Frequently Asked Questions on Natural Capital Accounting (NCA)
GDP only measures gross output. It tells us nothing about income for the long term. It does not answer questions like Are income and growth sustainable? Will the same level of income be available for our children?
That’s because GDP looks at only one part of economic performance—output—but says nothing about wealth and assets that underlie this output and the generation of income. For example, when a country exploits its minerals, it is actually depleting wealth.
The other major limitation is the poor representation of natural capital. Important contributions to the economy of forests, wetlands, and agricultural land are not fully captured in national accounts or may be hidden. Forestry is an example—timber resources are counted in national accounts, but forest carbon sequestration is not included. Other services like water regulation that benefits crop irrigation are hidden and the value is (wrongly) attributed to agriculture in a country’s GDP.
It is in the interest of developed and developing countries to move beyond traditional GDP and start incorporating their natural capital into their national accounts to make better economic decisions.
Wealth is what underpins the income that a country generates. It includes buildings, manufactured assets such as the machinery used in factories, infrastructure such as highways and ports, and natural assets such as land, forests, fish, minerals and energy. Wealth Accounting measures these assets and capital goods that are inputs to our economic well-being.
Most countries follow the System of National Accounts (SNA) which provides an international standard for measuring national income, savings and wealth. The SNA, which has been in use since the 1960s, has some provision for doing wealth accounting but relatively few countries are doing it. Without wealth accounts, countries have a very incomplete picture of the sources of future income, just as assessing the value of a business would be incomplete without analyzing its balance sheet.
Truly comprehensive wealth accounting would go beyond the SNA to include intangible forms of wealth such as human capital and the benefits flowing from ecosystem services such as pollination and flood protection from mangroves.
Natural capital includes, first of all, the resources that we easily recognize and measure such as minerals and energy, forest timber, agricultural land, fisheries and water. It also includes ecosystems producing services that are often ‘invisible’ to most people such as air and water filtration, flood protection, carbon storage, pollination for crops, and habitat for fisheries and wildlife. These values are not readily captured in markets, so we don’t really know how much they contribute to the economy and livelihoods. We often take these services for granted and don’t know what it would cost if we lose them.
The concept of accounting for natural capital has been around for more than 30 years. However, progress in moving toward implementation has been slow.
A major step towards achieving this vision came recently with the adoption by the UN Statistical Commission of the System for Environmental-Economic Accounts (SEEA). The SEEA provides an internationally agreed method, on par with the current SNA, to account for material natural resources like minerals, timber, and fisheries. The challenge now is to build capacity in countries to implement the SEEA and to demonstrate its benefits to policy makers.
Natural capital is a critical asset, especially for low-income countries where it makes up a significant share (36%) of total wealth. For these countries, livelihoods of many subsistence communities depend directly on healthy ecosystems. Incorporating natural capital into national accounts can support better decisions for inclusive development.
Natural capital accounting can provide detailed statistics for better management of the economy. For example land and water accounts can help countries interested in increasing hydro-power capacity to assess the value of competing land uses and the optimal way to meet this goal. Ecosystem accounts can help biodiversity-rich countries design a management strategy that balances tradeoffs among ecotourism, agriculture, subsistence livelihoods, and ecosystem services like flood protection and groundwater recharge. Ecosystems accounting not only provides a tool to maximize economic growth but is also a means to measure who benefits and bears the cost of ecosystem changes, helping governments gauge whether their growth is inclusive.
Following the recent adoption of the System for Environmental-Economic Accounts, there is now wide acceptance of the need to put natural capital accounting into action. As a result, there is renewed momentum with finance ministries and ministries of environment who want to show the contribution of natural capital to national income.
Countries that have started implementing the SEEA have a road map to guide them through this process. They begin by establishing institutional structures with clear lines of responsibility and commitments across government departments. Rather than taking on the challenge of compiling all natural capital accounts at once, countries are prioritizing which sub-accounts to begin with, based on important development challenges facing them.
The Wealth Accounting and Valuation of Ecosystem Services (WAVES) is a global partnership, which World Bank President Robert B. Zoellick announced in Nagoya, Japan, in 2010. It has been supporting a number of countries as they prepare to implement natural capital accounting based on the SEEA.
The WAVES partnership include the United Nations Environment Programme, the UN Development Programme, and the UN Statistical Commission; the countries of Botswana, Colombia, Costa Rica, Madagascar, and the Philippines, which are implementing programs; as well as financial or other support from Australia, Canada, France, Japan, Norway, the United Kingdom, and several NGOs.
The partners want to take natural capital accounting beyond the SEEA-approved material resources, such as timber and minerals, to include ecosystem services and other natural resources that are not traded or marketed and are therefore harder to measure. That includes the “regulating” services of ecosystems, such as forests for pollination and wetlands for reducing the impact of floods. A Policy and Technical Experts Committee, working closely with the processes set up by the UN Statistical Commission, has been established to take this forward.
Already, countries in the Partnership are making major inroads into developing natural capital accounts. Botswana, Colombia, Costa Rica, Madagascar, and the Philippines have embarked on work plans that have been endorsed at the highest level of their governments.
Natural Capital Accounting is more about measurement and information—for example, how much water is being used by which sector. The objective is better government decision making, better planning using this information.
Knowing the total value of natural capital can help us better address poverty issues. Not knowing the value of natural capital is more likely to result in losses that affect the poor, such as:
- Lack of valuation of coastal protection services of mangroves led to massive conversion of mangroves to shrimp farms, with the poor losing livelihoods (from loss of fish habitat and other products from mangroves), as well as suffering increased damages from storms
- Lack of information about the value of forests for hydrological services downstream, livestock grazing for local communities, and soil retention services, has led to clear-cutting of timber and the loss of these services
The key is not only to measure the total value natural assets, but also to measure the distribution of benefits, how much goes to each stakeholder group and the dependence of each group on natural capital, especially the poor.