How a natural capital fund could enhance the environment
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Future of the Environment
The destruction of our natural environment is one of the biggest challenges facing us in the 21st century. We can’t live without nature, yet we behave as if we could. As the world’s population climbs towards 10 billion, and as global economic growth continues at around 3% or more per annum, global consumption will increase by at least 16 times by the year 2100. All the additional people, mainly in poorer and developing countries, will need food, energy and water. It is the natural environment that will have to provide them.
Natural capital – all the things nature has given us for free – has been taken for granted for most of human history. It just kept giving and endlessly renewing itself. To date, human development has been about cutting back nature, clearing Europe’s temperate forests, ploughing up the Great Plains of America, damming the great rivers, felling the rainforests and plundering the oceans.
Greens versus industry
The debate about the natural environment has typically been a battle of irreconcilable positions: greens versus industry. Like the Marxists who see labour and capital as inherently in conflict, the natural environment is too often treated as a zero-sum game played out between the eco-warriors and the industrial lobbyists.
This is both wrong and dangerous. Unless natural assets are treated as a core part of the economy – indeed, an essential input – the consequences will be dire. Continuing with business as usual means that by 2100 we’ll lose most of the rest of the rainforests, degrade the oceans and render perhaps half the rest of the species on Earth extinct. No amount of genetic engineering can reverse this wave of destruction.
The natural-capital approach is an integrating concept, which puts the natural environment at the centre of the economy. Natural assets become core inputs to production, part of the economy’s balance sheet, and if these assets are to go on delivering for us, they need capital maintenance. Depleting natural capital below the thresholds necessary to keep on delivering their services for free is not just bad for the environment, it is bad for the economy.
A natural boost to economic growth
It is almost certain that we have already done so much damage to our natural capital that it is way below the optimum. Natural capital does not simply need to be maintained: there are great economic benefits from it being enhanced.
Most environmentalists would probably agree, and then claim that this proves that capitalism and industrialization have gone too far. They want to stop economic growth in its tracks and “go back to nature”. This is not only impractical (it’s never going to happen) but wrong. The economic calculus shows how investment in enhancing natural capital can improve economic growth, properly measured. Sustainable economic growth will need more, not less, natural capital.
To stop the rot, we need to integrate natural capital into the economy. We need to compensate for damage, so natural capital is maintained in aggregate. Compensation for damage is a very familiar principle. It is also radical, as it would put an end to the destruction of nature that has been the hallmark of human development to date.
Why we should pay for pollution
Paying for pollution is increasingly accepted in the case of carbon emissions. It should be extended to agricultural use of pesticides, herbicides and nitrates, to biodiversity, water supplies, fish stocks and soils. It is bad economics not to price pollution. Even worse and more perversely, we subsidize agricultural practices, and this is damaging our natural capital with terrible results.
To go further and enhance natural capital (and thereby increase the rate of sustainable economic growth) we need to harness the economic rents from the depletion of non-renewables, such as oil, gas and minerals. These can only be used once, and if we use them up, there is nothing left for subsequent generations. Economic theory suggests a straightforward rule: the gains from their depletion should be reinvested in other assets.
Many countries already recognize this. They set up state-owned investment funds. Norway is a good example. The US and the UK do not: they simply consume all the economic benefits now. For the US, this has been going on since Europeans first started arriving in the new world: the ever-expanding frontier was a cornucopia of nature’s bounty.
Given that natural capital is now seriously sub-optimal, it would make sense to use the monies from depleting non-renewables to invest in renewables. The Sovereign Wealth Fund should become a Natural Capital Fund.
Natural capital is a rigorous, hard concept. It mandates assets valuations, capital maintenance, and national and corporate balance sheets. It requires that the thresholds for renewables assets to replicate themselves are measured, and benefits assessed. It requires compensation, pricing and the use of depletion rents. It is all about mainstreaming the environment to maximize sustainable economic growth. It is time for the environmentalists to take economics seriously – as most have already done for climate change.
Author: Dieter Helm is author of Natural Capital: Valuing the Planet. He is Chairman of the Natural Capital Committee and a professor at Oxford University.
Image: Cracked earth marks a dried-up area near a wind turbine used to generate electricity at a wind farm in China REUTERS/Carlos Barria
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