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Natural capital accounting is calling into question our traditional use of GDP, but it has a long way to go
Today Gross Domestic Product (GDP) is the de facto measure of national economic progress. But as outlined in our recent White Paper, “The Rise of the Impact Economy,”1 measuring output alone is an incomplete reflection of how well an economy meets society’s needs.
Some economists argue instead for using ‘national wealth’, a metric that builds on GDP by measuring output plus the less tangible things that people value, such as health, equality, and the natural environment. The idea is to provide a broader and more accurate yardstick of an economy’s functioning, a core argument of the 2021 Dasgupta Review.2
Perhaps this is why Adam Smith, one of the founding fathers of economics, wrote about the ‘Wealth of Nations’, not their GDP.
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It is likely that GDP will remain the focus of macro-economic commentary for a while, given the tricky business of measuring intangible-yet-valuable things that together contribute to national wealth. But economists are making strides in standardizing the national measurement of one area: nature.It is likely that GDP will remain the focus of macro-economic commentary for a while, given the tricky business of measuring intangible-yet-valuable things that together contribute to national wealth. But economists are making strides in standardizing the national measurement of one area: nature.
Valuing a nation’s environment
Think of a woodland. GDP only measures the dollar value of the lumber that it produces, or the potential sale value of the land on which trees stand. But as an ecosystem a woodland can provide many valuable services that don’t have an easily grasped monetary value. It can for example be valuable to bird watchers, who take pleasure from seeing wildlife; dog-walkers; climate scientists, who value carbon sequestration; and local properties, which benefit from flood protection (even if they are not aware of it).
These are intangible and yet valuable services, but they do not always have a market price. As a result, they are easily overlooked in output-focused metrics such as GDP. The good news is that significant strides are being made towards measuring nature’s value. In recent years, academic economists have defined nature’s services as ‘natural capital’. This concept is being increasingly used in public policy and markets. Its mainstreaming unlocks new ways to standardize concepts, allowing economists to discuss the services the environment can provide beyond immediate monetary value (such as the services woodlands provide besides lumber). That is gradually forming the bedrock from which agreed-upon frameworks, datasets, and metrics are emerging.
For instance, the UN recently adopted3 an international accounting framework built on the concepts of natural capital, helping to standardize metrics of national environmental wealth. Another example is the UK Office for National Statistics’ (ONS) innovative work4 on ‘hidden capitals’. It extends the definition of the UK’s ‘traditional’ National Accounts—which describes the UK economy using conventional economic concepts like GDP—by using more than a decade of work to try capturing the full value of the country’s natural capital (such as land, renewables, or finite stocks of fossil fuels) and human capital (people’s knowledge, skills, and experience).
The ONS plans to refine5 these figures further by accounting for things like environmental liabilities, creating a clearer reflection of national wealth over time. Its provisional work shows the UK’s output (GDP) originates from a much larger stock of national assets (wealth) than previously imagined. The work highlights how sustainable development hinges on ensuring that GDP is not increased by excessively depleting the stock of national assets.
Including ‘hidden capitals’ provides a richer picture of national wealth
Source: ONS (2022); UBS Analysis; Traditional National Accounts include productive capital covered by the UK’s National Accounts (such as buildings, machines, software), & Inclusive Net Worth is this plus total Human and Natural Capital; See ONS for more details.
Treading GDP’s path
Natural capital accounting, and national wealth as a broader approach, paints a richer economic picture than GDP can offer alone. However, there is a long way to go before natural capital and national wealth are as widely used. For one, the ONS is ahead of its time. Few other6 countries have even begun to work on full national environmental accounts.
The status of natural capital accounting today is arguably where GDP stood 80 years ago. It emerged from the 1944 Bretton Woods Conference as a central measure of the emerging ‘System of National Accounts’. The UN formalized it under international guidance in 1953, the UK government used GDP as a central measure in its debut official National Accounts publication in 1955.
Similarly, the conceptual basis of natural capital today enjoys broad agreement—as signaled by the UN’s recently agreed ‘environmental-economic’ accounting framework . But data issues still abound . For instance, some countries do not possess reliable data on key environmental ‘stocks,’ from fish populations to mineral deposits. That has stymied further work on valuing these assets.
Even once adequate data exists, there will need to be a broader international consensus to support9 the adoption of natural capital accounting. Governments that regularly and reliably publish economic figures in a quantifiable manner help to legitimize and promote their use. The consistent usage of GDP has allowed it to flourish; natural capital accounting has some way to go.
Despite facing hurdles, natural capital is treading a similar path to the one taken by GDP almost eight decades ago. It is currently at an early stage and is defined by international conceptual agreement and experimental statistics, but there is a growing recognition for the need of its inclusion, and it is well on the road to becoming a useful part of international economic measures. Over time, we expect natural capital will mature, and it may eventually sit alongside GDP as a key macro-economic measurement of progress. But this process needs to happen quickly.
Natural capital plays an integral role in measuring national wealth, but the current lack of consensus over how to measure it means that it has some way to go before being widely adopted. However, as the Dasgupta Review10 underlines, the world cannot afford to wait another 80 years.
The author is grateful for feedback from: Dean Turner, Richard Mylles, Jackie Bauer, Mike Ryan, Richard Morrow.
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By: William Nicolle
Originally published at: UBS