Undervaluing natural capital in conventional economics causes unsustainable resource use and environmental harm, thus threatening economic sustainability and public health.
This article is a part of the essay series: Not the End of the World: World Environment Day 2024
Nature provides invaluable goods and services (collectively termed ecosystem services), that are fundamental to human life and livelihoods. While these services flow from nature organically, it is important to acknowledge the fundamental capital stock that ensures the provision of such flows. This capital stock that rests in nature has been delineated as “natural capital”—it comprises Earth’s inherent natural assets, including soil, air, water, flora, and fauna. The importance of natural capital is ignored in traditional economic metrics, with ecosystem services not being accounted for. However, heterodox economic frameworks especially those provided by the body of knowledge created by Ecological Economics delineate ecosystem services as the “GDP of the poor,” because of the inextricable linkage of the poor’s livelihoods with the ecosystem services. These services include food, water, fisheries, air and water purification, soil formation, plant pollination, and climate regulation. Regrettably, the undervaluation or complete ignorance of the ecosystem service in conventional economic measurements leads to unsustainable exploitation and the degradation of our natural resources.
Nature provides invaluable goods and services (collectively termed ecosystem services), that are fundamental to human life and livelihoods. While these services flow from nature organically, it is important to acknowledge the fundamental capital stock that ensures the provision of such flows.
Large parts of the developing world including India that have been transitioning to development from underdevelopment through processes that entail land-use change present a prototype of this phenomenon. The profound impacts of land-use change on natural capital in economies like India are not accommodated in the traditional national accounting systems, such as the System of National Accounts (SNA), thereby, failing to recognise the depletion of natural resources and environmental degradation. This oversight has led to policies that inadvertently promote environmental damage, posing significant risks to economic sustainability and public health.
Land-use change brings losses in natural capital, thereby, leading to losses in critical ecosystem services. Due to a lack of valuation, the importance of natural capital in economic development and growth goes unnoticed. Economically, the implications are dire. Diminished productivity and increased costs associated with replacing the services nature once provided for free are just the beginning. A landmark study by Costanza and colleagues estimated the global loss of ecosystem services due to land use changes between 1997 and 2011 to be an astounding US$ 4.3 trillion to US$ 20.2 trillion annually. Additionally, a decrease in natural capital can reduce resilience against natural disasters, increasing economic vulnerability for all sectors reliant on natural resources.
It needs to be understood that natural capital gets undervalued or non-priced due to a lack of markets for ecosystem services. Various problems arise due to this. Firstly, while the valuation of ecosystem services could have offered a basis for understanding nature’s roles in the livelihoods and sustenance of human communities at various scales, the same is being missed out due to a lack of valuation. Secondly, in the case of infrastructure projects entailing land-use change, the cost of environmental degradation might be large enough to exceed the apparent economic benefits. Investment decisions need to be revised under such circumstances. The lack of valuation of the losses keeps the decision-making body bereft of objectivity and rationale for making such decisions. Thirdly, it is this lack of valuation of ecosystem services that squeezes any scope of market creation leading to the prevailing market failures for environmental resources. Fourthly, ecosystem services play an important role in the livelihoods of human communities in the developing world. For example, the loss of a forest ecosystem can lead to the disappearance of medicinal plants, which are crucial for traditional healthcare practices. Similarly, the degradation of coastal ecosystems, such as coral reefs and mangroves, increases the vulnerability of coastal communities to storms and sea-level rise, potentially leading to displacement and socioeconomic instability. While a possible monetary compensation mechanism setting is important, the non-existence of valuation removes any such possibility. Fifthly, the failure to properly value natural capital often leads to inequitable distribution of resources, where few enjoy the benefits of exploitation. The broader society bears the costs, especially the marginalised groups who depend most on these resources for their livelihoods and cultural identity. It has been found that the ecosystem dependency ratio (defined as the ratio of the value of the direct provisioning services of the ecosystem and the income of the beneficiary community) in certain parts of the developing and underdeveloped world is greater than unity. This implies that the community obtains more benefits from the ecosystem in monetary terms than their incomes from various sources.
It needs to be understood that natural capital gets undervalued or non-priced due to a lack of markets for ecosystem services. Various problems arise due to this.
Green accounting, or environmental accounting, is pivotal for achieving momentum towards valuing natural capital. It involves assessing environmental costs and benefits, aiding better decision-making across public and private sectors. For example, integrating green accounting into India's policy framework could help address the overlooked environmental costs of extensive agricultural and industrial activities, which pose long-term threats to food security and public health. Moreover, green accounting facilitates the achievement of the United Nations Sustainable Development Goals (SDGs), particularly those related to environmental protection—such as SDG 13 (Climate Action), SDG 14 (Life Below Water), and SDG 15 (Life on Land). An illustrative example of green accounting in action can be seen in the World Wide Fund for Nature's (WWF) valuation of ecosystem services at the Terai Arc landscape in Uttarakhand. This 2017 study provided an objective approach to valuing relevant ecosystem services at a landscape level, showcasing that the total value of these services was 19 percent higher than the region's total income. Such quantifications highlight the indispensable value of ecosystem services and argue strongly for their conservation and sustainable management.
There has been a perennial conflict between conservation and development priorities in the developing world—India is no exception. Valuation makes this conflict and the trade-off apparent. In 2006, a Supreme Court-constituted Committee under the chairpersonship of Professor Kanchan Chopra submitted a report on estimating the Net Present Value of ecosystem services of forests as a mode of compensation for forestland diversion for other purposes. Based on that, the Central Empowered Committee (CEC) recommended a set of values for different forest types in 2007. These values were accepted and implemented till recently, with developers required to pay the NPV for forest diversion based on those values. A more state-of-the-art report from the Indian Institute of Forest Management in 2014 came to the fore, with substantial upward revisions of the numbers. However, due to the concerns that the high NPV values would discourage developmental activities, the new NPV formula was not accepted. This reflects the priorities of the dispensation that would prefer development at the cost of conservation priorities. Finally in January 2022, through a notification from the Forest Conservation Division of the Ministry of Environment, Forests and Climate Change, the NPV was revised with respect to the “fitment factor” of 1.53 on the basis of the ratios of the Wholesale Price Index or WPI (prevailing in 2022 and 2007 respectively). This methodology of upward revision through WPI is scientifically flawed as argued in the January 2022 report Supreme Court-appointed Expert Committee. The same report suggests a substantially advanced estimation method, and is still under discussion.
There has been a perennial conflict between conservation and development priorities in the developing world—India is no exception. Valuation makes this conflict and the trade-off apparent.
In any case, this entire debate is still an ongoing one – but what is more important is the acknowledgement that the valuation of ecosystem services can bring to the fore the very important trade-off between conservation and development, provides an objective mechanism for an engaged discussion and debate, and sets a quantitative basis of assessment and decision-making – though one needs to understand that numbers are neither omnipotent nor the solution to all problems! Many other qualitative and cultural considerations set policy priorities.
There is, however, no denying that valuing natural capital is a broad economic, social, and environmental imperative. Integrating green accounting into national accounts supports more informed and sustainable economic planning and policymaking. Especially on this World Environment Day of 2024, when the theme centres around land restoration, the importance of valuing the ecosystem losses due to land-use change, and the ecosystem benefits due to land and ecosystem restoration, needs to attain the centre stage of discussion. The rectification of the persistent failures of environmental markets, understanding the trade-off between conservation and development, and reversing the trade-off through institutional interventions are important. Nature valuation can indeed help in that.
Nilanjan Ghosh is a Director at the Observer Research Foundation.
Soumya Bhowmick is an Associate Fellow at the Observer Research Foundation.
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Dr Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF) in India, where he leads the Centre for New Economic Diplomacy (CNED) and ...
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Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...
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