Rob Tinch 

Iodine SPRL, Belgium

Cost-benefit estimates of natural capital

The Natural Capital Committee has reported evidence on the economic case for investment to protect and improve natural capital in England. [1]The research aimed to identify a set of ambitious natural capital protection and improvement investments that are likely to be most beneficial to society, and an economic case for why they should be undertaken.  There are of course many possible reasons for protecting and improving natural environments: the use of economic evidence is not intended to replace but rather to complement alternative arguments.

Ten broad investment options were identified.  An example of one, saltmarsh restoration, was explicitly focused on coastal restoration. [2]The evaluated/suggested option was restoration of 22,000ha of saltmarsh, representing a 54% increase in the total resource.  This is primarily land that is already susceptible to flooding/sea-level rise, but to manage the realignment of defences and ensure creation of sustainable saltmarsh habitats would require five times more managed realignment activity each year to 2030, realigning approximately 450km overall.  The costs of this realignment and re-engineering of retreated embankments was estimated at £1.7bn.  However, the benefits were estimated at £2.4bn (present value over 50 years).  These include avoided flood defence costs of £285m, carbon sequestration of around £1bn, and habitat value of around £1.1bn.  That habitat value includes ecosystem services of flood control, non-consumptive recreation, amenity and aesthetic services, and biodiversity protection.

These cost and benefit estimates illustrate the broad alternative approaches to estimating values:

• Costs per ha were estimated based on actual cost data and areas of habitat created from average outcomes/predictions for recent UK managed realignment projects, leading to an estimate of £50,000/ha
• Avoided costs of flood defence are based on assumptions about reduced expenditures due to new structures being protected by the saltmarsh, again based on existing scheme evidence and estimated as ongoing savings of £33,000/year for every km of realigned coast
• Ecosystem service increases are valued using value transfer from a meta-analysis function. [3]This provides a bundled value controlling for various characteristics (wetland type and size, population, income, source study features and so on).  Meta-analysis allows statistical estimation of values based on a rich evidence base, using dummy variables to control which ecosystem services are included in the valuation.  The central predicted value here was £1,343 per ha per year for new saltmarsh.
• Carbon sequestration is valued separately using estimated rates of sequestration per ha per year, valued using official UK government figures for non-traded carbon sequestration. These values are not based directly on damage estimates, but rather on the abatement costs implied by the carbon emission targets to which the UK is committed.

Adding this all together, the study estimated a net present value of £1.2bn over 50 years: benefits of £2.9bn minus costs of £1.7bn, giving a benefit: cost ratio of 1.7, suggesting this would be a rather beneficial use of public funds.

Corporate natural capital accounting 

Natural capital accounting brings environmental and economic data together to answer several key questions in an organised format. The balance sheet, and changes to it over time, give a picture of the benefits natural capital assets provide and how sustainably they are being managed. This is generally envisaged at a national level, but is increasingly common at the organisational level, with accounts developed for specific landholdings and companies.

Answer these questions to generate these accounting outputs:

1. What natural capital assets does the organisation own, manage, or depend on? Natural Capital Asset Register records the stock of natural capital assets (their extent, condition and spatial configuration). These indicators help determine the health of natural capital assets and their capacity to provide benefits.

2. What flows of benefits do the assets produce, for the organisation and for wider society? Physical Flow Accounts quantify the benefits the assets deliver in physical terms. The changes in the quantity / quality of the assets and their benefit provision over time are also shown. The provision can change due to maintenance activities or external providers outside the control of the organisation. 

3. What is the value of the benefits and to whom do they accrue? Monetary Flow Accounts estimate the economic value of the benefits in monetary terms and discounts the projected future flow of these benefits to provide the present value (PV) for the assets. This uses data from actual markets and other (non-market) values. There are physical and monetary sub-accounts for each of the main benefits evaluated.

4. What does it cost to maintain the assets and benefit flows? Natural Capital Maintenance Cost Account details the costs of management activities required to sustain the capacity of the natural capital assets to provide benefits over the long term.       

5. What’s the net impact of the business on natural capital? Natural Capital Balance Sheet compares the present value (PV) of asset benefits to the PV of maintenance costs. Where understanding and evidence allow, calculation of assets and liabilities take account of expected changes to future costs and benefits of management, and external factors such as population growth or climate change.

6. How is the impact changing over time? Statement of Changes in Natural Capital Value shows the difference from the previous balance sheet in terms of changes to the quality, quantity or value of the assets and liabilities.                                                                      

The purpose and valuation principles of accounting are not the same as for economic appraisal.  National accounting uses exchange values (‘prices’) that are generally different from welfare values used in cost-benefit analysis.  A significant part of the theoretical and practical research effort in natural capital accounting goes on deriving comparable surrogate exchange values for ecosystem services.  This is challenging since the whole point of natural capital accounting is to include ecosystem assets, goods and services that are not actually traded in markets and have no observable prices.

Uses and attitudes to the use of valuation evidence

In neoclassical economics, ‘total economic value’ (TEV) represents all the ways that goods and services influence individual utility.  This is revealed through the decisions or preferences of individuals, acting under their budget constraints, and expressed as their ‘willingness to pay’ (WTP).  At a societal level, TEV represents the aggregate of these individual values, either as a simple sum or using weighting criteria, in particular to reflect income/wealth distributions and the diminishing marginal utility of income.  For a particular ecosystem or natural ‘asset’, TEV can be thought of as the sum of all the ways the ecosystem functions, ecosystem services and goods influence the utility of individual humans, as reflected by their WTP values.  Integrating over time, using discounting to convert future values to present day equivalents, gives the net present value of these flows.  Assuming calculable risk about future flows, these values are generally expressed as expected values, and cost-benefit analysis (CBA) compares the expected values of different courses of action.  Other treatments and decision rules may also be used, for example to implement some degree of risk-aversion in the calculations.

If nothing else, this provides a useful framework for thinking about ways that humans might value aspects of nature.  Although the framework is grounded in individual preferences, it nevertheless provides space both for non-selfish preferences (non-use values: existence, altruistic, bequest) and also for uncertainty about future preferences and uses (option and insurance values).  In a similar way, the ecosystem services framework, often combined with the TEV framework, provides a useful checklist of ways in which natural systems provide benefits to humans.  These values and benefits are not an exhaustiverepresentation of natural values, but rather provide a minimum set of things to consider.

For further information, contact Rob Tinch (robtinch@gmail.com)

Note

[1]https://www.gov.uk/government/publications/natural-capital-committee-res...

[2]Investments in demersal fisheries, and in shellfisheries, were also identified as potential priorities.

[3]Brander et al. (2008; EEA 2010)