population Division, New York.

 

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One thought on “Natural capital – The New Accounting System

  1. Hi there! This post couldn’t be written much better!
    Reading through this article reminds me of my previous roommate!
    He always kept preaching about this. I most certainly will forward this
    post to him. Pretty sure he will have a good read. Thanks for sharing!

    Like

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