December 1, 2020

Natural Capital, Ecosystem Services and Environmental Economics – an Introduction

By Oliver Hölzinger

The natural environment surrounding us is not just a ‘good to have’, it is absolutely crucial for our human wellbeing, physical and mental health, and economic prosperity. Ecosystems such as a water catchment, green infrastructure or even a single tree provide us with many goods and services including food, timber, space for recreation, a pleasant amenity, water and air quality regulation services, climate regulation benefits, and many more.

These goods and services we receive from nature are called ecosystem services which are commonly defined as “the benefits people obtain from ecosystems” (Millennium Ecosystem Assessment 2005). Natural Capital can be defined as “the world’s stocks of natural assets which include geology, soil, air, water and all living things. It is from this Natural Capital that humans derive a wide range of services, often called ecosystem services, which make human life possible.” (World Forum on Natural Capital 2018).

Examples for Ecosystem Services

Natural Capital and many ecosystem services in the UK are already in a degraded and/or declining status (UK National Ecosystem Assessment 2011). In its recently published 25 Year Environment Plan the Government makes a clear commitment to ‘environmental net-gain’ (HM Government 2018). The ambition for ‘environmental net-gain’ is also present in the Industrial Strategy (HM Government 2017) and the new National Planning Policy Framework, NPPF (MHCLG 2018). CEEP helps you to implement this Government policy into practical decision-making and management.

A continuing decline and degradation of Natural Capital means that we cannot keep on taking the provision of ecosystem services for granted anymore. Natural Capital needs to be protected, enhanced and actively managed to secure a sustainable flow of ecosystem services.

Ecosystem services do not present the value of ecosystems for their own sake (intrinsic value). Rather they reflect the benefits (and in some cases disbenefits) to human wellbeing and are therefore based on an anthropocentric approach. Choosing this approach should not be interpreted as undermining or neglecting intrinsic values of nature. The two concepts are not mutually exclusive but rather additive.

For some ecosystem services such as food and timber it is comparatively easy to work out the value because they are traded on markets and therefore have a market price which indicates the value. But many ecosystem services do not have a market price. We usually do not have to pay trees (or those who plant/manage them) for cleaning the air we breathe or an entrance fee for accessing a park, for example. If others provide these services we can benefit as ‘free-rider’ without paying. However, if no one pays for such ecosystem services there is also little economic incentive for others to provide such services in an unregulated market because they would not be paid for planting trees or managing a park. And because there is no payment there is also no market price which could indicate the value of such services.

But ‘no price’ does not mean ‘no value’. This can be clarified using a simple example. The price for the air we breathe is zero but without air we would not be able to survive which means that clean air is clearly of high value to us even if there is no market price for it. Having no price or explicit quantified value for ecosystem services often results in the misjudgement that such ecosystem services are self-evident or without value. The high complexity of ecosystem interactions makes their value even more intangible and reinforces a tendency to neglect them. This undervaluation commonly results in degradation of the Natural Capital assets that provide these services, leading to an undersupply, and finally to a decline of overall human wellbeing and health.

In principle this ‘market failure’ leading to an undersupply with ecosystem services should be compensated for by governmental institutions and regulations. However, decisions – not only affecting the environment – have to cope with trade-offs and are very often based on cost-benefit deliberations generally related to more immediately marketable outcomes. In a case where the benefits of one ‘grey’ engineered policy option is comparatively clear and tangible and of the other ‘green’ policy option being less certain and tangible, a justification of the first option is much easier and more defendable.

Economic valuation of ecosystem services serves to mitigate this information bias, and also makes the value of services provided by ecosystems more tangible for non-specialists which generates awareness for such benefits. This in turn supports more sustainable decision-making by better implementing formerly overlooked values into decision-making.

There are two main approaches to reveal the value of non-market ecosystem services. Sometimes, the ecosystem value is contained within a market price (revealed preferences). This is for example the case for flood risk regulation. One can calculate the amount of water stored by a grassland patch in a flooding event. It can be modelled how much damage this amount of water would have caused e.g. to properties and infrastructure if that natural water storage capacity would not be available. These avoided damage costs reflect the value of the flood risk regulation service of the grassland patch.

Another method to reveal the value of ecosystem services is by simply asking people what they would be willing to pay if there was a market (stated preferences). One can for example ask people what they would be willing to pay to access a park if there was an entrance fee. CEEP uses these and other ecological economic approaches to reveal the true value of nature for you and the people and communities you care about.

However, for revealing and managing the value of Natural Capital and ecosystem services monetary quantification is not neccessarily required. The value can also be assessed in non-monetary terms such as with the Natural Capital Planning Tool (NCPT) or Multi Criteria Decision Analysis (MCDA) tools.

To explore the right approaches and methods for your context and circumstances please enquire with CEEP.