Natural Capital: Valuing the Planet 9780300213942

Citation preview

NATURAL CAPITAL

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For Sue, Oliver and Laura

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NATURAL CAPITAL Valuing Our Planet DIETER HELM

YALE UNIVERSIT Y PRESS N EW HAV E N A N D L O N D O N iii

Copyright © 2015 Dieter Helm The right of Dieter Helm to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. This book may not be reproduced in whole or in part, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press) without written permission from the publishers. For information about this and other Yale University Press publications, please contact: U.S. Office: Europe Office:

[email protected] [email protected]

yalebooks.com www.yalebooks.co.uk

Set in Minion Pro by IDSUK (DataConnection) Ltd Printed in Great Britain by TJ International Ltd, Padstow, Cornwall Library of Congress Control Number: 2015936735 ISBN 978-0-300-21098-9 A catalogue record for this book is available from the British Library. 10 9 8 7 6 5 4 3 2 1

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Contents Preface and Acknowledgements List of Abbreviations

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Introduction: Taking Natural Capital Seriously

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PART ONE: What Is Sustainable Growth? 1 Facing up to the Challenges 2 Sustaining Economic Growth 3 Defining the Aggregate Natural Capital Rule

19 37 55

PART TWO: How Can Natural Capital Be Measured? 4 Accounting for Natural Capital 5 Measuring Natural Capital 6 Pricing and Valuing Natural Capital

79 97 116

PART THREE: What Needs to Be Done? 7 Compensating for Damage 8 Taxing Pollution 9 Protecting the Commons

139 160 179

PART FOUR: How Can It Be Done? 10 The Prize: Restoring Natural Capital 11 Finance: Paying for Natural Capital 12 Conclusion Notes Bibliography Index

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Preface and Acknowledgements

There is nothing new about the destruction of our natural environment. It is well known, and well documented – so much so that it has become a part of our culture and literature. Wordsworth’s poems about the violence that humans bring to nature and the threats to his beloved Lake District, and Henry David Thoreau’s Walden Pond, link through to Rachel Carson’s Silent Spring. Scientists have measured what poets have lamented. With the coming of satellite technology and the digitalization of just about everything, the destruction cannot be hidden from public view. When E. O. Wilson noted the progress of what he termed in The Diversity of Life the sixth great extinction in geological history, even he may have underestimated what is coming. We may not know how many species there are, and we probably never will, but the pace of decline for what we can and have measured is all too apparent. What nature, and the natural capital embedded in it, now confronts in this century is on a new and completely different scale. If the world’s economic growth carries on along the current path, and the world economy expands at around 3–4 per cent per annum, then it will be a staggering 16 times bigger than it is now by the end of this century. China alone on its current growth rates doubles in size every decade. It is almost impossible to imagine what this world will be like. vi

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This book is not primarily about the scale of the challenge. This will largely be taken as a given. The focus here is on why this destruction takes place, and how it can be moderated, stopped and eventually reversed. Doom and gloom make good headlines, but they do not get us very far. Understanding why things are going so badly wrong helps to identify how to put them right. The central argument of this book is that only by putting the environment at the heart of the economy can there be much hope of addressing the scale of the destruction that will otherwise happen. It is perfectly possible to achieve sustainable economic growth. The prize is great, and it can be financed. The loss of biodiversity and much of our natural environment may be a physical and biological process, but the solutions lie squarely in the allocation of scarce resources – in other words, with economics. Economic growth does not have to be abandoned to improve the state of natural capital. It just has to be sustainable economic growth, not the sort of growth currently so widely promoted. The way economies and narrow economic growth have been measured and promoted has much to do with why nature is in such a poor state. In rethinking the economics of natural capital, and properly incorporating it into the economy, solutions can be found. It is easy to get angry at the failure to stop the rot and capture the considerable economic benefits from enhancing natural capital, especially when there are immediate and practical measures that can and should be taken. I have had the privilege of chairing the Natural Capital Committee since 2012, when it was set up to start to address some of these failures. It is the first such committee in the world, and hence the way it addresses the natural capital issues in its particular national context provides an example for other countries contemplating a similar path. Though there are many areas where different approaches can be taken and assessments made, my fellow committee members have all influenced me enormously and I am very grateful to them. Each has made a major contribution to understanding natural capital generally. Giles Atkinson’s understanding of sustainability and international accounting, together with

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Colin Mayer’s deep knowledge of finance and accounting, Kerry ten Kate’s understanding of the corporate and international dimensions, Ian Bateman’s mastery of cost–benefit analysis, Georgina Mace’s research on the science of biodiversity, Rosie Hails’s practical understanding of ecology, and Robin Smale’s work on specific environmental policy issues and the key players comprise a formidable bank of expertise on which I have been able to draw. The Natural Capital Committee’s secretariat has been led by remarkable individuals, notably Nick Barter and Julian Harlow. It should, of course, be stressed that none of these colleagues is responsible for my errors, and nothing in this book should be ascribed to the Natural Capital Committee or to any of its members. The Committee’s views are presented in its key papers, notably the three ‘State of Natural Capital’ annual reports (to be found on its website). I also have the privilege of being a Vice President of Berkshire, Buckinghamshire and Oxfordshire Wildlife Trust (BBOWT). Conversations with Hugh Mellor, Clive Booth, Philippa Lyons and Estelle Bailey of the Trust over the years have influenced my thinking, as have the extraordinary work and commitment of its staff and volunteers. Discussions over the years with those running the great environmental trusts and organizations – including Simon Jenkins and Helen Ghosh at the National Trust, Mike Clarke at the Royal Society for the Protection of Birds (RSPB), Shaun Spiers at the Campaign to Protect Rural England and Stephanie Hilborne at The Wildlife Trusts – have also helped shape my views. John Bennett at the Kent Wildlife Trust and Simon Nash from the Somerset Wildlife Trust have helped with some of the examples in this book. I have greatly benefited from the contributions to the Natural Capital Seminars, which I have co-chaired with Cameron Hepburn and Bob Hahn at the Smith School of Enterprise and the Environment at Oxford, under the impressive leadership of Gordon Clark. Kathy Willis and Ian Boyd in particular have shaped some of my thinking. Nature in the Balance, which I co-edited with Cameron Hepburn, brought together a number of the world’s leading environmental economists, and several papers are echoed in this book. Ed Barbier has been pioneering in his work on natural capital,

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and the contributions by Kirk Hamilton and Chuck Mason have been profound. I have benefited from conversations with all three of them. A number of colleagues have commented on various drafts. I am particularly grateful to Cameron Hepburn, Charles Godfray, and (again) to Stephanie Hilborne and Julian Harlow for their critical assessments and saving me from errors I would otherwise have made. I am also grateful to Matt Jackson of BBOWT for his very helpful comments. Again, none is responsible for my errors. Though there are major global dimensions to natural capital, our experience of nature and natural capital is inevitably local. It is part of what gives us a sense of place and identity. Each has his or her own special places, be it an urban park, such as Central Park in New York, a playing field, a favourite beach or a wild landscape. For me, these include the Upper Thames (where I live), the lochs and sea pools of North Uist in the Outer Hebrides off the west coast of Scotland, the rivers and moorlands of Exmoor in the southwest of England, and the Isles of Scilly off the coast of Cornwall. It is therefore no accident that these provide some of the examples in this book. Readers will have their own special places, and the concepts developed here can be read across from my necessarily local examples to their own contexts. A wider group of people have, sometimes unwittingly, also helped me to think through these examples and draw out some of the implications. They will know who they are and why I am so grateful to them. Others who have helped me in a variety of ways include Colin Skellett, Joe Grice, Richard Abel, Stewart Clarke, David Elliott, Andy Pymer, Russ Houlder, Tony Balance, Paul Leinster, Andrew Sells, James Bullock, Robin Mortimer, Peter Unwin, Andrew Duff, Charles Berry, Myles Archibald, and Ian Cheshire. In the background is the pervasive influence of the late David Pearce, who can be said without too much exaggeration to have invented much of the modern application of environmental economics to policy design. He is greatly missed, and this book would have been much better had he been here to read and comment on the earlier drafts. Further back in my past, I learned a great deal from John Hicks on national income accounting when I had the privilege of assisting him with his collected papers, and from Amartya Sen

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(who supervised my doctoral thesis) on distributional and intergenerational issues. Research assistance has been provided by two very talented young economists, Laura van der Erve and Andrea Caflisch. The production of the book has also been greatly assisted by Kerry Hughes, Vicky Hibberd, Jenny Wand and Ann Bone. Heather McCallum at Yale University Press has been an excellent editor and supported the project throughout. Finally, it is customary and right to acknowledge the burden placed upon an author’s family by the obsessive nature of the writing process. This is a double debt to Sue Helm in my case, not just for putting up with the pressures, but also for commenting on the book in considerable detail, and for bringing her botanical knowledge to bear.

Abbreviations

BBOWT BSBI BTO CAP DEFRA DFT EPA EU EU ETS GDP GM GPS HS2 IT IUCN NFU NGO ONS OPEC

Berkshire, Buckinghamshire and Oxfordshire Wildlife Trust Botanical Society of Britain and Ireland British Trust for Ornithology Common Agricultural Policy Department for Environment, Food and Rural Affairs Department for Transport Environmental Protection Agency European Union European Union Emissions Trading Scheme Gross Domestic Product genetically modified Global Positioning System High Speed 2 information technology International Union for Conservation of Nature National Farmers’ Union non-governmental organization Office for National Statistics Organization of the Petroleum Exporting Countries xi

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ppm R&D RSPB SEEA SNA SSSI TEEB UN UNESCO UN REDD

WAVES WCED

L I S T O F A B B R E V I AT I O N S

parts per million research and development Royal Society for the Protection of Birds System of Environmental-Economic Accounting System of National Accounts site of special scientific interest The Economics of Ecosystems and Biodiversity United Nations United Nations Educational, Scientific and Cultural Organization United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries Wealth Accounting and Valuation of Ecosystem Services World Commission on Environment and Development

INTRODUCTION

Taking Natural Capital Seriously

Thirty miles beyond the tip of the Cornish mainland lie the stunningly beautiful Isles of Scilly, and in the south-west corner of the most westerly inhabited island, Bryher, there is a small patch of close-cropped grassland in which can be found the dwarf pansy Viola kitaibeliana. You need to look extremely carefully, and a magnifying glass is a great help. This tiny pansy can also be found on one of the other Isles, St Martin’s, and at one site in Cornwall. And that is probably it in Britain.1 Few people have ever seen it, and few would miss it if it disappeared. Botanists regularly travel to see it and check on how well this isolated population is doing. If more people knew how rare it was, many more would probably come. But in the scheme of things it is not a big deal. More might notice if the heather moorlands of Exmoor on the Devon and Somerset border were denuded of their peat mires and bogs. Some would miss the bleak and open landscape. Others might be in flooded houses in Exeter, as the rain washed quickly into the Barle and Exe rivers and gushed into the city centre. Everyone would notice if North Sea oil and gas production immediately ceased. Having benefited for three or more decades from the revenues these reserves have brought, Britain would find that their absence meant higher taxes and, as more energy would almost certainly have to be imported, a less favourable exchange rate. 1

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What do these three examples have in common? The answer is that they are all specific local or national types of natural capital. The first yields direct benefits or utility to the observer. It delights, but has no obvious uses.2 The second provides not only a beautiful landscape but also significant ecoservices, notably the provision of a natural form of flood defence. The third is a core energy source, to power our fossil-fuelled economy. They are all, as the Natural Capital Committee defines them, elements of nature; they directly or indirectly produce value to people, and can be broken down into ecosystems, species, freshwater, land, minerals, the air and oceans, as well as natural processes and functions.3 In other words, natural capital. Lest this seem a parochial list of British examples, a similar one can be constructed for any area in the world. The list in the United States might include the western prairie fringed orchid, Platanthera praeclara, which grows in so-called ‘prairie potholes’ left by glaciers in the last ice age; the Catskill Mountains watershed and its vital links to New York’s water supply;4 and, of course, the US’s abundant oil and gas, conventional and shalederived. In the developing world, the examples of rarities which delight are widespread, as are watersheds and their ecoservices, and minerals. Each country has its own examples, and it is a feature of natural capital that it unavoidably comes with a specific context. It is impossible to be contextfree. The examples in this book, taken to a considerable extent from Britain, are designed to illustrate the general features of natural capital and what has to be accounted for, measured and valued. Natural capital is itself one of many different types of asset. Capital is an input into production, which in turn produces a flow of goods and services for the ultimate benefit of humans. What makes it natural is that it is not itself produced by humankind – nature gives it to us for free. In some cases, like North Sea oil and gas, there is a fixed amount and it is a question of who consumes it, when, and with what consequences. This sort of natural capital is non-renewable. In other, and in many ways more interesting, cases nature keeps on providing the asset for free, provided it is treated with respect and not over-exploited. It is renewable, with a potentially infinite yield at zero

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cost, and hence is extraordinarily valuable. Nature keeps providing the pansies, and the peat bogs – provided they are not depleted to such an extent that they are no longer able to keep reproducing themselves. There are some who may find it objectionable to think about nature as just another commodity and an economic input into the production process, and therefore something that is ultimately just for human benefit. In the case of the dwarf pansy, it might be claimed to have an intrinsic value, or even to be ‘priceless’, and that a poet like Wordsworth might better capture its value, rather than economists – ‘dismal scientists’ (as the nineteenthcentury historian Thomas Carlyle described them), focusing only on utility, costs, benefits and accounts.5 Nature has spiritual and ascetic value above and beyond the instrumental economic yields. As Thoreau put it, ‘We need the tonic of wildness . . . We can never have enough of nature.’6 The environmental movement has been criticized for being too negative – for being against progress, against economic growth – as Luddites who fail to appreciate wider economic needs and the realities of paying for the regular supermarket shopping trip, the utility bills and the rent. This risks an insidious dialogue of the deaf, not just because it limits the possibilities of rational discourse and persuasion, but also because the environment often comes out the loser. While the more radical arguments for nature should be respected, those who promote them should not dismiss the big resource-allocation problems, which are what economics is all about. Economics forces choices to be made. Money spent conserving Bryher’s dwarf pansies is money that could have been spent on something else, such as local health services. Money not spent on preserving the peat uplands of Exmoor might instead have to be spent on concrete flood defences in Exeter, and more sheep and cattle could graze the uplands. Oil and gas reserves left in the ground – as many argue they should be for fear of climate change – means high taxes or lower public spending. Conservation is about more than leaving things alone: it is about hard choices with economic consequences. Focusing on natural capital is a way of ensuring that the value of nature is embedded in our economy. By making

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a choice, a price is being put on nature. That price can never be infinite. Pricing and hence valuing the benefits from nature is a very imperfect and deliberately limited exercise, and is fraught with complications. The issue is not what something is ultimately ‘worth’, but rather how much should be spent to preserve and enhance it. If nature is priceless then there is no obvious way of sorting out which assets matter most, where the efforts of conservationists should be concentrated, and which projects offer the greatest extra benefits. Every manager of a nature reserve, a wildlife trust or a national park has to allocate limited budgets. What they do – and what they do not do – reveals their assessment of the relative values of competing alternatives. These are the facts that have to be faced. While philosophers can argue about the ultimate value of nature, ‘priceless’ in the sense of resource costs it is not. Refusing to price or place an economic value on nature risks environmental meltdown. Absent a carbon price, carbon will be over-produced – as it has been with potentially catastrophic consequences. Absent prices for sulphur, for particulates in diesel, and for nitrates, and our air may choke us, our rivers and lakes become eutrophic, killing fish and invertebrates in the process. Without a price, fishing will be without limit. The eutrophication of the Great Lakes between Canada and the US, the collapse of the cod stocks in Canada’s Grand Banks, and the large numbers of premature deaths in China’s cities are all examples of what happens when there is no price. Not even London or New York escapes the consequences of air pollution. It might be argued that the obvious solution to all these problems is prohibition and preservation. Nature should be left alone. Such naive utopianism gets us nowhere. Ban cars? Ban fossil fuels? Ban economic development in China? Ban fertilizers? The result would be a hard – albeit simple – life, and much poverty. As an appeal, it might work for intellectuals who can afford it, like Thoreau in his cabin at Walden Pond, or those choosing an ‘alternative’ lifestyle. But despite many attempts since the early mystic prophets and monks in deserts and other remote places, the appeal has been a strictly limited one. It is a retreat from the world, not an engagement with it.

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Despite so much goodwill, good intentions and innumerable campaigns, a striking feature is that those who seek to conserve nature have achieved much less than they perhaps could have done. In the twentieth century, despite the occasional hard-won successes, the situation has gone overwhelmingly downhill. In the meantime, the damage to our natural environment has been proceeding apace. If anything it has been accelerating. We continue to pollute our atmosphere and our oceans, and to denude the planet of its global biodiversity. In this century, on current trends, the world’s economy will multiply by perhaps 16 times. Three billion people will be added – more extra people than the entire world’s population in the middle of the last century. Global temperatures may rise by 2ºC and perhaps by as much as 4ºC. Half of all species may be exterminated. So great are these numbers that it is very hard to grasp their implications. Economic growth is incremental and typically parochial – a new housing estate here, a new factory there. Even the enormous infrastructure and house-building programmes planned around the world are trivial when compared with the economy doubling in size within a couple of decades. China 16 times its current economic size is hard even to imagine, let alone think of the resource implications, and that is at a much slower growth rate than its current one.7 Not much will be left on a business-as-usual basis, and current policies are utterly feeble when confronted with this scale of destruction coming down the track. The dwarf pansy, the Exmoor bogs, and even North Sea oil and gas are all trivial when set against the awesome scale of what is to come. It is not that these problems are new, even if the scale is an order of magnitude larger. They have been around a long time. Few can be unaware of the disappearance of wild spaces, ancient woodland, and many species – if only from watching nature programmes, which attract such wide viewing audiences. The wild flowers have all but gone from the fields, as have the farmland birds. Springs are not quite ‘silent’, but the noise of traffic is more prevalent than the sounds of nature, even in the countryside. The colour and sounds in the landscape are but a shadow of what they were even 50 years ago. Less visibly perhaps, insects have been severely reduced.

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Where once they splattered car windscreens in summer, this no longer happens. It is as if the ‘war on insects’ launched by the chemical companies with DDT after the Second World War had been carried through to completion with the more recent pesticides.8 Children today have little idea of what they are missing. Why, like the attempts to limit climate change, has so little been achieved? It is not that there are no answers, or that a sustainable growth path is not possible. The prize is great, achievable and financeable – but not if we go on as we are. The answers lie in large measure with economics – with putting the environment at the heart of the economy, and in thinking economically about nature. By viewing the environment as made up of natural capital, it takes its place alongside man-made capital and human capital. It is integrated into the fabric of the economy, not a second-class add-on. Economic production is the combination of natural capital with other forms of capital and labour to produce outputs, which we consume. It is an input into the stuff in our supermarket trolley, our health and our leisure. Plants give us the oxygen we breathe, clean up our water and recycle our wastes. Animals provide us with food, and insects deliver a whole host of services, from feeding animals through to waste disposal. Soils are essential for agriculture, and forests deliver biodiversity, timber and health benefits. Without these there would be little production. Once nature is viewed as a set of assets it can be valued in economic calculations. Valued assets are worth looking after. This is precisely what we are currently failing to do. By putting the natural capital into the economic equation, the present and the future would be very different places, as we confront the damage and pollution we cause. Though it is tempting to think that pollution is all the fault of nasty capitalist companies, the inconvenient truth is that the polluters are ultimately us consumers. Companies produce the stuff for us because we demand it. We do not pay the true economic cost of the carbon we cause to be emitted, of the production of palm oil and its devastating impact on the rainforests, of the trees that are felled for all the packaging on our shopping, of the food which requires fertilizers and pesticides to produce, and of a host of environmental services we take for granted.

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In some cases, the impact of an economic approach to natural capital would be dramatic, in others marginal. In the three examples above, the dwarf pansy might well be preserved – not because the sum of economic returns is high, but rather because the costs of preserving it are low and the land has little or no other use, since development would be practically impossible in this remote and exposed location. The moorlands of Exmoor would be protected from the plough and intensive stocking of sheep and cattle because such upland farming is possible only through subsidies – in this case, largely perverse ones. The exploitation of North Sea oil and gas would be very different too. There would be greater attention paid to pollution (because it would be priced), and the greed of the current generation in pumping it out as quickly as possible would be constrained. Following Norway’s example, the benefits of oil and gas would be spread over many generations to come. The sums of money involved are enormous, and this matters not just now but for financing the great prize of a sustainable natural environment. This book sets out to explain how the failure to preserve and protect many of our natural assets can be turned around by thinking about the problem in terms of natural capital. It shows how the benefits from our extraordinary natural endowment can better contribute to economic output. And it provides a practical framework within which natural capital can be better protected. Taking natural capital seriously requires answers to four broad questions. First, what would a sustainable economy look like? Second, how can natural capital be accounted for, measured and valued? Third, what policies would be required to put natural capital at the heart of the economy? And fourth, how could the prize of a large-scale river, land and marine restoration plan be designed, financed, and delivered? To describe a sustainable economy, we first need a reality check – just how bad are things going to get if we carry on, given the scale of conventional economic growth and population projections, and their consequences for climate and biodiversity? Are we doomed? The scene is of unsustainable growth, but one that nevertheless could go on for decades without running

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out of resources. It will not result in the ‘end of the world’, and certainly not before the century has wreaked its irreversible havoc on nature. This is not our last century, even on a business-as-usual basis. As with climate change, there is an urgent need to act, but the consequences of not acting will not be felt possibly for decades to come. The absence of imminent crises is what makes these problems so hard to tackle within the shorter-term political context. Faced with this prospect, the challenge is to design a sustainable economy and a sustainable growth path now, before the damage unfolds. Passing on to the next generation a set of assets at least as good as the ones we inherited requires a number of conditions to be met. Continuing to substitute natural assets with man-made ones, swapping swallows for iPhones, as we have been doing for all of human history in one form or another, has its limits. Economists have too readily treated this substitution as straightforward and paid little attention to the constraints of nature on man-made capital and labour. Worse, too many farmers, developers and industrialists and politicians have treated nature as if it is a liability, getting in the way of progress. At the heart of this book is an asset-based sustainable natural capital rule, focused on the inheritance of future generations and the recognition that the damage to natural capital in the twentieth century is so extensive as to require a line in the sand to be drawn. The rule is simple to state but anything but simple to implement. It is: the aggregate level of natural capital should not decline. It might sound arcane, academic and innocuous, but it is a radical constraint in terms of its implications, since it requires that any renewable natural capital assets that are damaged should be compensated for with improvements in other renewable natural capital that is at least as good. No net loss would transform the environmental outlook. Damage can in limited circumstances still be done – as it will be – but not without compensating gains elsewhere that are at least as good. If the rule is extended to require compensation for the running down of non-renewable natural assets such as oil, gas and minerals with renewable assets, the impact is even more radical, requiring a natural capital fund to

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support a major programme of enhancing our natural capital. The next generation would then inherit a better set of natural assets. The full implications will become apparent in the last part of the book, where the prize of restoring natural capital is set out. Implementing the aggregate natural capital rule requires that natural capital is incorporated in national and corporate accounts, measured, and valued. While economists tend to start with ecoservices and work back to the assets, the asset-based approach in the aggregate natural capital rule starts the other way around – with the assets we inherit and should conserve and protect. Economists start with the timber, the charcoal and the firewood from forests, and then impute a value. The natural capital approach starts with the forests as an ecosystem, its critical thresholds to sustain itself, and then thinks about the benefits it yields. It is not by accident that business-as-usual produces such an unsustainable outcome. It is embedded in the way nations and companies do their accounting – how they measure conventional economic growth, and corporate profits. The day-to-day business of finance ministries, central banks, and the boards of corporations, trusts and charities is driven by such accounting, and especially by national income accounts. Numbers matter. The front pages of the Financial Times and the Wall Street Journal report the latest gross domestic product (GDP) numbers; the Bank of England and the Federal Reserve look at how fast the economy is growing in GDP terms when considering changing interest rates; and corporate finance directors look at cash flows, and operating and capital expenditures when considering how large their dividends should be. By focusing on GDP, the way economic growth is measured neglects all assets, not just natural assets. Remarkably, there is no proper balance sheet, and the future consequences of depleting natural capital are simply ignored. Indeed, depleting natural assets typically leads to an increase in GDP growth. North Sea oil produces a flow of income, increasing output, and that means GDP goes up. There is no countervailing balance sheet adjustment for the fact that the oil is thereby used up. Worse still, the renewables – natural assets such as fish stocks, the rainforests and the soils

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that can go on producing their services forever – have little or no value in these accounts, precisely because they are free. Accounting for nature is not therefore just some arcane and academic exercise, but rather it is vital to turning the tide on nature’s destruction. It shines a torch on what is going on, and tells us what level of consumption can be sustained over time. What goes into the accounts has to be measured, and natural capital has to be measured to make sure that the aggregate rule is not broken. Nonrenewable natural capital is relatively easy to value: oil has a price, and hence multiplying the price by the amount produced and consumed gives us a value of what has been depleted. To meet the aggregate rule, the economic rents from depleting non-renewables – the surplus after all the costs of extraction (including a normal profit) are taken into account – are what should be set aside in a fund, if the interests of future generations are to be properly taken into account. This fund turns out to be potentially very big, creating lots of opportunities to improve our natural capital. Renewables are much harder to measure. Trying comprehensively to value all of nature is impractical. Fortunately we do not have to. By concentrating on measuring assets that might be at risk and those in danger of going below critical thresholds, ceasing to be renewable, and thereby losing all those future benefits that nature would have provided us with for free, we have a shortcut which massively simplifies the measurement problem. Herring and salmon can go on being caught as long as they can breed and grow fast enough. Catch too many and they are effectively finished, and all the future catches are forgone forever. We need to know what these assets at risk might be, what the critical thresholds are, identify safe limits given the uncertainty about the science, and make sure they are not crossed. And if for other reasons they are depleted beyond the critical point then serious compensation will be needed. Holding the line on the destruction of nature would be a great improvement, but it is far from ideal: the optimal level of natural capital is almost certainly much higher than the current depleted state of nature. We can do much better by improving those natural capital assets that have additional economic benefits if they are restored and enhanced, and thereby yield a

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higher level of sustainable economic growth. The benefits that justify these higher targets above the thresholds need to be valued too. Once the sustainable growth path has been defined as one which meets the aggregate natural capital rule, and the accounting, measurement and valuation toolkit is in place, the next challenge is to set out the practical policies necessary to implement the natural capital approach to economic policy. There are three: compensation; environmental taxes, subsidies and permits; and the provision of natural capital public goods, including protected areas, parks and nature reserves. Compensation is at the heart of the aggregate natural capital rule. To ensure that there is no decline, there needs to be compensation for any physical damage within the aggregate. If applied, it would be revolutionary. While it is not hard to be persuaded that if a developer damages something they should make good – and indeed it is part of common law embedded in the concept of property rights – in practice imagine what would happen if the current house-building, urban expansions, airports, and roads plans mandated full compensation for the damage to natural capital. It would result in a colossal conservation programme. Think what it would mean in the US, Europe and China. This is precisely what the aggregate natural capital rule entails. We as consumers would have to confront the costs of what farmers, developers, industrialists and manufacturers do on our behalf. Compensation is all about projects and direct asset damage. The second policy focuses on putting a price on the pollution from continuing activities – from emitting carbon, and the consequences of applying nitrates and pesticides to watercourses and wild flora and fauna, to discharging chemicals and waste at sea. Farmers and industrialists hate such pollution taxes, just as developers hate the idea that they should pay compensation when they create new housing estates. But it is inescapable that in their absence pollution is excessive and hence sustainable economic growth is lower, and collectively we are worse off (even if GDP goes up). Unpriced externalities are inefficient and reduce the value of economic output. Compensation and pollution pricing would put us on a much more sustainable path, but there would still be one big part missing in getting on

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to the sustainable growth path. Many natural assets are what economists call ‘public goods’. They are protected areas such as national parks, nature reserves, ecosystems and large- and small-scale habitats ranging from rainforests to urban parks. The reason they are public rather than private goods is because the private sector has little incentive to provide them. People cannot easily be excluded and charged, and anyway up to a threshold each person’s use has little or no impact on others. Worse, without some form of intervention and public control, where nature provides such public goods for free, the incentives to over-exploit them beyond a critical threshold are typically overwhelming. This is the problem of the commons, and why much renewable natural capital is in danger of being taken below the thresholds of its ability to renew itself. The price it would be possible to charge would be zero up to this point, and it almost always is zero. No private company is going to get into this business. So society as a whole has to do so, and a host of community organizations are involved in creating and conserving these protected areas. Much of natural capital is, as a result, provided through public bodies – from the great national parks and conservation zones, through to the National Trust and open urban spaces and Royal Parks such as St James’s Park in central London, and the Nature Conservancy in the US. These public goods can be thought of as part of the infrastructure of a sustainable economy, to be integrated into national infrastructure planning and development. The challenge for a sustainable growth path is to work out how much of these sorts of public goods to provide, how they should be paid for, and how they should be managed. With the sustainable growth path defined, the toolkit for accounting, measurement and valuation in place, and the policies set to ensure that there is no further depletion of natural capital, the final step is to set out how natural capital could be increased so as to redress some of the damage done in the twentieth century, reap greater economic benefits, and hence raise the sustainable rate of economic growth. The great prize of enhancing the natural environment so that the next generation inherits better natural assets requires an ambitious plan for the

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restoration of rivers, land and marine natural capital, and a means to pay for it. While there is obviously no perfect unique plan, there is a cornucopia of options and plausible projects, many developed by the numerous environmental groups, which are full of schemes to improve the bits of the environment their particular organization focuses on. These need to be brought together into a practical and coherent plan to deliver sustainable economic growth, building on the science of ecosystems and the relationship between scale and area and biodiversity. System-wide approaches focus on ecosystems and habitats rather than particular species. They are concerned with river catchment management, landscape-wide schemes, and marine ecosystems. Lots of separate projects are less than the prize of a coherent overall approach. Delivery of the prize needs finance, funding and institutions. Money is the constant nagging constraint for conservationists. Many organizations live from hand-to-mouth, spend lots of time trying to entice people to donate often small sums, and come very low in the pecking order of government expenditure. They often campaign for more public expenditure. This is pretty marginal and often quite hopeless. Shaking a collection tin in a local town centre is worthy, but usually the takings do not remotely match the needs. It is easy to be dispirited. Yet there is a category mistake here: there is an altogether better and more sustainable way of financing conservation and enhancement of natural assets. There are at least three major sources of finance: compensation payments, pollution taxes, and the contributions from the depletion of non-renewable resources. The aggregate natural capital rule dictates that compensation for the damaging of renewable natural assets must provide enough money to ensure that total natural assets do not deteriorate. If properly applied it should do the job: it should self-finance the rule. Pollution taxes are additional, and the revenue raised is potentially large – these are typically activities with inelastic demand. If the revenue is saved from getting rid of the perverse subsidies, such as those granted to agriculture, the amount is even bigger. It is an open question as to whether the monies raised from such taxes and subsidy reductions should go

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towards general government expenditure or towards rectifying some of the damage that untaxed pollution in the past has done – in other words, towards restoration. But this is not the full picture. The proper compensation to future generations for the depletion of the non-renewables such as oil and gas would also be very large. Think of the Norwegian sovereign wealth fund, now approaching $1 trillion in assets. Think of the potential economic rents from fracking gas in Britain, and the actual ones in the US. If the economic rents from depleting non-renewable natural capital were offset by investments in renewable natural capital – all within our aggregate natural capital rule – then the scope for a major shift towards the targets, as opposed to simply holding the line against further depreciation, would be significant. Together these sums are significantly bigger than anything the environmental movement currently dreams about. The extremely important corollary is that none of this requires more public expenditure – expenditure that is very unlikely to happen anyway. It is all about improving efficiency through pricing natural capital and damage to it, ensuring that the economic rents from non-renewable depletion are shared across the generations, and in the process raising the sustainable growth rate. Implementing the policies to meet the aggregate natural capital rule, delivering the restoration plan, and managing the money, requires a significantly enhanced institutional capability. In most countries there is already a complex web of high-level government agencies, nature-orientated bodies, and a host of non-governmental organizations (NGOs). There are, however, few, if any, institutions exclusively focused on natural capital. As a result, natural capital tends to fall between the gaps, and indeed can be the victim of the inevitable infighting between all these bodies competing for political attention, members and money. The case for overarching national natural capital institutions is a strong one, even if it is much more difficult at the global level. What this book shows is that there is a perfectly plausible and economically efficient way to protect and enhance our natural capital in order to achieve sustainable growth. There is nothing wrong with economic growth,

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so long as it is properly measured. Technical progress is, if anything, accelerating. Human ingenuity keeps on pushing out the boundaries of what can be achieved and what can be consumed. It has brought us great medical advances, taken hundreds of millions out of poverty, provided the internet and much more. It can go on doing this throughout this century, provided the necessary assets, and particularly the natural assets, are maintained and enhanced in the process. Whether this sustainable path is followed is a matter of policy choice. There is unlikely to be any sharp and immediate jolt. Non-renewables such as oil and gas are not going to run out any time soon. We can go on being unsustainable for a long time to come, polluting the atmosphere, the rivers, the land and the oceans. But not forever. The current path is unsustainable, and therefore it will not be sustained.

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CHAPTER 1

Facing up to the Challenges

The brilliant naturalist E. O. Wilson entitled the last chapter in his book In Search of Nature, ‘Is Humanity Suicidal?’ It is a good question, and the answer depends upon whether humans are just a peculiar sort of animal, genetically programmed to focus on the short term and consume all before them, or whether they have the ability to choose a sustainable future path. If the former, there is little hope. As Wilson puts it: ‘Darwin’s dice have rolled badly for Earth . . . Unlike any creature that lived before, we have become a geophysical force . . . No other single species has remotely approached the sheer mass in protoplasm generated by humanity.’1 Although Wilson does not think we are suicidal, some take a more pessimistic view of our prospects, predicting some sort of Malthusian check. They see a wall of people and consumption coming up against a finite earth, with finite resources, finite food production, and finite ecosystems. There are limits to growth, which will become, or already are, binding constraints. It is simply a question of supply and demand. For them, the solution is obvious: we must stop pursuing economic growth, and if we do not, it is all going to end in tears. Can growth be sustained, or must it be abandoned – either by choice or necessity? There are several steps to answering this question. First, we need to be brutally realistic about the state our natural capital is in, and the legacy 19

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the twentieth century has left us. Second, we need to do a bit of star-gazing into this century, and consider what might happen if we carry on as we are now. Third, we need to work out whether the modern Malthusians are right, whether there are really finite limits which will bind in this century.

The Twentieth Century The twentieth century witnessed a miraculous transformation of economies, driven by a combination of fossil fuels and new technologies. One of the factors limiting human numbers for all of human history was the combination of energy from manual labour, horses and draft animals, and an agricultural system based upon them. Life was typically nasty, brutish and short for good reason: humans and their animals were the brute forms of energy. Natural disasters were a constant threat, and at times plagues, famines, volcanic eruptions and perturbations in the climate checked populations. The Black Death in the fourteenth century reduced global populations by over a third, and perhaps in Europe by as much as a half, and the seventeenth century witnessed disasters across Europe, precipitating wars and famines.2 Infant mortality was an ever-present shadow over families. With life often at the margins, doomsters regularly have historically had a good hearing – including in all the main religions – precisely because the threats were ever present. The Egyptian famines and the great floods depicted in the Bible resonated with many down the centuries because they had a realism right up until recent times. The twentieth century changed all this. Back in 1900 there were only 2 billion people on the planet. It took 50 years to add a further billion. After that, things really took off. By 2000 there were 7 billion. This by any historical measure was a population explosion, and it was largely a developingcountry phenomenon. By the end of the twentieth century there were roughly 1 billion people in each of China, in India and in Africa. Of these, Africa’s population is the youngest and the most rapidly growing. Other developing countries are young too: several Middle Eastern countries have

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very young populations, as do the emerging countries in South-East Asia. Pakistan provides an example: its population has surged from just over 30 million at independence in 1947 to around 200 million now. By 2050 it could be over 300 million. By contrast, China, like Europe and Japan, is ageing. Notwithstanding the regular health scares, from smallpox and tuberculosis to AIDS, SARS and Ebola, advances in medical science have transformed life expectancy and new drugs such as penicillin have tamed some mass killers. Children have increasingly survived into adulthood, and people live longer. Antibiotics may have added as much as ten years to global average life expectancy. The three Malthusian checks of hunger, disease and war remain, but by the end of the twentieth century even these constraints had been eased in many countries. Ask the question in 1900 as to whether the earth could sustain 7 billion people and it would seem so unlikely a prospect that population could rise so quickly and to such a huge figure as to be something from science fiction. The twentieth century’s economic growth would have been science fiction too back in 1900. For most of human history economic growth had struggled to reach 0.5 per cent per annum, and it was only during the Industrial Revolution that growth eventually reached the dizzy heights of 1 per cent, punctuated by regular and often severe economic recessions and depressions.3 Yet 1 per cent compound was a lot. If our person in 1900 had been told that, by 2000, the global economy would, despite two world wars, grow at twice that rate, the response would probably have been ridicule. That this world would be one in which cars, aircraft, tanks, rockets, satellites, mobile phones, the internet, fridges, vacuum cleaners and central heating were ubiquitous by 2000 would have been inconceivable – or at best something from an H. G. Wells novel. So too would the fall in mortality and working hours. For the first half of the twentieth century, the 1 per cent plodding progress was indeed what on average happened. There was a burst of expansion in the first decade and a half, in part driven by massive military spending. The gradual conversion of navies from coal-fired steam engines to oil was a straw

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in the wind. The First World War spurred on technical change. By its end there were tanks and aircraft, and the internal combustion engine was starting to make itself felt. The 1920s saw the beginnings of a national electricity transmissions system, which was to become every bit as important a technological revolution as the internet would be at the end of the century. But then came the Wall Street Crash in 1929, followed by a global depression, solved eventually by the coming of another world war. Looking out at the ruins of 1945, be it Hiroshima, Stalingrad (as it then was), Berlin or London, the future again looked bleak. Only the United States looked in reasonable shape, and even there the backdrop of the Great Depression did not augur well. The really phenomenal growth took place during the second half of the twentieth century. It was of an order of magnitude different from anything that had ever happened in human history. From the rubble of 1945, Japan by the 1980s had emerged as the second largest economy in the world (with fewer than 120 million people); Germany, despite losing its Prussian parts, was transformed into the leading European economy; and even Britain experienced a golden age of economic growth. In the last two decades of the twentieth century China rejoined the global economic race after the years of Mao’s despotic rule. It ended the century growing at 10 per cent per annum, thereby doubling its economy every seven years. This great expansion, concentrated in just four decades, not only made it possible for living standards to rise, and to support 7 billion people, but also came with significant environmental consequences. It was fuelled by non-renewable natural capital – coal, oil, gas, iron ore, copper and other minerals – and it resulted in pollution and habitat destruction on a wholly new scale. The environmental history of the twentieth century matches the economic history in scale.4 The effects have been felt across the planet. Nothing has been left untouched – air, water or land. There is nothing purely natural left. The atmosphere has been polluted with carbon, the oceans have been used as sewers and dumping grounds and depleted of fish, and on land, forests have been cleared, land conversion and agrichemicals have seriously damaged wild flora and much has been buried under concrete. If a person in 1900

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could not have envisaged a world so much bigger in economic terms at the end of the twentieth century, it would also have been inconceivable to them that the great rainforests would be in rapid retreat, plastic would be found everywhere, and that humans had started to change the climate. The very colour and texture of the landscape would seem alien, as wild flowers gave way to the green and yellow deserts of modern agriculture.

Star-Gazing – What Might Be Coming Trying to predict what will happen by 2100 is as hazardous an exercise now as it would have been to our person in 1900 trying to conceive of the world in 2000. It is unlikely that humans will discover how to live in peace for long, and we suffer the same disadvantages now as in 1900 in that future technologies are unknown. But trying to star-gaze is also unavoidable if the sustainability question is to be addressed, since sustainability is all about the future. The best that can be done is to think through some possible scenarios, and the obvious starting point is a simple extrapolation of current trends – business-as-usual – always bearing in mind that, as in 1900, this is very unlikely to forecast the future accurately, since the technology will not remain constant. On this sketchy territory, the overriding characteristic is that what is coming is probably on an altogether larger scale. Amazing though it may seem, the twentieth-century experience is but the beginning of the destruction that humans could cause to the natural environment in this century. Population will continue to rise (before possibly reaching a plateau), consumption will rise, carbon emissions will go on increasing, food supply will probably have to double, and biodiversity may actually halve. This is the base case if there are no structural changes. From an environmental perspective, it will make the twentieth century look like a picnic in the park. These trends are all deep-rooted. For population, the numbers for the period to 2050 are fairly robust. Many of the parents of the future children are already born, and fertility is slow to change. The very rapid population

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growth in much of the developing world in the last couple of decades has produced lots of potential parents. In a number of Middle Eastern countries, the average age is below 18. While China may be ageing, driven in part by the one-child policy, slowing down the population growth rates is a long process. The conventional assumption is that as these developing countries become developed countries, the size of families will fall. Confidence in this prediction is based on looking at what has happened in countries that have already developed and gone through the so-called demographic transition, notably in Europe and Japan. It is concluded that after 2050 the world population will peak. The structure of the 2050 population will then be very different. People are projected to live much longer. There will be lots of centenarians, consuming and not producing. After the peak of around 10 billion is reached, it is predicted that the replacement rate will have fallen sufficiently to bring on a gradual decline.5 Yet it is far from certain that all this will happen, and a glance at the history of population forecasts reveals just how hazardous such a prediction might be. It is just assumed that wealth will not be reflected in larger families, and that there will be no transformation from small family size to bigger ones as the sheer scale of extra growth raises incomes. Children might be increasingly affordable, and a luxury increasingly available to the many. There is nothing inevitable about a fall in family size. Indeed, a straw in the wind is the fact that African women are not following the transitional script so far. A recent analysis of United Nations data suggests that the population will increase to between 9.6 and 12.3 billion by 2100 with an 80 per cent probability.6 The upper bound is twice the number in 1990. What is more certain is that there will, again on current trends, be much more wealth. It is both more people and more aggregate wealth. Whether or not per capita wealth increases depends on whether wealth grows at a faster rate than population. Continuing economic growth, compounded through the twenty-first century, is indeed projected to rise faster than population, increasing wealth per head. In any event it means a wall of

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aggregate new consumption. A simple bit of arithmetic gives a flavour of what might be unfolding. The world’s economic growth rate is currently around 3–4 per cent per annum. This sounds manageable – until its cumulative effects are taken into account. The power of compound growth rates is awesome – a world economy growing at this rate doubles every 15–20 years. Assuming that consumption remains at about the same proportion of income, then by 2030 the world will be consuming twice what it does now. While the patterns of consumption will change somewhat, given that most of the growth is likely to be in developing countries, the growth of the middle classes in these countries probably means more of the same. It is pretty safe to assume that the new wealthy will want to spend their money rather like those in the developed world do now. But this is just the start. Continuing on this growth path makes consumption four times the current level before 2050, and at least 16 times the current level by 2100. This is what John Maynard Keynes meant when he wrote that the economic prospects for our grandchildren were bright, even at a compound growth rate he was more familiar with of just 1 per cent.7 Pause for a moment and just think of what this means. As in 1900 looking to 2000, the future is a foreign country. Think of all the extra energy, food, clothing and consumer goods this represents – all the extra cars, aeroplanes, ships, and electronic devices. Imagine what you personally would spend, say, 16 times your current income on. Think of the phenomenal growth of China, of the Three Gorges Dam, the two mega-dams on the Mekong, the new canals diverting China’s major rivers, the expansion of China’s electricity generation by more per annum than the entire installed system now in Britain, of all the skyscrapers and mega-cities, and then in China’s case on its current growth path double this every decade. Imagine waking up in 2025 and finding another China in the Pacific at least as big as China is now, and then four Chinas by 2035, and so on. Imagine all these Chinese people doing what many Americans and Europeans now take for granted – travelling by air, taking lots of foreign holidays, having two cars per family and eating lots of meat. None of this may happen, of course. It probably will not. But it would in a business-as-usual scenario, and since

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there is no other obvious scenario to work from, and it is what world leaders aspire to, this should be taken very seriously. Some will see this business-as-usual scenario as too many people doing too much consumption and already changing the climate at a rate that in geological terms is extremely rapid. As explained in my book The Carbon Crunch, in the quarter-century since the 1990 baseline for action on climate mitigation, nothing much has been achieved.8 In 1990 carbon emissions were growing at around 1–1.5 parts per million (ppm) per annum. They are now growing at nearly 3 ppm. The 400 ppm concentration has been breached (compared with the pre-Industrial Revolution level of roughly 275 ppm), and it is very hard to see how much can be done to stop the concentrations reaching 450 ppm in the next couple of decades. Beyond that, scientists predict that the warming may be more than 2ºC. Too many people and too much consumption mean we face a potentially radical change to the earth’s climate. Climate change and its impacts are well researched. There are many uncertainties, but at least some of the possible consequences can be sketched. Not all of these are bad – especially for the northern latitudes. A somewhat warmer Arctic is what made it possible for the Vikings to colonize Greenland (and to call it ‘green’)9 and travel as far as North America. A warmer Arctic now will free up fishing lanes and open up a cornucopia of natural capital to be exploited, both renewable and non-renewable. But for all the good news, there is much more that will be bad. It will be hard to maintain economic growth rates if emissions go on rising at current levels as the negative impacts kick in. This is one of several reasons why a compound rate of 3–4 per cent economic growth might not actually materialize. The implications of business-as-usual economic and population growth for agriculture are staggering. Too hot a planet will make it all the harder to feed the growing world population. In order to feed 9 or 10 billion much richer people, agricultural output will need to go through its own revolution. Assuming that the extra income is reflected in a transition in developing countries to greater meat and fish consumption, nutritional food output will have to double by 2050.10 There is a close relationship between

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economic growth and calorific consumption. Meat-eating is on the rise in China and in due course India and African countries may follow. Red meat in particular takes a disproportionate amount of cereals. The conversion of plants into meat is fabulously inefficient at around 10 per cent.11 Aquaculture will no doubt contribute much, yet the chances are that the destruction on land from modern agriculture will be meted out in the lakes and seas too, where it is so much less visible. Out of sight, out of mind. The destruction of the mangroves to make way for shrimp farming in South-East Asia is a harbinger of what might be to come.12 The extra food demand is a problem in its own right, but it is exacerbated by the demand for biocrops for energy. Palm oil, sugar cane and corn for ethanol are now competing head on with food production. In the US, ethanol now accounts for a significant amount of the total agricultural land use, with 40 per cent of corn used in ethanol production.13 In Britain, a significant chunk of the wheat crop is used not for food, but for the production of biodiesel.14 These biocrops not only push up food and land prices, but the land-use changes themselves can have offsetting negative effects on carbon emissions.15 On the supply side, more land – beyond the estimated 50 per cent already in pasture land and cultivation16 – can be pulled into production. The land currently in production can be made to yield more food. The oceans can be farmed and better managed. On the demand side, many more humans could become vegetarians, developing countries could regulate meat consumption, and meat could be taxed to reflect the environmental consequences – externalities in the economists’ jargon. But the scale of the demand is great, probably too great for these offsetting factors to play much part between now and mid-century. The negative impacts of trying to double food production will play out on the remaining biodiversity.17 The earth is currently at a biodiversity high point in geological time, having had plenty of time to recover from the last great extinction event despite many setbacks. But now biodiversity is, at the global level, emphatically on the way down in a matter of hundreds of years or less.

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The great biodiversity reservoirs are on the wane. It has been claimed that 25 biodiversity global hotspots, now comprising only 1.4 per cent of the land surface (previously it had been nearly 12 per cent), contain 44 per cent of all species of plant species and 35 per cent of all species in four main vertebrate groups.18 Much of this 1.4 per cent is threatened in the foreseeable future. Most of the primary vegetation of these hotspots has already been lost, and most of the rest is on the way out.19 The Millennium Ecosystem Assessment presents a further depressing synthesis of the damage already suffered.20 Similarly, WWF, in partnership with the Zoological Society of London, estimates in its Living Planet Report 2014 that populations of mammals, birds, reptiles, amphibians and fish have declined by an average of 52 per cent since 1970.21 It is not hard to see where all this is heading. Wilson’s conjecture that by the end of the twenty-first century perhaps half of all biodiversity may have been lost does not look that implausible. As he has put it, we are ‘in the midst of one of the greatest extinction spasms of geological history’.22 After the last one, 66 million years ago, it took tens of millions of years for nature to do its work and restore the level of biodiversity. There is therefore no practical hope that the damage can be repaired. From the human perspective it is irreversible. Among these hotspots, rainforests are particularly vulnerable. Biocrops have taken ever more land, and logging is taking its toll. Roads, settlements and economic development first fragment and then break down their complex ecosystems. While humans often increase local biodiversity by spreading species from one locality to another, deliberately or by accident, the globalization of biodiversity through the introduction of alien species has not benefited the aggregate, as reflected in species extinctions and reductions in population sizes.23 Some introductions have been catastrophic, of which the brown rat’s island-hopping on boats is a classic example, devastating seabirds. A more localized example of misguided introductions is provided by the case of hedgehogs in the Outer Hebrides off the coast of north-west Scotland. A local resident thought hedgehogs would be a neat solution to the slug and snail problem in his garden. The introduced hedgehogs love their new habitat, and the result is that they

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have been eating their way through the eggs of the once-numerous waders and ground-nesting seabirds.24 There are various ways in which this loss of biodiversity can be measured. At the aggregate level, the global loss of species and the destruction of major habitats such as the rainforests provide crude measures. There is a relationship between the area of a habitat and the number of species. Loss of habitat area disproportionately reduces biodiversity. This is a downhill path, and in some cases an accelerating one. At a more focused level, there is a host of species studies looking at the decline of everything from the Atlantic salmon, Scottish wild cats and Chinese pandas, to European lynx and Asian tigers, peppered with the occasional success story, such as the return of the peregrine falcon, attempts to protect rhinos, and the reintroduction of wolves. Many of these projects face significant challenges in mitigating conflicts with existing land-use and political interests, such as the National Wildlife Federation’s work to return wild, free-ranging bison to their native lands in Montana’s Great Plains.25 In each of these snapshots it is not surprising that biodiversity loss is usually presented to the wider public in terms of the big mammals, birds and fish. While these matter, so too do the complex ecosystems of the soil, which in turn facilitate the growth of plants. At the bottom of the food chain, the chemicals that modern agriculture has applied on a massive scale have not been good news. Monocultures require high fertilizer inputs, and the concentration on single-crop species is an open invitation for pests and diseases to multiply, in turn requiring more pesticides and more herbicides. Modern agriculture seeks to eliminate all competitors to the chosen crop. It is a war of attrition against the nature it seeks to replace with these monocultures. And it is a war the agrichemical industry is winning. Whether it allows other land to be spared as a result is debatable.

The Modern Malthusians It is not hard to paint a very bleak picture of the environmental consequences of business-as-usual in the twenty-first century, and to conclude

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that the pessimists are right. Too many people, too much consumption, too much climate change, too little food and too little biodiversity – this cannot go on indefinitely. The planet cannot cope with all this consumption and associated pollution. Without a significant change in the form and content of economic growth, they argue that the environment will bite back and undermine the assumed growth rates. Environmental fundamentalists think that the answer is to get off the economic growth escalator now, try if possible to control population growth, and encourage people to become vegetarians. In its simple form some of this argument has to be right. The compounding of economic growth produces an exponential increase in demand, which cannot be met with the existing supply. Exponential demand growth and at best arithmetic supply growth must ultimately have a Malthusian consequence. Eventually we will run out of road, even if the population eventually plateaus. But the crucial word is eventually. Surprising as it might seem, there are no good reasons to expect an environmental check on economic growth to happen soon, and in particular before much of the twenty-first century business-as-usual scenario plays out. Economic growth might eventually be checked as the environmental constraints bite back, but probably not before much biodiversity has gone, and before the climate heats up by more than 2ºC. This is the sobering reality. Some see things as much more immediate. They see a destructive determinism being played out between a fixed planet with limited resources and greedy human genetics – a more sophisticated version of Malthusian arithmetic, in the near term. As demand keeps going up, supply will fail to keep up, and there will be a nasty crunch – soon. They are wrong, and the failure to recognize this blinds them when it comes to what needs to be done. It is important to understand the structure of this neo-Malthusian argument, for it is less than it seems. For Thomas Malthus, land was a fixed factor of production, with subsistence rising at best arithmetically, and hence population would be checked as food production could feed only so many mouths.26 The geometric population growth would be checked by malnutrition, disease and war – as it had been for all of human history up to then.

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Many modern Malthusians remain obsessed with population, but they also add in the minerals and fossil fuels that underpin the modern economy.27 They argue that these are already being so depleted as to bring economic growth to a halt, as the price of oil and other commodities rockets up. A famous example of this imminent determinism is the predictions in the environmental classic, the 1972 Club of Rome report The Limits to Growth.28 It took the known existing resources and estimated the remaining reserves. These are the non-renewables. Recall that they can be consumed only once. Nature might have provided them for free in geological time, but it will not do so again. Nature does not replenish them once they have been consumed. The report took current demand and extrapolated it (and for them it was primarily population that drove demand). A fixed supply of resources and continuous demand growth means that demand will surpass supply. It is just a question of time. Dire warnings have been repeatedly issued. Paul Ehrlich, in his bestseller The Population Bomb, warned of mass starvation in the 1970s and 1980s: ‘the battle to feed all of humanity is over,’ he stated.29 ‘A Blueprint for Survival’, written by Edward Goldsmith et al. and published in The Ecologist magazine in 1972, recommended a radical return to pre-industrial social structures to avoid ‘the breakdown of society and the irreversible disruption of the life-support systems of the planet’.30 The Club of Rome report was just one among many such disaster warnings, and it was endorsed by leading scientists and conservationists. These dire warnings resurfaced in 1992 with the UN Conference on Environment and Development, popularly known as the Rio Summit or Earth Summit.31 Like religious groups which predict the end of the world, the doomsters may have got the date wrong, but for them it is merely disaster postponed, and if they are right we will be forced to alter our ways long before the surge in economic growth and consumption described above takes place. Our destruction of the natural environment would have to stop because the global population could not be supported any more and the great engine of economic development would no longer be able to continue eating up the natural resources. The ghost of Malthus will strike back – some 200 years

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after his own dire warnings. This argument, if correct, would be a gamechanger. More recently, the focus has been on oil and the claim that it is running out, and this provides an insight into the problems with the Club of Rome type of analyses. Peak oil is a particular variant of the finite resources argument – and it is reflected in the numerous ‘end of oil’ polemics.32 At its heart is a very simple idea: the oil, gas and coal deposits in the earth’s crusts are finite; therefore if we carry on using these deposits, we will run out. This proposition is in itself uncontentious. It is obviously correct. But what peak oil theorists add next is highly contentious. They argue that we will in fact use up these deposits, we will run out soon, and that in the run-up to this imminent decline, prices will rise sharply and be very volatile. The Arabs will exploit their assumed growing market power, and there will be resource wars. We will therefore be forced to change our ways in the near future. While the environmental trends in the twenty-first century may well be as adverse as described above in a business-as-usual scenario, resource depletion is not going to ride to the rescue any time soon. Many of the adverse trends can run on for many decades to come, and for two reasons: first, there are in fact still plenty of resources – much more than the pessimists assume; and second, technology will change the game. Though the Club of Rome report was a bestseller and required reading for committed environmentalists, the authors never really understood how the price mechanism and technology might alleviate the constraints. In their deterministic world the dice were loaded. The answer was prejudged in their assumptions.33

Plenty of Non-renewable Resources Left To the embarrassment of the doomsters, in the last two decades of the twentieth century, the new theme was resource abundance, not scarcity. It turned out to be possible for China to grow at around 10 per cent per annum for a quarter of a century, gobbling up mineral resources on an unprecedented scale, and catapulting itself into the number two slot among

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the global economies. And yet key resource reserves were estimated to be higher for many minerals after this transformation than they had been when the Club of Rome report was published. The reason why more supplies have become available is in large measure because of price. In the case of oil, immediately after the Club of Rome report was published, oil prices doubled and then doubled again. While this made the authors look good – it was after all what they had predicted – they had not thought through the market response. Higher prices reduced demand, made energy efficiency investments attractive, and made exploration for new reserves much more profitable. A whole new domain was opened up as a result – notably offshore oil and gas – and, come the 1980s, prices collapsed, staying low for two decades. Low prices in turn encouraged demand and reduced the incentives to drill, resulting in prices going up again. As they rose in the first decade of this century, the incentives to find new reserves increased. Major new finds cropped up across the planet, from offshore Israel, to the east African coast, Brazil, the Arctic, and Siberia. The great game of price, demand and supply played on. These new finds pushed the reserves envelope. Yet, they are trivial when compared with what has really torpedoed the peak oil advocates. Malthus, the Club of Rome and their followers never appreciated the full impact of technology on resource scarcity. Price rises not only make new marginal reserves worth going for, but they also encourage research and development (R&D) and innovation. Four massive implications have followed for fossil fuels: fracking has opened up huge new reserves; much more can be got out of existing wells, far beyond the current maximum yield of about 50 per cent; deep-water technology has opened up the possibility of sub-sea platforms and hence remoter and more challenging areas such as the Arctic (which may contain perhaps 25 per cent of the world’s reserves of oil and gas); and the ability to turn gas and coal into liquids opens up the fungibility of these fossil fuels – and in particular means that the vast coal reserves could potentially fill any oil and gas gap, in the unlikely event that this materializes.

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Indeed so great is the bonanza that it is possible to imagine a time when North America might be close to energy independence and hence no longer need Saudi Arabia and the other Middle Eastern supplies. Markets, contrary to the suspicions of the Malthusian pessimists, work. Those who imagine that peak oil (and presumably peak gas) will come to the environmental rescue by slowing economic growth and forcing a focus on low-carbon sources are in for a big disappointment. There is enough oil, gas and coal to fry the planet many times over. There is no imminent resource crunch around the corner – for fossil fuels or indeed a host of other non-renewable minerals – and even if all the dire warnings about the limits to fossil fuel supplies turn out to be right, there are other ways of generating electricity. Solar energy is, in practical terms, best regarded as potentially infinite in supply. Once the light spectrum is opened up, and new materials such as graphene begin to play their part, another energy revolution may be triggered. There is lots of geothermal potential. And then there is nuclear. It may well turn out that much of the fossil fuel reserves are simply left in the ground, replaced by more economic alternatives. No energy shortage need hold up the twenty-first century’s economic growth – or the environmental consequences of that growth. On the contrary, there is every reason to believe that the non-renewables will last a lot longer. There is a further twist to the failure of the Club of Rome and other doom-laden predictions of the end of the world: when they fail to materialize, public scepticism grows. It is already the case when it comes to climate change. Attributing every bit of extreme weather to climate change, and repeated dire warnings of floods, heatwaves and other extreme weather events, has induced a rather bored indifference since life goes on. Technological progress adds another twist, and is too often ignored. It is a pervasive feature of the economy. It is what made the radical advances in the twentieth century different from all of the human history that preceded it, building on the emergence of modern science in the eighteenth and nineteenth centuries. Rather than predicting Armageddon and waiting for it to arrive, it is an altogether different and more complex argument to

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claim that, by ignoring natural capital in our economic calculus, growth is lower than it would otherwise have been, and the tipping of many renewables over the sustainability thresholds, so that they cannot renew and regenerate themselves, is likely to be a serious economic loss. It lacks drama, crises and apocalypses, but it is the slow-burn reality that confronts us.

The Real Concern: The Depletion of Renewables Non-renewable natural capital, such as oil and gas, will last a lot longer, but in many respects its depletion might not matter much anyway. The fact that it is finite, at least in theory, means that it is largely a question of who gets the benefits. Far more important and worrying are the renewable natural capital assets, and the services nature keeps on providing for free. If these resources are depleted to the point that they can no longer reproduce themselves, the economic impacts on growth and sustainability are much more serious. There are lots of renewable ecoservices that nature yields up to us, provided that the stocks are not driven so low as to no longer be capable of reproducing themselves. Unlike non-renewables, where in many cases we have plenty left, in the case of renewables whole ecosystems are being driven to the margin of sustainability – to the thresholds beyond which they cannot replicate themselves in reasonable (human) time periods. This is permanent, irreversible damage. In geological time, there have been five major extinction episodes, wiping out whole genii of plants and animals.34 As noted, it takes tens of millions of years to recover. We are currently carrying out a comparative experiment – the sixth great extinction – and doing so incredibly quickly. Recall the rapid economic and population growth of the twentieth century. Recall the projected increase in consumption in this century. A couple of hundred years is utterly trivial set against the geological time in which the last five extinction episodes happened. Biodiversity is not uniformly spread. Tropical rainforests are key reservoirs, and rainforests come and go over millions of years. No ecosystem is

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permanent. But the processes of change are sufficiently long for evolution to take place. Darwin’s insight was that species evolve in the face of environmental change and competition. Indeed climate change over a sufficiently relaxed period may be a key cause of speciation. His Galapagos finches took a long time to fracture into the indigenous and separate species he found on each of the islands. Contrast this with the fate of the great rainforests today. The rate of attrition is already an order of magnitude faster. Now roll forward through to the twenty-first century. If rainforest depletion continues at the current rates for the rest of this century, what will be left will be remnants – essentially rainforest nature reserves. The Club of Rome paradigm has led some environmentalists up the wrong path. They are wrong about the depletion paths of minerals and fossil fuels, and they have been focusing on the wrong assets. In nearly half a century since the Club of Rome report, none of their dire warnings has materialized. Indeed, when the report was published, the global economy was on the cusp of the great boom of the late twentieth century, driven by new technologies, the collapse of the Soviet Union, and the emergence of China. The conclusion that follows is one with profound consequences for those who seek to conserve and protect the natural environment. Rather than complacently waiting for the ultimately finite non-renewable limits to bind, the path to a sustainable economy is altogether more demanding. The damage done so far is great, and much greater damage is on its way in the business-as-usual scenario, and it can and will go on for quite some time to come unless we change the current economic path. This means treating the environment not simply as a constraint on economic activity, but rather as an integral part of the economy. The starting point of such an exercise – a central theme and purpose of this book – is to work out what a sustainable growth path looks like, and the part that natural capital plays in underpinning it.

CHAPTER 2

Sustaining Economic Growth

Given the environmental pressures, is growth possible at all? Should we try to move to a zero-growth society, thereby significantly easing the pressures on renewable resources? It is tempting to think this is the only way out, and to face the consequences of ending the great expansionary era. It is not impossible. Growth could be held at zero, but the consequences would be radical. In such a world, as population increases, standards of living would fall. But since income and wealth are currently very unequally distributed, strong redistributive taxation could sharply curtail the wasteful consumption of the rich. If vegetarianism were widely adopted, foodproduction problems could be eased. The demand for energy could be sharply reduced and even rationed. Compulsory recycling of water and materials, limiting travel, especially aviation, relying more on walking, cycling and the use of public transport, and encouraging people to take holidays at home rather than abroad, would further reduce the environmental footprint. The zero-growth economy is, however, a temptation that should be resisted. While it does offer an alternative social, economic and political model, like most if not all utopias, it suffers from two serious defects: it is not necessarily desirable; and it is never going to happen. It is at best a distraction, and at worst an excuse for not engaging with the world as it is, 37

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rather than the world as its advocates would like it to be, with all the coercive restrictions on freedom, enterprise and choice that it entails. Setting incentives, encouraging more environmentally benign behaviour, and pricing nature all help, but there is a world of difference between this and a zero-growth society. Growth is not the problem. It is the sort of unsustainable growth that we have now which is the problem. How can a sustainable growth path be defined? Sustainability is one of those terms that find an easy acceptance. Who could be in favour of being unsustainable? But therein lies the problem: it is too often more a platitude than a guide to how an economy should grow and develop. It is an umbrella under which all sorts of views shelter. Such ambiguity has a number of advantages, making it easier to put together broad churches of support and hence providing the basis of campaigns for NGOs, interest groups and political parties. But it also aids the ‘green wash’ associated with many corporate attempts to present activities and products to the public in an ‘environmentally friendly’ way. This will not do. Some degree of precision is needed to cut through the claptrap. Definitions matter. Natural capital cannot be integrated into the mainstream economy unless the objectives are clearly defined, the assets and impacts are measured, and the policies and incentives targeted. Sustainability may mean different things to different people, but that merely reinforces the need to define precisely what those different things are. At the heart of the sustainability concept are two core questions. The first is: how should future generations be taken into account? And the second is: how far can natural assets be traded off against man-made ones – to what extent is there scope for substituting nature for cities and factories and motorways? The answers to these questions have split the environmental movement into ‘deep greens’ and ‘light greens’, ‘fundamentalists’ and ‘realists’, and the proponents of ‘strong’ and ‘weak’ sustainability, and provide the basis for the core aggregate natural capital rule, which will be our central organizing concept for all that follows.

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Brundtland and the North–South Debate The conventional answers are encapsulated in an ambiguous definition of sustainable development given by the Brundtland Commission in looking at the north–south divide, and considering the obligations of developed countries to their developing counterparts.1 North–south and the concerns of economic development are very much about the distribution of wealth and resources now. They are about global equity. They remain part of the sustainability architecture because a core question is whether economic development can be carried through so that the less well-off catch up with the rich nations, while at the same time the damage to nature is limited. Can China’s growth carry on doing so much environmental damage until such time as China becomes rich enough to start to repair the damage? Can the global climate wait to reduce carbon emissions until China is fully developed to western standards of living? Can that damage ever be repaired? Is it reversible? The Brundtland Report became the bible of sustainable development, in large measure because its definition is hard to disagree with: Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.2

Less often quoted but at the heart of the Brundtland approach is what immediately follows: It contains within it two key concepts: • the concept of ‘needs’, in particular the essential needs of the world’s poor, to which overriding priority should be given; and • the idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs.

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It is easy to see how its aspirational inclusiveness attracted politicians and NGOs. It is the sort of statement beloved of the United Nations. Yet its very inclusiveness renders it almost – but not quite – meaningless. The definition demands that we address both global poverty and inequality now, and do so in a way that can be globally sustained now and in the future. ‘Overriding priority’ given to the needs of today’s poor would presumably override the interests of future generations. It is the future bit that natural capital focuses on, and to make serious progress flesh is needed on the bones of a sustainability concept with this future focus in mind. Vague aspirations will not suffice. Concern for the future brings in the rights and preferences of future people. They cannot vote, and therefore they cannot express their preferences. Sustainability is partly about trying to work out how best to represent them in current choices. The standard economists’ approach conceives of this problem as essentially an efficiency question. It assumes that current and future people are just different consumers who have the same ethical status, and the problem is how to allocate scarce resources between them. The difference is in their wealth: if economic growth continues faster than population growth then future generations are going to be richer than we are, just as many of us are compared with previous generations. They will have a whole suite of technologies we can only guess at, just as we have mobiles, the internet and a host of related smart technologies that our parents did not anticipate. Hence, if we are to be equitable between us and them, we should consume more at their expense. We are relatively poor; they are going to be relatively rich. The ‘currency of exchange’ for this wealth between the generations is the assumed economic growth rate. At 3–4 per cent GDP growth per annum, by 2030, consumption will be almost twice as much as now, and hence we should raise our spending now, borrowing from the future, and those lucky future generations should – and should be able to – shoulder the resulting debt. This is pretty much what was going on before the credit crunch in 2007, and was used to justify the public and private debt that is the legacy of the boom of the late twentieth century. The central idea is that debt is the

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contract between the generations, and growth pays off the debt through the greater tax revenues that richer future people will be able to pay. This looks pretty straightforward, but there are at least three snags. First, why should we treat people in the future as having the same status as ourselves? Second, what happens if the growth is not properly measured or does not happen – for example, because of climate change and the destruction of biodiversity? And third, what does the current generation have to do to ensure that the growth actually materializes? The first is about the value we place on the consumption and welfare of future people compared with ourselves, and therefore whether and to what extent we should care about them relative to ourselves. The second is about uncertainty and technical progress. The third is about savings, investment and the preservation of natural capital. The first two are dealt with here and the third is deferred until part 4.

Future People A long line of utilitarians have taken as given the idea that the right way to go about pursuing the greatest happiness for the greatest number is from the perspective of autonomous individuals, and that these individuals should be regarded as equal in the sense of both being equally capable of enjoying utility and having an equal claim on resources. People are happiness machines, with given preferences, and life is about satisfying these preferences – without making any judgements about the relative merits of different kinds of preferences, unless they impinge on others’ abilities to pursue their own preferences.3 For the utilitarian, in thinking about future people, they should be treated equally with us – as equally important happiness machines. We should not therefore place a lower weight on their utility and hence discount it. As Frank Ramsey famously put it, pure time discounting is ‘ethically indefensible’, the result of ‘the weakness of the imagination’.4 It is an ethical position that Nicholas Stern takes as central to his assertion that we should act now because to do otherwise would be to discount the utility of future people, and thus to

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discriminate against them. As he puts it in his review of the economics of climate change, ‘if a future generation will be present, we suppose that it has the same claim on our ethical attention as the current one.’5 Indeed it turns out that Stern’s central claim about the economic case for urgent action on climate change relies overwhelmingly on this ethical judgement, and, if it is rejected, much of his argument collapses with it. (There are, however, other much more compelling arguments for urgent action.)6 This is an enticing ethical basis for thinking about sustainability. It makes the future important, and it is the future that is the main worry. It makes the economics of conserving nature pretty clear and, superficially, very convincing. The trouble is that this ethical approach is just that – an ethical approach – and it neither chimes very well with what is actually going on, nor is it an uncontested moral position. Put simply, there is no evidence that we do in fact treat future people on the same basis as we treat current populations, or are ever likely to do so. Indeed, we do not even treat current people equally – as Brundtland pointed out. Let’s start with human nature and what we actually do. While it is wrong to simply jump from practice to ethics – from an ‘is’ to an ‘ought’ – it is hard to argue that we ought to do things that go beyond the envelope of human nature. Policies are not going to succeed if people do not vote for them, and they are unlikely to vote for interventions that do not have some practicality. Ethics tries to define how we ought to behave, but it has to be grounded on practice. Even the crudest stylized facts about human nature should give us pause for thought about treating people in the future equally with ourselves. Our concerns tend to be local and rooted in the present. That is where we live our lives. We treat our own families, groups, tribes, clans and nationalities as more important than others. We place more emphasis on local and national natural capital. We tend to be patriotic, argue about whether aid should be provided and limit it to a small proportion of our wealth. Compare the amount spent on social security in Europe and the US with that spent on Somalis or Rwandans. Compare the treatment of homeless people in Europe with the millions of refugees pouring out of Syria. Or think

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about the political and public debates about immigration. The one thing that emerges from these examples is that immigrants and local people are not regarded as being of equal concern. It is not that we do not care. It is that we do not care as much as we do for our close neighbours and our local environment. Our concerns start with the family and close friends. Most of us will do almost anything for our children. We will do some things for others. But we do not remotely treat all people across the globe equally. To live as Ramsey and Stern would have us live requires a radical revolution that would do violence to human nature. We would have to equalize income and wealth across all 7 billion people now, regardless of where they live, and then do this for all future generations as well. Many utopian revolutions – from the French Revolution to Mao’s Cultural Revolution – tried to do some of this for their current populations. The ethical socialism required, even at a point in time, let alone in the future, has often been used to legitimize the use of force. It is not therefore altogether surprising that a sort of totalitarianism lurks uncomfortably and implicitly in some of the manifestos of more extreme green groups. They have a clear idea of how society should be ordered and structured and would like to impose this on the rest of us. Looking to future people over a very long time horizon, the chances are that humans will be just another transient species on this planet. Humans may last another 100,000 years. They may, like some ancient survivors of the geological past, last millions of years. But the problem with treating people the same whenever they live is that it is open-ended. It requires us to care about people later in this century on the same basis as people in 1,000, 10,000, 100,000, 1 million, and 100 million years’ time. Even Stern realized that this is implausible. He solved the problem by simply assuming a probability of extinction. But that is a cop-out; a much more sensible but uncomfortable assumption (for utilitarians) is that we do care about future people, but less and less so the further into the future they are. The good news is that our apparent selfish bias towards the present does not necessarily make a lot of difference to the practical business of

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sustainability in general, or to the focus on how to protect and enhance nature. The scale of destruction is sufficiently great as to affect the next few generations, and hence if we truncate our concerns to what happens this century not much will be lost. By concentrating on the near future – the current and next generation – and integrating the environment into the current economy, the scope for improvement in the sustainability of economic growth turns out to be enormous. By concentrating on the pairwise connection between each succeeding generation, a sustainable growth path can be defined and we can concentrate on our children’s prospects rather than worrying too much about our great-grandchildren. In this pairwise generational approach, it is the growth rate, properly measured, that matters, rather than the discount rate, and the niceties of utility-discounting. The environmental trends are so adverse as to impact on the economic opportunities for the next generation. What this means in terms of sustainability is that while we should not be unduly concerned about the utopian ethics of Ramsey and Stern, we should be concerned that the next generation will not benefit from the economic growth that is assumed. The destruction of nature might dim future generations’ prospects. We might still want to discount their utility a bit, but we cannot assume that we can consume more now on the basis that they will be better off through economic growth later on.

Uncertainty and Technological Progress The next generation’s economic prospects are the product of a balancing-out of conflicting factors. While they may have fewer species, less biodiversity, a warming climate and so on, they will almost certainly have better technology. Economic growth has to date, and in large measure, been created by technological progress, including the large-scale deployment of new technologies, many of which were invented in the late nineteenth century: cars, aviation, electricity, petrochemicals, fertilizers, new drugs such as penicillin, and, later, computers and the internet. These enabled energy from coal and oil to increase productive potential by an order of magnitude, and

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then later to allow the power of data and information to transform the economy. There is no reason to think that technical progress will slow down. On the contrary, if anything, it is speeding up. New materials such as graphene, new production processes such as 3D printing, and more developed automation methods such as robotics, will probably transform our world. Developments in solar technologies and electric cars may end the largescale reliance on oil. Taking all of these innovations together, this is what Erik Brynjolfsson and Andrew McAfee describe as ‘the second machine age’.7 The list is impressive, long, and yet most of it is blank – to be filled in over this century. This part of the growth story is pretty robust. We do not need to worry about whether future generations will be better off in aggregate in technological terms than ourselves. They will be. But this does not mean that they will necessarily be richer, and in particular the 16 times richer that is assumed in the business-as-usual scenario at a growth rate of 3–4 per cent through this century. That depends on how much offsetting damage they inherit from our abuse of the natural environment. A rapid rise in global temperatures might put paid to many of these gains, as would a depletion of biodiversity. These might play out in resource wars – notably for water – large-scale migration and the spread of infectious diseases. It is not necessary to go as far as Hollywood has with disaster scenarios to recognize that there is more to a damaged environment than the simple loss of the amenities of nature. The balance of positives and negatives – the gains from new technologies versus the losses of natural capital – will be complicated, and uncertain. It would be rash to assume that the 3–4 per cent GDP growth will really materialize to increase world GDP by perhaps 16 times or more by 2100. What is more, this would have to support a significantly bigger and older population. While GDP may rise, GDP per head depends on how many people there are. It is the contribution of population and the level of sustainable growth that determines the welfare of future generations.

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Substitution and Sustainability The second question – after discounting, technical progress and our regard for the welfare of future generations – is about substitution: what should be sustained – all natural capital or just some? For some environmentalists, the answer is all of it – what has been described as a strong sustainability position. Ask others and the answer is some key assets; they opt for a more pragmatic, so-called weak, sustainability position. There are all sorts of intermediary positions too.8 Let’s start with strong sustainability. Its adherents are a mixed bunch. Some hold a philosophical position, which gives other animals rights and which sees something of special ethical value in wild nature – nature free of human influence. There are also mystics who hold that nature has special spiritual value, and as such should be protected. The Romantic movement, which saw man as purer the closer to nature he was, had elements of this approach. Humans separate from nature are in some sense corrupt. JeanJacques Rousseau’s state of nature in his Social Contract takes this line, as do the numerous examples of ‘the noble savage’ in literature, film and art.9 Wordsworth and Thoreau share many of these perspectives. The belief in the virtues of the primitive, and that the development of civilization has been a corrupting process, has a well-established provenance. Yet it is not without its challengers. Thomas Hobbes thought a state of nature was anything but one of bucolic glory, famously arguing in 1651 that there would be: ‘no arts; no letters; no society; and which is worst of all, continued fear and danger of violent death; and the life of man, solitary, poor, nasty, brutish and short’.10 For much of human history, as Keith Thomas has documented in his history of Man and the Natural World, human progress has been defined as a process of subjugating and limiting nature, and pulling humans away from nature. That is one of the reasons why Darwin’s theory of natural selection, and the idea that humans are descended from the apes, was so shocking, placing humans back inside nature, and instantly dismissing the belief that man was made in God’s image. Thus began a process of reassessing

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the role of nature, which permeated thinking on both sides of the Atlantic, replacing an earlier mindset which Thomas describes as ‘the idea that human cultivation was something to be resisted rather than encouraged would have been unintelligible. For how had civilisation progressed, if not by the clearance of the forests, the cultivation of the soil and the conversion of wild landscape into human settlements?’11 Within the family of the ‘strong sustainability position’ there are at least three distinct camps. The first assigns moral worth to all life forms, and hence gives credence to the idea that nature has value independent of human wants and needs. Nature should be preserved for its own sake. The implication is that this value would remain even if there were no humans. It is priceless in part because price is a human artefact. The second strong sustainability argument concedes that it is only humans that ultimately matter, but that to be human requires nature and natural environments. Without the experience of nature, humans lose something fundamental. There are aesthetic and cultural values that nature supports, which have a spiritual significance.12 A third variant is advanced by those who argue that nature is the core building block to economies, and that it is a necessary condition for a growing economy that natural capital is preserved. Nature is, in this view, the primary factor of production, and labour and capital are secondary, derived from and dependent upon nature. It is special, necessary, but not sufficient for economic activity. This third view would have been familiar to the classical economists, and in particular to Malthus and John Stuart Mill. For these thinkers, in the eighteenth and nineteenth centuries, land was the fixed factor of production, and land determined – and limited – the productivity of agriculture. Agriculture determined how many people could be fed, and hence determined population. Population as labour was what produced valuable output, and capital was just embodied labour. The fact that land was fixed meant that there was a natural limit to growth. In classical economics this was the stationary state. Malthus translated this into a constraint that has many echoes in the strong sustainability camp today. The ways to avoid being caught between

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a rock (limited supply) and a hard place (geometric population growth) lay in part in opening up new frontiers in America and the colonies as populations filled the empty heartlands of the continent – empty, that is, if the native Indians could be ignored (or removed).13 The general argument later acquired an imperialist appeal, reflected in the creation of the British Empire, in the search by Germany for Lebensraum in the east and in the securing of new colonies – again in disregard of the interests of the native peoples. The great European emigrations to the US in the nineteenth and early twentieth centuries fitted into this mindset. What the classical economist failed to appreciate was that capital is not simply embodied labour. Malthus’s agriculture still depended on humans and horsepower, supplemented by organic manures. He did not foresee the great agricultural revolutions brought about by fertilizers and tractors and could not have envisaged that the land could sustain 7 billion people. In the Irish case, the monoculture that dominated agriculture played a crucial part too. It would take agrichemicals to subdue potato blight. What was missing, as Friedrich Engels pointed out, was science.14 Replace the words ‘land’ and ‘agriculture’ with ‘environment’ and ‘ecosystems’, and it is easy to see how an analogous argument could be carried over into environmental discourse. Its classic texts are Barbara Ward and René Dubos’s Only One Earth, Carson’s Silent Spring, Hardin’s ‘Tragedy of the Commons’, and Ehrlich’s The Population Bomb, and this fixed and rigid way of viewing the environment lends itself to predictions of shortages as the finite resources are exhausted.15 The Club of Rome substituted minerals for Malthus’s land, and the peak-oilers focused on oil rather than land. Most of them, and especially Hardin and Ehrlich, saw population ultimately limited by these fixed factors, and in this sense they are Malthus’s heirs. The trouble with strong sustainability is that it contains very little by way of guidance as to what we should do, except ‘preserve everything’. It is in essence the claim that natural capital should be regarded as nonsubstitutable, and hence, following Eric Neumayer, strong sustainability can be called the ‘non-substitutability paradigm’.16 It does not need to

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differentiate between classes of assets, and it does not recognize technical change. But, while there is obviously only one earth (unless we find other habitable planets), its productivity is a function of science and technology. Much more can be exploited from natural capital now than in Malthus’s time. The planet may be fixed, but its yield is not. Human history has been all about finding new ways to expand that yield. Strong sustainability is also extremely rigid. In prohibiting damage it radically curtails many of the things we do in modern economies. It rules out substitutions between natural capital and other factors of production, and hence it is against almost all economic development. The rise of China’s economy has many features that are objectionable from an environmental perspective, but it is hard to conclude that all of it is undesirable, unless a pitiless Malthusian logic is applied to keeping China’s poor in the state Mao left them in the 1970s after the Great Famine and the Cultural Revolution (and the estimated 70 million deaths that resulted).17 Advocates of this sort of strong sustainability are inevitably against development, and they find themselves on the front line in opposing most of what goes on in modern economies. In this sense, they are fundamentalists. To add to their conventional bugbears, such as nuclear power, they are now against fracking and genetically modified (GM) crops. Yet what they are reluctant to spell out is that their projected world is one in which standards of living are much lower than current levels, at least in the developed countries. It is not just that consumption is for them too high, something that many holding very different views agree upon, but that it needs to be permanently and radically reduced. We would need to go ‘back to nature’, to live in a state of ‘harmony’ with the natural world. It is perhaps not surprising that many political Greens want to return to wind, solar and local biomass sources of power in addressing climate change – sources of energy familiar in our pre-industrial past. The British Green Party manifesto for the 2015 general election is against nuclear power, fracking, and is to the left of the Labour Party in advocating both a wealth tax and a steep rise in the minimum wage. The strong sustainability position is against the very idea of economic growth. Indeed it is an

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argument for negative growth if population is rising. Zero growth would be acceptable after there has been a rebasing to a lower consumption level only if associated with population control – something Hardin, the Club of Rome, Ehrlich and others advocated. In contrast, weak sustainability allows some environmental assets to be substituted by man-made and human capital. Nature is not sacrosanct according to this view. Human history, as a process of creating our manmade and human capital, has not been an unmitigated mistake, though the substitution may have gone too far. In its pragmatic form, weak sustainability can be summarized as the view that although the three types of capital – man-made, human and natural – are not perfect substitutes, the degree of substitution is not zero. Weak sustainability is necessarily empirical: some substitutions do little damage; others are to be avoided. But which substitutions are acceptable? To sort this out, further distinction is needed between renewables and non-renewables. Recall that not all natural capital is the same. Renewables are just that: they renew themselves at no cost to us. Fish can reproduce and make good the depletion caused by predation. Trees grow and replace those that have been cut down. Nonrenewables, by contrast, are assets that can be used only once. They do not regenerate. Minerals, such as fossil fuels, are like this: if North Sea oil is used up now, there will be none left for future generations. Weak sustainability requires a different approach to these two types of asset. In the case of renewables, the task is to make sure that depletion is limited so that the population does not fall so low as to no longer be able to sustain itself and go on providing its bounty for free. The threshold that turns a renewable into a non-renewable must not be crossed without very good reason. Identifying that threshold is often a complex and uncertain exercise and, as a result, it may be necessary to add in a bit of risk aversion and keep the population well clear of the threshold. The practical metrics are discussed later on. In the case of non-renewables, there is a choice: consume now or consume later. If assets are consumed now, enough other assets need to be set aside to compensate for what this generation has used up. The current generation

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therefore needs to invest to compensate the next generation – sharing the proceeds (the economic rents). This may be through an explicit fund or it may just be that there is more man-made and human capital instead, if the revenues from depleting the asset are spent on investing in new factories, or more education. North Sea oil revenues could have been partially set aside in a sovereign wealth fund, similar to the system in Norway, or spent on creating other assets. Which compensating assets should be invested in is crucial – and in particular whether the depletion should be compensated for with renewable natural capital, or just any sort of capital. The introduction of the renewables concept carries with it a clear implication for substitutability. Renewables can be depleted, and hence substituted for by other forms of capital, up to the threshold. Non-renewables can be substituted for entirely. In theory, all that is needed is to identify the thresholds and concentrate on keeping renewable populations above this level, while creating an intergenerational fund from the economic rents generated by depleting non-renewables to ensure an equitable distribution of the benefits between the generations. When the physical unit of renewable natural capital is a species, the above rule can at least be understood. It is typically considered important to make sure species do not go extinct, unless they are really nasty. Since most species are above the threshold, there is, according to this argument, not really much of a general problem. The focus is just on a specific subset of endangered species. But suppose that the unit is not a species (or not just a species), but ecosystems and their supporting habitats. Suppose within ecosystems everything depends upon everything else. Then it is the system that needs to stay above the threshold. In this case, while it is still necessary to protect species from falling below their particular thresholds, it is not sufficient just to do this. Sustainability now requires much more – preserving and enhancing ecosystems and habitats to a level sufficient to sustain the myriad of interrelated species. Weak sustainability suddenly becomes a much more serious and complex matter. Here is where the conventional economic approach starts to break down. The concept of a range of factors of production, each being traded

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off at the margin against each other to produce outputs, relies on being able to analyse changes in these marginal ways. A bit more of this, a bit less of that. Systems are different: while they can be trimmed at the edge, they have their own – system – thresholds for breakdown. Consider the marginal reductions of a rainforest. Each hectare that is cleared leaves the bulk intact. The marginal damage is initially close to zero. But the damage to the system as a whole is not: a rainforest is a complex ecosystem whose biological productivity depends upon its size. It is not simply the aggregate of lots of separate hectares. It is a rainforest as a whole. While it is true that a number of the species in it would survive if it were radically cut back, the ecosystems would (and do) collapse. Rich and complex relationships between species break down. It is for this reason that habitats, as proxies for ecosystems, are often the focus of conservation. Peat bogs, rainforests, ancient pine forests, uplands, estuaries and coral reefs are all examples of this. Many environmentalists see the conservation of these habitats as being kept separate from humans in as pristine a state as possible. They are bits of nature where human influence should be minimal. This, interestingly, is what the Nature Conservancy in Britain thought it was doing after the Second World War.18 Nature reserves were literally reserves for nature, not people. There are two possible justifications: the radical idea that other species are intrinsically valuable and independent of human interests; and the instrumental idea that pure nature should be used for science, as well as reservoirs for species. There are few, if any, places left like this, and many species-rich ecosystems have developed because of human activity. In Britain, for example, the transformation has been a radical one. It was once a much more densely wooded island, and now much of it is used for urban and agricultural purposes. Key man-made habitats include water meadows, hay meadows, copses and hedgerows, and much effort is spent on conserving these. Hedges in particular are a recent phenomenon, the product of enclosing what were once medieval open field systems.19 There has been massive substitution already. This humanization of the environment is widespread

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across Europe, and even in the wilder mountain areas across the globe, such as the Rockies and the Alps, human impacts are significant. Humans have often added to diversity by clearing the wooded landscape, and habitat diversity has value. More species can thrive where there are woods and water meadows and upland grazing, rather than just woods. The landscape is managed: there is no ‘pure wild’ left. Even in the Arctic and Antarctic, humans have begun to change the environment, from plastic and chemical wastes, air pollution and tourism, through to mineral abstraction and military uses. If nature were to be left free from human impact now, many species would be in deep trouble as their man-made habitats gradually disappeared. The presence of humans makes the renewables and substitution challenges more complicated. Nature cannot just be left alone, and the idea that parts of the landscape should be ‘re-wilded’ is just as much a managed choice as deciding that the hay meadows should be cut and grazed to a particular pattern, or that field margins should be created as reservoirs for wild flowers. Re-wilded habitats exist in a context of an overall managed landscape. Conservationists are as much nature managers as are farmers and developers. The complexity of human intervention means that the ecosystems have had to adapt – or in many cases die out. Ancient woodland exists only in fragments in Britain now. Much of these remnants are enclosed in nature reserves and national parks. They need specific protection. New habitats have been created with their own ecosystems. The urbanization of the landscape and the creation of road and railway corridors have given us the garden habitats that many species thrive in. Motorway verges with higher salt deposits support salt-loving plants otherwise found along the coast. Roads provide abundant road-kill for scavengers. These may be poor substitutes for what they replace, but they are habitats that can add more if properly managed. The natural environment we may seek to conserve is the natural environment we have in part created.20 Future people matter, and how good their prospects are depends in large measure on whether economic growth can be sustained, making them

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better off than we are. That growth will involve the loss of some natural capital. Substitution will go on. The trick is to identify when and where such substitution is allowable without harming future prospects, and this requires careful empirical analysis. Natural capital needs to be properly accounted for, measured and valued. Simple broad-brush prohibitions will not solve this problem: strong sustainability suffers from the fact that it is of little or no practical use in guiding policy. The interests of future people are multiple and it is not possible to know, design and plan for their futures in detail. Rather they need to be enabled by having sufficient assets to meet their needs. This is the bit of the Brundtland definition that is relevant – they need a set of assets at least as good as the ones we inherited, even if those assets have been modified by humans. The challenge is to identify which capital assets matter most, and in particular whether natural capital assets play a special role in meeting the sustainability rule. This requires a rule or principle to underpin weak sustainability in order to sort out the role and limits of substitutability: the aggregate natural capital rule.

CHAPTER 3

Defining the Aggregate Natural Capital Rule

Current economic growth is unsustainable, but can nevertheless go on for some considerable time. A degree of substitutability between natural and man-made capital is inevitable and, on occasions, even desirable. In any event, under any plausible scenario, it is going to happen anyway. How then can substitutability be taken into account, while at the same time protecting and enhancing natural capital? Strong sustainability rules it out; weak sustainability is too permissive – too weak. The answer lies with a deceptively simple central organizing principle – the aggregate natural capital rule – and one with radical consequences for the way natural capital is accounted, measured and valued, and for the policies needed to meet the rule. It has a number of underpinning foundations, all of which require justification. In particular, it is asset-based, rather than focused on consumption, and it makes natural capital special compared with other types of asset – in terms of the next generation’s inheritance and as a core instrumental building block for the economy as a whole.

The Asset-Based Approach to Natural Capital Economists think about production and consumption in a very particular and narrow way. People are happiness machines. They try to maximize 55

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their utility by consuming bundles of goods and services. These goods and services are produced by combining inputs to produce outputs. The inputs – capital and labour – are of no intrinsic value. They are the means of producing the ends. What matters are the flows of goods and services produced, not the assets that produced them. Asked how sustainable a growth path might be, and the answer is in terms of the consumption path which produces the highest sustainable utility or income over time.1 This is a flow, not a stock, and this is what matters to the next generation. This income- or consumption-based approach underlies most economic approaches to markets and governments. Interventions are considered on a piecemeal basis, according to whether they increase the utility of at least one person, without harming anyone else. This is what lies behind the ‘market failures’ approach to policy, and it is enshrined in the economist’s guiding Pareto principle.2 Though presented as if it is merely an innocuous efficiency criterion, it does in fact rely on an ethical approach which not only sees improving welfare and well-being in terms of utility, but also sees distributional issues – who gets what – as subsidiary and a matter to be resolved separately. There are at least three fundamental problems with this approach, both generally and from a natural capital perspective. First, in characterizing the sustainable growth path by non-declining consumption through time, it assumes that more consumption is the objective. Second, it assumes future preferences are known, and hence is extremely informationally demanding. Third, it makes no distinction between different kinds of utility. These problems reflect underlying ethical questions: whether ever higher levels of consumption are desirable; and whether each sort of consumption is at least as good as every other. An alternative approach is required for both ethical and practical reasons. Though vague, the Brundtland definition of sustainable development provides one way forward. Recall that it requires us to pass on a set of assets at least as good as the ones we inherited. It says nothing about how happy they will make us. But why assets rather than income or consumption? One argument is that this accords with our intuitions about inheritance. There

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is a huge leap between making sure the next generation has the assets which form the basis of a good life, and making sure they are at least as happy as we are. The gap between the two leaves it open for individuals to try to find their own paths, to live a ‘good life’ as they see fit. The job of the state becomes restricted, and is kept out of the personal domain of making the best of the circumstances in which individuals find themselves. Children are provided with education; they inherit infrastructure, knowledge, culture, institutions and natural capital. Trying to ensure that our children are happy is altogether more complicated. These assets are necessary conditions for happiness, but by no means sufficient. It is reflected in practice. There is an informal contract between the generations. The next generation inherits what we leave them. They have no option. They get the houses, the factories, the roads and the sewers from us, just as we got some of these from our predecessors. They also get the nuclear waste, the polluted atmosphere and the reduced biodiversity that is left from all our failures to behave in an environmentally responsible way. It is a chain letter between generations. This way of thinking suggests that rather than trying to equalize out the consumption between the generations, something a bit more limited might be more practical. We might want to leave them the wherewithal to be able to consume – in other words, the set of assets necessary to have a decent life. Not the assets we are set to deliver on a business-as-usual growth path, but an appropriate set necessary to sustain a good life. Whether they are happy in the houses we leave them is for them to sort out, but we will at least give them the houses. Whether they enjoy wide-open spaces and wild places, we will at least make sure as a minimum they inherit them. And we should not leave them the pollution, the waste and the denuded biodiversity – the choking smog-ridden cities, the stockpiles of nuclear waste, and the stinking biologically dead rivers. They need the right sort of natural capital. An assets approach would transform the way economies are evaluated, compared and contrasted. Instead of concentrating on whether economic growth has gone up or down, national accountants would audit assets. Are the roads getting better or worse? What is the state of our water supplies? Is

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there enough energy? Is the atmosphere and biodiversity in good shape? These are all asset questions, and they are all questions about basic infrastructure systems. They are also questions that require a different way of accounting for economic growth. Brundtland’s approach starts at the right place when thinking about intergenerational equity, but it stops short of being really useful. What is needed is to extend the asset-based approach by asking which assets should be bequeathed to the next generation, in order to meet the criterion of being at least as good as the ones we inherited. This is where natural capital comes in. There are at least two good reasons for focusing on specific assets and asset classes such as natural capital. The first is an ethical argument about the value of different types of asset and the possibilities their possession opens up. The second is an instrumental argument – that some assets may be more important to the fabric of an economy than others.

The Ethical Case for Protecting Natural Capital Assets Let’s start with the ethics. It is not accidental that the design of welfare states focuses on a small number of what might be called social primary goods which take precedence over others. Health, housing, education, and electricity are some of the building blocks necessary for us to function in society. Welfare states do not treat the provision of cigars, yachts and restaurant meals on the same basis. A poor person may prefer a packet of cigarettes to a hot meal, but soup kitchens do not typically give out free cigarettes. It may be hard to work out precisely what is inside this boundary and what is outside, but the core components are fairly widely agreed. The assets necessary to deliver social primary goods could be regarded as the core distributional part of the contract between the generations. These include schools, hospitals, water, energy and transport systems, as well as law and order and defence. Where these break down, states are considered as having failed. Think of war-torn Syria, Iraq and Afghanistan. Think of recent despotic regimes such as the generals’ Burma and Robert Mugabe’s Zimbabwe. And even in functioning democracies, think of the

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regular power cuts in Pakistan and India, and the state of the levees which were supposed to protect New Orleans. The ethical argument is that, as a first claim on a nation’s resources, future generations should inherit these basic assets necessary for a decent life. This is in tune with the social contract theories from John Locke’s Second Treatise of Civil Government3 through to John Rawls’s A Theory of Justice and his resources-based emphasis on primary goods.4 Amartya Sen’s rights and capabilities approach shows some of these features, but his emphasis on freedom and choice requires a distinct, different and more demanding informational base.5 What the asset-based approach does is to fill in the types of asset which should be bequeathed between the generations. In particular, does natural capital fall into this category as an asset class necessary for a functioning society? There are several reasons for thinking that it does. Back in the early to mid twentieth century, nature could be taken for granted: needed, often essential, plentiful, and largely free. As it has been cut back, so the constraints bite and it is no longer a case of simply assuming it is available. Access to nature is a fundamental building block for the good life in a way that access to cigars is not. In Britain, the Open Space Society, the successor to the Commons Preservation Society, and one of the precursors of the National Trust, was set up in the nineteenth century very much with a social objective in mind. A driving force behind this social dimension was the great reformer Octavia Hill, whose aim was to provide open spaces for the urban working classes, to improve their health and well-being.6 The physical and mental health aspects of access to nature were very much what she had in mind. The added twist was a religious one – fear that the urban slums bred sin and wickedness, compared with the spiritually uplifting experiences that open air and nature would bring. The early US conservation movements concentrated much more on the concept of wilderness. John Muir’s Sierra Club, and the founding of the Yellowstone National Park, were very much in this spirit – as befits a country with an open frontier – well into the twentieth century, in contrast to crowded industrial Britain.7

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When welfare states were being established in Europe after the Second World War, natural capital was part of the framework, albeit under a different name. Legislation was passed not only for things such as health and education, but also for town and country planning, and the establishment of national parks.8 Among the benefits to society given prominence in the 1940s, the protection and enhancement of the natural environment became a core function of the state and, as such, a social primary good in most developed countries. Fast-forward to the present time, and a host of natural assets form part of the basic building blocks. In richer countries, the extended state, including trusts and charities, provides protected areas and nature reserves, longdistance footpaths and trails, youth hostels and canals, as well as planting trees to improve recreational opportunities, provide clean city air and protect the diminishing biodiversity. Nature provides an essential input into our psychological welfare, as well as space for activities such as walking, running, cycling, angling, shooting, and bird-watching, and a place to relax, contemplate, and find peace in a stressful world. It is very hard to imagine a good healthy life without this natural capital.9 Not so for many poorer countries, and here the gains from some of these basic steps would be correspondingly very great.

The Instrumental Argument: Natural Assets as the Primary Factor of Production The second argument for giving natural capital a special place among the assets which should be bequeathed to the next generation is an instrumental one: natural capital is the factor of production upon which the others – man-made capital, human capital and labour – all depend. Instead of being just one factor among many, it is primary, and the rest are secondary. Why might this be so? To many environmentalists it is obvious: there is only one earth, within which everything depends upon everything else. Humans are just a particular type of animal, and depend upon the productivity of nature for all that they do. Our very survival depends upon this set of natural ecosystems. Mother Earth, Gaia, sustains us.

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In one sense, this is obviously correct. Humans could not survive without the earth’s atmosphere roughly as it is now. Indeed human life became possible only because of the abundance of plants, which provide the oxygen we need through photosynthesis.10 Without the complex ecosystems of soils, most agriculture would collapse. The earth is a good place to live because of its ecosystems, and these are natural capital. Without them human life, literally, cannot be sustained. But humans have been substituting man-made capital for nature for millennia, and the result has thus far not been catastrophic. Is it really true that all other factors of production are derived from nature and hence are in fact embodied nature? And is it the case that human modifications to nature have all been bad? Let’s look at the other factors of production – man-made capital, labour and human capital. Factories, houses and roads displace nature. And there is a lot more to come with current growth projects. In the US case, President Obama’s Build America Investment Initiative, launched in 2014 together with his Grow America Act, provided not just a statement of intent, but a recognition of the scale of investment to come, whether or not his particular plans are implemented. The European Commission has made infrastructure investment one of its priorities, and most member states have their own ambitious plans. China’s commitment to infrastructure is truly awesome, with many ‘mega’ projects in the pipeline. These specific measures need to be seen in the context of the great global growth in urbanization. Already over half the world’s population lives in cities, and by 2030 there will be 5 billion urban dwellers. While there is a lot of focus on mega-cities, most of this growth will take place on the boundaries of smaller cities, encroaching on the surrounding landscapes. In one sense these are all embodied natural capital. The tarmac and the bricks are all derived from nature. They use non-renewable natural capital and are sustained by renewable natural capital. The builders need food, and are ultimately natural products themselves. The designs, concepts and know-how are a bit different. While the brain is biological, science and technology may be best thought of as distinct.

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All these other factors can, it is argued, be thought of as ultimately just different types of natural capital, a bit like Karl Marx thought that all production was derived from labour, and hence capital could be regarded as embodied labour. But as with Marx’s labour theory of value, a natural capital theory of value would not get us very far, and it might share the same temptation to provide the foundation for a radical green ideology, just as Marx’s Communism sprang from his labour theory of value. Once man-made capital has been created, it has a life of its own, whatever it is ultimately made from. The need to consider how the various factors, derived as they might ultimately be from nature, should be combined remains. Treating everything as natural capital gets us nowhere in trying to identify which particular assets the next generation should inherit. We still need to decide whether there should be more national parks, more woodlands, or more roads and houses, and in particular where these developments should go. And worse, if everything is ultimately natural capital, for those who want to preserve it all there is nothing useful to say about what we should do. Why is one bit more worthy than any other if all natural capital is to be preserved? If, then, it is better to think about different types of asset as factors of production, is there in this instrumental regard any good reason to think that natural capital is special, and in particular worthy of special protection? Here the distinction between non-renewables and renewables counts. There can be nothing that is special in this context about non-renewables, provided the impacts of their use are properly taken into account. Recall that nonrenewables can be used only once. The same is not the case for renewables – they can continue to be used up to the point where they are so depleted that they become non-renewables. The special bit, therefore, is all about renewables. Recall, too, that the scale of the destruction of renewables is now awesome. It is no longer about losing the odd species here and there, or of a slight change in temperatures. The context is now one of a slow-burn but ultimately catastrophic extinction episode, with the great biodiversity reservoirs gradually being destroyed. Losing species here and there has

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not troubled humans much so far, and when it has the reasons have been because of regret more than mass concern. Losing half the species on the planet is a different matter. It is not hard to make the case that the process of destruction has gone too far, and that renewable natural capital as a whole is already well below the optimal level. While so far the direct damage has been quite limited, there are good reasons for thinking it will start rising, if indeed it has not already done so. The state of the core ecosystem services, from climate to fresh water and soils, is already a serious cause for concern. The costs of protecting natural capital are rising too as it becomes increasingly scarce. The reasons are the competing uses for the resources. As population grows the demand for food rises. Felling a bit more of the rainforests, for example, helps to satisfy this demand. Where a century ago the land did not matter so much, now it does. The instrumental argument for protecting natural capital is extremely important.

The Aggregate Rule Faced with such complexities, with systems rather than marginal units, with little or nothing remaining that is purely wild, how can the sustainability requirement be met? It is implausible to apply the strong sustainability rule both ethically and practically. There will be further economic development. It cannot be stopped, even if it is sometimes desirable to do so. Damage to renewable natural capital will carry on being done. Therefore substitution will take place – and in a context where a lot of damage has already been done. This is the reality within which policy on natural capital – and nature conservation – needs to be set, not some idealistic utopia. On the other hand, weak sustainability allows damage to natural capital to be traded off against any type of capital, and hence does not specifically protect natural capital once damage is permitted. It is therefore, as its name implies, too weak. In between the two, a possible rule to adopt is to require that the aggregate level of renewable natural capital does not fall, so that for every new bit

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of damage, there has to be a compensating increase in renewable natural capital elsewhere – and not just any sort of capital. The envelope of total natural capital is kept intact, while its composition can change where there are overriding economic benefits from development. Given that the amount of damage already done is large, and the fact that biodiversity is in steep aggregate decline, it is a pretty safe bet to assume that we are already well below the optimal level of natural capital. Sustainability might then be achieved by ensuring that the next generation inherits a bundle of renewable natural capital, and not just all types of capital added together, at least as good as the one it inherited. Notwithstanding the fact that non-renewables can be used only once, a more demanding rule would be to include all natural capital. Here the rule would be that, if the aggregate value of natural capital as a whole is maintained, the depletion of non-renewables requires compensation by reinvesting the economic rents from their depletion in other forms of capital.11 The tricky bit is whether that compensation has to be in renewables, or just capital more generally. Non-renewables are valuable: someone will use them, and whether the substitution is in renewable natural capital, or capital assets more generally, compensation implies a natural capital fund for future generations, made up of the economic rents from the depletion of non-renewable natural capital. There are then two versions of the aggregate natural capital rule: • Weak aggregate natural capital rule: the aggregate level of renewable natural capital should be kept at least constant, and there should be general capital compensation for the depletion of non-renewables. • Strong aggregate natural capital rule: the aggregate level of renewable natural capital should be kept at least constant and the value of the economic rents from the depletion of non-renewable natural capital should be invested in renewable natural capital. Both rules would be radical departures from the conventional economic approach to weak sustainability. The key difference between the two

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aggregate rules is whether, and to what extent, the surplus revenues from oil, gas, coal and other mineral depletions should finance the restoration of renewable natural assets. If they are used for this specific purpose, the scope and scale of restoration would be very large. The rules as stated leave open the choice of the unit of measurement, and in part 2 the accounting, scientific measurement and economic dimensions will be explored. In the case of renewables there is a physical component where thresholds are at risk of being breached, and as we shall see the units are at the habitat and the ecosystem and the species levels. Maintaining renewables above their thresholds requires capital maintenance, again explored below. This is a cost of maintaining the physical units intact. When it comes to substitutions within the renewable aggregate, again it is about the costs of the replacement. For non-renewables, there is no possible physical substitution, so depletion can be measured only in economic terms.

Extending the Rule to Other Assets The Brundtland definition did not single out natural capital. It argued that sustainability covered all assets, without distinction. In effect it was a general aggregate asset rule, rather than the specific natural capital ones advanced above. The aggregate capital stock should not decline. Between the two – the aggregate asset rule and the aggregate natural capital rule – lies a host of other possibilities, each providing special protection to classes of assets. Among the most interesting from a natural capital perspective is infrastructure. It is interesting because man-made infrastructure systems share common features. They are instrumentally essential to the functioning of the economy. They are necessary for the provision of basic social primary goods, and hence meet the ethical condition. Interesting too because they are typically systems and, like ecosystems, are not amenable to marginal analysis. The systems are either provided or they are not. And because they are systems, they are unlikely to be optimally provided without significant state intervention.

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This is not the place to exposit in detail how the energy, transport, water and communications systems should be protected and enhanced.12 Rather the key point is that renewable natural capital comes in systems too, and it can usefully be thought of as part of the core infrastructure. It is a special type of asset analogous to the special role of, say, electricity systems. The modern economy needs to rely upon a continuous, high-quality and reliable supply of electricity. Natural capital is a similarly necessary input to a wellfunctioning economy. Without electricity it would be hard to image how the coming economic growth in this century could materialize. Similarly, a hotter climate with half the biodiversity may not be good news for economic growth and all those extra billions of people. The aggregate capital assets in these man-made infrastructures also need protecting and enhancing. The idea of maintaining natural capital intact is not new. It is implied in the general sustainability rules, and David Pearce and others proposed a crude version of the rule back in 1990.13 Given the radical nature of the departure from current practice that these aggregate constraints imply, it is not surprising that there have been a number of objections, which can be grouped into four broad categories: that the conceptual framework is ill-defined and flawed; that the planet can get by with a lot less natural capital, and therefore that the aggregate rule means that other economic opportunities are forgone; that the rule puts developing countries at a disadvantage; and that it is not ambitious enough, since some natural capital is already over-depleted.

Challenges to the Conceptual Framework The conceptual objections are that an aggregate concept is not necessary; sustainability itself is not necessary; and the rule cannot be operationalized. The first is an objection directed specifically at Pearce et al. by Maurice Scott.14 Scott argues that an aggregate concept is not necessary, and instead that the objective should be to ensure that the economic value of capital generally be maintained by focusing on capital maintenance rather than depreciation.

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In focusing on capital maintenance, Scott’s argument is a subtle one, and his approach will prove important to the accounting framework and to the design of natural capital policy. But he has little time for any asset being special per se. He uses the example of the English countryside, which he claims is more valuable than the primeval forests that used to cover it.15 Wilfred Beckerman goes further. He argues in his provocatively titled book Small Is Stupid that there is nothing particularly desirable about sustainability at all: that there can be welfare-superior trajectories where income and consumption in particular periods fall, but over a future time span the total welfare is nevertheless higher.16 It is total income and total consumption over time that should be maximized, and there is nothing desirable about placing a non-decreasing constraint upon the growth path for any particular period. In theory, if all that matters is income and consumption, Beckerman is right. But it is not all that matters, and there is a practical and instrumental reason for expecting, in the absence of any aggregate asset constraint, the path to turn out to be seriously suboptimal. Scott points out that Pearce’s version of the aggregate natural capital rule does not have an operational definition. However, our aggregate rule can be operationalized, even if incompletely. The fact that there is no precise balance sheet listing out – and valuing – each and every natural asset is not relevant because it is not strictly necessary. It would be good to have this, but its absence does not detract from compensating for losses and identifying those assets-at-risk. Fish stocks are imperfectly understood, but the parameters are roughly known. Rainforests and other biodiversity hotspots are known, even if we do not know how many species there are in each bit. The interesting point is not that there is uncertainty and incomplete knowledge that should be rectified. It is that uncertainty is endemic, and therefore uncertainty needs to be taken into account in operationalizing the rule. There is uncertainty relating to not just the physical and biological facts and the relationships in ecosystems, but also the values of the different bits of natural capital. The price of oil goes up and down, and so does the price of herring. It might be that the next generation of solar power is so

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cheap that the oil is left in the ground. Or it might not. Similarly it might be that a particular species is a keystone one, or it might not. This consideration requires a position to be taken on risk aversion. In particular, should the precautionary principle be applied? There are several reasons to be risk-averse when it comes to renewable natural capital. The main one is irreversibility: if the stock of a renewable asset is depleted below the threshold from which it can reproduce itself, there is no way back, or at least not without very large asymmetric costs. While populations of endangered species have in some circumstances been nursed back to a more selfsustaining level, restoration is usually even harder when it comes to ecosystems. Ancient woodlands are, as the name implies, ancient: they take centuries to develop. Once cut down, such a wood cannot be replaced by planting lots of new trees. The rainforest is another example. It is true that forests can regenerate – but not to what they were before for a very long time. Since in many cases the precise location of the thresholds is unknown, and since the consequences are asymmetric, it pays to take care. Ecosystems are almost always very complex, balancing a host of relationships. They make economies look simple by comparison. While it is often possible to have some grip on the thresholds for particular species, it is much harder to know what stresses might turn out to be terminal for ecosystems. The depth of our ignorance is enormous. For the rainforests, the number of species is typically a guess. Many are yet to be discovered, and many go extinct before they have even been discovered. Many may have important chemical properties of great benefit in the ecoservices they could provide. We just do not know. These option values are a reflection of the benefits of taking a precautionary approach. Ecosystems can be subject to implosions. Suddenly it all goes pear-shaped – and all the options are gone.

Can We Get By with Less Natural Capital? A second objection to the aggregate natural capital rule is that while some natural capital is required, not all of the existing natural capital is essential for human welfare. Over time, the services from natural capital will become

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more valuable as they get scarcer, but that will anyway be reflected through prices in the economy. In the meantime, there is a lot of nature we can do without. If, for example, there are no snow geese or swallows returning each year to breed, those for whom their return brings great pleasure will be worse off, but in the scheme of things it would not alter most economic activity. Most people are not affected, and many do not even know what a snow goose or a swallow is. Imagine if half the farmland birds disappeared, but agricultural productivity increased through more intensive farming. Most people would have more and cheaper food, and a few birdwatchers would find it harder to enjoy their hobby – though there would, of course, now be more rarities to seek out. The bald eagle and the osprey are so valuable because they are rare – not so the American robin and the European wood pigeon. Most Americans do not miss the once huge flocks of the passenger pigeons in the US – possibly the world’s most numerous bird in the mid-nineteenth century, but extinct by 1914. Indeed only a minority even know they once were so common as to darken the skies.17 Introducing a more intensive agricultural system to the Kruger National Park in South Africa, the Okavango Delta in Botswana and the Serengeti in Kenya would yield a lot more food, just as the Great Plains switched to corn, wheat and cattle in the US, devastating the bison herds from perhaps 20–30 million to just over 1,000 by 1890. The great migrations of the wildebeest and zebra would come to an end, but many more mouths would be fed as a result. The biodiversity that is being culled at an alarming rate starts from a high level, higher than in the history of the planet. It might be asked: does it matter if we lose quite a lot more of it? At a more local level, there is lots of open land not developed, even in densely populated Europe. The Scottish Highlands are largely empty. If a few more percent goes under concrete and more intensive agriculture, is there not still a lot left? If this were just a marginal discussion about a few individual species and the odd patch of land, the above argument would have a lot of force. But it is anything but marginal. The prospect in this century is for the destruction of major ecosystems, and there is a risk that the consequences could be dire.

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It is a version of what Martin Weitzman called ‘the fat tail problem’ in his discussion of climate change.18 The future temperatures that may result from increased concentrations of greenhouse gases in the atmosphere are not known with any precision. The predictions for business-as-usual vary from about 1ºC warming to over 6ºC. Should we treat a small probability of a catastrophe (6ºC) on the same basis as a larger probability of something much smaller? Weitzman says no, the former is more important, and he is surely right. In this respect, biodiversity is in a similar category to climate change, though it is much more complicated and ignorance is much greater. Modelling a small number of gases on a global scale is much simpler than modelling an enormous number of species in specific systems in specific locations. The uncertainty is an order of magnitude greater in the latter case. The fat tail is all the more worrying. We may be able to get by without specific renewable assets, but not with a diminished aggregate.

Should Today’s Poor Take Priority? A third objection to the aggregate natural capital rule is the one that has most resonance in environmental policy debates. With a billion people living on around or below a dollar a day, the argument is that their immediate welfare should take precedence over natural capital. It is argued that China’s development should not be held up because of this rule, and the rapid growth of Africa should be allowed to follow. The fact that China’s carbon emissions per head now exceed those of Europe is a price worth paying. According to this view, the environment is a luxury and it can wait until poverty has been addressed. From the perspective of the poor this is a powerful and widely held argument. Yet it is not straightforward. Natural capital is an important form of wealth on which development will have to rely. If the soils and habitats are not conserved, agriculture may not thrive. The application of agrichemicals may increase yields in the short term, but there will also be detrimental consequences – for rivers, water supplies and soils. China is already

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paying a high price for its air pollution, with reduced life expectancy, and its water systems are doing serious damage to health too. Its deserts are expanding, and vast infrastructure projects such as the Three Gorges Dam are having serious negative consequences. So serious in fact that public protests and riots threaten the political hegemony of the Communist Party.19 These considerations suggest that it may be the poor who have most to lose if aggregate natural capital is allowed to depreciate. The trade-off between development and natural capital is not what it seems. Once the environmental damage is properly accounted for, the trade-off between the preservation of aggregate natural capital and poverty dissolves. Dissolving the trade-off does not, however, address the question of who should bear the brunt of the costs of preserving aggregate natural capital. This raises big questions about equity. If poverty is to be alleviated now without reducing the opportunities of future generations, then richer nations should shoulder the burden of protecting natural assets. Current inequality, as well as inequality over time, is a priority if the aggregate sustainability rule is to be applied. This is an argument that has already come up in discussions on climate mitigation measures. Under the Kyoto Protocol, countries were divided into two groups – developed and developing – with common but different obligations. Rich countries should act now; poor countries should develop but not have to impose immediate caps on emissions. The argument is straightforward: rich countries put most of the carbon in the atmosphere, and hence should take historical responsibility, and they can afford to take the lion’s share of the burden because they got rich by burning fossil fuels. A similar argument can be applied to natural capital and its historical depletion. Indeed, climate is just a special case of a more general argument. The rich countries have trashed their environments, used up the timber and extracted the minerals, and they have exploited the poor countries’ natural resources too through the processes of trade and colonization. There has been little compensation for depleting non-natural resources, and thresholds for renewable natural capital have been frequently breached as whole ecosystems and habitats have been damaged. The rich countries

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have both the responsibility and the wealth to act, whereas the poor developing countries have neither. Therefore, the argument goes, let the developing countries run down their natural assets as the developed countries have done until such time as they are rich enough to be able to afford to pay for protecting them. The trouble with this argument is that it mixes up two separate concerns: what the obligations are of rich countries to aid the poor; and what the responsibilities are for everyone to protect natural assets. Furthermore, given that the key natural assets, the biodiversity hotspots and their precious ecosystems and habitats are mainly in poor and developing countries, the consequences of a ‘develop now, conserve later’ strategy could be terrible. The fault line is that the world cannot afford to wait until development has happened and all 10 billion people are wealthy enough to take the natural environment seriously – just as the atmosphere cannot absorb all the carbon emissions generated by the rapid economic development of China, and the South-East Asian countries, and the Middle East and North Africa and the rest of Africa and India, and maintain a reasonable climate. There is no sustainable development path to follow before an environmental transition. The developed countries can either address the poverty directly, or they can pay the poorer countries not to destroy their natural environments. In practice, both approaches are being pursued: various transfer mechanisms, such as the United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (UN REDD),20 pay developing countries to avoid destruction of forests and other habitats; and there are aid transfers. Neither, however, is remotely adequate to meet either the poverty or the environmental challenges, and hence the aggregate natural capital rule is not being met at the global level. It is hard not to be very pessimistic about the outcome.

Is the Rule Ambitious Enough? A fourth objection to the aggregate natural capital rule comes from an altogether different direction. It is that, far from being too restrictive, the rule

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is not ambitious enough. The rule takes the status quo, and stops it getting worse. Yet many natural assets have already been over-exploited; there are many endangered species, and the pace of biodiversity loss suggests that thresholds are being widely breached or are in danger of being so. Renewable natural capital is, according to this view, seriously suboptimal. For nonrenewables, little or no provision for the economic rents is being made to benefit future generations, and what is required, it is argued, is a rebasing of current consumption downwards so that restitution to the next generation is made. Instead of passing on all our various debts and liabilities, the current generation should adjust now to a lower standard of living and from this lower baseline the aggregate rule can then be applied. There is much in this criticism. Thresholds are not optimal. To hold the line for, say, a fish species is not the same as having an optimal population. The threshold is the line of last defence. We can do better. On this basis, the aggregate rule should be a minimal constraint, but the bar should be higher. The next generation should get more than the same set of depleted assets, and should be entitled to a better set of natural assets. Later on, the optimal level of natural assets will be considered, translated into targets for specific assets. But the practical response to this line of criticism is that, in itself, the aggregate natural capital rule is so far from being met that it is this constraint that should be applied now. If it turns out to be possible to go beyond it – and it is – and expand the aggregate, then this would be a bonus. For now the mountain in front of us is very hard to climb, and the prize of contemplating the whole mountain range is even more ambitious.

International and National Aggregate Natural Capital Rules A final general question for the aggregate natural capital rule concerns domain. Is it a global, national or local rule? Can it be applied to each level simultaneously? In particular, does it make sense to apply it unilaterally, or is this necessarily a global problem, focused on the global biodiversity hotspots?

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Unlike the climate change case, unilateral action on natural capital is typically additive. Backyard biodiversity matters alongside rainforest protection. Developing countries may find it hard to meet the condition, but it does not follow that developed countries should not try anyway. Whereas climate change is caused by emissions irrespective of where those emissions take place, much natural capital is location-specific at the national or local level. Not all animals and plants adhere to national boundaries, and all ultimately rely on global ecosystems, but many are primarily national and much can be done in the backyard. The global problems of following the aggregate rule set out here do not prohibit individual countries following this path. The aggregate natural capital rule is additional at the national and local levels in a way that unilateral carbon targets are not. A unilateral national aggregate capital rule will, however, need to take into account the international consequences of the activities within a country. For example, if Britain imports hardwood trees logged in a rainforest in order to make furniture, this should be accounted for in its national aggregate rule. The aggregate applies to the impacts of national consumption on natural assets, whether domestic or international. Almost all trade has environmental consequences and these need to be internalized. The aggregate capital rule, even in its weaker form, is a radical one, requiring that the existing stock of assets be maintained at least intact. As a condition for sustainable growth, it necessitates a new way of accounting for economic growth. A national balance sheet is needed, with explicit policies and provisions to maintain the natural capital stock of assets. Imagine how different the world would be. Instead of carrying on the destruction of our renewable natural capital – chopping down the rainforests, carrying on the war against insects and indeed most living creatures through modern agricultural practices, and treating our rivers and seas as sewers and rubbish dumps – the planet would be put on a path that could be sustained, and give us a chance of meeting the needs of all those extra future people. Our planet should be properly valued. The aggregate natural capital rule is no less radical than the business-asusual case. For if we carry on as present the future is likely to be a much

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more hostile one for future generations. By ignoring the rule, the climate is being changed, biodiversity slashed, and freshwater resources degraded. The future will be a radically different place if we carry on our current destructive path. For the most committed environmentalists the aggregate natural capital rule is too weak. But then their aspirations are for a utopia, which might well turn into a dystopia – by trying to protect everything, they would end up protecting very little. It is a dangerous delusion to think that people will accept a radical reduction in their standards of living, and the return of billions to a Malthusian nightmare. For those with a more practical bent, the tasks are much more immediate – creating a sustainable accounting framework, and identifying the thresholds for renewable natural capital and the associated metrics. Economic valuation of the benefits in excess of the thresholds helps to identify what the targets should be, and in particular which assets should be the focus for improvements, to compensate for those which have been damaged, and more generally to move forward from the current, often poor, state of affairs. These are the topics – accounting, measurement and valuation – on which the prospect of a sustainable growth path depends, and not some simplistic fairy-tale world in which everything is protected.

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CHAPTER 4

Accounting for Natural Capital

What is measured tends to be what matters – and when it comes to economic growth almost all political and economic discourse is about the gross domestic product – GDP. GDP is what makes the headlines, the political weather, and how most people and businesses view the performance of the economy. It turns out that one of the reasons why natural capital – and indeed infrastructure more generally – is neglected is because GDP largely ignores both. GDP is not a measure of sustainable growth, and it does not tell us whether the aggregate natural capital rule is being met. To provide the framework for governments to take account of the interests of future generations, and in particular to integrate natural capital into macroeconomic decisions, a set of national income accounts which address these issues is needed. At the microeconomic level, company accounts are also needed which properly incorporate natural capital and the risks to, and opportunities of, the natural capital under company control. Accounts and accounting matter: without proper accounts, the damage is perpetuated, and the continuing of unsustainable growth will run on for years to come. Once there are proper balance sheets it is possible to work out what is required to maintain natural capital intact, and hence the baseline for a sustainable growth path. But first we need to understand the extent to which current national accounts misrepresent what is happening 79

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to natural capital, and hence how misleading a picture they paint of how well we are doing.

GDP and What Is Wrong with It The starting point is to work out what is wrong with GDP and why maximizing it can undermine natural assets. It is best explained by looking at the current treatment of the debts passed on to the next generation, and how the pursuit of GDP contributed to the recent economic crises. It is a story about spending and borrowing rather than thrift and saving, the sorts of values that lie behind a focus on sustainability and future generations. Investment and consumption for those focused on GDP are just different kinds of spending. The fact that one (investment) creates new assets (including new natural capital) and the other (consumption) does not is largely irrelevant. Replacing GDP with something better necessitates a focus on assets and balance sheets, rather than income and aggregate demand, picking up the asset-based approach that underpins the aggregate natural capital rule. This, in turn, leads to a focus on proper provision for capital maintenance of natural assets as the mechanism to embed the aggregate natural capital rule in national and company accounting. Proper accounting would lead to a restatement of economic growth. Once the depletion of non-renewables (such as North Sea oil and gas, Russian and US oil and gas, and all the massive reserves in the Middle East) is added to the failure to maintain renewables and then combined with failure to maintain the rest of the infrastructure properly, and when the debt liabilities too are all fully incorporated, the past would look a very different place, and so too would the future. What is measured depends on the question to which the numbers that result are supposed to be an answer. There are several ways of framing the question of how well our economy is doing. The usual frame is to ask in cash terms whether it is getting bigger – whether more is being produced. All the production in the economy is added up to see if it is getting bigger or smaller. This is current practice – it is called GDP: ‘gross’, ‘domestic’,

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‘product’. It is gross rather than net because it does not take any account of capital consumption and depreciation. It is domestic because it ignores the overseas bit, and it is the product because it is about production.1 Natural capital is an integral part of the production process. More natural capital, like more manufactured and human capital, means more inputs, which should translate into more outputs. More output should lead to a higher level of economic activity, at least if measured in terms of the production of the economy as a whole. Yet this is not necessarily what happens, for three reasons. First, GDP going up does not require natural capital to go up. There could be sufficiently more manufactured capital to outweigh less natural capital so that the total inputs go up – substitution in the weak sustainability case. This has been going on for centuries as GDP has risen. Then there is technical progress. Some economists have treated this as exogenous, and hence output can go up without inputs – natural capital or otherwise – rising at all. Third, GDP could also go down without a reduction in the inputs available. There could be a major recession, so that inputs such as labour and factories remain available, but idle. There is therefore no tight correlation between natural capital increases and GDP growth. As a result, an increase in GDP does not imply that the aggregate natural capital rule has been met. It will therefore not do as a measure of sustainable growth. But it is worse. GDP accounting not only ignores the asset side, but also encourages the building-up of liabilities – debts the next generation will be lumbered with. To understand why this is so, and why it matters, a slight detour through the history and development of national income accounting is called for. It may come as a surprise to learn that national income accounts are relatively new.2 Though there have been numerous attempts from the Domesday Book onwards to measure the size of the economy, modern national income accounts are largely the product of institutional work promoted by the US Department of Commerce and the National Bureau of Economic Research, led by Simon Kuznets just before the Second World

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War. They were designed to answer a set of questions about how to manage the macro economy, and they are a product of the approach to macroeconomics that Keynes suggested in the context of the economic depression of the 1930s. Before then, the task of government accounting was a matter of trying to balance the books to meet the monarch’s, and then the Exchequer’s, needs for revenue to finance the activities of the state – wars most notably, but also the limited public goods the state provided. What the national income accounts did was to look at current revenues and current expenditures – cash – for the economy as a whole, to help elucidate the balance of aggregate demand and aggregate supply so that the business cycle could be evened out. In this Keynesian world, aggregate demand consists of consumption plus investment, and it matters little which as long as the total is high enough. A deficient level of demand ‘explained’ the unemployment of the 1930s in the US and Britain, and the job of the state is to correct such imbalance, Keynes and his followers argued, by borrowing and spending. The spending would be multiplied through the economy, and would lift output and employment so that the borrowing would be paid back through the extra output. Unemployment costs would fall, and tax revenue would go up. Almost everything the Victorians had believed was wrong: the private virtues of thrift and savings created public misery – as indeed did much else the Victorians believed in, Lytton Strachey and Keynes’s Bloomsbury friends argued.3 At one point Keynes publicly urged housewives to go out and spend to create demand rather than to prudently save for a rainy day: ‘O patriotic housewives, sally out tomorrow early into the street and go to the wonderful sales . . . You will do yourselves good . . . And have the added joy that you are increasing employment, adding to the wealth of your country because you are setting on foot useful activities.’4 Economic growth would take care of the future by making everyone richer. Lest this seems like ancient history, much of the argument was re-run at the end of the first decade of the twenty-first century. As the great boom of the late twentieth century finally came to a nasty end, the major economies

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started to implode. Governments responded by trying to offset the collapse in demand by increasing their borrowing. Notwithstanding all the talk of austerity, governments in the US and Britain not only ran deficits on a scale previously unimaginable except in times of world wars, but they also resorted to the printing presses to try to kick-start their economies. Deficits in Europe expanded sharply too, so that almost a decade later, borrowing still remains very high by historical standards. Debt is not relevant in GDP accounts, other than the charge for interest payments on that debt. There is no debt-adjusted GDP, and with interest rates at very low levels – kept there by deliberate government and central bank policies – the debt does not much matter. The interests of future generations, inheriting the debt, are absent, except in terms of assumed economic growth that is supposed to be created by borrowing. Back in the 1980s and 1990s a new sense of optimism pervaded major world economies. After the dismal 1970s, President Ronald Reagan and Prime Minister Margaret Thatcher embodied a pro-capitalist rhetoric and a renewed interest in markets, the private sector and lower taxes and spending. Their ideology was fed by some remarkable economic luck. Contrary to the dire warnings of the Club of Rome and others, world oil prices collapsed in the mid-1980s and stayed low for another two decades. The Berlin Wall fell as the Soviet Union imploded. China started its remarkable transformation after the death of Mao. Behind all these historic developments lay the technical transformation wrought by information technology. The personal computer, the fax machine, mobile phones, the internet and emails, texts, Google and social media were staging posts in changing the ways in which almost everything in the economy worked. It is a process that is still in its infancy. The new technologies, plus the market ideology, plus the historic changes in Russia and China together created an extraordinary optimism, even if not everyone shared in the benefits. Suddenly the future looked bright. Even the business cycle, that Keynesian nightmare, looked as if it had been tamed. In such an optimistic world it seemed likely that tomorrow would be better than today, that incomes would keep going up, and that

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there would be no more rainy days. The roof did not need to be fixed while the sun was shining. Free from such fears, the obvious thing was to spend and borrow. Debt would be a temporary affair. People would get better off and their higher wages would pay off the debt. Better still, their houses would keep going up in value, and hence there was little point in saving for retirement. The house could always be sold. Much richer future people would in due course have the money to address the environmental damage the new growth spurt would cause. The future could look after itself. It would be self-sustaining. Governments got in on the act too. Borrowing was not a problem because buoyant tax revenues would pay it off. As the economy kept on growing, so the debt would be a smaller proportion of the total. Best of all, the financial pyramids being erected by ever more sophisticated financial instruments kept on yielding more corporate tax and stamp duty revenues. For ordinary people, barraged with offers of cheap debt, credit cards and mortgages on ever greater multiples of their income, it was all too tempting. The fear of debt and borrowing, which once spelled personal ruin and even the debtors’ prison, was replaced with the idea that being indebted was quite normal. A big mortgage, a student loan and credit card debt became an acceptable way of life. It was a very un-Victorian approach, and Keynes would have approved. The GDP numbers told this very uplifting story. Indeed, they positively encouraged it. GDP growth was high in the late 1990s, and after the 2000 stock market crash, more stimulus further pumped up the GDP figures. In Britain, as Chancellor and then when Prime Minister, Gordon Brown would repeatedly declare that there would be ‘no more boom and bust’ and, in his presidential address to the American Economic Association, Robert Lucas claimed that the ‘central problem of depression-prevention has been solved’.5 By the middle of the first decade of the twenty-first century, people, companies and governments were all in the borrowing game. Then, quite suddenly, the music stopped – as it had to. Suddenly it all looked very different. The future would not necessarily be better than the past. On the

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contrary, it looked as if pensions could not be paid, and as if the next generation would be poorer than the last. The GDP numbers had created a false optimism and complacency. Maybe the Victorian approach – and the focus on assets, investment and savings – was not quite so redundant as the Keynesians argued. The Keynesians saw all this as a temporary setback, to be solved by yet more government borrowing to offset the attempts by companies and people to prune back their spending. Keynesian economists urged governments to spend more, and opposed what they saw as austerity, littering the pages of the New York Times and the Financial Times with this argument. This might look sensible even beyond the immediate crisis, but only if the focus is cash, and debts and liabilities do not much matter. But they do, and a balance sheet approach – including natural capital – would have yielded a very different answer. For what was true in the mid-2000s was that we were all living way beyond our means. There was no obvious large ‘output gap’. Instead of the old (Victorian) adage that if you did not have the money, you could not afford to buy something, the idea took root that it was all fine as long as the economy kept booming. Thrift – putting aside money for the future – was out of fashion. But once the growth rate looks lower then the spending looks unsustainable. After the party, the debt remained, to be paid back from incomes that were much lower than expected. Conventional national income accounts, and GDP in particular, had another unpleasant surprise in store. Not only had the debts not been taken into account, and with them a measure of the spending levels that would be sustainable, but the state of the assets had been neglected too. In cash-based accounts, failure to maintain the core infrastructure – including the natural capital infrastructure – does not show up, except in the higher costs of doing business. If the roads had potholes, more would be spent on repairing cars – a positive contribution to national income. It was better than digging holes and filling them in again, which, as Keynes remarked, would have increased demand and hence national income.6 Now the holes could be left, and the benefits would flow from spending on the damage caused. Floods

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too could be good news – they give rise to a spate of activities. An earthquake might be better still, kicking off a construction boom. In the long run (the period that matters from an intergenerational and sustainable perspective),7 debts and failure to maintain the infrastructure – man-made and natural – will undermine economic growth, even in GDP terms. There might be arguments about the precise timing of the detriments kicking in, but there is little doubt that there is a limit to the credibility of the assumption that the next generation can or will pay.8 Debts and defaults have never done much good, and poor infrastructure undermines an economy’s ability to compete, as witnessed in the US and Europe. Undermining natural assets leads to climate change, soil depletion, poorer health, reduced well-being, and a loss of key ecosystem services. Neglecting transport investment raises costs across the economy. Failure to invest in energy systems raises costs and even risks power cuts. But not necessarily in the short term, and not in short-term GDP.

The Balance Sheet For Keynesians, consumption and investment are, in macroeconomic terms, just different types of aggregate demand. It is the aggregate, and not the composition of the aggregate, that matters. A moment’s reflection tells us this is highly suspect. If the government spends $1 billion on welfare benefits or on reducing taxes, demand does go up, although it might be offset by the spending reductions that people make because they know they are going to pay later through higher taxes.9 But consider instead $1 billion invested in a physical asset – a power station, road, railway station, or a natural infrastructure asset such as protecting an upland water resource. Now a new asset is created (or an existing asset is improved) to sit alongside the liability of the debt to pay for it. Provided the new asset is a good one – it has a positive rate of return – then we are better off, taking both the new asset and the debt liability into account. Something tangible and permanent has been created, instead of a bit of transient spending.

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If the question is ‘are we better off this year than last?’ we would want to know whether our asset base – net of borrowing – has gone up or gone down. To meet the aggregate natural capital rule, do we have more or less natural capital? Current national income accounts tell us almost nothing about either the general state of our assets or the particular state of natural capital. This is most immediately apparent when non-renewable natural capital is taken into account. Consider the depletion of major oil and gas fields. It was demonstrated in part 1 that in order for the growth rate to be sustainable, in the sense of not unduly discriminating between the generations, the depletion of non-renewable natural capital should result in future generations being compensated for their forgone opportunity to use the nonrenewable by investing the economic rents in other capital assets. There should be some sort of fund. In accounting terms, there should be a provision against the total gross revenues from the oil and gas. National income accounts should state the net revenues, after providing for future generations. But from a GDP perspective, none of these considerations matters. The oil and gas are just cash revenue, and the GDP in the depletion period through to now has consequently been inflated by the cash yield of the depletion, be it in the North Sea or the tar sands of Alberta in Canada, without any provision for the depletion of the resource base. Think what this would mean on a global scale. We could have a giant party by depleting the earth’s resources as fast as possible. GDP would correspondingly look very impressive. But then would come the day of reckoning, when the depletion of the earth’s resources left us bereft of our biodiversity and our climate. It would be Easter Island all over again.10 Sadly, much of what has gone on during the last century followed this pattern, with the recent scale of depletion of both non-renewable and renewable natural capital in China an awe-inspiring example, bequeathing soil degradation, destruction of river systems and chronic pollution in just two decades. In scale and speed it is unprecedented and it does not show up in GDP accounts. A sustainable growth path is very different from a GDP path. Sustainable growth is that level of increased consumption that can be maintained into

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the future. That future depends upon the assets and liabilities we pass to the next generation – the amount and state of the assets, and the amount of debt and associated liabilities, such as pension and health costs for the current generation as it ages. This sustainable growth needs physical infrastructure: factories, hospitals, schools and educated workers. But it also requires natural assets too, without which the economy will not be able to function. Sustainability asks how the level of consumption can be kept up into the future – how future generations can be guaranteed to be at least as well off as the present generation. The case has been made for taking a narrower asset approach to this question, by focusing on the core assets needed for the economy and society to function, and ensuring that within this core the stock of natural capital should not fall in aggregate. With this in mind, how should national income accounts demonstrate that this requirement is being met? Accounts need to reflect assets and liabilities. The Domesday Book was an attempt to list the assets of Britain in the eleventh century. William the Conqueror wanted to know who owned what – and since the economy was overwhelmingly agricultural, that meant a compilation of landownership, the stock of animals, servants and serfs, and buildings. His motives were control and taxation, just like those of most of his royal successors, and indeed modern governments too.11 Had the Domesday Book been regularly updated, there would have been a set of accounts which could answer the question as to whether or not the asset base was expanding or contracting. Roll forward many centuries and imagine being given the task of updating the Domesday Book today. Imagine trying to audit Britain’s wealth. Land would not figure greatly on the asset list now. It might matter to the Oxbridge colleges and property fund managers, but it hardly accounts for much of Britain’s wealth. What would grab more attention would be the main infrastructures, such as water, gas, roads and railways, and energy. Asked about the comparative position of two countries, most casual observers would, among other things, point to the quality of the hard infrastructure. They might take a look at the quality of broadband, and then there would be all the houses and factories. More

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difficult still, but highly relevant, would be intangible assets – professional services, creative arts, universities and the media. Americans would naturally add Wall Street and Hollywood to their own Domesday list. Put like this, if you were asked to compile a modern Domesday Book, you could be forgiven for being daunted by the challenge. Which assets really matter? Do you need to count them all? There are lots of ways of thinking about creating a comprehensive balance sheet value for natural capital as part of a wealth accounting exercise. Kirk Hamilton, a leading researcher in this area, has explored one option. He focuses on protected areas, such as national parks and nature reserves. What, for example, is the Amazon rainforest worth? He considers the opportunity cost of not using natural capital areas (such as the Amazon) for something else. That something else is, he argues, typically agriculture, and since it has not yet been cultivated, it can be assumed that the agricultural value would be very low.12 In addition to there being something suspect about the very low values of natural capital that emerge from this sort of comprehensive wealth accounting,13 especially in comparison with the overwhelming dominance of human capital, it is important to recognize that the question that this approach is considering is a rather different one from that of the preservation and enhancement of natural capital. Comprehensive wealth is just that – the value of everything – and it requires all the assets to be valued. As such it is extraordinarily ambitious and informationally demanding.14 As Colin Mayer has pointed out, natural capital accounting is about maintaining natural capital, and that means maintaining its capital value, and, where it is not maintained, replacing it with something else.15 A comprehensive balance sheet is a long way off, and nature and natural capital cannot wait. But, as Mayer goes on to argue, the good news is that a comprehensive approach is not necessary to start the process of getting on to a sustainable growth path. The task is to introduce a capital maintenance charge, to ensure that the assets of most concern maintain their value on the balance sheet. There is a more interesting, and easier, question that follows: what are the key assets on the list that we should ensure are in good shape and

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properly maintained? The answer might focus on those assets that are crucial for the economy to prosper and grow – what might be called keystone or infrastructure assets. Not all assets fulfil this role. We may need houses, but the quality of every house is not make-or-break for the economy. However, not enough electricity would be a big deal. If it fails, then so does almost everything electronic (that is why it is called ‘elect-ronic’). Everything – from cash machines to broadband, to mobiles, to water supplies – stops. Transport failures are a big deal, as are water shortages. Flood defence failures were a disaster for New Orleans. They would be truly terrible for the Netherlands, which has one-third of its land below sea level. Without the Thames Barrier, London would be very vulnerable. What these examples show is that infrastructures play a very special role, and at the most basic level the sustainability criterion cannot be met without them. Natural capital falls into this category too. To meet the aggregate rule for natural capital we need to be able to identify those bits of natural capital that may be vulnerable. As with the physical infrastructure, the most important feature of asset-based accounts is those assets at risk. These – and not comprehensive wealth accounting à la Hamilton – are where the immediate focus should be. While compiling a full natural capital balance sheet would be an enormous task, in order to meet the aggregate rule it is largely the renewable assets-at-risk that are of immediate concern, as well as the depletion of non-renewables. Renewables are the ones that we will lose forever if they cannot replicate themselves. Later on, improving, rather than just holding, the aggregate line comes into play (and hence expanding the asset base), and this is where the valuation methodologies come in.

Capital Maintenance To achieve the weak aggregate rule, the total value of natural infrastructure systems needs to be held at least constant and renewables must be nondecreasing. They therefore have to be maintained. Since there is little prospect of us doing without any of these, this maintenance has to treat the

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systems effectively as assets in perpetuity – they cannot be depreciated, and conventional accounting for depreciation is not only incorrect, but can actually yield some serious distortions to decision-making. Depreciation is, in any case, open to serious challenge as an economic concept. As Scott has pointed out, there is a big difference between physical depreciation and the economic cost of capital maintenance.16 In principle, any asset can be maintained in its original state. Take a tractor or an old car. Enthusiasts maintain many very old vehicles in good condition. They can replace parts when they show physical wear and tear. But a 1950s tractor is not of much practical use compared with a 2010 model. The reason is that prices (and costs) have changed and technical progress has advanced a great deal. The economic value of the 1950s version has decreased because there are cheaper ways of getting the same services from the tractor – by buying a 2010 model. The physical depreciation is irrelevant. The value of the old tractor lies almost entirely in the collector’s pleasure and fun from using it, and its rarity, not its agricultural use. Whether it is in good or bad physical condition does not much matter from an agricultural perspective. It is effectively useless for farming. Not all assets are worth keeping. Economic values rise and fall with prices and technologies. What matters is whether the services are likely to be necessary to the economy going forward. The technologies required to deliver them might change for man-made assets, and the knowledge transmitted through education might change too. It is strictly these services which need to be delivered in perpetuity. But when it comes to many core infrastructures, the assets are typically very long-lived, stretching sometimes over centuries, and technical progress is likely to be a longer-term factor. So practically it is the assets themselves that need to be maintained in perpetuity. When it comes to renewable natural capital there is an important difference. There is no technical change to species and biodiversity. Nature provides it for free and, although it might be managed by human beings, it does not use man-made technologies to change itself (though genetic engineering might make some natural assets in the future really man-made

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assets). They are genuine assets in perpetuity and need to be maintained accordingly. For non-renewables, the assets are being run down. The result is that the residual asset, as it is depleted, falls to zero. Its value is declining. It is not depreciating in the sense that a unit of the non-renewable becomes less valuable. Indeed, that residual unit may go up in value for scarcity reasons. There are just fewer units left. This way of thinking about natural assets has radical accounting and policy implications. A balance sheet set of accounts subject to an overall sustainability criterion should provide for a capital maintenance charge against the current revenue, and not a depreciation charge. It is not enough to create a ‘net national product’ to replace GDP to take account of depreciation. It is not about depreciation. The economy needs to find a surplus in cash terms sufficient to pay for the necessary capital maintenance of the assets in perpetuity. Imagine what the impact would be on current GDP numbers. The total GDP would need to be reduced by the capital maintenance charge. How big would this number be? We can have a pretty good idea of the costs of maintaining several of the physical systems – railways, roads, water, sewerage and broadband. It is a bit harder to work out how to maintain the educational and health systems, but not impossible to get a good rough approximation. Let us try some back-of-the-envelope numbers. Supposing the value of total assets was very low, say only four times national income. And suppose national income is around $2 trillion (roughly Britain’s annual GDP). If capital maintenance and liabilities combined require, say, even just 1 per cent of national income, the charge would be $80 billion. In reality it would probably be considerably more and it is easy to see why finance ministers might be reluctant to present sustainable accounts. Not all of this provision comes off the public budget, but it does come from people’s pockets in one form or another. Whether people face higher water bills and other utility charges, higher taxes, or lower public expenditure is a matter of the route by which capital maintenance is achieved, not the amount.

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This neatly links up with the issue of saving and how much money the current generation should save for the benefit of future generations. Currently savings ratios in many developed countries are lower than that dictated by the above approach to national income accounting. By saving too little the current generation is being selfish – enjoying a higher standard of living at the expense of the next generation. As noted above, a very practical example of generational selfishness is the treatment of the oil and gas revenues from the North Sea – and indeed oil and gas resources around the world. These are non-renewable assets, depleted to pay for current consumption with little or no provision for future generations. It has been pure natural capital consumption. The UK Office for National Statistics (ONS), charged with producing green national income accounts by 2020, has made some initial estimates of the value of natural capital.17 These suggest that, even based on a very partial account of natural capital, the value of these natural assets declined by 4 per cent between 2007 and 2011. This in itself calls for an adjustment of this amount, net of the costs of extraction, to be subtracted from GDP. The fall in the value of non-renewable assets should be compensated for to maintain a constant aggregate capital value – in assets generally in the case of weak sustainability, and in renewable natural capital in the stronger case. Given that the ONS accounts are very partial (the total is roughly equal to annual GDP) and take little account of renewables, the actual adjustment for either form of capital maintenance is likely to be an order of magnitude larger than the 4 per cent indicates. Liabilities come in many shapes and forms, and provisions need to be made for these too. Some of these relate to the way assets have been treated. Obvious examples include the liabilities for dealing with nuclear waste, decommissioning oil platforms and restoring contaminated land. These asset-related liabilities are sometimes difficult to anticipate. The health risks of asbestos were not understood until the latter half of the twentieth century. Then there are human liabilities. The obesity epidemic will have long-term costs as it works through the age structure. The health liabilities of a growing and ageing population are compounded by the discoveries being made by genetic science,

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new drugs and other support systems at ever greater costs in terms of newly treatable conditions and new ways of prolonging life. Most welfare systems take the form of each generation looking after the one that preceded it. Pensions are widely underfunded and hence comprise major liabilities.

Corporate Natural Capital Accounting While attempts at integrating natural capital into national income accounts remain primitive, there has been much more enthusiasm for pushing forward corporate accounting for natural capital. Translating this accounting to the corporate side, there is the obvious benefit of having balance sheets as part of normal accounting practice. Companies have these, with assets and liabilities, and they are required to identify the risks faced in arriving at valuations for their owners. Natural capital accounting for companies involves building on the existing foundations. The focus is on the asset and liabilities register. If the value of these assets goes down then there is impairment to the company’s balance sheet. Some of these natural capital assets yield ecoservices that the company can sell. For example, woodland might yield timber and firewood, or it might provide cover for shooting game birds. These returns can be capitalized. But the assets might also yield wider environmental benefits that the owner cannot capture. The woodland might be a habitat for rare species of birds and beetles. It might enhance the countryside and bring in tourists. Dealing with these wider economic and environmental benefits can be addressed in two ways. The first is to look for ways of compensating the owner by paying for these services. Farmers are paid environmental subsidies to do some of this, and their balance sheet value of land, which receives the subsidies, should go up by the capitalized value of the future stream of subsidies. Generalizing, society could buy these services from landowners and companies, and then the subsidies would come out of the government’s revenue account, showing that GDP is lower by the corresponding amount. The natural capital assets for the economy as a whole will, however, have been enhanced and be reflected in the corporate accounts accordingly.

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The second approach is to treat the protection of environmental assets as a regulatory requirement, and hence a liability. Companies that own contaminated land have to clean it up. Many forms of pollution are regulated, and as a result a company’s liabilities should reflect damage to natural capital. In this case the balance sheet is adjusted down, and the corporate value is lower by the amount of these obligations. On the other hand, the government no longer needs to pay owners to improve the environment, and hence its revenue does not have to be adjusted down. This is not some arcane academic and accounting point. It has real consequences. Take farmers. Many of their activities damage natural capital. They apply nitrates to fertilize their crops. These have had devastating impacts on the flora and, in leaching into rivers, they have significantly impaired water quality and biodiversity. Pesticides and herbicides damage insect and bird populations. Intensive farming has decimated farmland birds.18 The list of negative environmental impacts is a long one. Whose fault is all this? Whose responsibility is it to meet the aggregate natural capital rule? It can go either way: the government can pay the farmers not to pollute; or the farmers can have the liability and hence the obligation to put things right. In practice it is a bit of both, with perhaps more of the former as the farming lobby groups use the political process to protect their asset values and force governments to pay. But it is not all oneway: regulation of pollution, and the imposition of limits and controls, such as health and safety regulation, up the farmers’ costs. The important point is that, from an accounting perspective, it does not matter – provided one side or the other has the duty to maintain the value of the assets intact, and hence provide for the capital maintenance. Natural capital accounting is also of considerable relevance to not-forprofit organizations, especially for those with core environmental objectives. In many countries land is owned by environmental trusts and membership-owned and charitable organizations.19 These organizations all want to maximize the environmental benefits they deliver, and hence have a direct interest in producing natural capital accounts. The fact that they have limited resources, depending upon membership fees and charitable

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donations, means that in accounting for natural capital they have an interest in focusing on those assets with the highest values – and these are often assets-at-risk. A set of national, corporate and trust accounts which incorporated natural capital would present a radically different picture of the performance of the economy as a whole. Technical and, to many, rather dull though these accounting issues may seem, a balance sheet provision for capital maintenance of our natural assets, and supporting company accounts incorporating natural capital, would shine a light on what has been going on, and in particular demonstrate just how far we have been living beyond our means. It would not be a pretty sight, but pretending otherwise by dressing up economic performance in the brighter colours of GDP does not alter the reality. The fact is that we are not maintaining capital generally, let alone natural capital in particular. The consequences are inescapable, and they will come back to haunt us. By attaching so much importance to the GDP numbers we not only fool ourselves about our real wealth, but may be actually making things worse by positively encouraging behaviours that are detrimental to the next generation.

CHAPTER 5

Measuring Natural Capital

The accounts, national or corporate, are only going to be as good as the data that go into them. But which data to collect? That depends upon the question to which they are supposed to be the answer – whether the aggregate natural capital is being preserved and enhanced. National income accounts help, once recast to include a balance sheet of assets and capital maintenance. But not all natural capital can or should be protected. There is, and will be, lots of substitution within the aggregate number. The resources needed to conserve natural capital are scarce, not infinite, as any conservation body knows only too well. Which bits of natural capital are most important? Which ones should we focus on for protecting and enhancing? Most natural capital just goes on delivering its services. Some of it delivers more benefits than other bits. Preserving the aggregate (including compensating for the depletion of non-renewables) can in practice be achieved by concentrating on two classes of renewable natural capital – those that are at risk of no longer delivering their benefits, and those that have the greatest benefits. There are several necessary steps in identifying these assets: establishing the units, whether species, ecosystems or habitats; estimating where the thresholds (and the safe limits) lie which tip renewables over the edge towards 97

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becoming non-renewables and eventually to extinction; and calculating the economic benefits above the thresholds to find possible higher targets. The first step tells us where to look; the second helps identify the assets-at-risk, and hence the ones we should concentrate on; and the third points towards what restoration might do to increase economic growth.

The Units of Measurement When it comes to natural capital, measuring it turns out to be much more complex than for other forms of capital. What are the units? How can the science be married up with the economics? While the answers are bound to be rough-and-ready, the good news is that there is a wealth of information on natural assets. The challenge is to turn this mass of heterogeneous information, collected for other purposes, into a format that can help to determine whether the sustainability objective is being met, and how to improve performance. Let’s start with the capital bit, and consider how it would be measured for man-made physical assets. Measuring these conventional forms of capital has exercised accountants for centuries. It is what accountants do. It might look simple, but it is not. Consider a typical manufacturing business. It will have factory buildings. There will be machine tools, trucks and other vehicles. Perhaps there might be packaging machines. There will be lots of computers and electronic equipment. The company will have bought, leased or hired these assets. There will have been a cost to each, and these costs can be added up to reach a total amount for the capital employed in the company’s production activities. Yet this would not in fact be a very accurate or even useful picture of the value of the capital employed, for the obvious reason that what something cost and what it is worth are not the same thing. The computers might have cost a lot ten years ago, but they would be almost worthless now, since there have been huge advances in technology and big falls in prices. The machine tools might be worn out. Cost and value are two different things. The former is in itself of little interest.

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Now consider the case of natural capital. Non-renewables, such as oil and gas, come in tonnes and have costs and prices, and so they are not hard to measure and value. Some renewables share these features. Salmon comes in tonnes too, and there is a price for salmon just as there is a price for oil. The value of salmon capital is this price multiplied by the quantity for all future years, discounted back to the present. Establishing the price of salmon is a bit more complicated than for oil as there are different species in different locations. But on the quantity side, unlike oil and gas, nature keeps on reproducing salmon forever if the stocks are properly maintained. So even if a discount rate is applied, the capital value is driven by the openended quantity nature keeps on providing. Salmon raises a number of additional measurement problems. First, if the units are numbers of salmon, this might mask the type and size. Second, if the concern is the sustainability of the salmon stocks then the number of salmon might not be the only or even the most important unit. The stock’s prospects depend upon lots of ancillary and contextual factors. Overfishing, pollution, diseases and pests can all do great damage to wild populations. Setting up fish farms in the path of migrating salmon can decimate the wild stock through the proliferation of sea lice and other parasitic infestations. Dredging and bottom-trawling can disrupt and even destroy complex ecosystems. The food for the Atlantic salmon off Greenland might be taken by industrial-scale trawling, often, ironically, to produce fishmeal to feed to the farmed salmon. Thus it might be better to concentrate on the ecosystems upon which salmon depend, and the habitats within which the ecosystems function. Declining salmon numbers might be just an indicator – the alarm bell. The choice of unit is critical in evaluating the sustainability of harvests. It is the species and the ecosystem, and it can be proxied by the state of the habitat. When considering whether the aggregate of natural capital is being maintained, and when considering whether and to what extent particular renewables can be depleted and, if so, to what degree, an element of pragmatism is required. In this example, the units are the state of the wild salmon stock (how many fish there are) and the state of the salmon’s prey and the temperature and quality of the seas off Greenland and the quality

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of the rivers in which the fish return to spawn and the sea-lice populations in the estuaries and fishing and other factors too. Unlike the man-made capital case, where each asset has a cost and a price, it is more difficult when it comes to many species, and almost all ecosystems and habitats. There is no single unit of analysis, but that does not imply empirical paralysis. Rather it is like taking pictures of a complex object from different angles – each gives useful information, and it is the combination of perspectives that yields the best insights. Given these complexities of the natural environment, it is inevitable that to concentrate on one unit will be at best a snapshot of what is going on. There is generally a good reason for starting with, and often concentrating on, the habitat level. It is the domain within which ecosystems function and individual species live, and it is usually easier to provide indicative measurements. These habitats can be subdivided into a hierarchy. At the top lie the global environment and its global systems. This includes the atmosphere and the complex interactions of the oceans and the ocean currents. Climate change relates to this category, and it is relatively straightforward to measure the concentrations of greenhouse gases in the atmosphere. The impacts of climate change on ecosystems and species are at best uncertain, but at least the temperature changes can be measured, the climate can be modelled, and the impacts on human populations are likely to be sufficiently bad to suggest that thresholds may be crossed. A rise in temperature of 2ºC is a crude benchmark, but it is a useful threshold to work with. Some of the impacts can be directly measured too. The size and scale of glaciers and the water locked up as ice can be measured. Targets for a sustainable climate in terms of emissions and concentrations of greenhouse gases are subject to debate and the uncertainty is unavoidable. Nevertheless the global components of climate change and a sustainable atmosphere are, in principle, tractable. In the Atlantic salmon example, water temperatures are affected by climate change. In the Arctic the warming is alarmingly quick. This has complex implications for the salmon. Temperature affects the location and populations of its prey. It affects the speed with which the glaciers melt and

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hence the salinity of the seas. It changes the temperatures, rainfall and other ecosystem characteristics of the rivers to which the fish return to spawn. The currents the young fish (smolts) follow from their river birthplaces to the ocean feeding grounds will change, as will the different layers and complex structure of the seas.1 Temperature rises change the behaviour, populations and locations of the salmon’s predators. Climate change might therefore provide a proxy for the threshold effects on salmon, and make the reduced populations more vulnerable to other adverse impacts. The next level down from the climate in terms of units is the global biodiversity hotspots. As noted, there are a small number of very highdiversity habitats around the world, concentrated in the tropics and including the rainforests. The loss of these has obvious and serious consequences, and hence measurement of their extent and health is a prime concern. Their loss will put a great many species below the sustainable thresholds. Habitat as a unit of measurement can be categorized and then each category can be measured by area. GPS and related technologies (such as drones) enable the loss of rainforests through logging, burning, the production of palm oil, the building of dams and other intrusions to be measured with a high degree of precision. It is now much harder to hide environmental damage in inaccessible and remote places. That in turn makes new and more efficient management techniques, including market incentives, increasingly feasible.2 Moving down the hierarchy, local and regional habitats are next on the list. River catchments are identifiable units, and they have system properties as core infrastructures. Great rivers cross many borders – rivers such as the Danube, the Rhine, and the Mekong. But most lie in single jurisdictions (such as the US, Russia and China), or regions of considerable cooperation (like the European Union), and hence national laws can in principle limit the exploitation of renewables. Upland regions, mountains and wildlife sanctuaries within mountain ranges (such as the Yellowstone National Park), fens, marshes and coastal fringes, chalk-lands, grasslands, ancient woodlands – these are all recognizable categories, and each supports its

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own ecosystem and many are protected by law. These may overlap, their boundaries may be unclear, but they can be approximately defined as distinct geographical areas.3 The measurement units for the marine habitats are more difficult. Coral reefs may be fixed and much biodiversity is located close to the coast. The oceans are different, owned and controlled by no one and exploited by everyone. That has tragic consequences for the salmon – as the giant trawlers from Russia and elsewhere strip the seas of fish, mindful only of the marginal costs being so low and there being no owners to defend the interests of the salmon, even if satellite technologies enable their behaviour to be closely scrutinized. The problem of the commons is all too relevant here. Disaggregation next moves to the smaller units of natural capital. Specific nature reserves and sites of special scientific interest (SSSIs), urban parks, village ponds, beaches – these are all examples of renewable natural capital. Their protection depends on national agencies, local government, trusts and private companies. These are all commons capable of being protected through regulation and incentive mechanisms, described in part 3 below. In the salmon example, specific river spawning grounds protected from silt running off ploughed fields and protected estuaries all play a vital role. Finally there are individual species, and it is here that much effort has been expended. How well each and every species is doing is much easier to measure and also interesting in its own right, and naturalists have produced single-species studies for a large number. There are books about most large animals and many bird and insect species, but few on the micro species that dominate the earth. The quantity of pertinent information on the large species is vast, and in practice there are three main focuses of attention: endangered species likely to become extinct; indicator species whose populations signal how well ecosystems as a whole are doing; and keystone species of particular importance for the prosperity of ecosystems. Often species fit into more than one category. Peregrine falcons, for example, were endangered by pesticides that became concentrated in their prey, and their decline therefore signalled

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how pesticides were threatening the food chain.4 Given that they are top predators, their total loss might not in itself have had much impact on the ecosystem as a whole compared with, for example, how the disappearance of sand eels and krill might decimate seabird and fish populations that feed on them. Peregrines take pigeons, and as a result of their decline, pigeons might require extra culling (and hence extra costs). Similarly, the loss of wolves allows deer populations to climb. Again, human intervention might be needed to replicate the culling that wolves once contributed. A more complex and damaging case is that of the once common Indian vulture, virtually exterminated by poisoning from the drug diclofenac, which was given to working animals to extend their productive life, but remained concentrated in their carcasses. The loss of these vultures removed one of India and Pakistan’s most efficient waste-cleaning services.5 Salmon are predators too. As with the peregrines, which helped to focus minds on pesticides such as DDT, a study of salmon populations gives a hint of the trouble to come. It is quite plausible that wild salmon will soon be all but extinct in the rivers of Scotland, Norway and Iceland. It might also eventually be true of Pacific salmon species too. Starting with the species as the unit in this case is already signalling alarm. Their decline is an indicator which reflects the possible deterioration in the health of the wider ecosystems, and hence the possibility that other, lesser known species might also be in trouble. Trying to conserve the salmon is not just about the species itself – saving each and every salmon. It does, of course, help if the netting of salmon in estuaries is stopped, and it would be good to control and limit large-scale catches at sea. Culling salmon’s predators such as seals would also be good for the salmon, but not for the seals. The smolts would have a higher survival rate if cormorants and great northern divers were culled – but again not good news for cormorants and great northern divers. It might even make a small difference to limit the catches of recreational anglers and force the release of fish they manage to hook. But to concentrate on these measures – which indeed have been a prime conservation focus – might be to miss the bigger picture of the other species in this predator’s ecosystem, and the broader habitat management.

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The hierarchy of units of analysis provides two key insights into the measurement problem. First, there is no unique single unit of analysis. Second, the importance of the different units depends on the questions being considered. For aggregate natural capital, it is likely to be the state of habitats that provides the best general indicators. Loss of major habitats is likely to be incompatible with the overall objectives of maintaining the aggregate. For attempts to identify specific losses of natural capital, and to identify how and where to concentrate resources to improve natural capital, a lower-level and more fine-grained analysis is likely to be more useful. In the salmon example, the decline at the species level indicates that something is going badly wrong, but it is also to the broader habitat that attention may need to be directed if salmon are to avoid being translated from a renewable and abundant natural resource which nature provides in perpetuity to a rare non-renewable one on the path to gradual extinction. That threshold is what the units of analysis – habitats, ecosystems and species – are all in danger of crossing. It might be argued that since the aim is to preserve the aggregate to meet our rule, a common unit is required. But the neat consequence of focusing on capital maintenance is that it is only those dimensions of natural capital at risk that need to be measured. Thus the question is: for assets-at-risk what are the capital maintenance costs that need to be provided for to maintain the asset intact? It does not matter which unit is the target of this capital maintenance from the perspective of the rule. All that matters is that it is targeted at the unit level that is most scientifically appropriate in the particular circumstance. It is more complicated when we come to compensating for losses to renewable natural capital, to which we return in part 3.

Thresholds Recall that most renewable assets carry on delivering their services at zero (or close to zero) marginal cost. They just go on reproducing. As long as the depletion is sufficiently low, the relationship of the predator (very often ourselves) and the prey (the renewable resource) can be maintained indefin-

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itely. Human use, up to a point, does not impact on the future availability of the services to the next generation and hence the aggregate criterion is met. Since these ecoservices (for example, the fish harvest) can go on for millennia, the value of natural capital assets could potentially be very large. The benefits are open-ended, and the costs are near zero, so the economic surplus is the gap between the value of the ecoservice and these typically negligible costs, integrated and discounted over an open-ended time frame. The problem comes when the level of depletion goes too far. Too many salmon are caught, so natural reproduction cannot keep pace with nets and fishing boats. This is the threshold, or boundary line, which really matters. Those clearly above the line are fine. Those clearly below are beyond redemption, having moved from renewable to non-renewable status. Once non-renewable, it is just a case of which human generation extinguishes them. The interesting cases are those in between – those in danger of going under. These might be species on endangered lists, but they might also be bundles of species where whole ecosystems are at risk of going under. Tigers are very close to the extinction boundary. They can be kept above, but only at very great cost. Further in the future, the Amazon rainforest might be so depleted as to take out a swathe of its complex ecosystems and interdependent biodiversity. The marginal reduction in a habitat might not make much difference, but beyond a critical point it can no longer support its ecosystems. How do we establish what a threshold is and where it might lie? As part of the work of the Natural Capital Committee, scientists Georgina Mace and Rosie Hails have developed a methodology and metrics for analysing thresholds.6 The thresholds are defined for natural assets as biophysical, and the resilience to recover from disturbances adds a further dimension. For each asset, there is a safe limit below which the asset becomes unsustainable. There are parallel thresholds, resilience and safe limits for the benefits. The best that science can offer is to try to find these safe limits, and then to pick a sufficient margin so that our uncertain knowledge does not take the unit to the abyss. There is an economic logic here too. If the costs of the

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safety margin are typically not great, but the damage resulting from the unit dropping below the threshold is, it makes sense to take a precautionary approach. In the case of plants, this might be limited to keeping seed banks. Examples include the Millennium Seed Bank in the UK and the International Maize and Wheat Improvement Center in Mexico. Some even speculate that it might be possible to salvage DNA from the preserved remains of woolly mammoths discovered in the Arctic tundra, and to create a DNA bank. But these options are all species-based, and they have little chance of contributing to preserving, let alone recreating, ecosystems. Crossing these thresholds is a one-way path. The practical task is to carry out a thresholds analysis for key natural capital assets for which there are good reasons for thinking they might be in danger, provided that they are also of substantial actual or potential benefit. Not all assets can or should be saved. As a result of such analysis, it is possible to build up a picture of where the process of destruction has got to, and how much of the natural capital stock is at risk. This important work lies behind the creation of the Red List of Endangered Species by the International Union for Conservation of Nature (IUCN) and its use in informing conservation.7

Risk Registers Once assets in danger of crossing the thresholds have been identified, these can then be placed on a risk register, and it is on these that action needs to be concentrated at the global, national and local levels, both governmentally and on the corporate side. This is where capital maintenance expenditures will need to be concentrated. Many risk registers already exist in a variety of shapes and forms. There is a host of endangered species lists and agreements for their protection, including the Red List noted above. There are protected habitats, from global biodiversity hotspots to local nature reserves. National parks can be regarded as representing areas on an implicit risk register too, deserving of special protection.

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These various lists are of considerable value, since they bring together decades of scientific and conservation experience, as well as the work of recorders – from countrywide plant recording to bird records such as those put together by the Botanical Society of Britain and Ireland (BSBI) and the British Trust for Ornithology (BTO), respectively. There is in these often voluntary and amateur observations a wealth of data to utilize. The problem is that there is so much, and as a result it is difficult to work out which to prioritize. The lists help to establish which biodiversity is at most risk, but not how to prioritize it. It is impossible to save it all – and, indeed, it may be undesirable to do so. Rather, what is needed is to identify what really should be conserved, where natural capital is being lost, and where to look to compensate in order to meet the aggregate rule. Sifting through the lists sometimes allows prioritization on the basis of which bits are the rarest – so there are ‘red lists’ alongside ‘amber lists’ and so on. On the red list will be Californian condors and tigers and snow leopards. Rainforests and other biodiversity hotspots might also be at the top of such lists. In the case of charismatic and extremely rare species, enormous amounts of money and resources are sometimes deployed to preserve the remnant populations. Conservation groups find it easier to raise money to ‘save the tigers’ than to save a particular type of beetle. Curiously, there is a rather perverse economic rationale to the rarities approach. Nature is often valued inversely to its abundance. In other words, the rarer the species, the greater the enjoyment we get from seeing it.8 If there were lots of tigers it is unlikely that much attention would be paid to them. Seeing a blackbird or a chaffinch is nowhere near as exciting as seeing an osprey or a corncrake. In the case of the former it is of passing interest, if any; but with the latter, people will travel to the Outer Hebrides just to get a sight of a corncrake (or more likely even just to hear these elusive birds in the rushy meadows since they are very hard to spot). Nature reserves attract visitors by offering the chance to see something rare. It means that the benefits of conservation decline as the species get back towards the safety of the thresholds, and that on the benefits side, biodiversity abundance is not necessarily of much value. One possible solution is to

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divide the risk register into two parts: a biodiversity risk register based on the science; and a benefits risk register based upon economic evaluations. The twin-track approach has a number of merits. First, it enables expert information and analysis to inform the underlying priorities of the renewable natural capital, and it can be further split up into habitats, ecosystems and species. By contrast, the valuations people place upon biodiversity depend on the information they have and the way their perceptions are framed through education, the media and other cultural influences. It is necessarily imperfect. Second, many of the economic benefits depend upon the complex interactions within ecosystems, for which habitat conservation is necessary. For example, food has measurable value, but most people have only the haziest idea that it depends on the soil ecosystems, and the state of the rivers and oceans. Urban dwellers often have very limited understanding of the origins of the packaged meat and fish fillets they buy, and what the animals and fish look like. Similarly, health is obviously highly valued, but the relationship between air quality and mental well-being and the natural environment is not well understood by most people. This split between the biodiversity and the science on the one hand, and the economic valuations on the other, does not mean that the economic valuations should be discarded. People might be pretty ignorant about natural resources, but it does not follow that the pleasure they get directly – the delight – and the use from the products of natural resources should be disregarded. In constructing a risk register which takes account of economic benefits, the demand is often a derived one. People want food and health, yet they do not know how these outputs are produced. This type of derived demand is the norm: we have very little idea of how many of the products we buy are made. But this does not invalidate the importance of the primary demand and hence the derived benefits from habitats, ecosystems and species. In bringing the two assets-at-risk registers together there will be much common ground. These are assets-at-risk both in biodiversity and scientific terms, and in terms of the loss of significant economic benefits. That leaves two non-overlapping groups – those considered at risk from a purely

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scientific point of view but of little or no economic benefit; and those assetsat-risk which look to be of little biodiversity value but which have high economic benefits. An example in the first category might be a rare beetle. An example in the latter might be a young woodland on the border of a city, or a well-cut grass park in an inner city. The intersection of the two is where the initial focus of attention should be – it combines economic gain with protecting the renewable from becoming non-renewable. Within the intersecting natural capital assets, the benefits assessment can be directed at the three biodiversity dimensions – the habitats, the ecosystems and the species. The habitat as a whole might be valued. People might enjoy wilder open spaces, rainforests, the white deserts of Antarctica and mountain scenery. They might enjoy the benefits of the ecosystems, such as the benefits from the soil and clean drinking water. They might also value the particular species – to eat, to delight in, or both. This multiple risk register approach provides the basis for addressing the thresholds question. It helps to stop the rot, by directing attention and resources to renewables that would otherwise be lost and, among those that might be lost, to the ones that have the greatest scientific and economic value. But we can do better than this. Stopping the rot assumes that the existing levels of natural capital are where the line should be drawn, and that if a species, ecosystem or habitat is above the threshold, then the objective is met. What is left out is the possibility that the current levels, even if above the thresholds, might be suboptimal.

Improving Natural Capital Identifying natural capital at the margin of falling below the thresholds concentrates attention on those bits of natural capital that are most at risk in order to prevent a further deterioration in the aggregate. But this gets us only so far. It is deterioration from the current state, and that is hardly a desirable one. Many natural assets have been degraded. Habitats have been turned into green and yellow deserts by modern agriculture. Protected

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areas around towns and cities have been allowed to deteriorate. Rivers and the seas around us have been polluted. Given that we are not in a good place to start from, holding the line is not enough. How much natural capital, and of what sort, should we aim for? What is the optimal level of natural capital? This is given further motivation by the objective to leave the next generation with a better set of assets than we inherited – to put right some of the damage we have done. This is a question that economics should be good at answering. Economists are obsessed with optimal resource allocation. Indeed defining the optimal allocation of resources might be considered the objective of economics. Optimal points are ones where demand and supply intersect, where the marginal costs of an additional unit of output are just equal to the marginal benefits. Since the marginal costs of a renewable are effectively zero – or where human management is involved usually close to zero – the emphasis is on the marginal benefits. The trouble is that most (but not all) renewable natural capital has no market and hence no price. We saw earlier that salmon might have a price, but even here the ecosystems upon which salmon rely, such as the seas off Greenland, and the rivers they spawn in, typically do not. The economist’s approach is to try to estimate what the marginal benefits are by asking either what people would be willing to pay for the marginal unit, or what they would be willing to accept as compensation for the loss of the marginal unit. These valuation techniques will be explored in greater detail in the next chapter. But note here two massive problems with the economist’s approach – the impossibility of giving precise answers, and the nonmarginal nature of habitats and ecosystems. Working out the optimal size of rainforests or even local nature reserves requires an enormous amount of data, and the analysis of a range of possible future economies and landscapes. People do not have this information, and scientists have only a limited understanding of most ecosystems and habitats. It is therefore not accidental that attempts to estimate willingness to pay have focused on very narrow assets – species or very particular local impacts. There are studies on the economic value of (not having) wind farms in particular

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landscapes, of specific agri-environmental schemes, and of local woodlands to try to work out spatial benefits. When it comes to habitats, we noted earlier the attempt by Hamilton to use land values as a proxy, and we saw how weak this linkage is likely to be in practice. Attempts to derive an aggregate value of natural capital, such as The Economics of Ecosystems and Biodiversity (TEEB) study, involve enormous practical and conceptual details, and the results are so crude as to be arguably of little value.9 Consider the bison. It is no longer in danger of extinction, but the population is clearly way below that which once roamed the Great Plains of America. With this radical reduction in numbers, the plains themselves have been changed, no longer subject to the seasonal grazing, and no longer populated by the bison’s predators. The optimal population of bison, given what has been done to the plains by humans, is not the same as it might have been before the Europeans arrived in the Americas and started eliminating the Indians – one of the predators – as well as the bison themselves, and ploughing up and developing the land. Conservationists therefore limit their targets for the bison population to building up herds in reserves. There is a target, and it is above the assets-at-risk threshold, but it is also contingent on the realities of the man-made context that now prevails. There is no going back. Target populations are relative to the ecosystems humans have created, not to the pre-human state of affairs. They are context-dependent. Defining such targets is not about picking a date in history as some kind of Arcadian utopia and trying to approximate it. All nature has been modified by humans, and that is a reality that is not going to go away. Indeed, with the projected economic and population growth, the extent to which the environment is determined by human beings is going to go up, not down. It is in this context that, as a proxy for the optima, targets should be set. A target is not necessarily optimal, but it is often the best that can be done in a context in which it is difficult to know what optimal might actually mean. It is tempting to think that targets should always be one way, that is, more of each bit of natural capital: more nature, less human interference. This is also naive. Because humans have so modified nature, the nature that

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results is a product of those management processes. Wild populations that were managed by the delicate balance of predator and prey are no longer regulated in this way. Almost all predator–prey relationships have been modified by humans. So there are, in fact, many examples of natural capital stocks that risk becoming too big without human management. The example of deer has already been raised. The destruction wrought in Britain’s upland areas and woodlands by deer is considerable, often inhibiting regeneration by their eating most of the young saplings. White-tailed deer are radically reducing plant biodiversity in the eastern states of the US as populations lack predation on a sufficient scale.10 As a result some form of culling is essential to protect other species from being pushed towards thresholds.11 That culling process has traditionally involved harvesting the animals for human benefit. One form is hunting, so that humans are the predator. Here the stock is managed to yield meat and the pleasures of the hunting itself, both of which are ecoservices. On Exmoor, hunting was once a core part of the social fabric, supporting lots of local jobs, hotels and restaurants and associated cultural activities. It was banned in 2004. This has had consequences. The ecoservices are now different. They come from nature holidays, deer-watching safaris and from the meat from animals shot as part of organized culling. For each species an optimal stock could theoretically be estimated and, although always approximate, and always dependent on the other species in the ecosystems and the human context, species population targets can be established. In principle, plans could be drawn up for all the main species to get from the current populations to the targeted ones – either up or down. This is indeed what happens in a number of cases, and most of these are necessarily very local. In the US and Britain, there are bee and deer strategies. In Britain there is a badger-culling strategy; introductions of sea eagles, red kites and beavers; a pro-red squirrel/anti-grey squirrel strategy; and so on. These are all strategies to get to some target, whether explicit or implicit. Improving natural capital for the next generation is in part the sum of these strategies, based on the individual targets.

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It is obviously not possible to have targets for all the species, even in a relatively small country poor in flora and fauna such as Britain, let alone for the US. There is no chaffinch strategy, no field mouse strategy and no earthworm strategy. In none of these cases is there a known reason for concern. Thus, like the thresholds, work on targets needs to be itself targeted at those areas where the returns are expected to be highest. A species-based set of targets gets us only so far. It often tends to be focused on species that have friendly faces that humans warm to and which look cute and cuddly. Being species-based it omits many of the ecosystem considerations and thereby tends to be myopic. Sorting out the red deer population does help the rest of the ecosystem, but to determine how many deer there should be requires a prior consideration of what whole ecosystems such as the eastern US states, Scottish Highlands or Exmoor should look like. This requires a move towards habitats and targets for habitat improvements. There have been numerous attempts to set habitat-level targets. A particular example is the EU Water Framework Directive (2000).12 It sets targets for ‘good ecological status’. The EU Bathing Water Directive (2006) is another example.13 Few if any of these targets have much by way of analytics behind them. Rather, they tend to be a political compromise framed by the various advocacy groups and by consideration of the potential costs. While far from ideal, lacking full analysis of the costs and the benefits, they are often the best that can be done in the circumstances, and typically embody both targets and objectives and a degree of pragmatism in their applications. The second problem with the economic approach to trying to establish optimal levels of natural capital is that ecosystems and habitats are anything but marginal. They come in systems and, as a result, marginal economic analysis is in this context of limited value. Marginal analysis works well for particular projects and particular benefits, but it is less good when it comes to larger integrated and interdependent habitats and ecosystems. Climate change and the atmosphere are obvious examples – it is very hard to work out what the optimal climate would look like. Other analytical tools are

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needed, and an alternative approach to establishing specific targets as proxies for the optimum is to consider what essential natural infrastructure assets at the global, regional, national and local levels are necessary for a sustainable economy to function and grow – analogous to considering the optimal transport, energy and water infrastructures. This approach links with the idea that there is a minimum set of assets necessary for the functioning of society and the economy. It is primarily focused on habitats. Considered in this way, at the global level the climate, the oceans, rainforests and other biodiversity hotspots are obvious candidates. The atmosphere is a core global infrastructure. Oceans support a host of global functions. The rainforests are key regulators of climate and contain lots of biodiversity, and hence are incorporated in the major biodiversity hotspots. At the national level, the main natural capital infrastructures are the national parks, the nature reserves, the rivers and estuaries, the shorelines and inshore waters. Putting these elements together in a national natural capital infrastructure plan provides the backbone of a restoration towards the overarching target of enhancing the aggregate, and hence meeting the aggregate natural capital rule. To sum up, measuring natural capital is made a tractable exercise by focusing on what matters most and putting aside the rest. That means focusing overwhelmingly on renewable assets, and in particular on those at risk of becoming non-renewable. The science of thresholds and safe limits guides us to the assets-at-risk, and these can then be placed on a risk register. These are the assets in danger of being used unsustainably. Once the assets-at-risk have been dealt with, the next step is to work out which natural assets would yield the greatest net benefits over and above the thresholds. This is where the economics comes in. If the science of the thresholds suffers from uncertainty, the economics of the overall optimum set of natural assets is often a hazardous exercise. Yet just because the science and the economics are incomplete, and the thresholds and the optimum are subject to considerable uncertainty, it does not follow that they are therefore not useful. Being paralysed by the

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problems is not a good way forward. Instead the uncertainties should be faced head-on. Prices might be imperfect but they are usually vastly superior to the alternatives. There are costs which will not go away, and valuation techniques tell us a great deal about how we imperfect human beings think about natural capital.

CHAPTER 6

Pricing and Valuing Natural Capital

Thresholds are driven by science, and the units of ecology – habitats, ecosystems and species. They are where renewable natural capital assets risk going under. Keeping those at risk above the line requires capital maintenance, and this is a cost which needs to be charged against current revenue in national and corporate accounts. But thinking about natural capital also involves benefits as well as costs, notably in addressing two key questions. When, notwithstanding the thresholds, can renewable assets be damaged? And what targets should be set, and for which particular renewables, to take them above their thresholds? Benefits require valuation, and the units are explicitly or implicitly money. Hence a price has to be put on nature. This is highly contentious. Many environmentalists shy away from the explicit recognition that nothing is of infinite economic value. But they are wrong: there are not infinite resources to devote to conserving everything. Some bits of nature cost more than others to protect, and some are valued more highly than others because they yield more benefits. The case for economic valuation is a powerful one, and there are lots of techniques that can be applied. These valuation techniques, together with the thresholds and the accounting, complete the toolkit for assessing natural capital.

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The Case for Using Prices For much of the conventional economy, prices and costs are accepted as the way to allocate resources. Markets are the social institutions through which demand and supply are brought together, and equilibrium is found where the prices and quantities match up people’s willingness to pay with companies’ willingness to produce. Changes in demand and supply work themselves out through markets. A reduction in the supply of oil, for example, leads to a rise in the price of oil, which in turn means that on the demand side fewer people are willing and able to pay, and on the supply side oil companies are induced to seek out new reserves. The reason why prices, costs and markets are widely accepted is not that the results are necessarily ideal, or that capitalism has some deep moral superiority, but rather that they tend to be more efficient than the alternatives. They do not require some all-seeing central planner to decide what is good for us and, for example, to determine how many cars should be produced and who should have them. They are decentralized, letting each of us signal what we both want and are capable of paying for, and allowing companies to signal what they are willing to make and sell, reflecting their own costs. Many buyers and many sellers coordinate their activities through markets, without the need for the state or some dictator to tell us what we ought to have. Markets are all about the allocation of scarce resources. If something is not scarce then there is no allocation problem. Until recently, fresh air has been available to all at zero cost. There is no market in air, and no price. Many renewable natural resources have been treated this way – fish stocks, forests and uncultivated land. But as human populations have grown and wealth has increased, almost all these abundant natural resources have come under pressure. Humans impact on almost all of nature now and, where there is no price, and hence no cost to the users of these natural resources, there is no incentive to conserve them. That is why they are over-exploited and, as a result, degraded. In an increasing number of cases, this over-exploitation runs up against the thresholds, and even where

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stocks are above or close to the threshold, they are nevertheless reduced to suboptimal levels. The result is economic inefficiency. The famous tragedy of the commons is just one example of how this problem plays out in the absence of prices and costs. Hardin set out this problem in his example of a ‘common’ – an area of pasture open to all grazers without limit.1 Each farmer tries to decide how many cattle to graze. Since the cost of access is zero – it is common – it is worth adding extra animals way beyond the threshold of sustainable use. Each ignores what the other does: each asks, ‘What is the potential profit to me of adding one more animal to my herd?’ In the face of zero costs, any positive return from an extra animal is worth pursuing. Since the farmer knows these are the incentives all farmers face, not to add another cow just means someone else will. So voluntary abstinence makes no sense.2 The result, inevitably, is overgrazing and a collapse of the common. Hardin actually had in mind the whole planet and its human population, and his remedy for the commons in general, and population in particular, was some form of coercion. Commons are remarkably common. Much of natural capital comes in this form, and Hardin’s problem is therefore at the heart of natural capital policy. A similar story can be constructed for the incentives to fish where the seas are free to each fisherman. The decline of the Atlantic salmon is a painful example. However well the rivers are protected, notably through private ownership, the plundering of the oceans will carry on. Logging in rainforests is yet another example. If the trees are free, they are worth taking as long as the felling and transport costs are covered – until there are none left. Abstracting water for irrigation has led to the collapse of river systems in Spain and the expansion of deserts in China. Farmers do not typically pay for the scarce resource of water aquifers and river systems when they irrigate and spray pesticides, herbicides and nitrates on their crops. That is why the state of many rivers and lakes is so poor. It explains how eutrophication comes about and the rapid emergence of green algae in many water systems. Farmers do not pay for the damage inflicted on bees and other pollinators, or the impacts of their chemicals on the stock of this natural asset.

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In the absence of prices there is a very powerful economic incentive to drive renewables below the thresholds. Look at the environmental degradation around the globe and evidence of the tragedy of the commons is everywhere. To many environmentalists the answer is ‘conservation’. What this means is that somebody should decide who can do what, and in many cases people should simply be prohibited from using the natural asset. National parks, nature reserves, areas of outstanding natural beauty and marine reserves should be created, and planning laws should regulate activities in respect of renewable assets. This is indeed what often happens. Nature is planned, controlled and regulated. But the results are not always impressive: the great commons of the world are mostly declining, and Hardin’s problem has not been solved. The poacher, the logger and the fisherman have strong incentives to carry on, even if the planner knows the safe limits. Usually they do not know – the informational difficulties are formidable. How do the planner and regulator know which assets to preserve, and at what level? The whole of the US or Britain cannot be declared a nature reserve. The planning approach tends to be binary – either a habitat is protected or it is not, with all the usual boundary effects and the degradation of what lies just outside the protected commons. The thresholds approach helps here, but not all assets, even those at risk, can be top priorities. Choices have to be made. But on what basis? Even if particular commons are chosen for protection, the second difficulty is in knowing what precisely the quotas and access rules – the rights to exploit the commons – should be. In the Hardin example, the problem had, as he noted, been kept at bay for centuries, ‘because tribal wars, poaching and disease keep the numbers of both man and beast well below the carrying capacity of the land’. But these Malthusian checks no longer apply. Now someone has to decide the total carrying capacity of the commons, who should have what share of the sustainable yield, and how quotas should be enforced to avoid ruin. Elinor Ostrom won the Nobel Memorial Prize for Economic Science for her work on social norms as solutions to the problem of the commons.3 Yet

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the conditions for such social norms to be established and sustained are context-specific. The evidence is all around us that the problem of the commons in respect of natural capital is not generally solved this way. If it were, the destruction of nature would not have occurred. In the absence of sufficiently constraining social norms, there are two routes forward. The first is that experts can decide. The authorities – be they national park authorities, government departments, the US Environmental Protection Agency (EPA), the British Environment Agency, the European Commission or national planners – make the choices supported by a battery of legislation, from the EU Habitats Directive4 to the US Endangered Species Act. The second is to use the price mechanism, either directly by setting prices or indirectly by auctioning permits. To help the planner or regulator make these choices, some principle of valuation is required. Environmentalists argue that the choices are about deep-rooted values concerning the sort of society we should live in, and behind these ‘values’ lies a particular ideology. Many environmentalists believe that the society should be decentralized, based around local communities, and that it should be one with a radically lower level of consumption. But what if the rest of us do not want to live in their society? It is fine that they should try to persuade us otherwise. That is, after all, what politics is supposed to be about. But it is less democratic to try to get experts to make the sorts of decisions they would want without spelling out at the same time the implications for the availability of resources to meet requirements elsewhere. The point is that, while experts have a role in telling us about the thresholds, the uncertainty and the risks, there is a chasm between giving the best advice that science can provide, and telling us what valuations and resource allocations should be made, and hence what assets might be damaged and what targets should be set. It is a distinction that frequently gets trampled on. Consider the climate change example. The role of the scientific experts is to provide us with the best advice on the consequences of rising greenhouse gas emissions, and the extent to which these are or are not responsible for changes in temperature. Scientists build climate models, make

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forecasts and predictions about global temperatures, and try to predict how climate change will impact on different regions of the world. They can advise on the impact of different emissions paths on the climate. Two degrees warming is a threshold frequently cited. So far, so good. There are no prices and no costs – just science. The next step is different in kind. It is advice on what we should do about emissions. Different paths have different predicted outcomes, but it is not very sensible to pick one path without any regard to the costs and benefits of doing so. If the costs of emissions reductions are low – as some economists suggest5 – then it makes sense to reduce them aggressively. But if the costs are high, then the optimal path may be rather different. China could have burnt very little coal in the last two decades instead of being in large measure responsible for the continued growth of emissions since 1990. But that would have meant that the growth path would have been much lower, and tens or even hundreds of millions of people would still be in poverty. These are the sorts of choices to be made. By crossing the line between science and economics, scientists as advocates of particular policies do not escape valuation and costs. Every path for emissions reductions has associated costs and benefits. Every path for limiting logging from rainforests has costs and benefits. Money spent on reducing carbon emissions typically comes out of customers’ energy bills. This money is not then available to be taxed for other purposes or to be spent on other goods and services. Indeed, in the arena of climate change policy, it is this reality check of customers’ bills which has put the brakes on some of the more expensive current ‘renewables’, such as offshore wind, advocated by many scientists without much consideration for whether people are either willing or able to pay for them, or, indeed, whether they will or could solve the problem.6 The case for incorporating costs and benefits in allocating resources to protect different types of natural capital is both overwhelming and easy to make. It does require a demarcation between science and economics, and it does require the science to identify the thresholds and assets-at-risk, and the uncertainties, and to provide an understanding of the complexity of

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ecosystems and the linkages between the various assets. But more is needed to tell us what to do – which assets to protect, which to allow to deteriorate, and which to increase towards higher (optimal) levels. This implies that nature is either priced or rationed – and it is easy to see that rationing choices carries implicit prices. There is no escape from putting a price on nature.

Values and Prices Values in the ethical sense and prices are not the same thing. There are lots of different types of value. My values are unlikely to be the same as yours, and the values of committed environmentalists are unlikely to be the same as those held by liberals or conservatives. Values are about ends, prices are about means. The achievement of all ends has costs, and costs are implicit prices. As to the problem of the commons, the reason why the renewable resource is depleted below the threshold is because the resource itself has no economic price or cost to its users. The farmer pays nothing for the use of the common. The common might be deemed to have ethical or even spiritual value, but it is open to anyone to exploit, and by focusing only on their own marginal costs and not the asset itself, and in the absence of binding social norms, they can – and often do – trash it. Imagine now that in the example of the fish stock this natural asset is valued and priced. The thresholds matter, and so the stock available to the fishermen is the safe limit above the threshold, allowing a comfortable margin for error. It could be identified as a specific quota – so many tonnes of tuna, cod, mackerel, herring and salmon. A tonne could be auctioned, revealing the price. Fishermen could take part in a regular auction for the right to catch a tonne, or a price could be set by a regulator as a best guess at the level that would restrict fishing to maintain the stock above its threshold and, as the regulator sees what is happening, the price could be adjusted accordingly. In the auctioning of permits, the market in permits sets the price. In the price-setting case, the market determines the quantity.

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Some of this happens in the EU’s Common Fisheries Policy.7 Scientists are called upon to give advice on the sustainable stock levels and to advise on how many tonnes of particular species can be caught for those fish that conveniently stay within the EU members’ territorial waters – the maximum sustainable yield. The fact that the European Commission has frequently overridden this scientific advice and allocated greater quotas is a failure of the politics, not the science. The tragedy of the commons cannot be avoided if the politicians are not willing to administer Hardin’s coercion. The European Commission has also been guilty of a failure to think through how to allocate the quotas labelled as the ‘total available catches’, as has the US and a number of other countries with the allocation of ‘individual fishing quotas’. If it is via an auction, it is clear and obvious who gets what share of the quota. If, however, politicians allocate bits of quota to fishermen without cost, the fishermen have every incentive to ask for as much as possible. A higher auction price deters demand for quota at the margin. A zero cost of quota encourages the fishermen to lobby for the maximum catch. It is hardly surprising, therefore, that fishermen do not want open auctions. The principle of pricing nature is at the heart of conserving and protecting natural assets. It is a form of coercion: it makes people pay. So far we have assumed that that price should be high enough to keep the asset above the threshold. But it is more complicated – there are some natural assets that may be allowed to fall below the thresholds, while other natural assets may have benefits that suggest that they should be considerably above the threshold, towards some higher optimal level. The threshold simply tells us when an asset is at risk of moving from the renewable to the nonrenewable category. Within our aggregate constraint that the total natural assets should not fall, some might go up and some might go down. To add yet a further layer of complexity, the stock of a natural asset might be kept above a threshold, but some bits might be damaged while others might be enhanced. This is likely where the unit is a habitat or an ecosystem rather than a species. A national park might allow some housing development while at the same time reducing the intensity of some forms of farming.

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Calculating the Prices Particular natural assets therefore need to be priced. But how exactly is the price to be calculated? This is where cost–benefit analysis comes in. Economists have developed a very sophisticated set of tools to work out prices on the basis of costs and benefits. In typical markets, prices reflect these costs and benefits as a result of the decentralized trading in markets. But most environmental assets do not have markets, and so economists try to work out what the prices would have been had such markets existed. There are two broad approaches to this: to start on the demand side and try to work out what consumers would be willing to pay or their willingness to accept the damage; or to look at the supply side and try to work out the costs. In a perfectly competitive economy, the supply-side and demandside approaches produce the same answers. Otherwise – and therefore almost always – they produce different answers. Economists like to start with preferences, and hence the focus in cost– benefit analysis has been on the demand side. The problem the analyst confronts is similar to that of the market researcher. Suppose a biscuit company comes up with a new product, say a cross between a digestive and a ginger nut. Let’s call it a ‘Dignut’. Will it be a winner with the biscuiteating public? To try to answer this question, the biscuit manufacturer might employ a market research company, which would carry out taste tests and ask people carefully constructed questions to see how much they like the Dignut and how much they would be prepared to pay for it. The company can then decide whether to produce the new biscuit and determine how much to charge. Now consider unpriced natural assets. There are lots of examples of major projects with significant environmental impacts where choices have to be made. These range from large-scale infrastructure, such as the Keystone Pipeline System in Canada and the US, to very local housing developments. Take one very local example of how cost–benefit analysis helps in natural capital choices. A couple of decades ago the British Department for Transport (DFT) was weighing up the possibility of extending the M3 motorway from

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London to Southampton. Bang in the middle of the path of this lay Twyford Down, a wonderful chalk grassland. The choices facing the DFT were not to extend the motorway; to cut straight through the middle of the Down; or to dig a tunnel underneath it. (The option of going around the Down is not considered here.) In each case, the cost is assumed to have been known. Not extending the motorway would incur the continuing costs of the traffic jams and delays. Unsurprisingly, cutting through Twyford Down was the cheapest option – it just needed bulldozers and the movement of lots of soil. A tunnel would be more expensive than cutting through the Down.8 So what is the Down worth? Or rather, how much is it worth spending to preserve it? Asking people how much they value the Down is an obvious starting point, but this is fraught with difficulties. It is like asking the potential consumer of the Dignut whether they would buy the biscuit without telling them what they would have to pay. Everyone affected by the M3 extension can see that it is in their interest to give a strategic answer since it is not they who will pay for the tunnel. Price has to be factored into the market research, and ingenious methods have been developed. It is not an easy task. The researchers would first need to think about who should be asked. Very occasionally I might go to Winchester, which is near the new motorway, to fish for trout on the Itchen River. I now hear the noise of the motorway. Should my preferences have been included? What about people who care about the existence of Twyford Down but are never likely to go there at all? I care about emperor penguins, but will probably never go to Antarctica to see them. Second, there is the informational and framing question. Suppose I do not know that this sort of chalk grassland is crucial for the survival of a species of insect I had previously never heard of – or a plant species? If the researcher explains the importance, does this information change my views about the conservation value of the habitat? The precise design of the questions matters – as does the information the researcher provides. The choice is ‘framed’ and the answers depend on how this is done. Ian Bateman, one of Britain’s leading experts on cost–benefit analysis, thinks these difficulties are so great as seriously to question the usefulness

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of the results, especially for non-use existence values of wildlife and biodiversity.9 In one very amusing study, Bateman dressed a student up in a three-piece suit one day and T-shirt and jeans the next. After a full summer interviewing about conservation payments, the results showed that the willingness-to-pay responses to the student in a suit were three times higher than when a T-shirt was worn. While these weaknesses are serious and should be kept in mind, the value of the information is not zero, and there is the obvious question of whether the alternatives are better – in effect leaving it to experts to decide. Decisions have to be made, and much of the uncertainty is endemic. The fact that these difficulties exist does not mean that alternative approaches are superior. Letting politicians or experts decide, independent of the evidence, has its own drawbacks. The current state of the environment is hardly a testimony to the experts’ approach, and in practice opens up all the pressures of lobbying and vested interests. Fortunately, assessing willingness to pay and conducting surveys are not the only way to tackle the valuation problem. Back on Twyford Down there were houses which once had wonderful views and easy access to the open landscape and its flowers, Chalkhill Blue butterflies and wildlife. These houses were valued at a premium since their owners were willing to pay more for the location. Rather than ask them what they would be willing to pay to protect the Down, we can instead look at the preferences they reveal through what they actually pay. House prices (imperfectly) capitalize the value people place on these locations. Yet another option is to look at expenditures in relation to the natural asset. Many people once used Twyford Down but did not live there. They travelled there and spent time walking their dogs, botanizing and birdwatching, exercising and generally just enjoying the place. We can calculate how much they spent on the journey – both in time and transport costs – and how much time they spent on the Down when they got there. If their time is assumed to be worth some proportion of their wage rates, an estimate of the value to them in terms of their revealed spending provides a further glimpse of the importance of the Down to them.

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Lest we get hung up on precise valuations, it is important to recognize that often it is only approximate answers that are needed. In the Twyford Down case, all that needs to be discerned is whether these valuations produce a number less than the additional costs of the tunnels. In the Twyford case, it is hard to think that any of the approaches would produce so low a number (less than £90 million at the time).10 Therefore, on economic grounds the tunnel should have been the chosen way of extending the M3, and much natural capital would have been protected. It was not and, unsurprisingly, the government department responsible never carried out the relevant analysis suggested above. Twyford Down is but one example of the numerous cases where specific projects cause environmental detriments, and where the costs and benefits have to be evaluated. Digging tunnels to avoid detriments has a parallel in undergrounding power lines and the routing of pipelines. The acrimonious debate around the Keystone Pipeline to bring Canadian tar sands oil to the Gulf of Mexico is one of the most complex of current examples. Not only are there substantive issues about carbon and climate change raised by those against tar sands full stop, but there are lots of alternatives to be considered, each with different and usually higher costs. If it is not built then perhaps Canada will instead build new pipelines through the Rocky Mountains to its west coast. The route can – and has been – changed to avoid sensitive environmental areas. Whereas environmentalists see many such developments in black-and-white terms (as strong sustainability indeed dictates), the realities usually involve much more complex tradeoffs, for which numbers, costs and prices are highly relevant.

Pricing Pollution The Twyford Down case concerns decisions to be made about particular projects – whether to go ahead or not, and in what form. These are projects that damage natural capital, and there is a need to consider the compensation that might be required in order to maintain aggregate natural capital intact. Other projects might directly enhance natural capital, and again it

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will be important to consider the costs and benefits. Planting a new woodland near an industrial town, creating a new public park in an urban setting, or extending allotments all have economic benefits, and these will vary according to location. They also have costs: the monies spent on these projects could have been spent on something else, and efficiency dictates that we find the projects with the highest benefits relative to costs – the highest net present values. Making sure that the damage from pollution is reflected in prices such that the costs of the damage are internalized in decisions made by governments, companies and individuals through pollution taxes (and subsidies to activities with positive externalities) is part of the policy toolbox. It is easy to say that polluters should pay, but a much more complex activity to work out exactly how much. Many environmentalists are simply against pollution: they want it stopped. Yet stopping all pollution is a very radical step – radical in that virtually all economic activity involves some pollution. Facing the costs of pollution is not the same thing as preventing it. Unless the absolute values of environmentalists are imposed on the economy, the optimal quantity of pollution is usually not zero. Some illeffects from the use of fertilizers, the production of animal waste, housebuilding, and roads and railways are acceptable. The difficult question is: how much? If pollution is untaxed, and hence the costs of polluting are zero, it will be too much. A price is needed in almost all pollution cases. Take two very different examples of pricing pollution: the marginal damage from an extra tonne of carbon emissions; and the marginal damage from applying another tonne of fertilizer. The carbon example is quite tractable. It does not matter where the carbon is emitted. A tonne of carbon saved in Birmingham is the same as one saved in Chicago or in Beijing. A universal global single carbon tax is needed. How much damage does that extra tonne do? The answer lies in considering the carbon targets, and in estimating the price that would deter emissions to such an extent as to bring them within the envelope to achieve the 2ºC warming limit the Intergovernmental Panel on Climate Change scientists have suggested and the associated maximum ppm of carbon in the atmosphere. It can be

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achieved by setting the total amount of emissions, and then auctioning allowances up to that limit. This is indeed what the EU Emissions Trading Scheme (EU ETS) tries to do for the European component of the total emission targets (though it turns out this is a very badly designed scheme).11 Or it can be achieved by setting a carbon tax. Now take the fertilizer case. There is a strong and immediate difference compared with the carbon example. The impact of fertilizers is contextspecific. Suppose they are applied along the banks of a clear chalk stream, teeming with aquatic life dependent on high levels of oxygen in the water. The effects could be devastating. Now consider the application alongside an already heavily polluted river with little biological activity. The marginal cost in the first location is massive; in the second it is negligible since there is little left to damage. Location matters too in respect of aquifers, the intensity of other pollution, and proximity to the sea. Applied on ancient grasslands with diverse plant life – such as chalk downlands – and the biodiversity impacts could be devastating. Applied to the intensively cultivated arable lands of East Anglia or the grain belts in the US, and the impacts will be much less. The damage has already been done. The more context-specific the marginal costs, the more complicated confronting polluters with these costs turns out to be. Furthermore, the greater the existing pollution, the lower the marginal cost of more pollution, and hence the perverse incentive to create the initial pollution in order to reduce the subsequent taxes.12 This turns out to be an important incentive question. It is tempting to conclude that, in the fertilizer case, taxes will not work, and what is called for is direct regulation. Yet note that the problem does not go away because the marginal costs vary. The pollution still has to be dealt with and setting regulations is no easier than setting taxes. The problem is the same, and so is the information. In practice, lowpollution zones are typically created. There are ‘nitrate-sensitive areas’ where fertilizers are restricted, and some areas where they are banned. This is analogous to having higher tax areas, and infinite taxes, respectively. Smart policy might involve a base-level fertilizer tax, and then additional restrictions – leaning into the wind in setting price incentives, and

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constraining the total room for manoeuvre. Some of these smart policies will be reviewed later in part 3.

Prices and Natural Capital Values Working out the marginal costs of pollution, and putting in place pollution taxes, impacts on capital values. All prices are capitalized. The ‘correct’ capital value of an asset is that which takes into account all the environmental impacts. It is the net present value – the capitalized value – of the full stream of future costs and benefits that the asset yields, all discounted back to the present. Let’s take an example. What is the capital value of a hectare of prime agricultural land – let’s say land used to grow wheat? First, there is the income from the land – the number of tonnes per hectare of wheat it yields multiplied by the price. The farmer gets this income, but incurs costs. These include the use of tractors and ploughs and combine harvesters. Then there are the costs of the seeds and the pesticides, herbicides and nitrates that are applied to the crop. Let’s say the value of the wheat produced per annum is $500 per hectare, the costs paid to a contractor to do the mechanical work is $300, and the seed is $50 – yielding a profit of $150. How much would you pay to have an annual profit of $150? You would consider your alternatives. You could put the money in the bank and earn interest – say 2 per cent. You might buy shares and perhaps expect 5 per cent. Both of these might be less risky than exposing your money to the vagaries of the weather. So you might want, say, 10 per cent to be persuaded to put your money in farming. If that were the case then the capital value of a hectare of farmland would be $150 per annum discounted at 10 per cent, giving a total capital value of $1,500 per hectare. Now suppose the farmer is forced to face up to the pollution caused by the run-off of the nitrates in the fertilizer into the watercourse. Assume that this is estimated to have a marginal cost per tonne of $25, and that one tonne is applied per hectare. Now the costs have gone up to $375 and profits

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have gone down to $125, and the capital value will correspondingly fall to $1,250 per hectare. This simple stylized example explains why the farmer will be so hostile to the tax – it reduces the value of the land. And indeed the farmers’ unions are extremely hostile, as witnessed by repeated lobbying from the American Farm Bureau Federation and in the UK the National Farmers’ Union (NFU).13 But it also has a much wider implication: the value of natural capital is net and not gross of the environmental impacts – the externalities. These should all be capitalized in the asset value. Take a second example: the value of the Exmoor upland peat mires and bogs mentioned in the Introduction. The farmland value is very low – because a hectare can support only sheep and cattle, and in very low densities. Farmers do not get much income from this sort of land. It should therefore be cheap. Yet it provides additional ecoservices, such as reducing the incidence of flooding downstream and increasing biodiversity. This is ‘income’ too, and it should be capitalized in the natural asset value. Adding back the various environmental benefits – the ecoservices – changes values, but this exercise is independent of the considerations of thresholds and assets-at-risk. We could just do the cost–benefit analysis using the various techniques in the economics toolbox, and this would then create a proper set of prices – internalizing the benefits and the pollution and other costs – and then the economy would function in the usual way in allocating resources. This is indeed what much of environmental economics has been about for the last century – correcting prices. For this reason, the concept of natural capital has played little part: it is just capital, and it is valued as a result of discounting returns against the corrected set of prices. And prices are what matter. But there is more to natural capital than simply correcting prices, and in two senses. First, there is the boundary constraint that the aggregate of natural capital should be maintained in order to meet the particular sustainability criterion, and hence the natural capital has to be valued on an asset basis. Second, there are discontinuities around the thresholds, providing a further constraint, albeit one that is not always binding. Recall that for a

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renewable asset the ecoservices go on being provided by nature at zero cost above the point at which the stock of the asset reaches a threshold. There is a discontinuity at this point – not a marginal increase in costs. As the stock approximates this point, it becomes an asset-at-risk and, according to the sustainability criterion, it deserves special attention. It might still be allowed to fall below the threshold, but only if there are compensating increases in other natural assets, which may turn out to be difficult to achieve. The discontinuity at the threshold is important for a variety of distinct reasons. One is that once the threshold is breached there is no way back and hence the option value is destroyed. It might turn out that the asset has properties in the future that are not currently understood. It might have a pharmaceutical value. Future people might enjoy it in ways not currently appreciated. Like extinction, the threshold has a finality that motivates risk aversion. A second reason is that knocking out natural assets might have broader ecosystem consequences. Killing off wolves has meant that deer have one less predator and, since human beings are no longer very good at fulfilling this role, the deer multiply and destroy the undergrowth of woods and forests, thereby reducing the habitats of other species. In this case, the threshold might be restored by reintroduction, although since wolves tend to eat livestock as well as deer (and very occasionally attack people), top predator reintroductions are not always very popular. It is now possible to see where the natural capital approach and the traditional cost–benefit analysis fit together. Cost–benefit analysis provides an economic framework within which to evaluate potential projects, and to incorporate all the costs and benefits into the common denominator of money. It enables us to see where, before the aggregate natural capital rule is considered, a project would be economically efficient. It is step one. Step two applies economic valuation techniques more generally, establishing prices for externalities – positive and negative – for all economic activities. In principle, this is a complete set of environmental taxes and subsidies. These would all then be capitalized in asset prices, giving the correct values for natural capital across the economy, and the basis for the national balance sheet and national income accounting.

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Step three is to incorporate the constraints imposed on top of the resource allocation that would result from step one (which sorts out which investments to make) and step two (which corrects prices). The aggregate constraint means that, even where there are projects that pass the cost– benefit test, they may still not be desirable if they reduce the natural capital stock and where there are no compensating measures to offset these sufficiently. The asset-specific constraint says that where a renewable natural asset is in danger of breaching a threshold, these assets-at-risk should be protected except in special circumstances, informed by both the benefits assessment and the compensation options. Assets-at-risk have priority for the two particular reasons given above: the option value and the ecosystems consequences. Yet this last point regarding ecosystems creates a serious snag in jumping from these three steps to policy. Margins and systems do not mix very well.

Systems and Cost–Benefit Analysis Economists are obsessed with margins and marginal changes. Elementary textbooks teach students that price equals marginal cost in perfect competition, and the apex of modern economic theory has been to demonstrate that a perfectly competitive, decentralized economy would be efficient, in that it would exhaust all possible trades so that the resulting equilibrium is one in which no change could be made which would make at least one person better off without harming someone else. It is, in the economics jargon, ‘Pareto-efficient’. To non-economists, this is underwhelming. It rules out lots of changes that make some better off and some worse off – and much of modern democratic politics is about just such changes. Priority should be given to the bundle of social primary goods necessary for people to participate in society and meet their basic needs, many of which, including natural capital, are core infrastructure assets in the economy. But the real problem for valuation is that it does not consider broad system changes. It is just about changes at the margin.

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To the scientist, the environment is made up of systems – ecosystems – within which biodiversity is set, and everything is dependent on everything else. A competitive economy does have this property too – it is a system solved by a vector of prices, which all the players take as given, but which adjust to their choices and decisions. A competitive general equilibrium is just the outcome of these individual choices by consumers and producers. Indeed, the bringing together of supply and demand is ‘solved’ by assuming that a costless auctioneer fixes the prices – Adam Smith’s invisible hand. A competitive equilibrium therefore assumes away the system characteristics of markets, and treats all assets on the same basis, allocating according to their marginal products. Finally, it does not acknowledge the possibility that some assets cannot be substituted by other forms of capital. Consider an example. St James’s Park in central London is a green space in an otherwise crowded and built-up location. It shares much in common with Central Park in New York, and indeed city parks around the world. It is used as a set of footpaths, for people to relax and for exercise. It has its own flora and fauna and St James’s Park opens up views of both Parliament and Whitehall at one end, and Buckingham Palace at the other. A marginal analysis might be applied to a small corner of the park. What if a few square metres were sold off to a rich person to build a house? It would be worth a fortune. That money could then be spent on a new hospital. The rest of the park would remain, and it would not make a lot of difference. Such arguments are currently being applied to the use of protected land for new housing, for encroaching on national parks, and for chipping away at the rainforests. The trouble with this argument is that it applies not just to the small corner but, once this bit has been developed, to the next few square metres of St James’s Park, or Central Park, too. And the next. It is true that the marginal value goes up as more and more of the park is taken out, but the amount that rich people might be able to pay is also very large. The less park that is left, the more valuable the rest might be. Soon the whole park is reduced to a small patch of grass. Crucially, it is now no longer St James’s Park as we know it. It is merely a small patch of grass.14

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It is obvious that there is a problem here. These systems are key building blocks of the aggregate of natural capital and they are not so amenable to marginal analysis in the way that specific projects or specific types of pollution are. There are lots of ways of characterizing and classifying ecosystems. Scientists have developed sophisticated modelling techniques upon which economists can draw. In carrying these over into the mainstream economy, one way of thinking about them is as environmental infrastructures. The main water, land, air and marine assets form habitat systems, and these systems are the natural infrastructures, comprising sets of natural assets that mesh together in interdependent ways. Each of these also meshes with each of the others too, but this is just a recognition that the whole of the natural environment can be regarded as an integrated system within which biodiversity is set. The difficulty with this total environmental approach is that it does not give us much of a handle on deciding how to maintain and enhance natural capital. Some disaggregation is needed to make sense of natural capital as part of the economy, in the same way that electricity and rail systems are treated separately, even though the latter depends on the former. Although everything in the economy depends on everything else, even in the idealized theoretical model of perfect competition, it is still useful to talk about producers, consumers, companies, networks and infrastructures. In the case of natural capital, species, ecosystems and habitats can still usefully be distinguished, and their differences identified. It is helpful to distinguish between the various natural infrastructures – water, land, air and marine – in the same way as it is useful to separate out transport, energy and communications networks (none of which can function without the others). The full system characteristics will be understated as a result, and this will need to be taken into account when it comes to policy. The whole is more than the sum of the parts, but it is still useful to understand and value the significant parts that constitute the whole. The identification of systems limits the role of marginal analysis and, in particular, of narrow cost–benefit analysis, which is typically all about projects and particular estimates of costs and benefits, given the existing

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systems. But this is not the show-stopper it might seem. Rather it dovetails rather neatly with the three-step approach above. If the aggregate level of natural capital is not to deteriorate, it follows that our current environmental infrastructure should not be allowed to deteriorate. And if this is true, the task is to identify how to make marginal improvements to these systems – given that they exist and should not deteriorate. The system is defended on the basis that there are ecosystem thresholds as well as thresholds for particular bits of natural capital. Looking at changes within the context of the existing environmental infrastructure has several advantages. It allows the focus of our attention to be on thinking about improvements at the margin that contribute to enhancing these systems as a whole, and it enables us to work out how environmental infrastructure fits into the broader infrastructure of the economy as a whole. The practical implication is that plans to enhance our natural capital need to be considered on the basis of water catchments, marine estuaries, wildlife corridors, the system of agriculture as a whole and marine protection, and that the myriad of particular and local projects and plans can fit into an overall coherent strategy for enhancing aggregate natural capital. None of this escapes the need for valuation and the pricing of natural capital. All decisions embed choices, and all choices have costs and benefits. The fact that these are more difficult for natural assets than for many other forms of capital is not an excuse to hide behind the expert judgement of scientists, politicians and regulators, or to pretend otherwise by denying that nature has a price. The problem of the commons, the problem of systems, and the practical issues of framing and imperfect information are all challenges that need to be tackled pragmatically. It is better to be roughly right than to rely on the judgement of those with interests and those who are exposed to the full force of lobbying and regulatory capture. What is required is to design policy initiatives that are flexible enough to cope with the inevitable uncertainty that these valuation problems bring.

CHAPTER 7

Compensating for Damage

With the aggregate natural capital rule as the objective, and with the tools of accounting, measurement and valuation in place, the next step is to design policies that take the economy from its unsustainable path on to one that meets the rule. If the aggregate level of natural capital is to be maintained intact, yet there are inevitably going to be many instances when specific natural capital assets are damaged by developments and pollution incidents, how should these specific detriments be dealt with? Compensation is intuitively appealing as a way of addressing this sort of problem. In spectacular US cases, such as the Exxon Valdez oil spill in the Prince William Sound in Alaska and the Deepwater Horizon explosion and oil spill in the Gulf of Mexico, this is what has happened through lengthy and costly legal processes. In both these cases there were guilty parties with deep pockets, a causal chain of events and identifiable victims and environmental agencies. But for many other natural assets, particularly those that are not privately owned, and for many countries without the legal traditions of the US, such compensation rarely happens.1 The reasons are many. Compensation is not quite as simple as it might seem at first sight – even in the two cases above. It depends on property rights, on identifying who is responsible for the damage, and on how and through what mechanisms the damage can and should be rectified. 139

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None of these reasons is straightforward. Property rights are rarely perfectly defined; compensation imposes costs on polluters and developers who – not surprisingly – resist; valuations are imperfect; and many natural assets are unique. Sorting out who should pay, what and to whom is fraught with practical difficulties.

Compensation and Property Rights Compensation in economics is about property rights. If all the assets in the economy are owned, any damage to any assets harms someone (the owner), and they are entitled to compensation as a result. Property rights are defined as having the entitlement to exclusive use – exclusive in the sense of being able to prevent others from harming the assets, and exclusive in the sense of rivalry (my use precludes yours). These characteristics make a good or service private rather than public. Formally, pure property rights are excludable and rival. This is fine in theory – if anyone or any company damages someone else’s property, they must pay. Damage is internalized through the courts and within the market, and the resource allocation problem is therefore solved. In practice, almost all property rights are conditional and imperfectly defined, and social and private interests almost always diverge. Let’s start with the imperfection of property rights and the formal definition in terms of exclusiveness and rivalry. Exclusiveness is an atomizing principle. It envisages an asset the enjoyment of which can be wholly contained by the owner. There are no externalities – no impacts on others which are not paid for, either positively or negatively. A moment’s reflection tells us that there are very few, if any, such assets. In the case of natural assets, and especially renewable natural assets, the externalities are typically very great, and sometimes overwhelming. As a result, an owner of natural assets faces a whole plethora of policy interventions – regulations, taxes, planning rules, and so on, which heavily curtail their ‘pure’ property rights. Rivalry is what also makes a good private. Yet many goods are public in the economic sense: my enjoyment does not affect your enjoyment, and

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hence the marginal cost of adding another consumer is zero. In such circumstances it is inefficient to restrict access – up to the threshold where it becomes non-renewable, and where the problem of the commons kicks in. The private ownership of a nature reserve, excluding the general public, rules out the utility others would have got at zero cost. Not as much benefit as could be derived is garnered. If the owners get their kicks from knowing what others cannot have, this is also inefficient since the preferences are no longer atomized. It is about rich people enjoying the fact that poor people cannot have what they have, and therefore about the pleasure they get from others having less. This has a long history, from the exclusivity of the parks that medieval kings kept for their personal pleasure, through to the private ownership of beaches. It turns out that almost all the important aspects of renewable natural capital have public good elements, and that pollution externalities are pervasive too. Recall the examples in previous chapters. The oceans off Greenland where the salmon feed are public goods. There are lots of externalities from polluting practices along riverbanks and the discharge of effluent and pollutants into rivers. The reason the River Thames stopped having salmon running up it was because it was turned into an open sewer. The management of the Exmoor mires and bogs has positive externalities for the flood defences on property downstream in Exeter, and increases the public good of biodiversity. The dwarf pansies on Bryher are classic public goods. Central Park in New York and St James’s Park in London are public goods too. Since property rights lie at the core of any market system, and are necessary conditions for markets to function, their impairment is a major market failure. That is why a compensation policy is needed, above and beyond what market participants might agree among themselves. Subsequent chapters will look at the design of taxes and subsidies to address the externalities and the provision of protected areas, parks, reserves and other public goods. These are all policy instruments intended to correct the market failures, focused primarily on internalizing the externalities and public provision where non-rivalry means that private companies have little incentive to

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provide the services because they cannot exclude – and therefore charge – users. In theory, if the market failures in respect of exclusivity and rivalry are dealt with, then the market should allocate resources efficiently, and there is little more that needs to be done. Compensation, in addition to tackling these property rights failures, is required for two reasons: first, for fairness between the gainers and the losers, and hence to address the distributional aspects; and second, to address the specific problems which natural capital brings, notably in respect of the aggregate natural capital rule. It is mainly confined to the cases where there are direct impacts on natural capital of a proposed development project, and where there are identifiable losses to natural capital. It is therefore highly relevant in a context in which governments around the world are committed to large-scale housing and physical infrastructure developments, many of which are likely to have massive detrimental implications for natural capital. The question is whether these detriments (substitutions of man-made capital for natural capital) can be accommodated while leaving the aggregate natural capital stock intact. Natural capital considerations require a particular form of compensation. In the general economic case, the compensation can be in any form, and can be represented by a monetary amount that can then be spent in any improving way. A housing development might damage a water meadow with rare plant life. That damage is calculated, paid for, and the proceeds could be spent on a school, a road or a tax cut – whichever unconstrained option has the highest pay-off and hence is most efficient. Similarly, the revenues from the depletion of North Sea oil could be spent on tax cuts, hospitals or welfare subsidies. There is an unconstrained supply curve of projects to spend the money on, and the efficient solution is to pick the ones with the highest returns. This unconstrained approach will not work if the aggregate natural capital rule has to be met. If particular renewable natural assets were to be damaged, the project can go ahead only if there is a compensating improvement in other natural assets sufficient to make good the damage to natural capital. There has to be an offset of sufficient magnitude. This may or may

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not be possible for renewables. For non-renewables, the weak aggregate capital rule allows for any offsetting compensation in capital assets. The strong form requires compensation in renewable natural capital.

Objections to Compensation The principle of natural capital compensation is easy to state but difficult to implement. It would be revolutionary if it were applied. But short of prohibiting any change, it is the only way in which the aggregate could be preserved. To oppose natural capital compensation is either to take an environmental fundamentalist position (and even then the aim to get back to nature involves some retrospective compensation), or to admit that the aggregate can be allowed to decline. Yet the fact is that there is very little compensation in practice – it is the exception, not the rule, and general compensation in the form of extra man-made infrastructure, schools and other local benefits often ranks higher than natural capital compensatory measures, even for renewable natural capital. Why? The obvious place to start is with those who would lose out if compensation were required for developments. These include powerful interest groups – house-builders, farmers, oil companies and construction companies. Their lobbying focuses on the fact that, as a result of compensation, their costs will rise. This in turn will increase the prices of the houses they build, for example, and reduce the quantity. Given that there is a political consensus in Britain that more houses are needed, they argue against mandatory compensation, and unsurprisingly oppose increases in their costs.2 There is little doubt that this lobbying has had an impact. It has, for example, neutered proposals for compensation through mandatory offsetting.3 Yet the lobbying is just that – the protection of self-interest. It is true that compensating for damage will raise costs, but the fact is that the costs of development in the absence of compensation are too low – below the efficient level. Worse, since the environmental damage varies from place to place, the effect of excluding compensation is to bias house-building

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towards areas where it will do more rather than less damage. Building houses on protected land is very attractive to developers because buyers will pay more for the location. But if the damage is compensated for, prices will reflect this and make house-building more attractive where less compensation is needed. If compensation became a mandatory requirement, the capital value of developmental land would fall by the capitalized value of the compensation. Recall the example of the value of agricultural land, and that all cost and price changes are capitalized. Thus, with compensation, development land prices fall, and the builders get the land for lower costs. Compensation is not a tax, but rather the reflection of the true costs of development. Not to have a compensation requirement is a subsidy, going alongside all the other subsidies that the housing and farming sectors attract. And then, finally, the lobbyists leave out the benefits and the beneficiaries of the compensation – the improvements elsewhere to natural capital that people will enjoy, and that, ironically, will increase their house prices as their environmental location is improved. The net effect might be close to zero. It is not surprising that house-builders object to compensation. Nor is it surprising that farmers hate it too, or that BP might resist some of the compensation claims for the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. But what is perhaps more surprising is the number of environmentalists who object. The issues for them are split between the strong sustainability and weak sustainability principles on which the various green arguments rely. Fundamentalists hate compensation because they hate environmental damage full stop. In many respects they have the clearest case. They do not want the new houses, new runways, or the new oil and gas pipelines. They object to compensation because they object to these sorts of developments. They argue that they would not be needed if the environmental footprint were to be reduced, economic growth abandoned as an objective, and the resulting reduction in aggregate consumption ‘solved’ through a radical redistribution of wealth and income.

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This is a coherent ideology, and one that has zero chance of having much impact. There is no evidence that the bulk of the population will vote for this. Indeed the fact that all around the world politicians advocate more house-building and more man-made infrastructure suggests that the gap between this ideal world and the one in which natural capital will need protection is widening. More pragmatic environmentalists argue that the problem with the compensation principle is less the theory and more the practice. They think that it is a back-door way to let through many developments that would not otherwise be permitted. The protected areas around cities, called the Green Belt in Britain, is an example of what might concern them. They accept that there will be some substitution between natural and other types of capital, but worry about how much compensation should be allowed. The Green Belt has been degraded by poor agricultural practices, and the resulting lower levels of compensation might allow it to be further chipped away, whereas the current land-use and planning restrictions provide protection, and the argument might be that, rather than build houses on the land, it should be restored to its original condition and returned to its original purpose. This critique is a powerful one and largely correct. What it implies is that any compensation should be applied only in those circumstances where the aggregate is fully maintained, and this in turn requires that the full extent of the damage is properly valued. There is a further twist. Recall the example of the development of a corner of St James’s Park. This example can be applied to the Green Belt. Taking out a small bit leaves most of the rest intact. It might then be argued that the initial compensation should be correspondingly small. But this neglects the system properties of the Green Belt as a whole, and it is necessary that any development is thought of in these system terms. Building on the Green Belt is all about whether an area should be reserved and protected from development as the lungs of the towns and cities. So the correct way of thinking about compensation in this context is that it should in such cases be considered by addressing two questions. First, do we want the Green Belt? Second, if the existing Green Belt is impaired, is there a compensating large-scale Green Belt or similar

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natural capital asset that could be created and sustained which is at least as good as the one that is being lost? If the answer to the first question is yes, it is highly unlikely in a small crowded island that the second answer will also be yes. If this is the case, the Green Belt should not be built on. QED. The more pragmatic case against compensation is that the politicians, and the institutions in their current form, could not be trusted to undertake compensation properly. Those presenting this view are probably right – and therefore it is crucial that there is a major reform of the rules, institutions and funding if compensation is to be the route to maintaining the aggregate capital rule. The onus should be on the politicians and developers to prove that the spirit and letter of compensation can be applied within the constraints of the aggregate natural capital rule. Otherwise compensation has much less to recommend it.

Compensation for the Depletion of Non-renewables The non-renewables are, from a compensation perspective, a pure intergenerational equity problem. One generation uses the resources, and therefore another cannot. The question is how to compensate the future generations for the fact that the asset will no longer be there for them to use – how much compensation should be paid, and for what? The economics of the ‘how much’ question is pretty straightforward. The depletion of the resource could take place now, or it could be spread in equal amounts over all future generations. In the latter case, each would then get the total amount divided by the number of generations. To make the maths tractable it cannot be completely open-ended, so the number of generations has to be finite. To make it even more tractable, the problem can be distilled down to one between this generation and the next. In a two-generation game, this generation could deplete half of the North Sea reserves of oil and gas. But instead of leaving half in the ground, another way of thinking about this is that the current generation could extract all the oil and gas, and invest the proceeds in a fund that would yield

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a return in perpetuity. This fund is likely to be organized at the national level (a sovereign wealth fund), but it could also be at a regional or global level. Global funds have already begun to be explored to help address climate change and rainforest depletion (though neither is non-renewable).4 In the North Sea example, the amount of the value of the oil and gas reserves that each generation should consume is its share of the total net of the economic rents plus the real return on the fund – in other words, only that amount which leaves the fund intact for the future so all future generations can enjoy that real return. The fund approach is a neat way of doing the intergenerational bit, although it still leaves out who gets the asset value itself within each generation. Each generation gets the return plus a bit of the capital itself. It then sorts out how to distribute it – the equity bit. The practicalities of defining and enforcing rules to ensure the fund is credible and maintained over time are difficult. Future people do not vote, and current people always have the option of being opportunistic. Democracies based on pure majority voting do not enshrine in their constitutions the responsibilities to future generations who cannot vote. Indeed, the experience of countries rich in non-renewable resources is quite the contrary. They tend not even to be democracies respecting the wishes of current voters, and to be subject to the ‘resource curse’ as elites fight for control of the economic rents.5 Think of the asset-strippers who run Russia, and the super-rich Middle Eastern princes and rulers. Think of the Russian leaders Boris Yeltsin and Vladimir Putin, the Libyan Colonel Gaddafi, the Venezuelan Hugo Chávez, the Shah of Iran and generations of Nigerian political leaders. Think of guns and palaces and overseas bank accounts. Some form of constitutional constraint is therefore needed to ensure that future interests are protected if the aggregate rule is to be met. Very few countries have successfully created and sustained comprehensive sovereign wealth funds, and those that have tend to be very special cases. Norway is very small, with around only 5 million people, has a welleducated population, and is relatively culturally cohesive. Even here the rules for spending from the fund are the subject of intense and continuous political debate. But with the prospect of $1 trillion by 2020, and so few

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people, even opportunistic politicians have limited scope to squander it. Oil- and gas-rich countries, such as Kuwait, Qatar and Saudi Arabia, similarly have so much revenue from the exploitation of these resources that even the most extravagant rulers find it a challenge to spend it fast enough, although this does not always stop them trying. Almost every other country fails. Stable democracies such as the US, Canada and Britain all fail to provide for the future from resource depletion. No major African country has a credible wealth fund (the exception is Botswana’s Pula Fund, supported by revenues from diamond exports), and there are just a few in the Middle East. Indeed the rule tends to be that resource-rich countries spend their entire current income from resource depletion and then, when the oil prices fall, get into serious trouble. Designing sovereign wealth funds is clearly anything but straightforward, and democracy is no guarantee that they will be created. Some economists argue that a fund approach is not necessary at all, because future interests are represented and protected by the way the money is spent now. They argue that the revenues from the sale of oil and gas will boost economic activity, grow the economy and hence transfer to the next generation a bigger economy for them to enjoy. The intergenerational equity considerations get taken care of through economic growth. Companies and the private sector will invest the proceeds in capital assets, and lower taxes will boost demand. These in turn, through the Keynesian multiplier discussed above, increase economic growth. The idea is that the future will take care of itself if only aggregate demand is kept high enough in the short term. The housewives Keynes urged to go out and spend should be encouraged to enjoy the party that the North Sea revenues produced, rather than practise the Victorian virtues of thrift and saving. Perhaps with her deliberate identification with the interests of housewives it might have been expected that Margaret Thatcher would have saved some of the bonus, but interestingly neither she nor Nigel Lawson, her Chancellor of the Exchequer, behaved other than in the way Keynesians would have approved of. And their successors followed suit. GDP measures will have encouraged them, since the revenues are a GDP cash bonus.

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In addition to the flaws in the Keynesian analysis in general from a sustainability perspective, and the multiplier more particularly, these economic benefits from spending the proceeds now from depletion of nonrenewable resources usually prove disappointing. In addition to corruption and rent-seeking behaviours that characterize Russia and many African and Middle Eastern states, the impacts of the resource curse come through the exchange rate. Following on from the earlier experience of the Netherlands and the ‘Dutch Disease’ after their gas came on-stream, Britain’s North Sea oil and gas contributed to a rise in the exchange rate in the 1980s, and a consequent squeeze on manufacturing. The British took the benefits in the form of lower costs for imported goods and services, and lower taxes than would otherwise have applied. When the North Sea decline set in during the first decade of this century, the British economy had to adjust to the consequent deficit in the balance-of-payments current account and the need to import lots of oil and gas, in the unfortunate circumstances of the global economic crash. It is perhaps not surprising that, despite this windfall, Britain did not have a notably higher growth rate in the oil years than either it had previously experienced or its competitors had for the same period, and there is nothing obvious left for the benefit of future generations. The case for relying on the economic revenues from the depletion of non-renewable resources automatically compensating future generations is not a convincing one. If the non-renewables should be tackled through a fund, what should the fund invest in? The conventional answer is to choose those investments that yield the highest returns. In other words, it is just an investment problem, and it should be focused across all the different forms of capital on a returns basis. This is, for example, what the Norwegians do. Many environmentalists would want to go further and argue that the monies should be invested in environmental improvements elsewhere, and in particular in renewable natural capital – in other words, to follow the strong aggregate natural capital rule. This argument is given concrete form in the suggestions that oil and gas revenues should be invested in non-fossil fuel technologies and energy efficiency measures to deal with the consequences

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of the burning of fossil fuels. The argument has been extended to the case of shale gas. It is an attractive idea. Some of the damage to natural capital could be put right by using monies from oil and gas, and now fracking. A super environmental clean-up fund could be created, so that future generations get a better natural environment. The argument might be given extra force if the constraint that the aggregate of natural capital should not decline were strengthened to require that it should actually be increasing, to compensate for the past damage. As already noted, this argument is used by developing countries in the climate change case: developed countries did the damage by putting all the carbon in the atmosphere as they industrialized, and therefore they should bear a disproportionate burden in reducing emissions. It is a possibility we shall return to later when the funding for a major landscape-wide improvement in our natural capital is considered. For the moment, the case for compensation between the generations for the depletion of non-renewable natural capital has been made, and though there is the theoretical possibility that the economy might automatically make this adjustment, there are good reasons to expect that it will not, and indeed some reason to think that it may do the opposite. Before turning to the much trickier question of how to compensate for renewables depletion, there are three details that should not be overlooked. The first is that the depletion of non-renewables should be net and not gross of the environmental externalities. In other words, it is less a matter of spending some of the gains from depletion on cleaning up the mess created, and more of ensuring that the depletion itself is in the context of a set of environmental regulations and taxes that internalize these externalities. There should be carbon taxes, taxes on the sulphur dioxide and nitrogen oxides that result from burning coal, taxes to reflect the noise and local pollution from mining activities, and rules and regulations where such market-based instruments are incomplete or not practically feasible – over and above the compensation between the generations. Some of these taxes and other measures will be outlined in the next chapter.

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The second is technical change. Suppose a new form of solar power generation is developed. As already noted, it might plausibly come from a combination of opening up the light spectrum to make more of the energy that can be captured in sunshine, the development of new materials for solar capturing surfaces, and graphene to help the conversion to electricity. It is not impossible that the resulting next-generation solar power might be so cheap that fossil fuels could be left in the ground. They would be worthless to the next generation, which would not then need compensating for the loss of the reserves – though, of course, they would need compensating for the liabilities of the pollution of their atmosphere which the current and previous generations had caused, in the absence of the appropriate pollution taxes. Finally, there is the question of identifying when a resource really is non-renewable. In geological time almost everything is renewable, including coal, oil, gas and peat. Some of these resources take millions of years to renew. Others, like trees, take hundreds of years or less. Is a forest renewable or non-renewable from the practical perspective of compensation? This matters if, for example, trees are burnt as biomass in power stations, when it takes 80 years or more for the carbon sequestration to offset the carbon emissions. Is 80 years too long given the risks of rapid climate change? In some cases such as biomass, it probably does matter. Trees should not be treated as renewable in this specific context. They are critical parts of ecosystems, and so are hard to compensate for.6 Once logged, first-growth mature Canadian pine forests, bits of the Amazon rainforest and European ancient woodlands are not capable of fully replacing themselves for a very long time with second-growth trees and third-growth saplings. In these cases, the safe limit is probably at or above the actual levels, if the services that these trees provide are to continue to be delivered. Felling particular trees, collecting firewood and coppicing might be sustainable, but not harvesting all the forest. In many cases such as oil, gas and coal, there is no practical renewal. The practical conclusion is that we should be cautious in such cases.

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Compensating for Renewables Renewables pose very different problems. Their use by the current generation should not in theory reduce the use by the next if they remain above the thresholds. The issue of compensation arises where these thresholds are breached, and in particular where renewable natural assets are destroyed. Given that above-the-threshold renewable assets yield their returns in perpetuity at near zero cost, and given that the aggregate is to be maintained, the loss of any renewable natural asset requires its replacement by another of equal or greater value. It has to be completely offset. In practice, this means the replacement of habitats and ecosystems that are damaged or destroyed by development. In many cases this is likely to be very demanding. Compensation also applies above thresholds where the optimal stock is higher than the actual stock, and the aggregate rule requires this to be met. Biodiversity offsetting is the policy measure intended to help meet this requirement, and it has been introduced in a number of countries and contexts. The idea here is that the value of the damage can be estimated in monetary terms, and then the developer responsible for the damage either pays the money to an intermediary – an offsetting ‘bank’ – or makes good the damage directly through specific projects. There is considerable international experience, but always very context-specific. The US Wetlands Mitigation and the Australian offsetting programme are leading examples. Britain has also been toying with the idea.7 The concept is fairly simple; the application is anything but. Objections have been raised to each and every aspect of offsetting, sometimes incorporating the broader objections to compensation discussed above. They start with monetization, and then move on to restricting the domain, before turning to the problems of uncertainty and enforcement over long periods of time. The first objection is monetization. It is argued that offsetting requires like-for-like, or better-for-like. The replacement assets must be physical, but these physical investments will have costs. If the cost is not to be infinite – and it cannot be – then there is a monetary sum involved. The question is

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how much that cost should be, and what it should be spent on. Damage is inevitable in most projects. It is hard to think of any development that will not have some negative environmental consequences. The issue is whether there is compensation, and, if so, how much. As long as monetization is considered in terms of costs rather than the more demanding terms of value then it has a role to play. If there is no compensation then the cost to the developer of the damage is zero. There is no escaping the grubby question of money. The second objection is to the claim that compensation through offsetting can apply to each and every type of environmental damage, and hence all assets. In reply it is argued that there are some types of habitats and ecosystems, and some species, which should not be candidates for offsetting. Ancient woodland is one such possible candidate, and endangered species might be another. Yet even in this context there is a big difference between an empirical claim that the costs of replacing the assets are so great as to practically rule out an offset in these cases, and a principled claim that these assets should never be damaged. The empirical argument is a powerful one and should ensure protection in many cases. But there may just be cases where the damage is going to happen because the economic value of the benefits from the project is extremely large. Ancient woodlands, for example, are now a fragment of their former, almost complete, coverage of the British Isles and much of Europe. To object to compensation on the grounds that the ancient woodland should be excluded from all major developments is an objection in principle, rather than one based on the evidence. It does not then provide any guidance as to what should happen if, notwithstanding the importance of such habitats, development goes ahead anyway and the ancient woodland is in fact damaged. The practical question, to which we turn below, is whether in the event of damage there should be compensation (and in this case a very large amount) or none at all. If offsetting has a potential role in ensuring that damage to renewables is compensated for in order to protect the interests of the next generation, it remains to work out if, and how, it could be practically applied. Here the

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problems mount up. What exactly is a replacement for a renewable natural asset? Every habitat and ecosystem has its own unique characteristics, and although it is possible to envisage creating alternative habitats for affected species, the practical difficulties are great. Consider a couple of local examples. First, let’s take great crested newts. These are a protected species in Britain, and their presence can be a showstopper for developers. Yet their habitat has been extensively studied and documented, and it is not hard to envisage providing alternative and better ponds and surrounding conditions in which they might equally thrive. One colony of newts can be offset by another. Second, consider a much more difficult species, nightingales. This is also a protected species, but one which is getting rarer, migrates to breed in Britain, and has a deep cultural resonance – for example, in John Keats’s poem Ode to a Nightingale (1819). The Ministry of Defence proposed a major housing development at a former army base at Lodge Hill in Kent. Natural England designated this an SSSI, in part because it is a breeding site for nightingales, but also in recognition of the importance of its reptile (including great crested newt), bat and invertebrate populations. Offsetting would require an alternative site with similar characteristics for the nightingales (and all the other heathland flora and fauna that would have their habitat concreted over).8 Of our two examples, the nightingales one is altogether more troublesome. The nightingales might not move at all. They may just disappear. The exact characteristics of nightingale heaven are only approximately known. Low scrub is where they like to nest, but what sort of scrub? What else about a site appeals to the nightingale? No two sites are identical and so there will inevitably be differences. Then there is the inconvenient fact that a particular habitat has lots of other important species, and not just the iconic nightingale. There are reptiles too on this particular site. Will the new site be heaven for them as well? Will it be open to other predators? Since there are no truly wild habitats left (every habitat is influenced and shaped by humans), how will the management of the new site compare with the old? What this second example illustrates is that in such cases there is no such thing as ‘like-for-like’. It is bound to be a matter of approximations and

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there is inevitably a lot of uncertainty. There is also the question of the counterfactual – what would have happened anyway? – and the time an alternative project might take. The new habitat for the nightingales must be additional, and that means it has to be developed to the required state. If it already existed, it could not be considered compensation. Restoration is a tricky and long-term business. Creating new moorland, heathland, water meadows and fauna-rich woodlands is not an easy thing to do. Studies indicate that restoring a wild flower meadow might take more than 20 years, and getting a scrub habitat into the right sort of equilibrium might take more than a decade.9 The question of time raises further issues about credibility and commitment. How can we be sure that the developer will stay the course and see the offset through to completion? Over a 20-year period, companies may go out of business. They may not be able to sustain the investment, and they may try to renege. With limited liability, some other institution may have to be involved. This could also be desirable since few developers have any experience in habitat creation and restoration. It might pass the liability to an offsetting bank or an environmental regulator, and it could be required to put up a bond or other security against its delivery. There are already many such bonds in the commercial world, including, for example, bonds pledged by travel companies to rescue stranded tourists if they go bust. If there is no literal like-for-like, and if it is the aggregate of natural assets that is to be protected, it is plausible to ask whether the aim should not be like-for-like on a specific asset basis, but rather renewable natural asset for renewable natural asset. In other words, the damage could be offset by other natural assets. The destruction of the habitats of the great crested newt might be replaced by more habitats for nightingales, or an improvement in water quality in an estuary. There could be a suite of possible projects for improving renewable natural capital, and the damage could be offset by the project with the greatest natural capital gain. This approach has the twin merits of being more efficient generally from a natural capital perspective (it really could be much better environmentally

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to spend money on species at the thresholds than, say, the newts in the example above), and it gets round the problems of trying to do like-for-like on a specific habitat or species basis. It does not get round the question of needing to estimate how big in monetary terms the compensation should be, but it does separate out the assessment of the damage in the particular context from the question of how to spend the money raised to the greatest natural capital benefit. This turns out to be crucial when it comes to landscape-wide restoration, as we shall see later on.

Planning and the Confrontational Approach Offsetting creates formidable practical difficulties. These have so far severely limited the development of the policy. By default, the result has been to continue with the status quo as defined by the planning system. The battle between developers and environmentalists has continued, and in many ways it suits both sides. In a conventional planning framework, the planning authority sits in judgement about the relative merits of a proposed development. The developer tries to minimize the estimates of any damage, while playing up gains to economic growth and associated jobs and business tax revenues. Those adversely affected (from competitors to those impacted by the works, the new buildings and traffic) play up the costs, and environmentalists battle over the impacts. The language is about ‘fights’, ‘resistance’, ‘battles’ and ‘campaigns’, and it is usually framed in terms of a David-and-Goliath trial of strength. Developers claim that the local objectors get in the way of wider economic benefits. They are accused of being NIMBYs (not-in-my-backyard). The protestors cry foul in what are often all-or-nothing conflicts. Examples abound: battles over the Keystone Pipeline, wind farm developments, proposals for new towns, building on the Green Belt and housing developments on the fringes of towns and villages. Local people form campaign groups, and the big green NGOs muscle in. These battles are great recruiting grounds. Recent campaigns against fracking have boosted the Green Party’s votes in local elections in Britain. Campaigns are the lifeblood

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of Greenpeace. This is what members pay for and what celebrities endorse, and the prospect of victory or defeat reinforces the rationale for uncompromising belligerence. All sides hire consultants and advisers and lobby to get their way, with the spending heavily concentrated on the developers’ sides. Local councils are involved, and sometimes soft (and even, on rare occasions, hard) corruption creeps in. In assessing environmental impacts, planners use a mitigation hierarchy: avoid; reduce, moderate and minimize; relocate; restore; offset. Furthermore, developers may be required to contribute to the associated infrastructure, such as roads and schools, and it is here too that compensatory offsets might be volunteered. The problems with this approach have led successive governments to try to reform planning.10 The essence of the reforms has been to try to set national priorities and sectoral plans, defining national projects and, as a result, taking these largely out of the local planning process. The government declares wind farms part of a national policy, and similarly sets overall housing targets for local government authorities. If particular projects are turned down by local authorities, central government may ‘call them in’ for determination centrally, overriding local objections. They then go ahead, and the eventual damage is deemed an acceptable sacrifice. Little compensation is paid – landscapes are blighted with wind farms; housing developments are constructed; and railways and roads are built with little or no offsetting or compensation. As is played out repeatedly in the media, this is a war of attrition. Time is a crucial weapon for the opposition, raising the costs for the developer by protracting the process. The result is that development is not as rapid as many would like from an overall economic perspective, and yet the damage from an environmental perspective has not declined as a result. It might have taken years to get planning permission for Terminal 5 at London Heathrow Airport, and to get permission to build new nuclear power stations. But they happen anyway. Those that do not probably would not have passed the compensation test, but they can be claimed as victories all the same. Like estate agents who boast about the houses they have sold as a

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way to advertise their services, a victory role helps to create momentum for an environmental NGO. In this unhappy process, the planning approach does not alter the empirical problems with offsetting identified above. If damage is done it will have costs, whether or not it is damage endorsed through the planning regime as it presently stands or justified by offsetting. The problems of likefor-like will not go away. Damage to one habitat cannot usually be redeemed by trying to create an exact replica elsewhere.11 Most cases are more like the nightingales and less like the newts, and hence the problems of domain remain. If there are some habitats that are of very high value, such as ancient woodlands, they should remain of very high value under the planning system. The fact is that there will be circumstances where they may be damaged. The planning regime will in the end either sanction the damage or prohibit it, and that may well be the end of the matter. Compensation may not follow, or it may be insufficient to meet the natural capital rule. Where the uncertainty issues are concerned, none of these go away under the conventional planning route. They will be battled over by the teams of consultants. The only problem that does go away is the institutional one of enforcing the compensating offset – because there is no formal offset. To sum up, the aggregate natural capital rule entails compensation if there is to be any degree of substitution within the aggregate. It is unavoidable – the rule cannot be met without it. Those who oppose compensation must either reject the aggregate rule or reject any possibility of substitution. Fundamentalists can coherently hold to their principled objection to substitution, but there is no reason to believe that they will be successful in stopping all substitution, and almost certainly no chance before an awful lot of further damage has been done in this century as GDP growth multiplies and another 3 billion people are added to the world’s population. It is arguably morally indefensible to hold the fundamentalist view and stand idly by and watch the destruction that is coming on a business-as-usual basis. Once the principle of compensation is accepted, it all comes down to the practicalities. Like-for-like is typically not possible. It is also likely to be inefficient, since there may be better natural capital assets to invest in.

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There should be a gap between paying the compensation and investing in natural capital projects. Into that gap there needs to be placed credible institutions and a natural capital fund. The sums of money involved are potentially very large, and if the compensation for non-renewables as well as the renewables all goes into investing in renewables, the implications are radical and would make a very large qualitative difference to the natural environment. Then growth would be much more sustainable. This exciting prospect is based on compensation after appropriate policies have been put in place to ensure that pollution is properly priced and taxed, positive environmental externalities are internalized through subsidies, and natural capital public goods are properly provided for. Only then can we turn to the big prize – large-scale, landscape-wide, renewable natural capital projects. These are the remaining policy issues dealt with in the following chapters, in advance of setting out a comprehensive policy framework not only to meet the aggregate rule but also to reap the significant economic benefits of leaving the next generation with a much better endowment of natural capital.

CHAPTER 8

Taxing Pollution

After compensation, the second plank of a coherent natural capital policy framework is to ensure that the costs of pollution from continuing activities are internalized in the decisions made by companies and individuals. Making polluters pay for the consequences of their actions has an obvious intuitive – and ethical – appeal. It is complementary to compensation, but not equivalent. Compensation is what is paid for direct damage to natural capital from specific projects and developments. Pollution taxes change the prices in the market, and hence the choices and incentives of companies and us consumers. As with compensation, the use of taxes to make polluters pay is not quite as simple as it might seem. Who exactly is the polluter? What should they pay? How should they pay – through environmental taxes (and subsidies) or by buying permits? What happens to the money from the taxes and permits? What is the role of subsidies? And finally, where does regulation fit in?

The ‘Polluter Pays’ Principle If there is a chemical spill into a river and the fish all die, the problem of identifying the polluter is usually a fairly standard detective puzzle. 160

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Provided there is only one source, the culprit is not hard to find, and property and environmental law can be deployed to force payment for the damage caused and to compensate the loser. Property ownership creates the rights of the polluted and responsibilities of the polluter. The case is simple because there is just one polluter and the damage is easy to measure. All the fish are dead. Unfortunately very few pollution problems are this simple. There are often multiple polluters; there can be lots of different types of damage; and there is usually uncertainty about the impacts. As already noted, property rights are rarely perfectly defined, easily identified, or costlessly enforced. Take a river suffering from phosphate and nitrate pollution. The causes might be the discharges from a sewer or a factory, or run-off from farmers’ fields. There may be threshold effects – a bit of run-off may make little difference, but beyond a certain level river life might collapse. Upland afforestation is another example: acidification kills the life of rivers, destroying salmon and other fish habitats, yet the relationships between specific pine forests and loss of salmon are at best complex and controversial. In some cases, it is even less clear who the polluters are. Who, for example, is responsible for the carbon dioxide in the atmosphere? Is it the eighteenthand nineteenth-century Britons with their Industrial Revolution? Consider a contaminated industrial site. Is it the current owners who may not have known the problems existed when they bought the land, or the people who allowed the land to become contaminated? In both cases, what happens if they are now dead? A convenient fiction is to assume that it is businesses that do the polluting rather than people like you and me. Surely the owners and managers of businesses are the ones responsible? The same kind of logic leads people to believe that companies rather than individuals should be taxed. Yet this is an illusion. Companies are owned by shareholders, who receive dividends, and they sell products to consumers at prices that reflect their costs. If the farmer is not paying for the costs of the damage to the river that the nitrate fertilizers applied to the fields are causing, then the costs of production are artificially low. The result is that the price of bread

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is lower too, and those who buy it – you and me – are getting away with the benefits of the pollution, without having to pay the full costs. The consumers of the bread are the ultimate beneficiaries, and hence they are really the polluters. The farmer is doing the pollution on consumers’ behalf. The shareholder might also be a polluter if the company can capture the lower costs in higher profits rather than lower prices to us the consumers. But there is little escaping the inconvenient fact that the villains of the piece are the consumers and shareholders, rather than the easy scapegoat, some large corporate entity. Strictly speaking, companies do not pollute, only consumers and shareholders do. Companies are just our agents – intermediaries doing our bidding. Politically, few want to admit this and place the blame where it properly lies: with our consumption – at least in part. All that extra consumption that will come in this century will have embedded in it more and more pollution unless consumers have to pay in full for the damage their spending will cause. Even if the guilty party can be identified – as many campaigners are keen to do, and thereby simplify the world into good guys and bad guys – is it always obvious that they should pay? Think of our water example again. For many centuries rivers were waste-disposal systems. Those living or working alongside riverbanks assumed they had the right to dispose of their waste in them. Sewage went this way, as did a host of local waste. In many countries this is still the case. In Britain storm overflows allow the raw sewage to pass straight into the rivers when there is very heavy rain. It has typically been assumed that it will be adequately diluted in such circumstances. Barges, until quite recently, dumped London’s sewage into the North Sea.1 Do the water companies have the right to use the rivers this way (with our sewage, on our behalf), or does someone else (us too) have the right to clean water? In a classic economic article, ‘The Problem of Social Cost’, Ronald Coase argued that the efficient solution – the optimal level of pollution – could be arrived at by letting the parties bargain among themselves, irrespective of who had the right to pollute or to be protected from pollution.2 Imagine there is a fish farm (FishCo) downstream of the polluting sewerage works

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(SewerCo). FishCo needs clean water. SewerCo needs to dispose of its waste water. If FishCo has the right to clean water, it could sue SewerCo for polluting the river. Alternatively, if SewerCo had the right to disposal in the river, FishCo could offer to pay SewerCo not to discharge into the river. What Coase showed – under admittedly restrictive conditions – is that the optimal level of pollution is that which maximizes their joint profits, and they have every incentive to reach this by bargaining between themselves, irrespective of who has the property rights. It is the same solution that would be reached if the two companies merged, thereby internalizing the externalities and incentives within one single entity, SewerFishCo. The new company would have to face the costs to the fish farm in working out its profit-maximizing strategy. SewerFishCo could conclude that it is too expensive to treat its sewage to a sufficiently high standard to make the fish farm viable and simply close it down, or it could close down the sewerage works to protect the fish farm. Both are unlikely corner solutions. Most likely is some adjustment to treatment and discharges to find the optimal level of pollution, which is then not going to be zero. SewerFishCo could, for example, fit more treatment equipment at the sewerage works; it could add more filters at the fish farm; or it could reduce the fish stock density. The conclusion that follows is extremely important, and one that demonstrates that strong sustainability (banning pollution) is seriously suboptimal. Some pollution is typically optimal: zero pollution is rarely a good idea. This neat bit of economic theory has a wider application. Should Brazilians be forced to stop cutting down the Amazon Rainforest, or should the developed countries pay them not to do so? Should African countries be forced to cut their carbon emissions, or should developed countries pay them not to do so? Coase claims that, from an efficiency perspective, it does not matter. The level of pollution will be the same. If developed countries want to avoid climate change they will have to pay those countries that will struggle at an early stage of their economic development to meet the costs themselves. The politics are, of course, a very different matter, but here too it is about property rights – global ones. It fits with the notion that

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in the case of the global commons – the climate and the rainforests, for example – we are all in this together, we are all in global versions of SewerFishCo. The polluter pays principle therefore turns out to be much more complex than at first sight, and it is unlikely that the search for the ‘guilty parties’ will produce the right outcomes, though it does produce great campaigning propaganda for the NGOs. Rich countries are clearly ‘guilty’ when it comes to carbon emissions, but oil companies are ‘guilty’ too, even if they are national developing country companies. Fortunately, as Coase demonstrated, guilt is not what the issue is about. But none of this avoids the need to make sure there is a price to be paid. This is what matters. What does not strictly matter from an efficiency perspective is who pays (although, of course, from a distributional perspective it does, and here it may well be the polluted rather than the polluter who is in the frame). How then should the price be determined?

Taxes or Permits? Confronting polluters with the costs of their pollution involves changing the price to internalize the externality. Setting the right price requires quite a lot of information, and it is tempting to try to use increasingly sophisticated techniques to get the number right. The right number is that which equates to the marginal cost of an extra bit of pollution, so that the polluter has the corresponding incentive to adjust the pollution up or down a bit. Arthur Pigou famously set out how this should be thought about, and what the consequences might be.3 Raising the marginal costs changes the equilibrium. It affects the supply of the pollution and the demand for the products that result from the activity – and the market sorts out the most effective combination of responses. Think again of the case of FishCo and SewerCo. By, for example, pricing the pollution (say the phosphates in the discharges), SewerCo might be forced to take any one of the measures facing SewerFishCo suggested in the examples above, such as adding further treatment of the effluent to

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filter out the phosphates, with a benefit to the fish farm. In this example of the polluter paying, the right price is that which confronts SewerCo with the costs faced by FishCo of an extra dose of waste discharged into the river. The trick is to work out what that marginal cost is, given that the information is private. SewerCo has every incentive to underestimate it, and FishCo to overestimate it. Both will probably hire ‘experts’ and consultants to argue their cases, and maybe lobbyists and corporate public relations advocates too. This sort of strategic informational game is typical of a wide range of pollution cases: denial on one side, exaggeration on the other. This has been played out in the Deepwater Horizon case. In the US legal context, lawyers have scrambled to get a slice of the action in what has become a gold mine for fees. In the salmon example, the game is played out over fishing quotas at sea and the river mouth netsmen, and between the competing land users along the riverbanks. For example, forestry affects the acidity of water run-off into rivers which in turn affects the salmon. Thus in the Galloway forestry case in south-west Scotland, the Forestry Commission first denied and then tried to minimize the effects, while the salmon fisheries played them up.4 Coal miners, gas frackers and wind farm developers play the game against health interests, local property owners and bird watchers. The paradox is that if the expert has all the information and hence can set the right price, there is actually no need for the price at all. The regulator can just tell the companies what the level of their output and pollution should be. The reason a tax is preferred is precisely because the regulator does not know the right answer. The initial tax is at best a rough guess, and then the results can be observed. If, for example, a carbon tax was imposed at, say, $10 per tonne and nothing happened, this provides a lot of information. It says that it is worth causing pollution at this price. If the level of pollution really does have to be reduced, the regulator can increase the carbon price until it really does have an impact. SewerCo could be faced with an initial guess at the marginal costs of damage from the phosphate effluent, and then we can see what happens.

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This is ‘learning-by-taxing’, and once the tax is recognized as an imperfect approximation it can be applied in a wide range of circumstances. It can contribute to the right answer, without having to do all the heavy lifting. Each type of pollution has its own specific characteristics and these may need additional calibration, with regulation augmenting pollution taxes. Take the nitrates example above where there are many sources of pollution. The tax can do part of the work. It can be set at a level to reflect the broad environmental impacts of fertilizers, while leaving regulation to deal with special circumstances, such as the protection of especially nitrate-sensitive areas. There could be a fertilizer tax plus regulations about when and where nitrates can be applied. With experience, the tax can then be fine-tuned. It becomes one general instrument in the toolbox. Most pollution is not currently taxed, and so the prices do not reflect the costs of pollution, and the value of assets is thereby distorted. In other words, prices are precisely wrong. A gradual widening of the pollution covered by taxes can be part of a strategy to protect natural capital. The proportion of environmental taxes in the overall tax base could be gradually increased from the current fuel duties, carbon taxes, landfill levies and various waste charges. There would be broader economic benefits. By raising money from taxing things that are bad, such as pollution, rather than from taxing work and labour, which are good, there is what has been called a ‘double dividend’. Taxing work distorts the incentives to work. Reducing these taxes makes the economy more efficient as wages better reflect the value of work done. Taxing pollution is correcting failures in the market by internalizing costs, so it raises money at the same time as getting the economy to work better.5 Given these obvious advantages and the chance to remodel the economy in the process, it is surprising that there are not more pollution taxes. They are noticeable mostly by their absence, and even when they are used controversy is not far behind. The British carbon floor price is one recent example of an efficient tax (given the unilateral carbon target) that has come under sustained attack.6 Fuel duty is another. In many cases, they are the last rather than the first resort. How can it be that measures which are economically

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efficient, and offer the possibility of improving the economy more generally, are so little used? Broadly there are two answers. First, there is a worry that the level of pollution which results when the tax is imposed is uncertain; and second, there is a lot of politics about what happens to the money. This second objection is dealt with in the next section. First, let’s consider the uncertainty issue. Taxes are about prices, leaving the quantity to be determined in the market. While the optimal level of pollution is rarely zero, it sometimes is. Some sorts of pollution are so serious that any doubt about the quantity may be catastrophic. Mercury discharged into a river typically has devastating impacts – everything dies. In other cases, there may be critical thresholds that should not be breached. Fragile soils on chalk downlands support many wild flowers which could not cope with the impact of highnitrogen fertilizers. In many of these cases regulation is the instrument of choice. Regulators ban activities, and they set pollution limits. In the British case, these regulations are typically set on a case-by-case basis, dependent upon location and industrial plant characteristics. The European Union typically cuts out the context and sets uniform rules. A car can emit a maximum level of various chemicals, a power station can emit so much nitrogen oxides and sulphur dioxide, and so on. This approach relies on experts knowing best. The reasons why this sort of expert regulation is so pervasive are as much to do with the interests of the regulators and the ways companies can capture the processes as they are about pollution. One way of ameliorating some of this need to intervene in each and every case is to set the overall quantity of pollution, translate this into a number of permits and then let these trade in the market – as in the example of the fish quota. A permits market determines the price at which the given quantity is achieved. This is the idea behind the EU Emissions Trading Scheme (ETS), and also the earlier (and more successful) US sulphur trading scheme.7 It underpins trading in fish quotas. The regulator still sets the total quantities, but leaves it to the market to decide the pollution from

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each industrial plant. All that matters is that the total does not exceed the maximum, as limited by the number of permits issued. In the case of carbon, since the location of the emission does not matter – there is only one atmosphere – it is the total only that needs to be fixed. That total is the target, the approximation to the optimal level. But in the case of fertilizers, location matters very much, at which point the scope for permit-trading schemes is limited. Examples of more restricted schemes might include water abstraction in a river catchment, but even here water abstracted upstream is not the same as water abstracted lower down nearer the estuary mouth. Locational impacts therefore put quite a brake on permit trading, as they do on general taxes. Market mechanisms have their place, subject to these localization effects. There is no escaping the complexity of specific circumstances. Taxes and permits are part of the toolkit, and it remains to work out when a tax should be used and when a permits scheme might work. The choice is a pragmatic one. It depends on what there is most worry about getting wrong. Given the uncertainty that pervades pollution impacts, when the worry is that a bit more pollution than anticipated might have very big negative effects (the mercury case above), then it is the quantity that needs to be fixed, and the price can be adjusted accordingly. But in other cases (such as carbon) getting the quantity a bit wrong at the margin will have only a negligible impact, whereas a big cost overrun and a spike in permit prices would have a significant harmful impact on customers and companies. Cost certainty is in these cases more important than quantity certainty.8 Carbon taxes should be better than the EU ETS is the conclusion that follows. Yet the opposite is the case. The reason has all to do with the money, the second reason why there are so few pollution taxes.

Income Effects: What Happens to the Money? If the economics is all about getting the substitution right – setting the incentives to internalize the externality and thereby approximating the optimal level of pollution – the politics and lobbying are all about the income

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and where the money goes. Many sorts of pollution are what might be called ‘stubborn’. It is hard to get people and companies to change their behaviour. Most pollution is also indirect – from energy systems, industrial equipment and farm practices. In the short run, increasing the price through a tax, or forcing polluters to buy permits, has little initial effect on their behaviour. Their demand, at least in the short term, is unresponsive – or inelastic. It takes time to work. In the short run, increasing the price in these inelastic circumstances typically has a big income effect but a small substitution effect. Such taxes and permits have the capacity to raise a lot of money – a bit like taxes on alcohol and tobacco. Over time the story is different – there are low-carbon fuels, more benign ways of farming, and people can give up drinking and smoking. Over time farms can even go organic, and coal-fired power stations can be swapped for gas and, eventually, low-carbon technologies. With lots of money at stake, it is not surprising that there is a tussle between governments and their finance ministries, on the one hand, and those who have to pay on the other. It is a tussle fought with all the guile of lobbyists fighting over economic rents. Take the choice between taxes and permits. The money from taxes goes straight to the government. Not good news for polluters. In the case of permits, it is a bit more complicated. It depends on who has the permits. If the government forces the polluters to buy permits – to have to pay for the right to pollute up to the level stipulated in the permit – it is also bad news on the income front for the polluter. The value of the permit will be roughly equal to the capitalized value of the tax that would otherwise have been put in place. The polluters, however, have to pay up front. If, on the other hand, the government gives out permits for free on the basis of past emissions – a process called ‘grandfathering’ – then the money stays with the polluter. It is little wonder that, given the choice, industry would prefer grandfathered permits to taxes (and of course nothing at all would be even better). This is exactly what happened with the EU ETS. The European Commission originally wanted a carbon tax. Industry lobbied hard for grandfathered permits instead.9 They got what they wanted, resulting in windfall gains,

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and little immediate income effects. Small wonder that, now the scheme is established, the industry continues to lobby hard against taxes, even against the carbon floor price mentioned earlier.

To Hypothecate or Not Assuming that there is a tax or auctioned permits to reflect the costs of the pollution, and given that short-run price elasticities tend to be low and a lot of money will therefore be raised, it is frequently argued that the proceeds should be spent addressing pollution rather than going into the government’s general revenue. This is a process of hypothecation, earmarking income for certain projects and expenditures. It will turn out to be of particular importance when it comes to funding natural capital improvements. The conventional economic argument is that taxing and spending should be kept separate. Taxing is about raising money. Spending is about choosing projects with the highest net present value. According to this argument, the money should go into the general government-spending box. Hypothecation would overrule this more efficient outcome by constraining the choice of options. In the case of natural capital, there are particular arguments for hypothecation. The aim is to maintain the value of natural capital intact in aggregate, and hence to introduce just such a constraint on spending. It is therefore argued that the environmental taxes should be spent on achieving this goal, since it is the pollution the taxes address that is damaging to these natural assets. It provides a further source of revenue. In the rivers example, the nitrates pollute the river, reducing its value. The tax will not make the pollution zero, merely more optimal. Some damage to the renewable natural capital remains. The revenues from environmental taxes and the sale of permits can help to rectify this. The issue of hypothecation goes against the general argument of moving from labour taxes to pollution taxes in the tax system and the double dividend case above, since the reduction in labour taxes reduces revenue for spending on things such as hospitals and schools. If the pollution taxes go

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towards improving the state of natural capital, the revenue from labour taxes would still be needed. In practice, the two polar cases – full hypothecation or no hypothecation – depend on the overall design of the tax system and the ambition of tax reform policy. While pollution taxes remain such a small proportion of total taxation, and while the politics of the income effects dominate the substitution effects, hypothecation may have a significant part to play. In the event of a large-scale shift from taxing labour to taxing pollution, the total revenues from the pollution taxes would have to cover non-environmental spending as well. In this case, in ordering general public expenditure, the aggregate rule would provide a constraint to be met, and hence there would be a prioritization of spending on maintaining and enhancing natural capital. The current tax system is, however, so far away from the more radically efficient overall design that hypothecation will have a role to play for the foreseeable future, and hence pollution taxes could be channelled into a natural capital wealth fund alongside the economic rents from depleting non-renewable natural capital. There remains a choice as to which projects in the natural capital area the money should be spent on – and here (as with compensation) there is no convincing reason to target the immediately affected assets. The river in question might be well above the relevant thresholds, and hence there may be more natural capital benefits by tackling other assets nearer to the thresholds or further away from the optimal levels. This is where net present values and cost–benefit analysis come into play, and the broader financing of a restoration programme as described in part 4.10

The Role of Subsidies In principle, an environmental price can be positive or negative. Carbon emissions might be taxed because they damage natural assets. But there are also economic activities which have natural capital benefits that are not captured in market prices. These positive externalities will be underprovided by the market, and hence will need additional incentives – subsidies – to encourage their provision.

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Perhaps unsurprisingly, subsidies are more popular than taxes. There are, for example, virtually no environmental taxes paid by farmers, but they receive lots of subsidies. Indeed, the package of subsidies in Britain is so great as to account for an amount not far short of the total economic output of farmers. The net value of agriculture is surprisingly small – about 0.7 per cent of the economy’s total. Most of these subsidies have nothing directly to do with the environment, but rather are there to prop up farmers’ income and to subsidize production – much of which has ancillary and detrimental consequences for the environment. This is particularly the case on marginal uplands and areas with shallow soils and high biodiversity. Across Europe, legislation after the Second World War was drafted in the context of food shortages and, as a result, was targeted at national self-sufficiency; the British farming lobby has been highly effective in trotting out the self-sufficiency argument ever since.11 In Europe, the Common Agricultural Policy (CAP) has taken the bulk of the EU’s total budget for most of its history and has provided price and income support to farmers. However, this is nothing in comparison with the might of the farming lobbies in the US. Emerging from federal support for an industry struggling with climatic challenges and financial collapse in the Depression era, farming lobbies have for decades now wielded enormous power in Washington, with the Department of Agriculture spending billions of dollars each year in subsidies and insuring farmers against the loss of crops or income. It is estimated that, in the 2012 election cycle, farm and insurance lobbies spent at least $52 million influencing policy-makers.12 Joseph Heller’s classic 1961 novel, Catch-22, lampoons the absurdity of such subsidies in his description of Major Major’s father, a farmer ‘who held that federal aid to anyone but farmers was creeping socialism’: His specialty was alfalfa, and he made a good thing out of not growing any. The government paid him well for every bushel of alfalfa he did not grow. The more alfalfa he did not grow, the more money the government

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gave him, and he spent every penny he didn’t earn on new land to increase the amount of alfalfa he did not produce.13

What is most striking about this passage is how pertinent it still seems, more than 50 years on. These sorts of perverse subsidies have negative net impacts. A recent and particularly pernicious example is provided by biofuels and biomass. The idea is to encourage through subsidy low-carbon forms of electricity generation. Yet some of the subsidies have in practice been captured by farmers and have turned out to be not particularly low-carbon, while having major negative effects on the environment. Swathes of natural capital locked up in rainforests has been felled to provide palm oil in Indonesia; sugar cane plantations in Brazil for the production of ethanol have displaced cattle ranches, which have in turn been pushed into the rainforest. In the US, agricultural land has been taken up with corn for ethanol, and trees have been felled to provide wood for biomass power stations.14 Corn ethanol production is another ‘special interest’, with heavyweight lobbyists fighting its corner, and it has received what some might think of as more than its fair share of subsidies in recent decades, with millions of dollars continuing to subsidize its growth, including the installation of ‘ethanol blenders’ at fuel stations across the country. Aside from the questionable environmental benefits of ethanol, the industry has created an ‘artificial market’ for corn, removing crucial supplies from the food market, with the inevitable shortages and sharp increase in prices.15 In these cases, the appropriate policy is simple: stop the perverse subsidies, saving both money and the environment in the process. The elimination of perverse subsidies is the first port of call in addressing natural capital incentives, and in the process it reduces public expenditure. This is a clear example where the protection and enhancement of natural capital has a direct and immediate economic benefit to the economy as a whole. The costs of the subsidies are avoided, and natural capital is improved. There is an obvious urgency to phase these biofuel and biomass subsidies out where they directly impact on the global biodiversity hotspots.

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Not all subsidies are perverse. There are a number of subsidy schemes under the CAP which point in a positive direction, even if these are unlikely to compensate for the damage done by the other production and income-driven supports. These fall under the so-called Pillar 2, and comprise payments for higher-level stewardship and associated agreements to manage land in an environmentally friendly way. There have also been policies such as leaving field margins fallow and setting aside land from production (although this was largely for production management reasons rather than necessarily driven by environmental concerns).16 Subsidies provide an interesting example of the discussion above about the polluter pays principle. Here it is assumed that it is the farmer who has a right to damage natural capital through the use of pesticides, herbicides and fertilizers, to plough up water meadows and otherwise concentrate on maximizing the crop yield at the expense of the wider natural capital. CAPrelated subsidies are effectively paying the polluter not to pollute. In theory, on Coasian grounds this is irrelevant to the efficiency of the outcome. Farmers need to be paid not to ruin the countryside and to stop damaging biodiversity. They take the wider environment into account only if paid to do so. The subsidies are paid by taxpayers, who would otherwise pay as customers for higher food prices if the farmer did not have the right to pollute. In practice, the constraint on government expenditure means that the amelioration will be seriously suboptimal, as indeed it clearly is.

The Failure of Regulation The overwhelming bulk of policy relating to the environment has nothing to do with the above more market-based mechanisms. It is all about regulation. There are regulations covering almost all discharges and emissions from factories, farms, buildings and cars. These regulations are supported, revised and enforced by armies of regulators. If regulation were the answer then there would be little more to do. It is all-pervasive. Yet it has not solved the problems. Indeed it turns out that it can exacerbate them. Regulations suit governments and often the polluters

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too. By setting limits and standards, the regulators are involved in a process of engagement with industry. The polluters have a real interest in not just the level of regulation but its form and the way it impacts on competition. Provided all companies in an industry face the same standards, the higher costs of compliance help incumbents make it very hard for new competitors to enter the market, and hence they can protect their market shares. They try to influence the forms of the rules to suit their own purposes, and many large polluters have whole departments to deal with regulatory compliance. Then there are the businesses that make money out of the regulations, monitoring, measuring and assessing performance and selling equipment, the specification of which may depend on the precise form of the regulations. The process is very much a symbiotic one between regulators and regulated. In the farming case, the National Farmers’ Union (NFU) has turned it into an art form in Britain – though it is by no means unique. Almost all countries have entrenched farming lobbies. Farmers have multiple targets for their lobbying – politicians, the capture of the key offices in regulatory bodies, the media and government departments. For most of the postwar period, there has been a specific ministry to look after the interests of this comparatively small bit of the economy, and producer interests have largely captured it. NFU leaders often get elevated to the House of Lords; landowners have traditionally been a significant part of the hereditary peerage; and even the Environment Agency has on occasion been chaired by landowners. Perhaps only the British Medical Association (representing doctors) has been so successful at capture. No wonder the NFU prefers regulation and public subsidies to being confronted with the costs of its pollution through green taxes. It is deeply in farmers’ interests for it to do so. This experience, replicated across Europe and the US, is depressingly familiar. It is hardly surprising with such large economic rents at stake. The process of regulatory capture is one built on the differences in objectives and in information: the principal–agent problem. The objectives of regulators and the regulated differ, and the information is asymmetric – in favour of the regulated. It is the polluters who have most of the information. They know about the costs and the technologies. Their incentives are to

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reveal information in ways that get the regulators to choose rules that suit them. When they do not, they fight back, hiring consultants to highlight the costs of the regulation in terms of jobs, competition and prices. The regulators start with a blank piece of paper. How can they know what is the optimal level of pollution and therefore the right regulation to impose? They typically need to ask the polluter, and strategic information revelation is the obvious response. Take honeybees and the use of pesticides by farmers. How can a regulator work out whether, and to what extent, the use of pesticides should be controlled? The government and regulators will have their own scientists, but they do not act in a vacuum. Scientists in the agrichemical industries and the farming organizations oppose them. Worse still, many scientists in these sensitive areas end up working for the industry. Career doors revolve.17 Another example is genetically modified crops. Here the lobbying battle is intense between environmental NGOs which see the issue in black-andwhite and often have an ideological opposition to so-called ‘Frankenstein foods’, and the GM crop companies which spend large sums on advertising the merits of genetic modification, often using similarly emotive language about the needs of the poor in developing countries. The notion that in all this noise objective science is likely to prevail in the setting of regulatory rules is fantasy. Separating out regulation driven by interests and lobbying, and those circumstances where it is the superior tool over market-based instruments is far from easy.18 As a general rule, the more particular a problem, the more likely regulation is to be the preferred solution. Markets typically need players – many buyers and many sellers – to make them work well. Particular, location-specific pollution lends itself to interventions tailored to those particular circumstances, and here regulation tends to be the better option. Unfortunately, the more particular a problem, the greater the scope for capture. With this latter point in mind, the starting point should be to consider a market-based instrument first, and resort to regulation only where the obstacles are significant. In practice, as noted, regulation is typically the first resort, not the last.

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A Package of Market-Based Mechanisms It would be hard to argue that the current web of environmental regulation produces a good outcome for natural capital. It is true that regulations have helped to clean up air pollution in major cities and that river quality has improved from the excesses of sewage and industrial pollution. Beaches have been cleaned up too from the low points in the middle of the last century. Without regulation things could have been a lot worse. But the status quo is not good enough. Regulation-as-usual looks hopeless against the coming tide of business-as-usual consumption and environmental degradation. The question is whether it could be better, whether the costs of pollution regulation yield sufficient benefits. Any environmental policy will need some major regulatory elements, but they need not necessarily be the first or only instrument of choice. Market-based mechanisms have inherent advantages. They make lobbying and regulatory capture much harder to effect. They usually make polluters pay and they raise revenue which can be hypothecated to clean up some of the environmental damage and hence enhance natural capital. It is hardly surprising that the opposition to the development of credible environmental taxes has been forceful. Indeed, even where they have been introduced, such taxes have been subject to continuous attack. Large energyintensive users and the farming lobbies have been formidable operators. Not only have they killed off most tax initiatives, but in the case of the farmers they have captured the subsidies. It is all very predictable, but bowing to vested interests is not going to protect and enhance natural capital. It would be foolish to ignore the scale of this powerful opposition, or to imagine that it will go away as a result of enlightened self-interest. For these reasons – and because information is very imperfect, and therefore setting taxes will always be a very imperfect science – economic instruments need to be tailored to address the likely kickbacks. It is almost always best to start low, to get the principle of the tax established first, rather than to charge in with a high number. Taxes can be raised (or lowered) over time. This also has the merit of enabling learning-by-taxing, to see what the elasticities are.

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The impact of environmental taxes is to encourage producers and consumers to substitute away from their polluting activities. For natural capital, it is the substitution effect that matters. If income effects stand in the way, it is important to recognize them head-on and up front. What happens to the money is the political issue and it is vitally important to those paying the tax. Against the opposition to a tax, there are those who could benefit from the spending of the revenues. If labour taxes are lowered by switching to pollution taxes, labour-intensive industries (and especially services) are better off. For every loser, it is important to create a gainer, and therefore a constituency that has an interest in advocating the tax. Making the case for economic instruments is as much about creating an interest – and therefore the political constituency – in these measures, as getting the incentives precisely right. Getting the prices right, so that the ultimate polluters (typically us as consumers) face the consequences of what is done by producers on our behalf would change our behaviour and therefore significantly reduce our environmental footprint. It would not eliminate pollution, since the optimal level of pollution is rarely zero. It would, however, mean that the choices we make when we fill up our supermarket trolley or buy online would reflect the costs of the environmental impacts of the plastic packaging, the pesticides and herbicides that make fruit and vegetables look so perfect, the waste we create, the carbon consequences, and all the other damage caused to natural capital.

CHAPTER 9

Protecting the Commons

The third building block of natural capital policy – after compensation, and economic instruments – is the provision of natural capital public goods. Many natural assets – perhaps even most – have public good characteristics and, as a result, will not be provided by the market left to its own devices. They come in a variety of shapes and sizes, from great globally significant wildlife refuges and national parks to school playing fields and green urban spaces, and from the atmosphere through to environmental networks, ecosystems and infrastructures. Without them our natural capital would be greatly diminished, and unless they are actively protected they will probably gradually wither away. Left to their own private devices, markets will neither create nor sustain public goods. To meet this formidable failure in the economy, someone has to step up to the plate and provide and protect them. In the case of specific public assets and habitats, voluntary bodies, clubs and trusts have a big part to play, as does direct state provision. In the case of natural capital infrastructures, natural capital utilities have a key role. How well these policies are designed depends on understanding the nature of the underlying problem to which they are supposed to be solutions, as well as the particular contexts. What exactly is the public goods problem? How do the various organizational options address these? When 179

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are clubs and trusts best? When should the state step in? How can the utility model provide a way of dealing with the broader natural capital infrastructures? How do these various options work in specific circumstances?

The Problem The key features of public as opposed to private goods, as noted, are nonexcludability and non-rivalry. Think of the atmosphere. You cannot stop me using it by using it yourself, and your consumption makes no difference to my ability to benefit from it. You cannot exclude me, and you are not a rival. The maximum benefit is gained if we all use as much of it as we like, provided that critical thresholds are not breached. The obvious problem is that no one has any incentive to provide these public goods. In the case of the atmosphere this does not matter, since the atmosphere is freely provided by nature – at least until it is polluted. But many public goods are not provided spontaneously. Consider the example of a protected area. If it is not owned, nobody will respect the protected status. Someone has to enforce the protected status and this will incur not only costs of monitoring and enforcement, but also capital maintenance. Very few areas that qualify for protection are purely natural. Wild nature in its pure form rarely exists – precisely because it has not been protected. The tragedy of the commons is what happens when there is no direct intervention. Leaving nature alone is not a passive action: it requires an active management decision to exclude a variety of economic activities that would otherwise over-exploit the resource. As Hardin put it: ‘Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.’1 It is the non-excludability which gives everyone the freedom to exploit the commons. Protecting particular areas and habitats therefore requires non-excludability to be addressed, and the creation of property rights that allow one party (often the state) to determine who can and cannot access the public good, and what activities are prohibited or limited within the protected area. These active interventions

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require money and this in turn usually means finding a way of making people pay, as consumers or taxpayers. This problem arises in almost all the renewable natural asset cases: if nature provides these assets for free up to the thresholds, then the efficient solution is for everyone to take what they want so the aggregate utility is maximized, towards the thresholds. The tragedy of the commons means that there are good reasons to think that, left alone, the thresholds will be breached. This is what continues to go on in the oceans, rainforests and rivers on a grand scale, and locally when it comes to village greens, playing fields and local parks. Providing natural capital public goods therefore requires some form of intervention. Pure private sector market solutions will not do the job. There are two main routes: to create clubs and voluntary bodies; and for the state to provide. The infrastructure utilities model is one way in which either could be delivered. We begin with clubs.

Clubs and Voluntary Organizations To manage the natural capital resources so that they are maintained above the thresholds, and to pay for the costs of maintenance, a club might be created to provide the public good, and then be allowed to charge a membership fee. It allows access only to those who pay the membership fee, which can be fixed regardless of use. The number of members is restricted to ensure the thresholds are not breached. Once a member, there is no deterrent to using the resources, and since they are still in the technical sense non-rival, this means that all the benefits are reaped by those in the club. A couple of examples may help to illustrate this. First, consider the BBC. It is non-rival. If I watch a nature programme, it makes no difference to your enjoyment of watching it. Indeed if we can chat about it afterwards, it might actually increase your utility to know that we share a common viewing experience. So the maximum utility comes from it being free. The trouble is that without paying customers there would be no BBC. Someone has to stump up the money. The solution is the licence fee – a fixed fee that

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carries the right to watch television. It is akin to a membership fee. Once paid, you can watch as much or as little as you like. Some people might be deterred at the margin because they cannot or will not pay the licence fee. But that is the limit of the efficiency loss. The BBC is a club solution to the pure public good problem. A second example is my local fishing club. The Cotswold Flyfishers leases and rents parts of the River Windrush and other chalk streams to the west of Oxford. It looks after these waters, checks for pollution, and maintains and enhances the stock of trout. Up to a point, if a member goes fishing, it makes little difference to other members. But too many fishers, and the marginal costs will shoot up; the fish stock will be depleted below a threshold and the fishery will collapse. So the club limits the number of members to hold the resources above the threshold. It uses the membership fees to pay for maintaining the rivers and the fish stocks, and the rents to the river owners. These fees turn out to be quite high – too high for some to bear. To make sure the benefits are captured by those who might be excluded, the club has concessionary rates for the young and the old, and also rations the use of some stretches of river. These are just two examples of some of the many constructive ways in which public goods are provided. Clubs are a widespread and pervasive feature of the economy. In all cases, the excludability and rivalry problems need to be overcome and public policy is about ensuring that these public goods are provided at an appropriate level and financed. Club models are provided by a wide range of voluntary bodies, charities and trusts. The National Trust, the RSPB, Plantlife and The Wildlife Trusts are some of the ways the voluntary sector goes about solving these problems in Britain. There are very many such organizations in most countries, which range from the large to the very local scale. The role of voluntary clubs and trusts has a long and distinguished history, both in providing and protecting natural capital public goods, and in making the wider case for nature. But they are limited by the willingness and ability of members to pay for them, and it is no accident that their natural capital assets reflect the preferences of their members and the

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limited information that they have. It is easier to form a club to protect birds than it is to protect beetles, and the bulk of the assets in club and trust hands tends to reflect these priorities. The results, while very positive, are still likely to be suboptimal.

The State and Protected Areas When it comes to wider public interests, given that the private sector has little incentive to provide public goods, and given that clubs are limited by their members’ interests, the state has been the main sponsor of protected areas and reserves, nationally and internationally. These include the global commons – the global biodiversity hotspots that comprise the great national parks and reserves of the world, which require international cooperation and coordination and involve the difficult issue of making global financial transfers. There are world heritage sites, UNESCO sites, Natura sites in Europe, and many international agreements for the protection of specific natural assets.2 At the national level, most states provide and support national parks, and a host of smaller public goods. The government’s role is pervasive, as the British example illustrates. The 1949 National Parks and Access to the Countryside Act established the National Parks Commission, which gradually expanded the number of designated national parks.3 The Act set out the framework for the establishment of national parks and areas of outstanding natural beauty in England and Wales, and addressed public rights of way and access to open land. The state also designates SSSIs and has nature reserves, many controlled by its agent, Natural England. Local authorities own land too, including their own nature reserves. The Forestry Commission owns much of our woodlands, and after a twentieth-century history of mass conifer afforestation in the uplands, and all the environmental damage that went with this, now has wider natural capital objectives. This tangled web of interventions takes in much of the whole country. Parks, reserves and protected areas cover a surprisingly large amount of the

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total land area of the country. Add in conservation areas, protected areas around cities, and other designations, and planning law more generally, and the coverage is almost complete. Put another way, there are few parts of the country, outside the large-scale agricultural areas, where restrictions do not significantly control land use. The British state also controls many underground natural assets via the Crown Estate, along with the seabed. The state owns the oil and gas reserves, and other minerals. These primarily non-renewable assets allow the state to extract the economic rents which can, if a fund is created, be used for financing enhancements to renewable natural capital. In this respect the US is very different: the minerals underground belong to the above-ground owner, creating a special institutional twist to the treatment of the economic rents.4

Natural Capital Infrastructure and the Utilities Model In addition to the protected areas as specific natural capital assets, there are natural capital public goods provided through infrastructure networks – of which the rivers and their catchment areas are prime examples. These provide multiple ecoservices from drinking water to flood defence and recreation. Infrastructure has been defined in a number of ways. One approach is in terms of the essential services it provides, such as transport, water supplies, sewerage, electricity and gas and communications. The essential services concept links to that of social primary assets, identified as meriting special status in an intergenerational context. Infrastructure services are provided through networks, and these tend to be integrated systems. Finally there are definitions based on cost and demand characteristics. Infrastructure assets are capital-intensive: the costs are fixed and sunk, while the marginal costs tend towards zero. It is this latter economic approach that identifies the infrastructure services as public goods. Marginal cost pricing could not remunerate the average costs (since they are below average costs and often close to zero), and hence will not be sufficient to service and pay back the capital investments.

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For these economic (public goods) reasons, infrastructure tends to be provided by monopolies. The absence of competition enables the infrastructure provider – the utilities – to extract money from a captured customer base, and hence charge average and not marginal costs. Monopolies, however, create their own problems, and where essential services are involved, a monopoly that is not effectively regulated could be exploited to extract even more money, and hence make excessive profits. Early experience with unregulated monopolies was often unhappy, and first regulation and then nationalization were adopted in the twentieth century. The state decided how much infrastructure to provide, provided it, and then forced customers to pay for it. As public expenditure rose as a proportion of national income in Britain – and indeed in almost all developed countries – from the 1960s onwards, and as tax reached its practical limits in the 1970s, these infrastructures found it increasingly difficult to gain enough public monies for investment, while their prices were manipulated for political purposes. Privatization gradually replaced the nationalized model to relieve the public expenditure constraints, and a new model for regulating the private providers of what are public goods emerged: utility regulation. It was a model already very familiar in the US, which never experienced the wave of nationalizations that took place in Britain and Europe in the twentieth century. The challenge for utility regulation is how to design regulation in such a way as to ensure that there are incentives to create and sustain the infrastructures, while not exploiting their monopoly power. With a subset of these natural capital infrastructures the question is whether, in addition to the voluntary club option, and the state option of direct provision, there is a third option to use this utility regulation model. In a standard utility case – let’s say water – a private company is given a licence that requires it to carry out certain activities and provide services to its customers. In exchange for taking on these functions, the utility is entitled to earn a reasonable rate of return. It requires capital in the form of assets such as sewerage works and water treatment plants, and a labour force to maintain the assets and deliver the operational services.

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To mitigate the problem of the possibility that an opportunistic regulator might try to drive prices to marginal costs, and hence expropriate the investments the company makes once built, the assets go into a regulated asset base. This base is one part of what the regulator must ensure is financed. If, for example, the water company builds a new water treatment works, it agrees a reasonable cost of construction with the regulator. The company makes the investment, and finances it through a mix of borrowing and monies from current customers’ bills. That bit which is not paid for upfront by customers (the pay-as-you-go bit) is a debt, which needs to be honoured in due course (pay-when-delivered), and attracts interest payments in the meantime. It goes into the regulated asset base, for future customers to pay for. A further twist in the water regulation model (but not many of the other privatized utilities) is that the assets are treated as in perpetuity. They will always be needed – or rather the services they facilitate will always be needed. They are therefore not subject to depreciation but rather a capital maintenance charge. This is territory already covered in considering the accounting aspects of natural capital. Because the assets are protected in the regulated asset base, and because there is no depreciation, water companies do not face the problems of pure marginal cost pricing and there is no decline in their functionality. In other words, they are sustained. This is a model that has a number of features relevant to natural assets. It tackles two of the central challenges: maintaining the aggregate of the assets intact; and making sure in the process that they are not run down. It could be extended to other natural capital assets. Each case has its own particular characteristics, but there are common, generic, utility-like fundamentals. Consider the problems of flood defences in two very localized examples: the Somerset Levels to the south-west of Bristol; and Exeter and the River Exe. In both cases, the challenges are to the catchment as a whole. What happens at the top of the catchment area in the hills affects the speed of rainwater run-off, and that in turn is what contributes to flooding. Flooding is a regular occurrence in the case of the Somerset Levels. Somerset means ‘summer lands’, and the Levels have been traditionally

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grazed in the summer and then left to the floods and the birds in the winter. Much of the Levels are at or even below sea level so, like parts of the Netherlands, they are either left to nature or deliberate intervention is required. Nature can be left to cope and adapt, or humans can step in. One approach is to build hard concrete defences, put pumping stations in place, and dredge the rivers. The water can be collected in the dykes and from the dredged river and pumped out, with sea walls and other hard barriers to stop inflows. That is how the Fens in East Anglia were drained, and quite a lot of this sort of infrastructure is in place in and around the Levels. Hard capital infrastructure assets could be placed within a floods utility, paid for by compulsory charges imposed on those who benefit. This could be through the floods insurance framework for houses, farms and factories, or through property charges, as is the case for water and sewerage services, which include capital maintenance. The assets would therefore be financed and maintained in perpetuity. The above solution would work. With enough concrete, dredging, sea walls and pumps, the Somerset Levels – like the Fens, the polders and their surrounding dykes in the Netherlands, and New Orleans protected by its levees – could be kept relatively dry. Yet the costs might be very high. In the extremely wet winter of 2013–14 a relatively small number of houses flooded on the Somerset Levels. The extra costs of the dredging and related capital works have been estimated at several hundred million dollars. This amounts to more than a million dollars per flooded house, to which should be added the losses to farmers. There are some obvious alternative and cheaper ways forward. The houses are clearly not worth the capital and maintenance costs of the flood defences, so they could be demolished and their owners given a substantial premium on the house values. New houses could be built to be floodresistant, even on stilts. Finally, the upstream sources of the water could be addressed through investments in upstream natural capital. The land – the natural capital of the catchment – could be better managed. The farmers in the surrounding hills could avoid planting crops such as maize which can cause soil erosion, which then clogs up the rivers.

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All of these alternatives cost money, and the problem to date is that there is no obvious revenue source, other than direct government funding. There is no clear central coordination within the catchment of the Somerset Levels that enables the benefits of these alternative and cheaper options to be pursued. Yet this is largely a matter of policy failure. The farmers grow maize in part because of the design of the CAP and the incentives created to grow corn for biofuels. The houses get cross-subsidies for their flood insurance because of government intervention in the insurance markets. If, instead, a Somerset Levels Utility were created, and a flood property charge added to, say, the local Council Tax bills or to the water bills and paid into this new utility, the revenues could be set at a level to support natural assets within the utility’s regulated asset base, and capital maintenance could be provided. A more nuanced financing model might include revenues from insurance rebates in return for financing measures to protect houses and to pay for flood-resilience measures. CAP monies might be diverted into higherlevel environmental schemes to ensure that the uplands are more capable of absorbing rainfall. Although the details of the utility design will matter greatly, the general point here which these specific examples illustrate is that the regulated utility with its regulated-asset-based approach has the potential to protect natural capital and to help ensure that it is financed, either through incorporating all assets or by creating a special regulated natural capital asset base. A second example is already in place within this utility model framework. South West Water, a regulated water utility, is addressing the quality of water supplies and flood resilience by investing in the upper reaches of the River Exe catchment area in Exmoor. It has been blocking up drains so that the peat bog grows and hence is able to absorb and hold more water. Early studies show that this has not only achieved its primary purpose – holding more water – but that it has also enhanced biodiversity considerably, providing more breeding habitats for the likes of waders such as snipe and dunlin, dragonflies and amphibious reptiles.5 It is a neat example of the economic benefits of taking natural assets seriously.

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Extending the utility model The utility model has wider applications relevant to natural capital. A national park is in many respects a utility. It has lots of natural assets, which need maintenance, and it provides a host of services related to natural capital. These are paid for on a pay-as-you-go basis. Capital investment, capital maintenance and regular services are all paid out of current revenues.6 River catchments lend themselves to a utility-style model and it is an obvious step to add in the flood defences. Woodlands and forests are capital-intensive, and they are also amenable to a utility-style approach, and indeed this is implicitly already partially in place. Almost all their costs are for investment in trees and the capital maintenance of them and their habitats. Woodlands and forests produce multiple services. The timber is a natural capital product, but woodlands and forests are much more. They yield major recreational and tourist benefits and improve health and wellbeing from their fresh air and the exercise that is required to enjoy them. They can be reservoirs of biodiversity. Many of these multiple benefits are poorly captured through a focus on timber production alone, and the history of the Forestry Commission has too often been one of creating vast tracts of densely packed conifers, excluding light from the forest floor and excluding people and animals too. Forests have been cultivated for timber and not much else. The results have in many areas been dire. Uplands have been carpeted with non-native spruces and larches. The soils have been acidified, and the rivers seriously damaged. As mentioned earlier, salmon populations have been adversely affected as aquatic invertebrate life has declined, and with it the biodiversity that depends on it. The opportunities to think about woods and forests as key assets for wider public benefit have been lost. The conifer forests have been established in the uplands, away from people and urban centres. With timber as the prime focus, the value of forests has been quite easy to calculate. Trees have an initial planting cost, and then little else needs to be done for several decades until the crop is harvested. The value is the price times the quantity of the timber at harvest, minus the planting and felling costs, all discounted by some appropriate cost of capital. For good

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measure, and because of the long lives of the investments, tax concessions are often granted for forest investments. As with the Somerset Levels, it is possible to do much better. The ancillary recreational and health benefits are very considerable, as Ian Bateman and his colleagues have calculated.7 They have come up with surprising and sometimes radical ways to get much greater benefits from our forests and woodlands. By emphasizing the recreation benefits, they point out that it matters greatly where woodland is located. If planted near conurbations the recreational value rockets because there are lots more people close by who can derive the benefits. Planted in remote locations with sparse populations, there will be fewer visitors, and hence the recreational value is low. The counterargument is that the point of the woodlands is to encourage wildlife and that in sparsely populated, remote locations they will be less disturbed and more likely to thrive. More open countryside rather than the concrete of cities will surround the woods. Surely it would be better to have the woodland in rural mid-Wales than on the outskirts of Cardiff? Yet this depends on how the different ecoservices yielded by natural capital are valued. Are more red squirrels in mid-Wales more important than the ability of teenagers to go mountain-biking near Cardiff city centre? How are these to be equated? The choice of the location of woodland turns on the relative human benefits of the two alternative locations. These examples of flood defences and woodlands are discrete ones. It is not hard to see how these natural assets could be corralled into a coherent whole, and a utility established to deliver them, within the context of a licence and with appropriate regulation. National parks too are discrete entities and are already utilities in part. Other natural capital assets form more heterogeneous groupings, and could either be disaggregated into local utilities or brought together under a single organizational form. A single utility could be geographically organized on a regional basis within the whole, and there could be a national natural capital infrastructure charge, or set of different charges added up under the single organizational form. There are many obvious difficulties with large organizational forms. In addition to the sheer managerial problems of running such an organization,

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the assets bundled together might be very different. In the conventional utility infrastructures there is one set of utilities for each sector, and in several cases, notably for water and electricity distribution, these are further disaggregated into regional companies. Carried across to our examples above, there could be a single flood defence utility, or a set of flood defence bodies, one for each catchment or region. There could be a single parks organization as an umbrella for each – a National Parks Utility – or each could operate on a stand-alone basis. Similar options apply to nature reserves – a National Nature Reserves Utility, a regional bundle, or each could be a separate entity. The marine reserves might be placed within a marine organization, and forestry lends itself to a utility model as a single entity. It is unlikely that there is any unique and ideal organizational architecture, and a more pragmatic approach would be to roll out one or two leading examples first and then gradually generalize across the natural capital assets. It would not matter much that not all assets were covered. What is more important is to get at least some natural assets under the protection of a regulated asset base, and secure their revenue streams. The usual objection, and one that has been raised in respect of flood defences, is that revenue streams cannot in practice be clearly identified. This is a credible argument, but only inasmuch as it extends to taking revenue streams beyond the levels currently in play. In the case of flood defences, money is already spent in the form of government funding plus further contributions from other parties. The minimum that should be achieved is to deliver better and more sustainable outcomes, given the monies currently being spent. Going beyond this level to secure more longterm revenue from the beneficiaries involves bringing insurance and agricultural support payments into the frame.

Revenue for Natural Capital Utilities Relying on diverting subsidies or on direct government funding is usually a hazardous strategy, and the British government is unlikely to either be

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a credible funder or to commit to more than the short term. The shortterm funding provided is a poor match for the creation and sustaining of long-term capital assets, and it is hard to imagine the government being able to provide the reassurance necessary to ensure that private investors receive sufficient finance for their functions within the utility model. Direct customer payments are also unlikely to cover the full natural capital utility costs. Introducing new customer user charges for flood defences, or entry charges to national parks, will come up against political resistance, and in any event the technology to levy entry fees may not yet be available. While congestion charges can be levied in London and the costs of the system are recovered across a large customer base, this is less feasible on the roads crossing the boundaries of the Exmoor National Park. Open landscapes do not lend themselves to membership cards for access in the way that National Trust gardens or historic houses do. On the contrary, they encourage open access – the commons approach. This is not an argument against trying to deploy user charges and membership fees where they are practical, and in any event more than this will be needed in the majority of cases. In addition to all of the above, two sources of finance to consider are the economic rents from the depletion of non-renewable natural capital, and the income from pollution taxes and permit auctions and compensation payments. These could be used in part to subsidize the delivery of the positive environmental externalities that the natural capital utilities would provide, and the finance for enhancements where the benefits justify them. With these additional revenues, the total utility model structure looks as follows. The natural capital asset is identified – say woodlands. A utility is created and granted a licence that specifies the functions it must deliver. The capital expenditure, capital maintenance and operating costs are agreed for a period going forward, say for five years, and then periodically reviewed. The investment costs depend on the economics of expanding the woodland in terms of volume and quality, and this in turn is justified by estimating the additional benefits that the investments would yield.

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To these costs is added a return on the existing assets, in this case the costs of investment to create the woodlands. This adds up to a total revenue requirement. The total revenue is then met by taking direct revenues from ecoservices – say the sale of timber and waste products such as bark chippings, and fuels for biomass plants. Next comes a credit for carbonsequestration services, which can be sold on the carbon market if there is a permits arrangement, or there could be a credit from the carbon tax if this route to pricing carbon is taken. These revenues are unlikely to cover the total costs of the woodlands if they have been shaped to capture the recreational, biodiversity, health and other benefits. The deficit can therefore be made up from some combination of subsidies and pollution tax revenues, plus revenues from the exploitation of non-renewables mentioned above. It might be argued that this hypothecation of monies from pollution charges and non-renewables should be used for the benefit of future rather than current people – that it is an intergenerational transfer that is required. This might entail both funding existing natural assets in this utility model and transfers to the next generation. There is merit in this claim, but there are two responses. First, by investing in renewables now, the next generation is likely to get an additional benefit. The revenues from non-renewables depletion should be directed to investment in creating additional natural capital assets, but not the running costs and capital maintenance. Second, we are where we are, and given that business-as-usual is so far away from a sustainable model, it is a practical choice between investing in and maintaining natural capital or not. It is better, it could be argued, to get the result that is a bit closer to the right answer than to continue as at present, even if it involves an additional hypothecation of revenues that could otherwise have been transferred to the next generation.

Borrowing and Debt Finance One of the reasons the British utilities were privatized was so that they could borrow to invest. The idea was to switch from the public sector

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approach whereby investment was paid for out of current government income – pay-as-you-go – to a model in which customers paid when the services were delivered – pay-when-delivered. The utility model facilitated this by creating a private sector balance sheet. Leaving aside for a moment the question of whether a utility has to be private to borrow (which it does not), could this idea be applied to natural capital assets? Could natural capital utilities borrow to invest? And if they could, would this be a good idea? A key criterion for borrowing is that the borrower can service the debt. As long as the asset is maintained intact – its value is preserved by capital maintenance – it is not necessary to be able to pay it back, since the asset remains as the collateral. The servicing of the debt means that the interest is paid, and if the interest reflects the risk, someone will always be willing to hold the debt. Indeed, much of government debt is like that. It is never likely to be paid back in aggregate, and when each tranche of debt matures, the government just borrows some more. In the case of natural capital assets, servicing the debt means having a revenue stream that is both sufficient and credible enough to convince a lender to finance the activities. The money can be lent against the assets in total, or finance a specific bit of investment. What matters then is whether the revenue problem has been solved. The trickier question is about whether (and if so, when) borrowing is a good idea. This has a specific sustainability element. If an investment is made now to create a new natural asset, and if this is then to be maintained in perpetuity, the next generation is going to inherit it. The current generation should pay only for those bits of the services that the new asset yields now. In other words, the next generation is in effect signing a contract with us which states that if we invest in new assets for its benefit, it will honour the debt needed to finance it. There is a new asset and a new liability, and on the balance sheet they should more than cancel each other out, provided that the value of the services from the new asset is greater than the interest payments, net of the capital maintenance costs.

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Private versus Public So far the question of ownership has been studiously avoided. The last time the British government mooted privatizing natural assets was back in 2010, with the proposal to sell off some publicly owned woods and forests. The result was an outcry from a wide spectrum of society – the clergy, mainstream politicians and the green groups and NGOs. So furious was the onslaught that the government set up an independent panel to review forestry under the chairmanship of the Bishop of Liverpool and, not surprisingly, the report stressed the spiritual value of forests as well as the political commitment to the notion of public ownership.8 What was curious was that there was little or no scrutiny of the actual performance of the woodlands and forests under public ownership, and in particular the environmental damage caused by the carpeting of the uplands with conifers, as discussed above. Public ownership had not produced a good answer, and the rationale for wanting to preserve it must have been the belief that private ownership would somehow have been worse. Interestingly too, no attempt was made to compare the performance of public and private woodlands, given that the private sector had been in this business for a very long time. Probably it was the profit motive that most upset the Bishop and his supporters. It must have seemed wrong to try to make a profit out of woods because they are somehow different and distinct from other goods and services. To be fair, many of the supporters of public ownership also ask the question about whether other utilities such as water, energy and transport should be for-profit businesses. Whatever the objections, it turns out that the utility model, and the capacity to borrow, does not need private ownership. There can be trusts or other forms of not-for-profit or not-for-dividend organizations – as commercial as John Lewis or as charitable as the National Trust. There are lots of different business and organizational forms outside the limited company. The BBC, the Oxford colleges, Network Rail, the Co-operative, and Welsh Water are all models that lie between full private ownership,

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on the one hand, and full public ownership, on the other. Their performance has varied from the impressive – such as the John Lewis Partnership – to the disastrous – such as the Co-operative – in recent years, and most have, from time to time, had their share of management problems.9 The trust model has a lot going for it. It has a charitable and public interest objective, and is outside the control of government. There is evidence to suggest that people like working for these types of organizations, and many attract volunteers personally committed to their objectives. People leave legacies and make donations to trusts that they would never do to a profit-seeking private company or the national or local government. Being a trust might solve the public perception problem, but it does not necessarily solve the problems of control or management. While there may have been ideological reasons for privatization of the utilities back in the 1980s and 1990s, they also had the merit of determining a clear line of control and a clear set of management incentives to make the businesses efficient. Trustees control trusts, and in principle they appoint the management. Who chooses the trustees? The answer is typically the members. Where these are people who pay a membership fee – the club model – this makes sense. The National Trust and the RSPB follow this path. The risk is that the trustees become self-selecting and take advantage of the revenues from the various sources to pursue their own agendas – or simply get lazy. They are often quasi-monopolies and, as the economist John Hicks once remarked, ‘The best of all monopoly profits is a quiet life.’10 Lest this seems a remote possibility in the case of natural assets, it is worth recalling why there are Charity Commissioners and the numerous scandals concerning the performance of charities. In a competitive market, poor performance results in a loss of market share. This is not possible in many of the core utilities and it is unlikely to be the case in a natural asset utility such as a flood defence or a national park trust. In the privatized utilities, a regulator is necessary to assess performance as well as set prices. Whether the trustees can be relied upon to deliver on their objectives efficiently is an open question, but it should

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not be taken for granted. Governance of natural capital utilities requires considerable scrutiny. To those who would resist the club and utility models outlined here, there is an obvious riposte. The patchwork quilt of provision of public goods has many individual successes to its credit, but despite being fairly comprehensive, its overall impact has been far from impressive. It is true that which model is best depends on the specific and often local characteristics of the public good, the broader institutional and legal setting, and the available revenue streams. What works in Britain may not be what works best in the US. Yet the sum of these various public good parts does not produce an optimal whole. The aggregate natural capital that results is piecemeal, an accident of history and often focused on the protection of marginal lands that are of little use for other purposes. Finance is piecemeal too, and often inadequate when the benefits are set against the costs. Few of the delivery agencies described above have explicit provisions for capital maintenance to ensure that the natural assets they control do not deteriorate. At best, they target marginal improvements to what they already have. They are, however, the starting point for considering how better to maintain and improve natural capital. On a business-as-usual basis, this inherited set of protected areas and flood defence, woodland and other natural capital assets is unlikely to be sustained, let alone enhanced. A bolder step is needed. Natural capital and utilities have common core characteristics. Natural capital utilities have a place alongside the clubs, trusts and charities as key vehicles through which the aggregate natural capital rule can be met. The overriding framework is what is missing. This is the next task.

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CHAPTER 10

The Prize: Restoring Natural Capital

Maintaining the aggregate of natural capital intact would be a major achievement. Business-as-usual would be a disaster in this century, and the challenges of a multiplication by a factor of more than 16 of the global economy with all its associated consumption, plus another 3 billion consumers, are, in the true sense of the word, awesome. The evidence is that the line is not being held in any developed country. The situation is potentially much worse in the developing world. China has been described as an environmental disaster zone, while India, South Africa and Brazil are examples of the clash between economic development and natural capital. There is nothing optimal about the current state of affairs. Modern agriculture has destroyed much of the world’s flora and done great damage to bird and mammal populations too, not to mention the detrimental impacts of pesticides and fertilizers on invertebrates and fish. Many species are now in what are effectively ghettos surrounded by green and yellow deserts, and much has disappeared under concrete and tarmac. It would therefore be very odd to claim that, despite the achievement, to simply hold the line against yet more damage is enough. This current suboptimal state is widely recognized. Even the Chinese would not think it

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a success merely to stop air pollution getting worse or to maintain the current chemical and biological pollution levels in its once great rivers. Spelling out this prize – a more optimal set of natural capital assets – requires a wider canvas than the many particular improvements noted in the numerous and often necessarily local examples throughout this book. It is about large-scale, ambitious restorations, focusing on systems and infrastructures. It is about wide-ranging and integrated river, landscape and marine improvements considered in the round, rather than as a series of smaller-scale projects, valuable though they are. It is inevitably a speculative framework, one that merely scopes out some of the opportunities for restoration, to give a taste of what might be possible. What steps, then, would have to be taken if any government seriously wanted to stop not only the rot but to leave the natural environment in a better state for the next generation?

Improvements at Scale: The Case for Large-Scale Restoration A key scientific finding is that the level of biodiversity is a function of the scale of the habitat, and that it tends to increase more than proportionately with the size of the habitat. It applies not only to the number of species but also to the robustness of the populations. Not only are there proportionately larger numbers of plants, birds and mammals in a bigger protected area but also the populations of each tend to be in better shape. The corollary of this is that isolated islands of nature in a sea of modern agriculture and urban sprawl are likely to sustain not only fewer but also weaker populations. A nature reserve here and a green patch there, as compensation for building and development, are not credible approaches to natural capital and biodiversity. What matters is that existing reserves and parks are expanded, and especially that they are connected on a landscape basis. E. O. Wilson examined this effect in a famous experiment in the Florida Keys with Daniel Simberloff in 1966. Inspired by the example of the Krakatau volcanic eruption in 1883, which left the remnants of the island

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devoid of life, he selected four tiny islands and employed a pest-control company to destroy all the arthropods on them, and then observed the recolonization process. Two factors played out: the area effect and the distance effect. The area effect arises because more area means more space, more space means larger populations, and larger populations mean a longer life for species.1 The distance effect is the proximity to other islands and therefore to new immigrants. In his experiment the islands gradually filled up with immigrants – all at the same rate since they were roughly the same distance away from inhabited sources – but the bigger the island, the greater the area effect and hence the greater the resulting biodiversity. There is not much that can be done about the distance effect, except to limit it through quarantine, import restrictions and eradication plans for unwelcome species.2 For biodiversity generally, the distance effect means biodiversity increasing locally, and decreasing globally as alien and invasive species are now being introduced through human agency at a very rapid rate. For many habitats, distance has all but disappeared, creating a homogenizing effect. Just as the main streets in all the world’s capitals tend to have the same shops, so too with plants and animals from around the world that have been accidentally or deliberately introduced by humans, from rabbits in Britain to rabbits in Australia, and hedgehogs in the Hebrides; and, by accident or escape, Japanese knotweed, Himalayan balsam, Canadian pondweed, mitten crabs, American crayfish, and mink. Dutch elm disease and ash dieback are further examples of accidentally imported beetles and fungi, respectively. Aviation, shipping, tourism, animal and plant collections, and gardens have replaced the occasional colonizations of evolutionary history with wholesale migration. The area effect is something we can do a lot about – by making it much bigger, and therefore gaining what economists might describe as environmental economies of scale. A localized example illustrates this point. To the west of Oxford, on the banks of the Upper Thames, the local Wildlife Trust purchased a farm – Chimney Meadows – which had not been modernized.3 It is a bit of a time warp, which the agrichemical industry had failed to ‘improve’. To modern farmers it is inefficient, the fields are too small, and

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the drainage poor. It is, as a result, a prime site for the sorts of nature that once existed across large swathes of the farmed countryside. The reasons the local Wildlife Trust purchased the farm was not only to create a new nature reserve and prevent it being ‘improved’ but also because it is located in the Upper Thames Valley, where there are a series of agri-environmental schemes protecting the water meadows, and a number of other nature reserves. Snakeshead fritillaries can be found at Grafton, and further upstream there is the Cotswold Water Park. The river itself connects all of these as a corridor. The Thames long-distance footpath winds its way through this landscape and many people are able to enjoy the natural assets that still remain. A couple of miles upstream of the nature reserve the water meadows are grazed in sympathy with the seasons to allow the wild flowers to thrive. The fields are allowed to flood in winter, the grazing starts late, and the hay is not cut until after the breeding season for the birds. During the breeding season these meadows echo to the haunting sounds of curlew. The Upper Thames has other connected wildlife assets. It has been extensively mined for gravel, leaving a string of man-made lakes stretching for miles, notably upstream of Oxford through to Eynsham, Standlake and beyond, above Lechlade. Their proximity to each other means that the water birds and amphibians can easily get from one to the other, as can the coarse fish eggs on birds’ feet. They are a Mecca for birdwatchers, walkers and anglers and, in some cases, sailors. Chimney Meadows is valuable not only in its own right, but because it slots in one more piece into this jigsaw of the Upper Thames. The value in terms of benefits from these natural assets is correspondingly greater than it would be were the reserve isolated. There is, in short, a significant area effect. Area effects considerations can be advanced for most if not all river systems and marine habitats. Having clean water in the upper reaches of a river system is good for many species, but if there is lots of pollution downstream, migrating fish such as salmon and sea trout will never make it, and hence they will be a missing component of the natural species mix. Cleaning up the pollution of the Thames in London and the downstream estuary is

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as important as making sure there are spawning beds upstream fit for the salmon’s purposes if they are to return. A similar story applies to the Rhine and the attempt to get salmon back into this major European river system.4 Area effects are particularly important for all migratory species: it is of little use creating good habitats at one end if at the other conditions deteriorate. This can be very large-scale, like the great mammal migrations in Africa, or very local, where migratory birds rely on specific lakes and salt marshes. Given the importance of area effects, the prize in terms of an improved stock of renewable natural capital focuses on the identification of a number of large-scale projects, with an emphasis on connectivity. These focus on the three core environmental infrastructures that support the economy: the rivers, the land and the marine habitats. On a national basis, a good starting point is to provide natural capital corridors for all the main rivers and their catchments, since these are biodiversity highways and natural capital infrastructures.

River Restoration The patchwork quilt of important natural habitats is criss-crossed by rivers. These are quintessentially systems, and the catchment for each has been the location for the development of water and sewerage systems and flood defences, as well as for water-borne transport during the Industrial Revolution. Connectivity between river systems was one of the aims of the canal builders in the eighteenth and nineteenth centuries and, in a number of countries prone to drought, for bulk water transfers and irrigation as well. These river systems are obvious candidates for large-scale restoration projects, and there are many examples, such as the Thames. The systems are not just the rivers themselves but also the surrounding catchment lands. Much of the pollution in rivers comes from farms, sewage and industrial effluent. There are a couple of ways of tackling river catchment improvements. One is the route taken by the EU, and in particular by the Water Framework Directive (2000). The European approach is to apply general minimum

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standards to river water quality and require that this standard is met across the board. A similar approach is taken to bathing water. The directives define what a river or a beach is, and then say what the minimum standards are that should be met. While this looks like a comprehensive approach to the problem of restoration and improvements, it is far from obvious that it is the best one. Not all rivers start in the same place. Some are already in good condition, often as an accident of their history. Upstream rivers in remote areas are not prone to industrial development and large human populations, and if the landscape is mountainous, they may not lend themselves to modern intensive agriculture and all the agrichemicals that go with it. By contrast, rivers through industrial heartlands tend to be in a very different state. The Mersey has been heavily polluted since the dawn of the Industrial Revolution in Manchester and Liverpool; the Rhine has had the misfortune to flow through the industrial heartlands of the Ruhr in Germany; and the Ohio River in the US has been heavily polluted over many decades by urban runoff, agricultural activities, and abandoned mines. A number of rivers in these circumstances have been rendered all but biologically dead, and there are even iconic examples of polluted rivers catching fire because of their toxic chemical pollution. In China there are many such rivers subjected to all manner of environmental abuse.5 Restoration is typically a management process, and resources are not infinite. Where, then, should restoration start and what should it concentrate on? Under the EU approach, each and every river needs to meet the minimum thresholds, and this dictates that most of the resources should be directed at the most polluted ones. Yet a moment’s reflection tells us that a marginal improvement to a biologically dead river will not make much difference, while removing phosphorus and nitrates from an otherwise biologically rich upstream river might make a lot of difference. The EU approach is chronically inefficient from a natural capital perspective. Consider, for example, what best to do for the wild salmon population. Cleaning up the Rhine and the Thames to a sufficient standard is an incredibly expensive activity, whereas making sure the Tweed, Britain’s prime

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salmon river, is kept sufficiently clean to support the tens of thousands of salmon which migrate up it each year is critical to its thresholds and much more cost-effective. These examples illustrate a general point. A scattergun approach, trying to improve all rivers simultaneously to a similar standard, is likely to be a costly mistake. It would be equivalent to treating biodiversity hotspots with the same priority as contaminated land, directing resources to the most polluted and degraded sites first, rather than last. Scarce resources need to be directed to where the marginal benefits are greatest. The further point is that, as these river systems are in large measure public goods, it is not the marginal costs and benefits of particular bits of improvement in particular stretches of the river that matter, but rather the marginal costs and benefits to the river as a whole. Recall the example of St James’s Park in London. Instead of chipping away at a small corner of the park, restoration is about adding new areas. Each extra bit makes only a marginal difference, but add lots of bits together and the area effect kicks in. This is the implication of the area effect, and it requires an element of catchment planning and, in order to deliver the benefits, a focus on catchment-wide organizations too. The river needs to be considered as a whole, and that means adding together the various services this natural asset yields. Good-quality rivers provide drinking water, water for industry, sometimes irrigation, transport, ways of disposing of sewage, fish, boating, leisure and recreation, exercise and biodiversity. They determine flooding. Each improvement needs to fit into a catchment plan, and each catchment plan needs to sum these benefits. To complicate matters further, the catchments cover the bulk of the land, and hence land restoration needs to fit into the river catchment plans too. The various habitat systems need to all fit together. Back to the very local example of the Upper Thames and the Chimney Meadows nature reserve to illustrate this general observation. It is not just a wonderful place to visit, relax and enjoy wildlife. It is also on the Thames flood plain. Its ability to absorb floodwater upstream protects Oxford from flooding. My Oxford college stays dry in part because of the absorption of

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the shock of heavy and persistent rain in the upper catchment. The reserve is on a popular boating route – the river is navigable up to Lechlade. And it is part of the corridor of water meadows for the curlews mentioned earlier. All of these add to the benefits of this reserve. The Wildlife Trust is also trying to improve other aspects of the Upper Thames and its tributaries to the north of Oxford, notably the River Ray. This incorporates Otmoor, and in addition to being another great site for wetland birds, both breeding and overwintering, it holds water which would otherwise also flood Oxford. What happens on Otmoor is important in its own right for flooding, but its impact depends on what happens upstream of Oxford on the Thames around Chimney Meadows too. It is all one system. In the towns downstream of Oxford the water comes from both Otmoor and the Upper Thames. Capturing these benefits requires a financial and accounting framework for the whole of the Thames, and a basis for capital maintenance and capital enhancement of natural assets. That is where the utility model comes in. Thames Water covers most of the Thames catchment for water and sewerage. But it does not manage navigation on the river and the system of locks which control the flow. Flood management is the job of the Environment Agency and the London authorities further downstream – including the Thames Barrier. The design and management of agri-environmental schemes lies within the remit of the Department for Environment, Food and Rural Affairs (DEFRA) (and ultimately the European Commission). Wildlife and nature reserves lie with the various Wildlife Trusts, the RSPB, the Woodland Trust, the National Trust and the Canal and River Trust. There is a regulated asset base for the water and sewerage bits, but not the rest. While there are very good reasons for fearing a giant monolithic organization covering all aspects, there are also good reasons for thinking that fragmentation of responsibilities has resulted in fragmentation of system planning – to the detriment of natural capital throughout the river catchment. As noted, the Water Framework Directive requires that rivers are brought up to good ecological status, and hence there is already an ambitious

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set of objectives to enhance their natural capital value. But this is incomplete, capturing only some of the ecoservices and benefits that the rivers provide. Plans on a river-by-river basis to enhance the benefits would include two additional features – the management of the riverbanks and adjoining land and fields; and the provision of access and educational and tourist facilities to ensure that the maximum benefits are gleaned from them. Catchment plans should therefore include the agricultural management of surrounding land, the treatment of urban riverbanks, public access rights and footpaths, and considerations of local water retention for flood management. A hard concrete urban riverbank might not obstruct fish moving up and down the corridor, but it is a giant ‘no entry’ sign for many riverbank species. It is partly a question of joining up existing initiatives to create a connected whole which is greater than the sum of the parts, and in the process expanding the area and hence the benefits from the area effects for biodiversity. Internationally, and more ambitiously, it is a question of integrated natural capital approaches to the great global rivers – the Mekong, the Mississippi, the Amazon, the Congo, the Ganges, the Rhine, the Danube, the Volga and the Dnieper are just some examples. These are more than global hotspots considered in isolation. The prize is an integrated natural capital plan for each major river. Practically, this can start nationally, and incrementally build up the coverage.

Land Restoration The Lawton Report, ‘Making Space for Nature’, made the case for a largescale landscape approach to restoration in Britain.6 Recognizing that there is no past Arcadia to try to get back to, any restoration plan has to start with where we are rather than where we would like to be. The landscape has been seriously damaged, but already as in most countries there is a patchwork quilt of protected areas – the nature reserves, the sites in the hands of charities and trusts, the SSSIs, the green belts, the forests and woodlands, and the national parks. The challenge is to build on these and enhance them, not to start from a blank sheet of paper.

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There are three broad strategies for improving the natural capital embedded in these assets. The first is to make the existing ones better – to enhance the protected areas by improving habitat. Forests which are largely conifers can be softened with deciduous and native trees at their edges, and they can be gradually opened up to be both more productive for a wider range of species and more accessible for people to enjoy the benefits. Peatlands can be restored, as in the Exmoor example, yielding biodiversity and carbon capture and storage benefits. Nature reserves can be improved by measures such as creating and sustaining hedges, developing wetland areas, and restoring hay meadows. SSSIs in poor condition can be managed better. This requires a combination of adequate capital maintenance and capital investment, and the prize here is to deliver coherent plans to enhance the status of all of these assets, to raise them to the equivalent of land of ‘good ecological status’ in the Water Framework Directive referred to above. As with water, some are more important than others, but establishing a minimum acceptable condition as the baseline is a good start, and there are already targets with regard to SSSIs. However, a coherent plan to achieve them is what is largely missing. The second strategy is to look at the gaps on the maps between these protected areas. This is where the corridors come in. Filling in these gaps may be as simple as creating a hedgerow so that species can move between protected areas without being isolated by massive arable fields; by buying and enhancing critical locational assets (as in the case of Chimney Meadows); and by tailoring agri-environmental schemes to capture the wider system benefits as well as improving a particular and specific site. The goal is to do this. Again, much of this has already been considered on a piecemeal basis, but there is no national coherent and credible plan to join the dots on the national map. The third strategy is focusing on creating new habitats and carrying out restoration of currently degraded ones. This might be on a grand scale, creating new national parks and reserves, and opening up the sea defences to create new salt marshes, as, for example, on the Essex coast and the north Somerset coast.7 The landscape of Britain is determined not only by its

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underlying geology,8 but also by the ways we have remodelled it many times over. But new habitats might also be quite micro, creating green spaces in the heart of towns and cities. For example, such a strategy might aspire to providing an open space within a given number of square kilometres as the right of all citizens. This would build on the social primary goods approach, as one of the minimum requirements for citizens to enjoy reasonable health and recreation, and thereby to participate in society. Though there would be direct economic benefits, the justification here goes beyond efficiency to consider rights and entitlements.

Marine Restoration Perhaps the area with the greatest scope for a large-scale restoration is in the marine context. As already noted, ‘out of sight, out of mind’ captures the approach that has been taken to much of our marine natural capital. Marine environments have obvious interconnectivity that land and rivers do not. They are literally joined together. At the global level, the oceans deliver a number of services without which the planet would be a much harsher place. Most of the area of the globe is covered by salt water, and the great ocean currents drive much of our climate. The Gulf Stream warms Britain and much of northern Europe. The southern oceans drive the monsoons. Marine life congregates where the currents drive nutrients to the surface. El Niño and many other similar changes in the patterns of the currents have massive effects. The oceans absorb heat and carbon and they moderate land temperatures. Then there are the fish, molluscs, marine mammals and seabirds, which yield food. The direct ecoservices are considerable, and probably only beginning to be tapped. Farming the sea – aquaculture – is in its infancy, akin to the stage that nomadic hunter-gathers were at when they started to develop agriculture on land. Our seas provide the basic building blocks of much of life on earth. Rather like early slash-and-burn agriculture, the approach to the marine environment has been to treat it as a limitless renewable natural asset and

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as a convenient equivalent of a landfill site. It is assumed that it will go on delivering in much the same way as the sun delivers energy every day at zero cost. There are so many examples of this destructive approach as to make an assessment almost superfluous. The vast waste gyration in the Pacific, the destruction of the great Canadian Grand Banks fishery, the dredging of the bottom of the North Sea and the collapse of the great coral reefs are just some exhibits in this catalogue. Seabirds such as the albatross get tangled in the plastic debris; the cod the Basques first discovered off the Canadian coast no longer sustain a European salt cod industry; the once clear waters of the North Sea that were filtered by oysters are now brown and muddy; and the coral reefs are paradoxically greater tourist attractions as they diminish. As with the land and the rivers, and the climate, there is no meaningful optimal state of the seas. But unlike the land and rivers, where there is an element of disaggregation, the interconnectedness means that concentrating on one aspect is likely to have direct consequences for others. Their interconnectedness means that policies need to be joined up. There are ways of making the task tractable. Some dimensions are part of what might be described as great global public goods – the offshore sea beyond national jurisdictions. Others are more contained, for example, the more isolated marine areas such as the Baltic, the North Sea, the Mediterranean, the Sea of Azov, the Arabian Gulf and the Red Sea. Then there are the continental shelves, coastal waters and the seashores. Many of the natural assets – such as fish stocks – fit into one of these categories, even if they are interconnected. The problem with global marine public goods is that they are the responsibility of everyone and no one. They are not owned, but rather are open to all. International treaties have reinforced this, and focused on open access as a priority to stop great powers usurping shipping lanes and fishing rights. If the gains from the ecoservices can be reaped by each, then the resource will be over-exploited. Consider a boat fishing for cod on the Grand Banks towards the end of the twentieth century. Suppose the skipper knows that the stock will not last. He sees the catches falling each year. What is the rational response if his concern is his profits? Try harder, use

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more advanced techniques and continue to fish for as much as possible. Indeed, if the end of the stock will be the end of use for his boat, better to try to recover his capital costs as fast as possible. Each looks to his own interests, hastening the destruction of their livelihoods – a classic example of the tragedy of the commons.9 One of the next great challenges on the global front is the Arctic. As global warming – or at least Arctic warming – proceeds at a rapid pace, the natural assets of the Arctic become more easily exploitable. It turns out that the relatively shallow waters cover great reserves of non-renewable natural capital, notably oil and gas – perhaps as much as 25 per cent of the world’s conventional reserves.10 They contain a lot of fish too, and as the waters warm a number of other species can also be expected to head north. The disappearance of the ice means that both the North East and the North West Passage will open up to shipping. The long tradition of coal mining in Svalbard might expand, and a host of minerals are already being extracted from Greenland. The Arctic represents one of the last great frontiers for the exploitation of natural capital. Without intervention, it is yet another tragedy waiting to happen. Lest this seem a distant prospect, the speed of technical progress, particularly in oil and gas extraction, should give pause for reflection. Offshore drilling only really got going in the 1970s and 1980s in the shallow North Sea as a result of the OPEC oil price hikes in 1972–3, in response to the Yom Kippur War, and then in 1978–9 following the Iranian Revolution. Deepwater drilling is even more recent, spurred on by the gradual rise of oil prices after the turn of the century. The next step in more hostile waters has already begun. Oil installations can now be located on the seabed, without the need for surface platforms. The problem is getting electricity far offshore, but this is not insurmountable. It is quite plausible to imagine a series of underwater installations extracting a lot of oil and gas under the Arctic. The immediate issue is who owns this non-renewable natural capital. The Arctic Council is the forum for the governance of the Arctic, and the international Law of the Sea Treaty provides the context for registering

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claims. Russia has already staged a publicity stunt by planting a flag on the sea floor at the Arctic Pole to highlight its claim. This has serious content – the Lomotov Ridge extends from the Russian coast to the Pole. All the Arctic nations – Russia, Canada and the US, as well as Greenland, Iceland and Norway – are staking their claims that their continental shelves entitle each of them to the areas adjacent to their coastlines. Russia dominates because it has so much Arctic coastline, and because the waters off Russia are predominantly shallow. As long as no one owns the Arctic there is little interest in conserving its natural assets. Ownership matters and provides one route to trying to resolve the problem of the commons. But the owners might not take the wider interests of the oceans into account. Think what Russia will do if and when the ice clears and the technology opens up the possibilities. Will it worry about the beluga whales, the polar bears, and the enormous breeding colonies of seabirds? A moment’s reflection on the environmental destruction carried out around Sochi in preparing for the 2014 Winter Olympics should ring alarm bells.11 Ownership might be necessary to create an interest in the natural assets, but in the Arctic, the non-renewables are likely to trump the renewables. Indeed, wherever there is oil and gas, iron ore, copper and other key minerals, the renewables have typically taken a back seat. There is then no way around the development of treaties and international agreements to regulate the use of the high seas. These are the marine prizes. A regulatory approach is not, however, without hope. There is already a very large body of international law in respect of the sea, and there are also particular examples. The story of the whales illustrates many of the general problems. The whales were hunted (and still are in some cases) in a fashion reminiscent of the problem of the commons. Keep going while there are whales to catch, without regard for the thresholds for renewing the stocks, and without regard as to whether there would be any whales left for the next generation. Many species have been hunted almost to extinction. Being wondrous creatures their plight captures public imagination rather more than that of a

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forest-floor beetle whose habitat is destroyed by logging. Protecting whales is something politicians could make themselves popular doing. Better still, the very rationale of whale hunting began to wane in the latter half of the twentieth century. More modern products, notably from conventional fossil fuels, replaced the oil produced by rendering down the carcasses. The remaining value – the meat – has been largely displaced by the expansion of agriculture. Even remote communities can get frozen beef. All that is left is the market for specialist tastes, often with cultural roots – those of the Japanese, the Icelanders, the Norwegians and the Faroese. Whale meat is a luxury good. It is not that hard to bring the parties to some sort of treaty agreement. The whales can be tracked, and cheating is obvious. Satellite technology and fast boats allow activists to stalk the hunters, upload the bloody images to social media, and therefore put pressure on world leaders to ‘do something’. Even the Japanese feel it necessary to defend their continued hunting as ‘scientific’. In general, the larger the animal, the greater the chances of world agreements to conserve it. Think polar bears, seal blood on the white background of ice and snow, tigers, and butchered elephants. For the less glamorous creatures, the obstacles to forming credible agreements are formidable. Economists have long studied the problems of forming and then holding together what is in effect a collusive agreement – to reduce the quantities. Scott Barrett has led the way in applying the insights of game theory to work out when and how international environmental agreements might work.12 The elements are whether the entity to be protected is easily measured; whether cheating is easily detected; whether there are straightforward ways to punish those who cheat; and whether all parties gain from the attempt to conserve stocks and hence solve the problem of the commons. The job of ocean protection and conservation is a continuous one of trying to skew these characteristics in a direction that works – focusing on the measurement (tracking the whales and the hunters), increasing the pain to those who cheat (international media campaigns and attacks), and encouraging other governments to put pressure on the recalcitrant (by ostracizing Japan in this case).

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The open access to the sea lanes is enshrined in international law, but it does not work without enforcement. The great powers of the world have fought for the key sea lanes and they have built navies to defend them. The Strait of Hormuz, connecting the Arabian Sea with the Persian Gulf, is kept open in part because there are lots of US warships nearby to deter those who have threatened to close it. The Chinese are building a blue water navy to defend the Strait of Malacca, connecting the Pacific Ocean with the Indian Ocean, and hence ensure its oil supplies. Enforcement of international agreements in respect of the seas tends to depend on one or more of these powers having an interest in doing so. Could this also be true of the ocean’s natural capital? This depends on the interests of these powers. Russia in the Arctic has a narrow interest in non-renewables. The US and Europe are different. These democracies have populations who have both broad and narrow interests that they expect their politicians to defend. The coral reefs, the ocean fish stocks and the broader biodiversity fall into this category. As with climate change, eventually these political pressures have their consequences, and they are all the more effective where the information is exposed and made publicly available through the media. In the deep ocean case, the first task in protecting natural capital is to shine the torch on what is actually going on. The scope for improvement is much greater for other contained seas. There are a limited number of countries that share the Mediterranean. Though it is connected to the Atlantic and the Black Sea, much of its natural capital remains within its domain. In part because it does not have much by way of tides, pollution is readily visible. For centuries the Mediterranean people dumped their sewage in their sea, and kept depleting its fish stocks. Now that process looks like hitting the thresholds of lots of renewables. The Mediterranean receives the Nile, which in turn flows through a large and growing population in Egypt. It receives the Rhone, the Tiber and the Po. Upstream, the Black Sea receives some of the great Russian and Ukrainian rivers. Few of these are in a good state. The North Sea is a shadow of the great fishery it once was. The huge herring shoals have gone, and cod stocks have been heavily depleted. The

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great oyster beds have gone. In their place oil and gas platforms and wind farms have further industrialized the sea. The Rhine and the Thames, once joined together in a single European river system, have transported effluent for centuries, and the muds of the shallow waters in the southern North Sea are where much has accumulated. In both cases, there are obvious ways to protect renewable resources and to provide compensation for future generations for the depletion of the non-renewables. The parties can agree to fish quotas, based on scientific estimates of the thresholds. Each can agree to measures to reduce the pollution from their rivers. It has to be a system approach to the public good as a whole – the Mediterranean, the North Sea, the Baltic, and so on. At least the number of parties is limited: each knows what the other is up to since monitoring is easier in these contained seas and, because they are close neighbours, they have multiple relationships to build upon. The countries around the North Sea and the Baltic are either members of the EU or associated with it (like Norway). In the Mediterranean, the northern countries are in the EU, but the southern ones are not. The relationships have thousands of years of history behind them. In contained seas, multiple relationships encourage mutual agreements to solve the problems of the commons. The third marine context after the oceans and the enclosed seas is the coastal fringe, the inshore waters and the beaches and estuaries. Here the problems should be easier still. These areas are owned by the bordering countries, and the impacts are visible and typically immediate to the communities that live close to the sea (which is indeed most of the world’s population). Humans are overwhelmingly a coastal species. Yet it is remarkable that so little progress has been made, despite the much more benign context for protecting the thresholds for natural assets. Marine conservation areas are the exception rather than the rule, and attempts to control fishing activities have had limited success, and then only in cases where the thresholds have been seriously threatened or even breached. It is when the economic yield has fallen away, when fishermen can no longer catch enough to cover the capital costs of their boats and the labour of their crews, that conserving fish stocks becomes more attractive. Quotas have been applied,

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and sometimes these have worked, but almost always the fishing industry and its lobbies have opposed them. As with the farming lobbies on the land, the fishing industry campaigns for maximum freedom to do as it chooses. The results of this pressure, reflected through the political systems, have been quotas repeatedly in excess of scientific recommendations, considerable cheating, and also the unintended consequences such as catching and discarding fish which are the wrong species or are too small. The Common Fisheries Policy, like the CAP, has not been a friend of renewable natural assets. Creating marine conservation areas is an alternative to quotas. These are areas in which fishing is banned, and a number of other uses are limited too. To date they have tended to be small and have specific characteristics. They might be nursery grounds for particular species, or have particular biodiversities. They do not have to be small-scale and, as with the onshore argument that size of the protected area matters, the bigger these are the proportionally greater the pay-off in both species and population health. Among the most ambitious are protections of coral reefs – the Great Barrier Reef in Australia being the most high-profile example.13 By protecting key renewable natural assets on a large scale, significant biodiversity benefits result. Coral reefs are biodiversity hotspots. It is notable in this example too that public visibility matters. The Great Barrier Reef features in pictures, in history books and in marketing material for tourists. It has lots of colourful fish, and is ‘one of the places to visit before you die’. Not so obvious are the wonders of sea anemones, crabs and lobsters, seaweeds, wrasse and shoals of pollock that you might see if you were to go diving off the British coast. Not obvious too are the cold-water coral reefs on the North Atlantic continental shelf. These are out of sight – and hence out of mind. The implication for policy is that the protection of many marine natural assets depends on information. If only the public knew what there is out there, and could see the pollution, they might, like the citizens of Beijing inhaling the smog, demand action. They need to see the damage and understand its consequences for both themselves and future generations, and to value these natural assets.

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Bringing the Components Together in a Restoration Plan The prize of an enhanced natural capital to meet our optimal aggregate natural capital rule is necessarily complex. There is no simple blueprint, and one is not provided here. Protecting and enhancing natural assets inevitably depends on the specific local and national contexts – the starting point, the population and development pressures, the geography and the geology, the alternative uses of natural capital and the valuation of the costs and benefits. The examples here are merely illustrative of the sorts of things that might be included. Each country will need to fill in its own details and priorities, informed by estimates of the net economic benefits. The water, land and marine dimensions each merit their own generational plans and policies for each country, while always recognizing their interdependence. These restoration plans also have to have an international dimension, since the global commons of the biodiversity hotspots and the oceans cannot be treated on a merely national basis. There are plans for many individual aspects and, from Brundtland onwards, attempts have been made by the UN and other international bodies to bring some coherence, prioritization and money to bear at the global level. But that does not mean that the national natural capital restoration plans cannot or should not be implemented. Unlike climate change, unilateral natural capital policies are generally additive, and much natural capital is local and national in a way that carbon emissions are not. There will be a mix of measures in putting together a generational plan to first bring renewable natural assets up to a level that clears the thresholds. The thresholds provide a guide to where to concentrate, and the focus needs to be on habitats and the broader public goods. The economic benefits point to the greatest opportunities to increase natural capital beyond the thresholds, while in the process enhancing sustainable economic growth. In developing the prize of large-scale restorations, which can start to remedy some of the great damage done in the twentieth century, there are two final elements that need to be put in place: the money, and the institutions to implement the plans.

CHAPTER 11

Finance: Paying for Natural Capital

Though the money question is usually seen as a major showstopper, the good news is that it need not be. On the contrary, it turns out that there are multiple sources of potential revenue to deliver the large-scale restorations. These include the funding of capital maintenance; the compensation payments; the revenues from taxing pollution; the savings from getting rid of perverse subsidies; and the economic rents from depleting non-renewable natural capital. Together these hold out the prospect of a substantial, continuing and sound financial basis for achieving the aggregate rule and thereby underpinning sustainable economic growth. And because sustainable economic growth is efficient, we would all be better off, and the next generation would not end up being short-changed. Being selfish now has nasty consequences later: assets which are allowed to deteriorate will yield lower growth. The result is a surprising one: there is no need for much by way of additional public expenditure. Solving the local and global natural capital problems is never going to happen if it overwhelmingly depends on more government expenditure, and fortunately it is not necessary. But it will not happen automatically: putting natural capital restoration on a sound financial basis will require new institutions to marry up the money and the implementation of the restoration plans. Britain has led the way by creating 220

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a Natural Capital Committee, but this is just a start towards what will be needed. New institutions will be required to champion the natural capital cause. So we need to answer two questions: where is the money coming from? And how could the restoration plans and the associated capital maintenance and natural capital policies be implemented, and by whom?

Funding Capital Maintenance Recall in chapter 4 that national income accounts do not properly reflect changes to the underlying value of the assets – whether natural or otherwise. They are basically cash accounts. The result is that they misrepresent how well the economy is doing, and how well off we are. By failing to account for the deterioration of the assets, GDP paints a picture that is far too rosy. It pretends that the deterioration does not matter. The potholes in the roads can be left to get even bigger, for some future taxpayers to sort out. Suppose now that the national income accounts have to provide for capital maintenance. National income would be recorded as lower. The conclusion is not, however, that we are worse off. In the GDP world, the cash income is higher, but with a correspondingly lower asset base. In the capital maintenance world, there is a lower recorded cash income, but better assets. Indeed in this comparison, we are actually worse off in the GDP case – in the medium to longer term. The potholes will not go away, however much we pretend they will. They will get bigger, and they will eventually have to be repaired, at greater cost. To think otherwise is just fantasy. So we are no worse off if assets are properly maintained, and we are almost certainly better off. The scale of this day of reckoning for living beyond our capital maintenance means is already reflected in the physical infrastructure. The British National Infrastructure Plan proposes a massive catch-up investment programme, perhaps as much as £50 billion per annum.1 For the US, the numbers are similarly daunting relative to national income, and hence a great deal higher. By yet another accounting trick, governments pretend that this huge investment will not affect our standard of living. It is assumed that the

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investment funds can be borrowed rather than provided from savings out of consumers’ incomes. But, as with the GDP accounting trick on capital maintenance, this is an illusion. The debt has to be serviced and eventually repaid, and it can only come out of some combination of taxpayers’ and customers’ income – thereby reducing our standard of living. There is no way out. Debt matters, however much GDP accounts ignore it. The way this illusion plays out in the economy as a whole was discussed above in the context of the great macroeconomic crisis and the debt mountain associated with it. While the Keynesians think the magic of the multiplier will come to our rescue, the reality is that increasing debt, without the recognition of the inevitable bills that come with it, is a dangerously shortterm approach, and is simply not sustainable, as graphically revealed by the economic crisis that engulfed the global economy in the first decade of the twenty-first century, and remains with us still. What this tells us in terms of the financing of capital maintenance is that there is no extra cost in balance sheet terms of doing it properly, and accounting for national income net of capital depletion. Anything else is simply short-term greed at the expense of others later. It is like re-mortgaging the house and having a party on the proceeds, and telling everyone how much better off we are because we can hold the party. The morning after, the higher debt remains. We are no better off. We are worse off. The results of properly providing for capital maintenance would be radical. The claimed economic growth for the last two or three decades would be restated as lower. It would be an explicit recognition that we have indeed been living beyond our means, and that sustainable economic growth is a different – lower – number than the stated GDP growth. But over time, as capital maintenance is properly provided for and carried out, the asset base would be higher (because it will not have been allowed to deteriorate), and hence future sustainable growth will also be higher. The electricity, water, transport and communications infrastructures will be in better shape, and hence costs will be lower, and the benefits from natural capital assets will be higher too.

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Note that the radical change in national accounting that produces this result is not confined to natural capital. It is all capital, and this makes the accounting adjustment that much bigger. It requires a radical reassessment of economic growth, but it also requires a rebalancing between consumption, savings and investment. Not to carry out capital maintenance is to disinvest. Since the assets need to be maintained, investment in replacement and renewals will have to go up. The only way this can be done, except through the quick short-term fix of ever more borrowing, is to increase savings, and hence to reduce consumption. Thrift, that great bugbear of the Keynesians, is a virtue and will have to play a bigger role in a sustainable economy. That is the painful political and economic message of a proper capital maintenance accounting regime. The alternative is to bequeath the next generation the debt and the depleted infrastructure and natural capital. Thus the answer to the financing of capital maintenance on a sustainable basis is that it will be paid for by some combination of higher taxes and lower spending, so that our standard of living will be correspondingly reduced in the short term, but increased in the medium and longer term. Finance ministers will not like this message, but the even more unpalatable truth is that it will happen anyway, and indeed we will almost certainly be (and currently are) worse off in the absence of the proper capital maintenance provision.

The Treatment of Non-Renewables and Capital Depreciation To recap on non-renewables. They can be used only once, and nature is not going to provide them again for free, or at least not for a few hundred million years. How should they be treated in sustainable economic terms? The answer is that the economic rents should be reinvested for the benefit of future generations. The obvious way to do this is to set up a fund into which the rents are paid, and the fund then invests these for the benefit of future generations. For resource-rich economies, the economic rents can be staggering. Recall the scale of Norway’s sovereign wealth fund, soon to be worth

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$1 trillion, in the context of a population of around 5 million. That is roughly $200,000 each. In the US case the numbers would reflect both the much larger population and also the much larger non-renewable resource base. In the British case, the number will be smaller for North Sea oil and gas, since much has already been depleted.2 A fund generated from the depletion of non-renewables would in many countries be significant, and particularly for the cases above. But the opposite is what actually happens in almost all cases (Norway being the exception). Debt is being passed on, with the economic rents also having been spent, from the current generation to the future generations. National debt is a negative wealth fund, and in the last decade it has increased significantly across the globe. It is unlikely that anything can be done retrospectively. But going forward, the case for a fund remains, even with, in the British case, the lower non-renewable resources left in the North Sea. Into it would also go any future economic rents from shale oil and onshore gas depletion, which may turn out to be very significant. What should such a fund be spent on? There are three possible answers: future generations’ consumption; investment in all forms of capital; and investment in natural capital only. It is easy to see that if the third route is followed, the sums would greatly exceed even the wildest environmental aspirations for river, landscape and marine restoration. Following option three, the problem of natural capital restoration would be solved, and the prize could be delivered. Under the most demanding form of the aggregate natural capital rule, this is indeed what would happen. The rule would ringfence all natural capital – non-renewable and renewable. Since nonrenewables cannot be made good, maintained or replaced, the revenues from depletion of non-renewables would have to be spent on renewables to compensate within the aggregate. This meets the strong aggregate natural capital rule. Add in restoration, and the fund could go a long way to addressing the optimum natural capital rule too. It is unlikely that option three will happen any time soon, or indeed that it is even desirable. Why should all other forms of capital be ignored when it comes to investing the proceeds of the fund? A more nuanced approach

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focuses on whether it should all be investment and, with option two, how much weight should be given to natural capital compared with other forms of capital investment. The investment/consumption argument that separates option one from the other two is dealt with by assuming the fund is in perpetuity for all practical purposes. Its balance sheet would comprise the assets invested in, and these would include natural capital. Its value would have to be maintained intact in real terms, after adding in new flows from further depletions of non-renewables. There is, however, no reason why it should rise further in real terms to meet the sustainability criterion. Thus the consumption spending from the fund should be equal to the real yield over and above what is necessary to maintain the economic value of the assets in the fund and provide for inflation. This in turn should be roughly equal to the long-run growth rate, itself calculated on a sustainable basis, net of capital maintenance. At the global level, a precautionary but plausible number might be 2 per cent, based on guesses about the future of R&D and technical progress. Importantly it is a guess – we cannot know what the sustainable growth rate will be, although we do know that there is likely to be a significant drag on that growth from climate change, water shortages and the legacy of other natural capital problems we have bequeathed to the next generation by not properly maintaining these natural assets, indicating the need to be risk-averse. There is also all the additional debt racked up since the economic crisis that they will have to service and pay back. By way of comparison, the British growth rate from peak-to-peak and trough-totrough under the Thatcher governments was less than 2 per cent, and this was puffed up by the depletion of North Sea oil and gas, and the absence of capital maintenance, so a prudent approach for developed countries might be closer to 1 per cent. US GDP is similarly being puffed up by the economic rents from shale oil and gas. For some developing countries the growth rate might be higher, as it has been for China and until recently for many African countries too.

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Investing Compensation Payments A non-renewable natural capital fund would provide lots of money to address the river, landscape and marine restoration prize, and full capital maintenance provision in national income accounts would go a long way towards meeting the aggregate rule for renewables. The rule, however, permits some assets to be damaged, providing there is compensation. There are several options. One is that the developer does the compensating by directly investing in an offsetting renewable asset. This, we noted, is fraught with difficulties, not least because on a micro level like-for-like is very hard to define and companies have limited liability against what are often projects that take a long time to deliver. An alternative is to have an intermediary – a fund or a bank – into which monies are paid according to the assessed value of the damage caused by the development (if permitted to go ahead), and then the fund or bank invests the proceeds in alternative assets. There is a good case for going down this second route but, as with the fund, its investment mandate is what matters, along with the governance of the project selection, project management and delivery over a long period within that mandate. This is why natural capital institutional design matters. How big might the compensation fund be? In one sense it does not matter for the aggregate rule. It simply ensures that any development leads to compensation that is at least as good, leaving the aggregate intact. But at another level, it is obvious that very considerable sums of money could be involved. Consider the environmental impacts of all the massive physical infrastructure developments around the world. It is not difficult to envisage that the fund might be dealing with hundreds of millions for compensation. This is just another way of reflecting the fact that the scale of the damage to natural capital coming in the next few decades is likely to be very significant, and that therefore to meet the aggregate natural capital rule, a major programme of enhancements would be needed if natural capital is not to deteriorate in aggregate. This is the minimum that will be required to meet

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the ambition of leaving the next generation with at least as good a set of environmental assets as it inherited.

Revenues from Pollution Taxes and Savings from Perverse Subsidies The natural capital fund arises from the depletion of non-renewables and finances the river, landscape and marine restoration, and compensation payments through a large-scale offsetting programme ensure that existing renewables are not in aggregate adversely affected. That still leaves a lot of damage to renewables caused by the continuing polluting activities of farmers and industry, all ultimately caused by our consumption for which they provide. As we have seen, the case for pollution taxes is a powerful one, particularly for setting prices to reflect the marginal costs of the damage pollution causes. If pesticides, herbicides, fertilizers, carbon and methane emissions were correctly priced in this way, not only would the economy be more efficient (and we would in aggregate be better off), but the revenue could again be very large. Indeed so large would the revenues from these ‘sin taxes’ be, especially if existing taxes on alcohol and new sin taxes on fats and sugars in foods were added, that the entire tax system could be reconfigured. The taxation of what are largely inelastically demanded goods and services produced with the associated pollution would raise big sums. What should these be spent on? They could be revenue-neutral, in the sense that other taxes, notably on labour, could be correspondingly reduced. This would fit with the radical tax reform proposals. They could be hypothecated to be spent on other forms of renewable natural capital, and in particular they could also be used for the large-scale restoration projects. If they are to be hypothecated towards renewable natural capital then, as with the fund and the compensation payments, an institution will be needed to act as the intermediary. But even if they are not, the substitution effect of pricing pollution will nevertheless improve natural capital, or at least reduce the damage.

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This double benefit of improved efficiency (the substitution effect) and funding (the income effect) is also apparent in the case for abolishing perverse subsidies. Getting rid of the CAP (and the comparator subsidy schemes in the US) is a good idea, irrespective of the natural capital implications. It would reduce excessive subsidy-induced production, and alleviate pressures on marginal land. Fertilizer and pesticide applications would also probably fall. Some of the damage caused by the drive towards intensification and self-sufficiency would be eased. Sadly, thus far the attempts within the CAP to rebalance the subsidies from damaging activities towards agri-environmental schemes have been at best half-hearted. The result is that we are in aggregate worse off. In the European case, the removal of the subsidies would provide a reduction in public expenditure for government, both directly from its contribution to the CAP and the matching funds, but also because the contribution to the EU budget could also be reduced (recall that the CAP absorbs a considerable proportion of the total EU budget). These previously allocated funds become available for other purposes. They might be used to reduce other taxes by a corresponding amount, as well as being spent elsewhere. There is a case for arguing that some of the savings should be spent remedying the damage caused by the perverse subsidies – putting back the hedgerows, restoring soil quality, repairing damage to water meadows and wild flora, and so on. Since it turns out that a significant part of the landscape restoration plans, and the associated wildlife corridors, are on agricultural land, there is an obvious link between these restoration projects and the savings from getting rid of the perverse subsidies.

An Aggregate Natural Capital Fund If the economic rents from the non-renewables are augmented by the compensation payments and some proportion of the pollution tax revenues and the savings from perverse subsidies, there could be a very large renewables natural capital fund. With capital maintenance being a claim on current revenues of governments and companies (depending on who owns

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the assets), a fund is likely to finance the requirement to maintain current aggregate natural capital relatively easily, and indeed to enhance it significantly towards the optimum. This is what would be required to meet the overall policy objective of leaving the next generation with a better set of environmental assets than the ones we inherited. Economic growth would then be sustainable, and the environmental nightmare on a business-asusual basis would be less likely to come to pass, at least in Britain, the rest of Europe, and the US. Yet much of the coming damage is on a global scale, with the global hotspots and the open oceans in the firing line. The considerations in respect of the national funding above can, and indeed need to, be carried over to the international dimension. Consumers from developed countries are contributing to the depletion of developing countries’ non-renewables without providing for the economic rents. British consumers are benefiting from production overseas that damage renewable natural assets without compensation, and they buy goods and services from farmers, manufacturers and service providers overseas at prices that do not reflect their environmental pollution damages. The same is true for most Europeans and Americans. It is politically inconceivable that a global fund comprising all of these revenue sources could be created and made to function any time soon. Nor is it likely that many countries will develop their own versions of such funds in the near future. Nevertheless, it does point to a process of identifying the international impacts on biodiversity and other forms of natural capital, and considering how the damage might be compensated for, even if on a piecemeal and partial basis. Measuring the natural capital consumption at the border is a first accounting step – for example, identifying in the composition of imported goods the mahogany logged from rainforests, the palm oil imports from plantations that have displaced rainforests, and so on.3 Some imported natural capital products are extremely pernicious. Consider, for example, the export of rhino horn and ivory from Africa to China and a number of South-East Asian countries. The argument here is straightforward. There are thresholds for these species, and they are likely

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to be violated. There is no relevant compensation possible for their loss. Such trade should be illegal and the treaties covering endangered species should be tightened up. With these caveats in mind, the international dimension of natural capital, the development of a global aggregate natural capital rule, and the creation of funds to finance its protection (and eventually even enhancement) can be built on the framework described above.

Natural Capital Institutions Given the importance of natural capital, it might at first sight seem extraordinary that there are few if any institutions whose overarching role it is to protect and enhance it. The reasons are various. Historically, as long as the thresholds have not been breached, there has been little need to develop political and societal resources. Political and institutional interest is correlated with the economic value. There have been ministries of industry, mining, energy and agriculture for at least a century in most developed countries. Ministries of the environment came much later, typically from the 1970s with the rise of environmental movements. They have often been of low rank in the governmental hierarchy, and often tagged together with other interests such as planning, farming and energy. It might be argued that, if the task is to place the environment at the heart of the economy, then the environment should be the concern of each and every department of government, and not just of a separate one. Departments of health should take account of the health benefits of natural capital; the financial ministries should be concerned about intergenerational equity and depletion rules; the culture departments should be interested in the benefits of natural capital as a key source of material for films, art exhibitions, and so on. There are, however, a number of countervailing arguments. Many of the existing departments have been captured by particular interests. Departments of agriculture, in their various forms, are targeted by the farmers, departments dealing with energy by the lobbyists for each of the

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main technologies, and industry departments by big producers. In order to counterbalance these interests, most developed countries have set up their own departments of the environment, and these in turn have been targeted by environmental interests and NGOs. There are not many countries where existing departmental institutional structures have been a great success. The current state of our natural assets reflects this. Therefore, the question arises as to whether these should be restructured or whether there need to be specific institutions to protect and enhance natural assets to ensure that the intergenerational interests are taken into account, and to act as financial intermediaries. There are already many institutions: national parks and protected area institutions, trusts and charities, and national nature protection organizations. They are multiple, typically have small budgets, and lack coherence and consistency. Not surprisingly, they usually punch below their weight. One area where environmental institutional arrangements have started to be addressed is climate change. As an environmental problem the threat of global warming has been gradually recognized and has climbed up the political agenda. First, environmental groups lobbied for action, and then political parties began to recognize that the issue was gaining traction among voters. The emergence of green parties in a number of countries, notably Germany, encouraged the mainstream European parties to try to capture the issue. Interventions do not happen spontaneously. Once governments move towards taking specific measures, there are governmental tasks that need doing. They require institutions and, initially at least, these tasks tend to be grafted on to the existing bodies. What added a new dimension was the political search for a credible carbon framework to achieve the targets – just as natural capital requires that there is a credible framework also. Targets set in law for long periods into the future are credible only if there is a clear mechanism for translating them into specific policy measures. The carbon targets for 2050 can always be changed by subsequent legislation, and cynics might suggest that nothing much will be done until the target date is close. In other words, politicians could talk the talk on climate change, but did not have to walk the walk.

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Then there is the question of expertise. How could the government work out the best ways of achieving the targets? The interests of politicians are obviously short term – the next election in democracies is always only a few years away, whereas targets for 2030 and as far out as 2050 are well beyond their career and often even lifespans. Lobby groups and special interests will want to capture policies. Fossil fuel companies will want action postponed and will resist economic instruments such as carbon taxes. Wind turbine manufacturers and investors in wind farms and solar panels will want to bias the policies to give them the maximum subsidies. Rent-seeking behaviour is endemic. The need for credibility, as well as expertise, drives the argument for an independent body. Britain has provided an example for other countries in terms of how to use institutional design to try to add credibility to the targets, and it has some read-across to the design of natural capital institutions. The Climate Change Committee, the first of its kind, is charged with achieving the 2050 target through a process of recommending rolling fiveyear carbon targets, always set at least three five-year periods ahead. Its job is to analyse and measure, and to advise Parliament on the form of these carbon budgets. Parliament can reject its recommendations, but only if it can come up with a better way of achieving the same target. Its chairman and its staff are independent. The Climate Change Committee’s credibility comes from its statutory foundations and the role of the five-year carbon budgets. The statutory basis of the target means that its aims and objectives are given and not readily open to change. It has a legal remit which it has to carry out. It has some discretion in how it goes about its tasks, but it cannot deviate from these legal constraints. The five-year budgets force it to translate the target into bite-sized chunks, and for periods which are the same length as the gap between general elections. The requirement that Parliament must vote to approve the carbon budgets cements these into the political process. The strength and power of this sort of institution becomes evident when it comes up against difficult circumstances – difficult in the sense of achieving the targets and the budgets, and difficult when the consequences

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are reflected in public and voter hostility. So far carbon reductions have been relatively easy to achieve – partly because carbon reductions are measured in production rather than consumption terms, and partly because the economy has been deindustrializing and has been subjected to a massive economic recession.4 The promise that these carbon reductions would be affordable and would not impact on competitiveness has been altogether more difficult to deliver. Voters have reacted angrily to their energy bills being increased to pay for wind farms and solar panels, especially since both technologies contribute little to climate change mitigation, and energy-intensive industries have lobbied hard against the policy costs given the competitive challenge of the much lower shale gas prices in the US. As yet, no mainstream political party has suggested that the 2008 Climate Change Act, which provided the statutory basis for the Climate Change Committee, be repealed, or that the unilateral targets be made conditional upon the actions of others.5 Politicians so far have restricted themselves to slowing down the renewables roll-out, intervening to promote nuclear, and reducing the costs to industry. The challenge of actually repealing the legislation is altogether more difficult, and it is this embedding of the institution through legislation which maintains the credibility of the overall policy framework. When it comes to natural capital, and in particular the policies, the institutional requirements have some commonality with climate change, and there are lessons to be learnt from the Climate Change Committee example. Assuming the objective is to meet the sustainability criterion that aggregate renewables natural capital should not deteriorate, and that the non-renewable depletion should provide for the benefits to be spread over the generations, then the functions that need to be carried out are extensive. They include the measurement of natural capital; the accounting for natural capital; the provisions for the natural capital fund from the rents from the depletion of non-renewables; the investment of the fund’s monies; the setting of pollution charges and design and implementation of permits regimes and quotas; the establishment and management of public goods, including protected areas; environmental regulation; and the design and

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implementation of restoration plans for rivers, land, and marine environments at the domestic and international levels. This is a formidable list, and a number of these functions are already carried out by existing environmental agencies and nature organizations. A credible and well-designed institution requires a number of conditions to be met. It must have a coherent and consistent set of objectives. They should be measurable, so that they can be monitored and managed accordingly. The organization should be open to external independent assessment. The trade-offs between objectives must have clarity at the political level rather than be left to the discretion of its board. It must have at least as many instruments as targets at its disposal. The strategy of the organization needs broad social and political support. In order to achieve its objectives, there needs to be a plan. Finally, the skill sets need to be coherent so that the management of the organization can direct its workforce in a consistent fashion. These criteria are demanding and it is immediately apparent that they are not met by most, if any, of the organizations in the environmental space. The case for a new institutional structure for natural capital depends on the ability to define the objectives and to meet the above criteria more effectively than the existing structures do.

A Natural Capital Committee As with the Climate Change Committee, Britain has again led the way on natural capital institutional design, and hence provides a second example for other countries to consider. A British government White Paper, ‘The Natural Choice’, published in 2011, sets out the overarching policy objective: to be the first generation to not only stop the decline in the natural environment, but to improve it.6 It therefore has a goal which looks somewhat similar to our aggregate natural capital rule. The White Paper explicitly views the natural capital problem as economic: it states that the environment should be at the heart of the economy and that it is part of the framework for the promotion of economic growth. It therefore set up

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the world’s first Natural Capital Committee to take forward the framework for achieving this goal.7 This economic approach is not new. The broad aim of improving the natural environment has a long pedigree, as does sustainability. Back in 1990 another White Paper, ‘This Common Inheritance: Britain’s Environmental Strategy’, promised a similar concentration on the economics, and included an annex which was guided by the leading environmental economist David Pearce, then Special Advisor to the Secretary of State for the Environment.8 It set out an agenda to promote economic instruments, rather than relying on regulation, as a way to integrate environmental considerations into the market. It was all about internalizing externalities. Cynics might suggest that the Natural Capital Committee was set up because the White Paper was largely devoid of explicit policies to address these issues – and that there are, therefore, few lessons for other countries to draw upon. In a sense they would be right – there is little by way of significant new action advanced by the White Paper. Yet this is also beside the point: the question is whether the Natural Capital Committee is a sensible institutional step towards attaining the overall objectives, and a model for others to follow. There are obvious parallels with the Climate Change Committee, operating at arm’s length from government. Like the Climate Change Committee, the Natural Capital Committee faces a lack of information, data and accounts. Similarly too, the government itself lacks credibility in its numbers, since it obviously has an interest in showing that things are getting better and measuring those things likely to reflect it in a good light. Few trust the government to say whether the natural environment is in fact getting better. But there are important differences, which make any read over from one to the other open to challenge. Unlike the Climate Change Committee, there are no explicit targets to report on. Climate change is relatively easy to measure: it is about temperatures, the concentration of specific gases in the atmosphere, and emissions from particular sources. For natural capital, even the concepts themselves are disputed, and there are so many

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overlapping components that simple aggregates are of limited value. This is painfully apparent in the attempt by TEEB to reproduce the Stern Report on climate change for biodiversity. It just does not work and, indeed, in trying to turn a complex subject into simple numbers, it is arguably damaging to the cause. The absence of explicit, legally entrenched, targets leaves the Natural Capital Committee with a more open-ended and less well-defined set of objectives. It has had to set out the building blocks for measuring, monitoring and reporting, which the Climate Change Committee could largely take as given. This is reflected in its terms of reference. The Natural Capital Committee is tasked with advising the government of any assets that are being used unsustainably;9 of accounting for natural capital; and advising on the research priorities.10 It looks a very dry list, but it mandates a powerful torchlight. The first of the terms of reference is one which requires that assets-at-risk registers are developed; metrics are devised and implemented; and that the thresholds are reported. The Natural Capital Committee cannot make the government do anything about assets-at-risk, but at least there is no possibility any more that the government can claim it is acting in ignorance. The second of the terms of reference requires that natural capital be embedded in national and corporate accounts. It means that GDP is not the only thing that will be reported and that the national natural capital balance sheet has to start being constructed. It helps in trying to see if the aggregate of natural capital is going up or down, and therefore whether the government is indeed achieving its headline objective of improving the natural environment. It also means that companies, trusts and other natural capital owners will need to build their own risk registers and, once assets-at-risk are identified, it is much harder for these organizations to evade their responsibilities. This accounting work is already laying down a substantial legacy from the first years of the Natural Capital Committee. The research programme matters because the thresholds are so hard to identify and estimate, and because the natural environment is a complex

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overlay of ecosystems, habitats and species. It also matters in identifying the benefits from natural capital, and hence in identifying which investments in natural capital are likely to have the highest value-added in contributing to economic growth, properly measured. An earlier National Ecosystem Assessment provided some very important background, and the Ecosystem Markets Task Force highlighted some potential market opportunities where the benefits were more easily exploited.11 Finally, the Natural Capital Committee has a role in using its accounting, assets-at-risk, metrics and thresholds work to provide information on how to meet the White Paper objective of being the first generation to leave the natural environment in a better state. The Climate Change Committee starts with an explicit target for 2050, and a plan to achieve it set in statute, and its task is to flesh out the carbon budgets. The Natural Capital Committee starts only with the broadest objectives, yet its task of filling in the information is crucial to a plan being developed and implemented. It is a stage back from the Climate Change Committee, and is at best a part player in delivering the restoration prize. Something more is needed.

The Next Institutional Step A natural capital committee has a role to play in the early stages of developing natural capital policy. In the British case, the Natural Capital Committee is time-limited – it has an initial three-year remit, with a sunset. This is another important institutional detail. Once the information and accounting frameworks have been set up, the task is then to move on, use the information, and implement plans to improve aggregate natural capital. Though the tasks of the Natural Capital Committee need to continue to be done, it is not designed to take on the full list of roles described earlier, and in particular to handle compensation, environmental taxes, the provision of public goods and the natural capital fund. To do all this will require a new and much more substantial institution. Analogous to the problems that many countries have encountered in trying to embed climate change mitigation and adaptation policies, a programme

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of policy developments to deliver an improvement in natural capital requires someone to be in charge, to drive the plan, and to handle implementation. It will not happen in some laissez-faire spontaneous way. Existing institutions are likely to fail for a number of reasons. They already have objectives about lots of things which may be tangential to natural capital. There is also a lot of merit in starting from scratch, unencumbered by the baggage of previous objectives and actions. One way forward would be to turn the Natural Capital Committee into a clone of the Climate Change Committee, backed by law, as has been proposed by several political parties and many environmental NGOs. While there is merit in this proposal, there is unlikely to be a straightforward read-across. Carbon is simple compared with natural capital and there are already lots of organizations in the natural capital arena, whereas there are fewer on the climate change side. In most countries, natural capital assets are held by numerous public and private bodies. Setting up a new natural capital institution may require a degree of surgery to the existing institutions in a way which was not necessary in the creation of the Climate Change Committee, and this sort of surgery would vary between countries given the very different starting points. A new natural capital institution would need to be grafted into the context of these existing bodies. Just adding yet another organization will not automatically improve matters, as it creates a host of new interfaces and lots of scope for institutional squabbling and empire-building. Few regulatory and public agencies can resist the institutional incentives to try to increase their budgets, staffing numbers and salaries. They are filled with humans, not altruistic saints. Faced with a new kid on the block, the natural reaction of the others will be defence. There is no escape from the need to sort out the existing structures and roles and to provide a coherent overarching institutional framework. There is a clear difference between policy, regulation and enforcement on the one hand, and operational delivery activities on the other. These, in turn, are all distinct from running a fund, and from setting taxes and subsidies, and assessing compensation payments. There is also a strong argument for

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splitting out the operational running of national parks, nature reserves, urban parks and other public goods into clubs and trusts and expanding their roles. Finally, the creation of natural capital utilities provides the institutional structures for the major natural capital infrastructures. There is no right answer to the institutional question independent of the specific legal and existing institutional contexts. What would work in Britain might not in the US, where the role of law is very different, and where the legalistic approaches within the context of the Constitution create a very different approach to public policy. The European context is different too, with a rules-based approach rather than the pragmatic case-by-case British practice. But in all cases, the need for an overarching champion of natural capital is clear, with a remit to hand down to the next generation a better set of natural capital assets and oversight of each of the main building blocks described in this book, reporting annually to parliaments and congresses on progress. The lesson from the Climate Change Committee experience is that statutory backing is of considerable importance. With the three main funding elements in place – the economic rents from the depletion of non-renewables, the compensation payments, and the environmental taxes – and new natural capital institutions, the way is clear for an ambitious advance towards the restoration of rivers, land and marine environments. There are grounds for optimism. Sustainable economic growth is not just desirable. With a guiding institutional structure in place, it is practical, and it can be financed.

CHAPTER 12

Conclusion

It is tempting to take a very bleak view of a world with another 3 billion people, at least 2ºC warming, and a lot less biodiversity. Many environmentalists see a day of judgement looming, and a deterministic pessimism fulfils the prophesies of doom that are all too seductive. They argue that the failure of the world to come to an end is merely a postponement, and a recognition that there is a lot of resilience built into the fabric of our planet. The end may not be nigh, but it is, they claim, inevitable. This is a dangerous line to take. It leads all too readily to a detachment from the realities of the world as it is, and to a fundamentalism which divides rather than unites. There is nothing inevitable about an environmental collapse, no inevitable end of civilization as we know it. But there are very real threats, and ones that we can do something about. The environmental challenges can be dealt with, but they involve choices, and they will not be solved on a business-as-usual basis. Natural capital makes up the fabric of our world. It is the raw material from which our economies are built. Humans bring all the brilliance of ideas, concepts, theories and designs to the table. Human capital is a wonderful thing, and it has enabled us to develop agriculture, cities, transport and communications – indeed civilization as we know it – on a wondrous scale. It is a brilliance that is only beginning – the scale of technical change to come will inevitably dwarf what we now have. 240

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That brilliance cannot, however, exist independently of nature. Natural capital is what it rests upon, and without natural capital the very life systems of the planet will close down. The atmosphere is a mix of gases which neatly fulfils our needs, and to which we are adapted. The biodiversity around us sustains that atmosphere, the oceans and the agriculture that feeds us. The minerals bequeathed by ancient geological ages are the basis of production. It is a delusion to think that we can do without this natural capital, and as it is denuded, we play much closer to the margins of human sustainability in the most literal sense. There is a choice. We can go on as we are now, and then the pessimists will have the grim satisfaction of seeing their doom-laden predictions materialize. On current trends this might even be ‘our final century’, as Martin Rees hypothesized.1 But probably it will not be – the current trends have the ability to play out for quite a long time to come, and sudden collapse of the sort beloved by Hollywood is an unlikely scenario. Even at 4ºC warming, many will be fine, even if many will not, and there is nothing inevitable about tipping points, catastrophes, plagues and destruction. Even with half the biodiversity gone, the planet will probably still function, as it has in geological times with far less biodiversity than we have now. Nature, it should be borne in mind, does not care. Only we do. The alternative is much more plausible than either the environmental fundamentalists or those who consider that protecting the environment is too costly think. Maintaining the current levels of natural capital intact is possible and not prohibitively expensive. A sustainable growth path remains a growth path, not some return to the primitive state of nature from which we emerged. It does, however, require changing our ways and adopting a core objective: that there should at minimum be no more overall reductions in natural capital assets. This is encapsulated in the aggregate natural capital rule. A line in the sand needs to be drawn, and once this step is taken the rest will follow. This is in effect the heart of any environmental manifesto. Maintaining the level of natural capital is a necessary condition for a sustainable growth path. It does not mean that there should be no environmental damage, and no substitution. It does not mean zero or negative

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growth. The strong sustainability that lies behind the ‘save everything’ campaigns is neither necessary nor desirable. And it is wildly impractical. It is never going to happen without changing human nature, and the planet cannot wait the thousands of years this would take, even if it were desirable. This deceptively simple rule provides the driving force for the reshaping of our economy, and it starts with the accounts. Accounting is a place few environmentalists go, but they should. How we measure economic growth, how we provide for the maintenance of natural capital (and other forms of capital) determines how we understand our world and how we act to protect and enhance it. Failure to take assets seriously led us into the financial mess that we are still struggling to escape. Failure to face up to liabilities is one reason why the debt that we ignored came back to bite us. Short-term cash accounts suit the Keynesians who drive economic policy still, but it is thrift, savings, asset maintenance and investment that provide the foundations of a sustainable growth path, not deficits, money-printing and ever greater indebtedness. Environmentalists need to understand how big the gulf is between Keynesian macroeconomic management and the goals they aspire to. The aggregate natural capital rule has some painful political implications. Balance sheets, proper risk registers and provisions for capital maintenance are some of the ways that the facts can intrude on the politics and help to highlight the reality of what has been going on over the last few decades, in contrast to the fantasies that many of our political leaders would have us believe. Knowing where we are, and what is really going on in our economy, is a necessary step to meet the challenge of doing something about it. This needs measurements and numbers. The critical distinction is between renewable and non-renewable natural capital. Renewables are fabulously valuable, yet are valued at close to zero. Why? Because renewables keep renewing themselves. The clue is in the name. But only as long as they are above the thresholds that maintain their populations, and the ecosystems within which they are embedded are able to deliver that renewal. Nature charges us little to carry out this function, though active management is often required. As long as we get that management right, and as long as

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they stay above their thresholds, they can go on forever, or at least as long as evolution allows. At near zero cost, with effectively an infinite horizon, the benefits are massive. They need to be on the balance sheet. They are the underpinning of our economy and our wealth. Non-renewables, combined with technical progress, are what have powered the remarkable burst of economic growth over the last couple of centuries. Nature provided us with lots of gas, oil, coal, iron ore, copper and a host of other minerals. We have been depleting this cornucopia like children in a sweet shop. The stocks have been plundered, with little or no thought for future generations. This creates the illusion that we are better off than we actually are. It is like selling the family silver and pretending to be wealthier as a result. The depletion of non-renewable natural capital is not necessarily a bad thing, provided that it is done without causing damaging pollution and with due regard to future generations. The rule is simple: the economic rents from depleting non-renewables should be saved and invested for future generations. In practice this means a natural capital fund, like the sovereign wealth fund in Norway. It is exactly what most resource-rich countries do not have. Instead the money is usually squandered by elites that fight over the spoils. The resource curse often makes them worse off than if they had left the stuff in the ground, in turn making economic growth lower than it would have been on the basis of our aggregate rule and the sustainable growth path this approach implies. The fund ensures the transfer of natural capital assets between the generations. Unlike many of the political theories about how sustainability should be achieved over time, this asset transfer is not about making people happy in some utilitarian monetary way, or at least not directly. It is a more modest concern for the future, making sure the next generation has the wherewithal to make the best of their lives. It gives them the natural capital endowment to build upon, rather than the altogether more ambitious goal of trying to make them equally happy. That is the bit that Brundtland got right. The next generation should get a set of natural capital assets in aggregate at least as good as the ones we inherited – but not necessarily the same mix.

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This is where our aggregate rule approach gains traction: it allows substitution providing there is enough compensation, and that compensation is feasible and practical. The more radical bit is the requirement that the depletion of non-renewable natural capital should be compensated for by increasing renewable natural capital. This is where the prospect of a major restoration of natural capital moves from the desirable to the possible, and we can aspire to enhancing natural capital towards the optimum. Operationalizing the rule requires mechanisms for compensation, and the adage that we should ‘follow the money’ applies. Compensation requires resources to be deployed to make good any damage. Resources have costs, and costs and prices can be regarded as the same thing, so the money is the means to meet the rule. How it flows is a matter of institutional design. What the depletion of non-renewables brings is money on a vastly greater scale than has hitherto been directed towards enhancing natural capital. While it is unlikely that all the money from depleting non-renewables would flow to renewables, even a proportion of it would make an order of magnitude difference compared with where we are now. The revenues from depletion of oil and gas alone in the US and even Britain would produce natural capital funds on a scale unimaginable to the typical environmental group. With these financial resources, there is no reason why our environmental problems cannot be tackled, and the aggregate rule met. Economic growth can and should continue on a sustainable basis. We can go on benefiting from all the technological progress, the sort of progress that brought us trains and cars, and electricity and the internet, and at the same time protect and enhance our environment. But if we do not follow the aggregate rule, the risks are great and Hobbes’s description of life as ‘nasty, brutish and short’ could well be the fate of many in poorer countries, even if the rich escape the worst of the consequences. There is then an optimistic, positive way of looking at the environmental challenges we face. It can be done – economic growth and sustainability can be combined. Indeed they have to be. The prize that results is great. Biodiversity can be protected and enhanced. The climate can be stabilized.

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Another 3 billion people can be fed. But in all three cases, it will take considerable technological progress. The easy bit is climate change. The sun comes up every day, and breakthroughs in the next generation of solar power look increasingly likely. It might be possible radically to reconfigure energy consumption, and radically reduce greenhouse gas emissions. This may be within decades. New forms of storage, electric cars, IT-enabled households, and long-distance transmission cable technologies are all very real prospects. Put another way, without them, the climate is probably stuffed, since existing renewables and existing nuclear cannot bridge the gap, and it is hard to image that global energy demand is going to fall without technological breakthroughs, not least because of population growth. That is a central message of my Carbon Crunch book. Technology helps a lot with protecting biodiversity hotspots, rainforests and particular species. GPS plus drones plus satellite technologies have turned the sorts of destruction all too common in remote locations from the undetected and conveniently ignored to the all-too-obvious and transparent. Turning a blind eye, as so many politicians have done, encouraged by corporate lobbying and in some cases criminal gangs, is harder to do. Science, too, tells us much more about how ecosystems function and reveals the complex interactions that we know so little about. Conservation programmes become much more efficient. In feeding the world, technological progress is essential. Given that almost half the land is already under cultivation, and given the threats to fresh water from nitrates, pesticides and pollution, and to the oceans from greater fishing and poorly regulated aquaculture, it is a tough ask to expect existing technologies to meet the needs of 3 billion more people, especially if they want to eat meat on the same basis as Europeans and Americans do now. In the face of this challenge, the food production technologies are advancing fast, from the GM approaches to a host of other ways of increasing yields. The choice is stark: yields have to increase, or people go hungry. Embracing science and technology as part of the solution rather than the problem comes hard to some environmentalists. Many green NGOs

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favour campaign slogans such as ‘Frankenstein foods’, and argue for a deep aversion to science. ‘Playing safe with science’, putting obstacles in the path as an attempt to step back into a simpler life, is a dream which captures the imagination of the more idealistic and better off, and frequently the young. But sadly it just makes the planet even less sustainable. The campaigners for the simple life, for less intensive agriculture and for a world of wind turbines and current-generation solar panels need to think hard about the implications of what they advocate. There cannot be 10 billion people, all well fed and nourished, in their world. There have to be a lot fewer. That is the kind of coercion that Hardin advocated in his famous article on the tragedy of the commons. There is a perfectly coherent argument here. Fewer people with less consumption could – and indeed did – inhabit the planet in a way that maintains biodiversity and the climate. But a moment’s reflection on what that means tells us that it is hopeless as a strategy. How exactly do you stop people breeding? Give them access to contraceptives, good healthcare and education, yes. But that will not stop the 10 million mark being met. Make them wealthier so that they have fewer children? Maybe, but that increases consumption, and hence the environmental footprint. Better to be honest: this approach requires compulsion, of the sort that China imposed with its one child policy. The results have been horrible, and it has not prevented the massive environmental destruction that China has wreaked on itself and the world in the last two decades. If it is controlling breeding that is required, then E. O. Wilson’s question about whether human beings are suicidal suddenly becomes much more pertinent. It is just not going to happen. This brings us full circle, as indeed a good conclusion should. There is a massive problem. There is a solution. There is a choice as to whether to do what it would take. That choice is not as painful as some would have us believe – those who are more hostile to the environment, and the lobbyists, developers and farmers who resist anything which limits their ability to exploit the natural capital they have control of. Sustainable economic growth is not low growth.

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Better still, making a start locally and nationally, incrementally moving towards the aggregate natural capital rule, helps a lot. It may not make much difference to a genuinely global problem such as carbon emissions, but it does to biodiversity, and it does to the inheritance of the next generation at the local and national level. And best of all it is very practical – a start can be made today with proper natural capital accounting, with creating natural capital funds for the depletion of non-renewables, and with implementing a proper compensation regime. Green taxes can reduce labour taxes and they automatically improve efficiency. And people can benefit from the open spaces, woodlands and national parks – at the local, national and global level. Even better still, it is perfectly feasible not just to hold the line, but to implement major restorations for key species, ecosystems and habitats. This is the natural capital prize, and it is a prize which does not need yet more public expenditure. Imagine what our world would look like if rivers were full of fish, the landscape alive with insects, birds and mammals, and the oceans full of whales and thriving coral reefs. It does not have to be just a dream. But it will be if we do not change our ways and put natural capital at the heart of the economy. We can win the prize, or we can lose yet more of the richness of nature, and with it jeopardize our own futures. Access to, and the enjoyment of, natural capital is an integral part of what makes human life so good. We are ultimately the product of natural capital ourselves, and we are part of nature, not separate from it. It was one of the truly radical insights Darwin gave us. We are, in E. O. Wilson’s words, ‘smart enough and have time enough to avoid an environmental catastrophe of civilization-threatening dimensions’.2 But we do need to get on with it.

Notes

All urls in the notes were current as of December 2014. Introduction: Taking Natural Capital Seriously 1. R. Parslow, The Isles of Scilly (London: Harper Collins, 2007), p. 47. The dwarf pansy can also be found in central and southern Europe. 2. I borrow the terms ‘use’ and ‘delight’ from T. C. Smout, Nature Contested: Environmental History in Scotland and Northern England since 1600 (Edinburgh: Edinburgh University Press, 2000). Economists typically use the rather less exciting terms of ‘use’ and ‘nonuse’ benefits. 3. Natural capital ‘refers to the elements of nature that produce value or benefits to people (directly and indirectly), such as the stock of forests, rivers, land, minerals and oceans, as well as the natural processes and functions that underpin their operation’. Natural Capital Committee,‘The State of Natural Capital: Towards a Framework for Measurement and Valuation’, report, April 2013, p. 10. See also E. B. Barbier, Capitalizing on Nature: Ecosystems as Natural Assets (Cambridge: Cambridge University Press, 2011). 4. For details on the western prairie fringed orchid, see www.iucnredlist.org/details/132834. For a critical comment on the Catskill watershed, see M. Sagoff, ‘The Catskill Parable: A Billion Dollar Misunderstanding’, PERC Report, 23:2 (Summer 2005). 5. See, for example, Wordsworth’s poem ‘Nutting’ and his A Guide through the District of the Lakes, especially the first section, ‘View of the Country as Formed by Nature’. First published in 1810, the work is best known from its updated 1835 fifth edition. See also T. Carlyle, ‘Occasional Discourse on the Negro Question’, Fraser’s Magazine for Town and Country, London, 1849. 6. H. D. Thoreau, Walden; or, Life in the Woods (Boston: Ticknor & Fields, 1854). 7. At the current 7% per annum, China would be a staggering – and implausible – 250 times bigger in 2100 than now. 8. See L. Lear, Rachel Carson: Witness for Nature (New York: Allen Lane, 1997), pp. 119–20. 1 Facing up to the Challenges 1. E. O. Wilson, In Search of Nature (London: Allen Lane), 1996, p. 184. 248

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2. G. Parker, Global Crisis: War, Climate Change and Catastrophe in the Seventeenth Century (London: Yale University Press, 2013). 3. For growth rates over the last 1,000 years, see A. Maddison, The World Economy, vol. 1: A Millennial Perspective; vol. 2: Historical Statistics (Paris: OECD, 2006). 4. See J. R. McNeill, Something New under the Sun: An Environmental History of the Twentieth Century World (New York: W. W. Norton, 2000). 5. See D. Dorling, Population 10 Billion: The Coming Demographic Crisis and How to Survive It (London: Constable, 2013). 6. P. Gerland et al., ‘World Population Stabilization Unlikely This Century’, Science, 346 (Sept. 2014), pp. 234–7. 7. J. M. Keynes, ‘The Economic Possibilities for Our Grandchildren’, in Essays in Persuasion, vol. 9 of The Collected Writings of John Maynard Keynes (London: Macmillan, 1930). 8. D. Helm, The Carbon Crunch: How We’re Getting Climate Change Wrong – and How to Fix It (London: Yale University Press, 2013). 9. According to the Icelandic Sagas, Greenland’s founder, Erik the Red, chose the name to encourage new settlers to follow him from Iceland. 10. World Bank, World Development Report: Agriculture for Development (Washington, DC: World Bank, 2008). See also H. C. J. Godfray et al., ‘Food Security: The Challenge of Feeding 9 Billion People’, Science, 327 (Feb. 2010), pp. 812–18; and H. C. J. Godfray and T. Garnett, ‘Food Security and Sustainable Intensification’, Philosophical Transactions of the Royal Society, Biological Sciences, 369 (Feb. 2014). 11. Godfray et al., ‘Food Security’, p. 816. 12. See E. B. Barbier, ‘Natural Capital’, in D. Helm and C. Hepburn (eds), Nature in the Balance: The Economics of Biodiversity (Oxford: Oxford University Press, 2013), ch. 8. 13. See Helm, The Carbon Crunch, ch. 4. 14. UK wheat production in 2013 was 12 million tonnes. Biofuels will take 1 million tonnes, potentially rising to 2.5 million tonnes. For a list of the key plants and wheat consumption, see http://www.biofuelwatch.org.uk/uk-campaign/companies/. 15. See T. Searchinger et al., ‘Use of US Croplands for Biofuels Increases Greenhouse Gases through Emissions from Land-Use Change’, Science, 319 (Feb. 2008), pp. 1238–40. 16. See James Owen, ‘Farming Claims Almost Half Earth’s Land, New Maps Show’, National Geographic News, 9 Dec. 2005, at http://news.nationalgeographic.com/ news/2005/12/1209_051209_crops_map.html. In 1700 it was 7%. For individual country data see World Bank, ‘Agricultural Land (% of Land Area)’, at http://data.worldbank.org/indicator/AG.LND.AGRI.ZS. The numbers are sensitive to the treatment of ice-covered and mountainous lands. 17. Roger Lovegrove’s Silent Fields provides a depressing documentation of the destruction of Britain’s wildlife through agriculture and the ‘war on nature’ since the Middle Ages. R. Lovegrove, Silent Fields: The Long Decline of a Nation’s Wildlife (Oxford: Oxford University Press, 2007). 18. N. Myers et al., ‘Biodiversity Hotspots for Conservation Priorities’, Nature, 403 (Feb. 2000), pp. 853–8. 19. It is argued that the rate of rainforest depletion from logging is slowing down – a green transition analogous to the demographic transition. Yet destruction is not confined to logging. There are lots of more subtle impacts on biodiversity. 20. Millennium Ecosystem Assessment, Ecosystems and Human Well-Being: A Synthesis (Washington, DC: Island Press, 2005). 21. WWF, Living Planet Report 2014: Species and Spaces, People and Places, ed. R. McLellan et al. (Gland: WWF, Sept. 2014). 22. E. O. Wilson, The Diversity of Life (Cambridge, MA: Harvard University Press, 1992), p. 268. 23. See C. D. Thomas, ‘Local Diversity Stays about the Same, Regional Diversity Increases, and Global Diversity Declines’, PNAS, 110:48 (26 Nov 2013), pp. 19187–8.

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24. See Uist Wader Project, ‘All about Uist Hedgehogs’, Factsheet 3, at www.snh.org.uk/ pdfs/news/nw-uwp03.pdf. 25. See ‘Restoring Bison to the American West’ on the National Wildlife Federation website at http://www.nwf.org/What-We-Do/Protect-Wildlife/Bison-Restoration.aspx. 26. T. Malthus, Essay on the Principle of Population (1798). There are many interpretations of what Malthus’s position was, and it changed substantially in the second edition. For a recent reinterpretation, see R. J. Mayhew, Malthus: The Life and Legacies of an Untimely Prophet (Cambridge, MA: Harvard University Press, 2014). 27. The environmental pessimists have always worried about population numbers. Back in the late 1960s and early 1970s – when the global population was little more than half the current levels – it was fashionable in environmental circles to put population growth as the number one problem. Garrett Hardin’s ‘The Tragedy of the Commons’, for example, was primarily an argument about family size and population. He described the population problem as a member of the class of ‘no technical solutions problems’, which needed to be forcibly limited. G. Hardin, ‘The Tragedy of the Commons’, Science, 162 (1968), pp. 1243–8. The British naturalist Sir David Attenborough has recently added his voice to the ‘too many people’ cause. 28. D. H. Meadows et al., The Limits to Growth: A Report for the Club of Rome’s Project on the Predicament of Mankind (New York: Universe Books, 1972). 29. Prologue, in P. R. Ehrlich, The Population Bomb: Population Control or Race to Oblivion? (New York: Ballantine Books, 1968). 30. Preface, in E. Goldsmith et al., ‘A Blueprint for Survival’, The Ecologist, 2:1 (Jan. 1972). 31. The summit did have some concrete outcomes, not least the UN Framework Convention on Climate Change and the UN Convention on Biological Diversity. 32. D. Helm, ‘Peak Oil and Energy Policy: A Critique’, Oxford Review of Economic Policy, 27:1 (2011). 33. The ‘end of resources’ argument took on a personal dimension when economist Julian Simon challenged Paul Ehrlich to a bet in 1980. He bet Ehrlich that the price of five chosen commodities would decrease over the next decade. Ehrlich lost comprehensively. 34. For an accessible discussion of the five great extinction events, see A. Hallam and P. B. Wignall, Mass Extinctions and the Aftermath (Oxford: Oxford University Press, 1997); and A. Hallam, Catastrophes and Lesser Calamities: The Causes of Mass Extinctions (Oxford: Oxford University Press, 2005). 2 Sustaining Economic Growth 1. The Brundtland Commission – or the World Commission on Environment and Development (WCED) – was formally set up by the United Nations in 1984 and published its key report in 1987. WCED, ‘Our Common Future: Report of the World Commission on Environment and Development’, The Brundtland Report, United Nations, 1987. 2. WCED, ‘Our Common Future’, ch. 2. 3. This is John Stuart Mill’s utilitarianism, caveated by the paramount claims of individual liberty. He famously confused matters by setting out a conventional utilitarianism in ‘Utilitarianism’, 1861, having previously added in the constraint of liberty in On Liberty in 1859. Amartya Sen showed how the latter position is inconsistent with a utility-based Paretian approach to welfare economics in his seminal article ‘The Impossibility of a Paretian Liberal’, Journal of Political Economy, 78:1 (1970), pp. 152–7. See also his discussion in A. Sen, The Idea of Justice (London: Allen Lane, 2009), pp. 309–14. 4. F. Ramsay, ‘A Mathematical Theory of Savings’, Economics Journal, 38 (1928), pp. 543–59.

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5. N. Stern, The Economics of Climate Change: The Stern Review (Cambridge: Cambridge University Press, 2007), p. 35. 6. For both a critique of Stern and an alternative approach, see D. Helm, The Carbon Crunch: How We’re Getting Climate Change Wrong – and How to Fix It (London: Yale University Press, 2013). 7. E. Brynjolfsson and A. McAfee, The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (New York: W. W. Norton, 2014). 8. For a detailed exposition and critique of the differing versions of strong and weak sustainability see E. Neumayer, Weak versus Strong Sustainability: Exploring the Limits of Two Opposing Paradigms (Cheltenham: Edward Elgar, 2003). For a radical critique, see ‘The Shaky Ground of Sustainable Development’, in D. Worster, The Wealth of Nature: Environmental History and the Ecological Imagination (New York: Oxford University Press, 1993), ch. 12. 9. J.-J. Rousseau, The Social Contract, or Principles of Political Right (1762). 10. T. Hobbes, Leviathan or The Matter, Forme and Power of a Common Wealth Ecclesiasticall and Civil (London, 1651). 11. K. Thomas, Man and the Natural Environment: Changing Attitudes in England 1500– 1800 (London: Penguin Books, 1984), p. 14. 12. G. M. Trevelyan’s 1931 Rickman Godlee Lecture, ‘The Call and Claims of Natural Beauty’, expresses this view, and it was one that informed the National Trust’s outlook, to which he contributed significantly. 13. Malthus used the US example as evidence that population could double in 25 years if unchecked by agricultural constraints. 14. See Antony Flew’s ‘Introduction’ to Malthus’s Essay on the Principle of Population – in particular p. 35. T. Malthus, Essay on the Principle of Population, ed. Anthony Flew (Harmondsworth: Pelican Books, 1970). 15. B. Ward and R. Dubos, Only One Earth: The Care and Maintenance of a Small Planet (W. W. Norton, 1972); R. Carson, Silent Spring (Boston: Houghton Mifflin, 1962); G. Hardin, ‘The Tragedy of the Commons’, Science, 162 (1968), pp. 1243–8; and P. R. Ehrlich, The Population Bomb: Population Control or Race to Oblivion? (New York: Ballantine Books, 1968). 16. Neumayer, Weak versus Strong Sustainability. 17. See F. Dikötter, Mao’s Great Famine: The History of China’s Most Devastating Catastrophe, 1958–62 (London: Bloomsbury, 2010). 18. See D. Stamp, Nature Conservation in Britain (London: Collins, 1974). 19. For a history of the evolution of landownership, see A. Linklater, Owning the Earth: The Transforming History of Land Ownership (London: Bloomsbury, 2014). 20. Note the implication that natural capital is not strictly distinct from man-made capital. The critical definitional difference is the fact that nature itself has not been manufactured, even if the contexts within which it exists are. Within these contexts nature continues to be produced for free. 3 Defining the Aggregate Natural Capital Rule 1. This is Hicksian income. See Hicks’s classic papers on income and social accounting in J. R. Hicks, Wealth and Welfare, vol. 1 of Collected Essays in Economic Theory (Oxford: Basil Blackwell, 1981). 2. The Pareto principle states that any change should be made if it leaves at least one person better off, and no one worse off, in utility terms. When all these changes or trades have been made, an efficient optimum will have been reached. The first fundamental theorem of welfare economics connects this with a perfectly competitive general equilibrium.

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3. Locke published his Two Treatises of Government anonymously in 1690. 4. J. Rawls, A Theory of Justice (Cambridge, MA: Harvard University Press, 1971). 5. See A. Sen, The Idea of Justice (London: Allen Lane, 2009), pp. 231–5, and also his earlier work Commodities and Capabilities (Oxford: Oxford University Press, 1987). 6. For an account of the early history of the National Trust, see G. Murphy, Founders of the National Trust (London: Christopher Helm, 1987). 7. In the German case, urban spaces had their advocates, but the special geographical challenges of flooding and the wilderness of water and marshes drove, in the words of the title of David Blackbourn’s study, the conquest of nature. See D. Blackbourn, The Conquest of Nature: Water, Landscape and the Making of Modern Germany (London: Pimlico, 2007). 8. Key legislation included the Town and Country Planning Act 1947, and the 1949 National Parks and Access to the Countryside Act. 9. A good survey of the health benefits of exposure to nature is provided in C. Maller et al., ‘Healthy Nature Healthy People: “Contact with Nature” as an Upstream Health Promotion Intervention for Populations’, Health Promotion International, 21:1 (2005). 10. See ‘Photosynthesis: Summoned by the Sun’, in N. Lane, Life Ascending: The Ten Great Inventions of Evolution (London: Profile, 2010), ch. 3. 11. The Hartwick–Solow rule in the economics literature refers to the depletion primarily of non-renewable natural capital, and requires the reinvestment of the economic rents from depletion. See J. M. Hartwick, ‘Intergenerational Equity and the Investment of Rents from Exhaustible Resources’, American Economic Review, 67 (Dec. 1977), pp. 972–4; and R. M. Solow, ‘Intergenerational Equity and Exhaustible Resources’, Review of Economic Studies, 41 (1974), pp. 29–46. 12. See D. Helm, ‘Infrastructure and Infrastructure Finance: The Role of the Government and the Private Sector in the Current World’, EIB Papers, 15.2 (2010), pp. 8–27. 13. D. Pearce, E. Barbier and A. Markandya, Sustainable Development: Economics and Environment in the Third World (Aldershot: Edward Elgar, 1990). 14. M. Scott, ‘What Sustains Economic Development?’, in I. Goldin and L. A. Winters (eds), The Economics of Sustainable Development (Cambridge: Cambridge University Press, 1995). 15. Scott, ‘What Sustains Economic Development?’, p. 87. 16. W. Beckerman, Small Is Stupid: Blowing the Whistle on the Greens (London: Duckworth, 1995). 17. E. Fuller, The Passenger Pigeon (Princeton: Princeton University Press, 2015). 18. See M. L. Weitzman, ‘Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change’, Symposium on Fat Tails and the Economics of Climate Change, Review of Environmental Economics and Policy, 5:2 (Summer, 2011), pp. 275–92. 19. See E. C. Economy, The River Runs Black: The Environmental Challenge to China’s Future (Ithaca, NY: Cornell University Press, 2004). 20. See details at www.un-redd.org. 4 Accounting for Natural Capital 1. In theory, output should equal income, which should equal expenditure for the economy as a whole – what we earn is the same as what we spend, net of savings. Savings are translated into investment. Borrowing, debt, imports and exports and capital flow complicate matters, but the basic idea of a circularity between income, expenditure and production helps to explain why the discussion can switch between the three concepts. They are all flows, not stocks, and hence about current income rather than assets. 2. For a non-technical survey, see D. Coyle, GDP: A Brief but Affectionate History (Princeton: Princeton University Press, 2014).

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3. L. Strachey, Eminent Victorians (London: Chatto & Windus, 1918). 4. J. M. Keynes, ‘Economy’, in Essays in Persuasion, vol. 9 of The Collected Writings of John Maynard Keynes (London: Macmillan, 1930), ch. 6, p. 138. 5. R. Lucas, ‘Macroeconomic Frontiers’, American Economic Review, 93:1 (2003), pp. 1–14. Brown repeated his claim that there would be no return to boom and bust in his budget statements in 2000, 2001 and 2006, and as the crisis broke around him in 2007. 6. J. M. Keynes, The General Theory of Employment, Interest, and Money (London: Macmillan, 1936), p. 129. His specific example involved burying banknotes in old coal mines, filling the holes in with rubbish, and then leaving it to private enterprise to dig them up again. As a result, ‘there would be no more unemployment’, and capital wealth would probably be greater. 7. Keynes famously made the remark that in the long run we are all dead. While in a recession the short term is pressing, it is the neglect of the long run, and the view that the long run could look after itself, which differentiates Keynesian economics from that focused on the environment. 8. C. M. Reinhart and K. S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press, 2009). 9. The Ricardian equivalence theory set out the conditions under which borrowing will be exactly offset by savings. It was first proposed by David Ricardo in relation to war bonds in early nineteenth-century Britain. Robert Barro’s famous article ‘Are Government Bonds Net Wealth?’ was published in 1974 in the Journal of Political Economy, 82:6, pp. 1095–117. 10. The disastrous collapse of the civilization at Easter Island is a matter of considerable dispute – see T. Hunt and C. Lipo, The Statues That Walked: Unraveling the Mystery of Easter Island (New York: Free Press, 2011). 11. In William’s case, he needed the money to defend his southern flanks in France, and to beat off the constant invasion threats to England, as well as dealing with internal rebellions in both France and England. 12. K. Hamilton and G. Lui, ‘Human Capital, Tangible Wealth, and the Intangible Capital Residual’, Oxford Review of Economic Policy, 30:1 (2014), pp. 70–91. 13. See also, UNU-IHDP and UNEP, Inclusive Wealth Report: Measuring Progress towards Sustainability (Cambridge: Cambridge University Press, 2012), especially chapter 6, ‘Natural Capital and Economic Assets: A Review’, by Partha Dasgupta, and chapter 8, ‘Ecosystem Services and Wealth Accounting’ by Edward Barbier. 14. This is one of many reasons why progress on the accounts of the UN Statistical Commission’s System of Environmental-Economic Accounting has been slow and, while very useful, SEEA is unlikely to form the accounting basis on which to drive policies towards the meeting of our natural capital rule. SEEA uses multiple indicators and measures. See http://unstats.un.org/unsd/envaccounting/seea.asp. For how this comprehensive recording of assets might work, see C. Obst and M. Vardon, ‘Recording Environmental Assets in the National Accounts’, Oxford Review of Economic Policy, 30:1 (2014), pp. 126–44. 15. C. Mayer, ‘Unnatural Capital Accounting’, Natural Capital Committee Members’ Discussion Paper 1, 15 Dec. 2013, at https://www.naturalcapitalcommittee.org/ discussion-papers.html. 16. M. Scott, A New View of Economic Growth (Oxford: Oxford University Press, 1989). 17. ONS, ‘UK Natural Capital: Initial and Partial Monetary Estimates’, by J. Khan, P. Greene and A. Johnson, 2 May 2014, at http://www.ons.gov.uk/ons/dcp171766_361880.pdf. There have been lots of accounting exercises around the world, typically within the frameworks of the UN’s System of National Accounts (SNA) and SEEA. The exercise here is, however, distinct – it is all about assets and therefore stocks and not flows. On natural capital the Wealth Accounting and Valuation of Ecosystem Services (WAVES)

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initiative is particularly important; see http://www.wavespartnership.org/en/naturalcapital-accounting-0. 18. M. Shrubb, Birds, Scythes and Combines: A History of Birds and Agricultural Change (Cambridge: Cambridge University Press, 2003). See also The Farmland Bird Indicator (1970–2007) at www.rspb.org.uk. 19. In Britain the National Trust owns large tracts of land and the Royal Society for the Protection of Birds (RSPB) owns nature reserves. Much of this can be regarded as natural capital. 5 Measuring Natural Capital 1. See Michael Wigan’s survey of the challenges to salmon, The Salmon: The Extraordinary Story of the King of Fish (London: HarperCollins, 2014). 2. See K. J. Willis et al., ‘Identifying and Mapping Biodiversity: Where Can We Damage?’, in D. Helm and C. Hepburn (eds), Nature in the Balance: The Economics of Biodiversity (Oxford: Oxford University Press, 2013), ch. 4. 3. See, for example, the classification of habitats in UNEP-WCMC, UK National Ecosystem Assessment: Synthesis of the Key Findings, 2011, at http://uknea.unep-wcmc.org/ Resources/tabid/82/Default.aspx. 4. See D. Ratcliffe, The Peregrine Falcon, 2nd edn (London: T. & A. D. Poyser, 1993). 5. See J. L. Oaks et al., ‘Diclofenac Residues as the Cause of Vulture Decline in Pakistan’, Nature, 427 (12 Feb. 2004). 6. The key paper is G. Mace, ‘Towards a Framework for Defining and Measuring Changes in Natural Capital’, Natural Capital Committee, Working Paper 1, Mar. 2014, at https:// www.naturalcapitalcommittee.org/working-papers.html. 7. See www.icunredlist.org. 8. See J. C. Burgess, C. J. Kennedy and C. Mason, ‘On the Potential for Speculation to Threaten Biodiversity Loss’, in Helm and Hepburn, Nature in the Balance. 9. TEEB, ‘The Economics of Ecosystems and Biodiversity: Mainstreaming the Economics of Nature – A Synthesis of the Approach, Conclusions and Recommendations of TEEB’, European Communities, Geneva, 2010. For numerous updates, see www.teebweb.org. 10. A. Pursell, ‘Too Many Deer: A Bigger Threat to Eastern Forests than Climate Change?’, Cool Green Science blog, Nature Conservancy, 22 Aug. 2013, at http://blog.nature.org/ science/2013/08/22/too-many-deer/§hash.SvDQfZOS.dpuf. 11. See K. Wäber, J. Spencer and P. M. Dolman, ‘Achieving Landscape-Scale Deer Management for Biodiversity Conservation: The Need to Consider Sources and Sinks’, Journal of Wildlife Management, 77:4 (May 2013), pp. 726–36; and DEFRA, ‘Current and Future Deer Management Options’, report by C. J. Wilson on behalf of DEFRA European Wildlife Division, Dec. 2003. 12. Directive 2000/60/EC of the European Parliament and of the Council adopted 23 Oct. 2000, establishing a framework for the Community action in the field of water policy. 13. Directive 2006/7/EC of the European Parliament and of the Council of 15 Feb. 2006 concerning the management of bathing water quality and repealing Directive 76/160/ EEC. 6 Pricing and Valuing Natural Capital 1. G. Hardin, ‘The Tragedy of the Commons’, Science, 162 (1968), pp. 1243–8. 2. This is a version of the ‘prisoner’s dilemma’ – faced with this set of incentives there is no obvious self-interested motivation to cooperate. 3. See E. Ostrom, ‘Collective Action and the Evolution of Social Norms’, Journal of Economic Perspectives, 14:3 (2000), pp. 137–59.

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4. Council Directive 92/43/EEC of 21 May 1992 on the conservation of natural habitats and of wild fauna and flora. 5. Nicholas Stern is a leading example of an economist in the ‘low costs’ camp. For a critique of Stern’s analysis, see D. Helm, The Carbon Crunch: How We’re Getting Climate Change Wrong – and How to Fix It (London: Yale University Press, 2013). 6. One scientist who has confronted the question of whether current renewables could solve climate change is David MacKay, see Sustainable Energy – Without the Hot Air (Cambridge: UIT, 2008). 7. See European Commission, ‘The Common Fisheries Policy’, at http://ec.europa.eu/ fisheries/cfp/index_en.htm. 8. These are roughly the same choices that the DFT faces today in the case of the HS2 rail line, which will run from London to the north, cutting through the Chilterns on the way. Given that the option of doing nothing has been discarded, it is all about whether and, if so, how much to tunnel. The question then is whether the value of Twyford Down (or the Chilterns) is likely to be greater than the cost of the tunnel. 9. See, for example, I. J. Bateman and J. Mawby, ‘First Impressions Count: A Study of the Interaction of Interviewer Appearance and Information Effects in Contingent Valuation Studies’, Ecological Economics, 49:1 (2004), pp. 47–55. 10. The planning process for Twyford Down has spawned a large literature. For an overview of some of the many complex issues, see B. Bryant, Twyford Down: Roads, Campaigning and Environmental Law (London: Routledge, 1995). 11. See Helm, The Carbon Crunch, pp. 182–6. 12. Note how this perverse incentive arises in the case of protected areas around cities. It is argued that since it has been degraded, it can be built on without much additional environmental damage. Similar examples abound in respect of agricultural land. Farmers sometimes plough in advance to avoid restrictions – for example, ‘removing the evidence’ of wildflower meadows before they can be protected. In the case of the US Endangered Species Act, faced with the prospect that a species might be listed, the perverse incentive to prevent this is known as ‘shoot, shovel and shut-up’. 13. For a discussion about US agriculture see B. L. Gardner, American Agriculture in the Twentieth Century: How It Flourished and What It Cost (Cambridge, MA: Harvard University Press, 2002). 14. There are other aspects of this example that we return to in chapter 9. In particular, it is what economists call a public good – my enjoyment does not encroach on yours up to a congestion point. This turns out to be very important in the economics of protected areas. 7 Compensating for Damage 1. On the Exxon Valdez disaster see http://www2.epa.gov/aboutepa/exxon-valdez-oilspill-report-president-executive-summary. The disaster spawned a large literature on the valuation of the damages. See C. L. Kling, D. J. Phaneuf and J. Zhao, ‘From Exxon to BP: Has Some Number Become Better Than No Number?’, Journal of Economic Perspectives, 26:4 (Fall 2012), pp. 3–26. 2. See evidence on offsetting submitted by the Home Builders Federation to the House of Commons Environmental Audit Committee inquiry into biodiversity offsetting at http://data.parliament.uk/writtenevidence/WrittenEvidence.svc/EvidencePdf/3032. 3. DEFRA, ‘Biodiversity Offsetting in England’, Green Paper, Sept. 2013. 4. At a much more local level, charities and trusts often have endowment funds, from the great universities to local conservation organizations. 5. See F. van der Ploeg, ‘Natural Resources: Curse or Blessing?’, Journal of Economic Literature, 49:2 (2011), pp. 366–420.

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6. For possible recovery rates – and hence the case for treating some aspects of forests as renewable assets – see L. E. S. Cole, S. A. Bhagwat and K. J. Willis, ‘Recovery and Resilience of Tropical Forests after Disturbance’, Nature Communications, 5 (May 2014), at http://www.nature.com/ncomms/2014/140520/ncomms4906/full/ncomms4906.html. 7. For international comparisons see B. A. McKenney and J. M. Kiesecker, ‘Policy Development for Biodiversity Offsets: A Review of Offset Frameworks’, Environmental Management, 45 (2010), pp. 165–76. For Britain see DEFRA, ‘Biodiversity Offsetting in England’. 8. A 2012 study by the Environment Bank argued that ‘offsetting is both appropriate and feasible to ensure no net loss of nightingale habitat at Lodge Hill’. Others, notably the RSPB and the Kent Wildlife Trust, take a very different view. Environment Bank Ltd, ‘Independent Assessment of the Potential for Biodiversity Offsetting to Compensate for Nightingale Habitat Loss at Lodge Hill, Kent’, July 2012. 9. For a study on restoration time lags see B. A. Woodcock et al., ‘Identifying Time Lags in the Restoration of Grassland Butterfly Communities: A Multi-site Assessment’, Biological Conservation, 155 (Oct. 2012), pp. 50–8; and J. M. R. Benayas et al., ‘Enhancement of Biodiversity and Ecosystem Services by Ecological Restoration: A Meta-analysis’, Science, 325 (Aug. 2009), pp. 1121–4. 10. For a summary see www.parliament.uk/briefing-papers/SN06418.pdf. 11. There are wider philosophical difficulties here. See R. Elliot, ‘Faking Nature’, Inquiry, 25:1 (1982). 8 Taxing Pollution 1. The Oslo Convention on the Prevention of Marine Pollution by Dumping from Ships and Aircraft brought dumping of sewage sludge to an end in the North Sea in 1998. 2. R. Coase, ‘The Problem of Social Cost’, Journal of Law and Economics, 3 (Oct. 1960), pp. 1–44. 3. A. C. Pigou, The Economics of Welfare (London: Macmillan, 1920). 4. For more on the long battles over Galloway, see M. Wigan, The Salmon: The Extraordinary Story of the King of Fish (London: HarperCollins, 2014), pp. 190–5. 5. See ‘Environmental Taxation’, chapter 10 in the final report of the Mirrlees Review of Taxation. J. Mirrlees et al., Tax by Design: The Mirrlees Review, Institute of Fiscal Studies (Oxford: Oxford University Press, 2011). 6. The lobbying against the carbon floor price would be more credible if it instead focused on the unilateral target in the context of a global externality. The tax is an efficient way of achieving the target, but the target is not an efficient way of dealing with global climate change, especially where near-neighbour trading partners in Europe do not have such instruments. See D. Helm, The Carbon Crunch: How We’re Getting Climate Change Wrong – and How to Fix It (London: Yale University Press, 2013). 7. On trading schemes see T. Tietenberg, ‘The Tradable-Permits Approach to Protecting the Commons: Lessons for Climate Change’, Oxford Review of Economic Policy, 19:3 (2003), pp. 400–19. 8. The classic article is M. L. Weitzman, ‘Prices vs. Quantities’, Review of Economic Studies, 41:4 (1974), pp. 477–91. For an assessable comparison of taxes and permits, see C. Hepburn, ‘Regulating by Prices, Quantities or Both: An Update and an Overview’, Oxford Review of Economic Policy, 22:2 (2006), pp. 226–47. 9. See Helm, The Carbon Crunch, ch. 9. 10. An example of direct hypothecation is the Landfill Levy, where the revenues were channelled through an environment fund, to be spent on environmental schemes. A levy of around €15 per tonne on the landfill of waste was introduced on 1 June 2002 under the Waste Management (Landfill Levy) Regulations 2002. It was designed to encourage the

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11. 12. 13. 14. 15.

16.

17. 18.

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diversion of waste away from landfill and generate revenues that can be applied in support of waste minimization and recycling initiatives. In 2013 the National Farmers’ Union published yet another paper, ‘It’s Time to Back British Farming’, supporting this largely spurious argument. http://www.nfuonline. com/back-british-farming/news-channel/its-time-to-back-british-farming/. D. J. Lynch and A. Bjerga, ‘Taxpayers Turn U.S. Farmers into Fat Cats with Subsidies’, Bloomberg, 9 Sept. 2013, at http://www.bloomberg.com/news/2013-09-09/farmersboost-revenue-sowing-subsidies-for-crop-insurance.html. J. Heller, Catch-22 (New York: Simon & Schuster, 1961). For a survey and examples, see N. Myers and J. Kent, Perverse Subsidies: How Tax Dollars Can Undercut the Environment and the Economy (Washington, DC: Island Press, 2001). For a concise critique of the perverse effects of subsidies for ethanol production in the US, see C. A. Carter and H. I. Miller, ‘Ethanol Subsidies: Dumping Corn in the Ocean Would Be a Better Idea’, Forbes, 6 July 2011, at http://www.forbes.com/sites/henrymiller/ 2011/06/07/ethanol-subsidies-dumping-corn-in-the-ocean-would-be-a-better-idea/. The evidence suggests, however, that many such schemes are ill designed. See N. Hanley et al., ‘Incentives, Private Ownership, and Biodiversity Conservation’, in D. Helm and C. Hepburn (eds), Nature in the Balance: The Economics of Biodiversity (Oxford: Oxford University Press, 2013), ch. 14. In October 2014 the NFU launched a major lobbying campaign to defend the use of a range of chemicals the EU was seeking to phase out and ban. See http://www.nfuonline. com/science-environment/pesticides/nfu-responds-to-andersons-report/. D. Helm, ‘Regulatory Reform, Capture, and the Regulatory Burden’, Oxford Review of Economic Policy, 22:2 (Summer 2006), pp. 169–85. 9 Protecting the Commons

1. G. Hardin, ‘The Tragedy of the Commons’, Science, 162 (1968), pp. 1243–8. 2. See World Database on Protected Areas, at http://www.protectedplanet.net/. 3. The 1945 White Paper on National Parks was followed by the 1949 Act to establish national parks in order to preserve and enhance their natural beauty and provide recreational opportunities for the public. The first ten national parks to be designated started with the Peak District in 1951, followed by the Lake District, Snowdonia, Dartmoor, Pembrokeshire Coast, North York Moors, Yorkshire Dales, Exmoor, Northumberland and Brecon Beacons National Parks. 4. This different ownership of minerals helps to explain why shale oil and gas have been developed much faster in the US. The landowner has every incentive to frack. 5. Peat bogs grow at an average rate of 1 millimetre per year in raised UK mires. For studies of peat growth rates, see H. Rydin and J. Jeglum, The Biology of Peatlands (Oxford: Oxford University Press, 2006), pp. 250–7; K. E. Barber et al., ‘A Sensitive High-resolution Record of Late Holocene Climatic Change from a Raised Bog in Northern England, Holocene, 4 (1994), pp. 198–205; and J. A. Tallis, ‘Blanket Mires in the Upland Landscape’, in B. D. Wheeler et al. (eds), Restoration of Temperate Wetlands (Chichester: Wiley, 1996), pp. 495–508. 6. National parks are not, however, confined to providing services. They carry out regulatory functions too, especially in respect of planning. 7. I. J. Bateman, A. A. Lovett and J. S. Brainard, Applied Environmental Economics: A GIS Approach to Cost–Benefit Analysis (Cambridge: Cambridge University Press, 2003); and A. Sen et al., ‘Economic Assessment of the Recreational Value of Ecosystems in Great Britain’, Environmental and Resource Economics, 57:2 (2014), pp. 233–49. 8. Independent Panel on Forestry, ‘Final Report’, Department of Environment, Food and Rural Affairs, 4 July 2012, at https://www.gov.uk/government/publications/ independent-panel-on-forestry-final-report.

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9. See Robert Skidelsky’s account of Keynes’s extended version of the state in the first volume of his biography, John Maynard Keynes: Hopes Betrayed, 1883–1920 (London: Macmillan, 1983). 10. J. R. Hicks,‘Annual Survey of Economic Theory: The Theory of Monopoly’, Econometrica, 3:1 (1935), pp. 1–20. 10 The Prize: Restoring Natural Capital 1. E. O. Wilson, The Diversity of Life (Cambridge, MA: Harvard University Press, 1992), p. 209. This can be expressed in an area–species equation, S = CAz, where S is the number of species, C is a constant and A is the area. Z is a parameter which holds constant for a given group of organisms and a set of islands. 2. It has been convincingly argued that island biogeography is dominated by the economic isolation of human populations, instead of the geographical distance. See M. T. Helmas, D. L. Mahler and J. B. Losos, ‘Island Biogeography of the Anthropocene’, Nature, 513 (2014), pp. 543–6. 3. For a description of Chimney Meadows and a map see http://www.bbowt.org.uk/ reserves/chimney-meadows. Details of the wider restoration plan for the upper Thames can be found at http://ibrochurepro.com/11620LivingLandscapes/ib/. 4. For details of the Rhine salmon recovery plan, see http://www.iksr.org/fileadmin/user_ upload/Dokumente_en/rz_engl_lachs2020_net.pdf. 5. The most infamous US case is that of the Cuyahoga River fire in 1969. See http:// clevelandhistorical.org/items/show/63#.VEt9PYvF800. For an example of the state of Chinese rivers, see ‘China Pulls Nearly 6,000 Dead Pigs from Shanghai River’, at http:// www.bbc.co.uk/news/world-asia-china–21766377. 6. J. Lawton, ‘Making Space for Nature: A Review of England’s Wildlife Sites and Ecological Network’, report to DEFRA, Sept. 2010. 7. See A. Grant, ‘Restoration and Creation of Saltmarshes and Other Intertidal Habitats’, Centre for Ecology, Evolution and Conservation, University of East Anglia, at http:// www.uea.ac.uk/~e130/Saltmarsh.htm#. 8. W. G. Hoskins, The Making of the English Landscape (London: Hodder & Stoughton, 1955). 9. This is exactly what happened. The arrival of factory ships in the 1950s greatly enhanced the catch sizes. These peaked in 1968, and then a collapse set in. For a summary see ‘The Collapse of the Grand Banks Cod Fishery’, at http://britishseafishing.co.uk/the-collapseof-the-grand-banks-cod-fishery/. 10. US Geological Survey, ‘90 Billion Barrels of Oil and 1,670 Trillion Cubic Feet of Natural Gas Assessed in the Arctic’, news release, 23 July 2008, at www.usgs.gov/newsroom/ article.asp?ID=1980#.VCbzNkYtC00. 11. For a summary of the issues, see G. G. Koerkamp,‘Olympic Winter Games Have Damaging Effect on Sochi’s Environment’, Deutsche Welle, 21 Feb. 2014, at http://www.dw.de/ olympic-winter-games-have-damaging-effect-on-sochis-environment/a–17449525. 12. S. Barrett, Environment and Statecraft: The Strategy of Environmental Treaty-Making (Oxford: Oxford University Press, 2005). 13. The various Australian government protection plans for the Great Barrier Reef can be found at http://www.environment.gov.au/marine/gbr/protecting-the-reef. 11 Finance: Paying for Natural Capital 1. See documents relating to the National Infrastructure Plan from HM Treasury and Infrastructure UK at https://www.gov.uk/government/collections/nationalinfrastructure-plan.

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2. The ONS estimates of natural capital at the end of 2013 showed that the depletion is still significant – some 4% between 2007 and 2011. These estimates combine a partial coverage of non-renewables with one main ecoservice – recreation – which dominates everything else. This is one reason why they are of limited value in providing much guidance to what the comprehensive numbers might be. 3. A similar argument is mounted for focusing on carbon consumption embedded in imports rather than just products produced in Britain in D. Helm, The Carbon Crunch: How We’re Getting Climate Change Wrong – and How to Fix It (London: Yale University Press, 2013), see pp. 67–72. 4. See Helm, The Carbon Crunch. 5. The exception is the UK Independence Party (UKIP). 6. DEFRA, ‘The Natural Choice: Securing the Value of Nature’, White Paper, Stationery Office, June 2011. 7. The objective was stated as follows: ‘The Government wants this to be the first generation to leave the natural environment of England in a better state than it inherited. To achieve so much means taking action across sectors rather than treating environmental concerns in isolation.’ DEFRA, ‘The Natural Choice’, p. 3. 8. Department of the Environment, ‘This Common Inheritance: Britain’s Environmental Strategy’, White Paper, Stationery Office, 1990. 9. It formally reports to a Cabinet economic subcommittee. These details matter – reporting to an economics committee makes the finance ministry rather than the environment ministry central to its advice. It is one step in the institutional process of tying in the environment to the economy. 10. See the committee’s terms of reference at www.naturalcapitalcommittee.org/terms-ofreference.html. 11. See UNEP-WCMC, UK National Ecosystem Assessment: Synthesis of the Key Findings, 2011, at http://uknea.unep-wcmc.org/Resources/tabid/82/Default.aspx; and Ecosystem Markets Task Force, ‘Realising Nature’s Value: The Final Report of the Ecosystem Markets Task Force’, report to Secretaries of State for Environment, Food and Rural Affairs; Business, Innovation and Skills; and Energy and Climate Change, Mar. 2013. 12 Conclusion 1. M. Rees, Our Final Century: Will the Human Race Survive the Twenty-First Century? (London: William Heinemann, 2003). 2. E. O. Wilson, In Search of Nature (London: Allen Lane, 1996), p. 191.

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Index

accounting assets 85, 87, 242 balance sheets 86–7, 92 business-as-usual 9 importance of 79, 242 natural capital accounting 89, 94–6 restatement of economic growth 80 see also national income accounting Africa area effects 205 carbon emissions 163 development 70, 72 economic growth 225 exported natural capital products 229 oil 33 population 20, 24 rent-seeking behaviour 149 wealth funds 148 see also South Africa aggregate asset rule 65 aggregate natural capital funds see natural capital funds aggregate natural capital rule asset-based approach 9, 55–8 compensation 11, 142, 158 conceptual objections 66–8 defined 8 domain of 73–4 financing 13, 220 implementing 9, 243–4, 247 measurement units 65

266

as minimal constraint 73 and natural capital funds 10, 64, 229 objections to 66–73 operationalization 67 policy design 139 political implications 242 and poverty 70–2 pricing 133 public goods 197 strong version 64, 143, 149 and substitution 55 and sustainability 38, 63–5 and sustainable growth path 11, 74–5, 220, 229, 241–2 weak version 64, 143 agriculture agricultural revolutions 48 business-as-usual scenario 26–7, 29 environmental impacts 95, 118, 201 ethanol production 27, 173 farmers’ unions 131, 175 genetically modified crops 176 intensive 69 land values 130–1 subsidies 172 technology 245 aid obligations 72 alien species, introduction of 28 America see United States American Farm Bureau Federation 131 ancient woodlands 68, 153

INDEX Antarctic 53, 109 aquaculture 211 Arctic 26, 33, 53, 100, 213–14, 216 Arctic Council 213 area effect, biodiversity 203 asset-based approach, aggregate natural capital rule 9, 55–8 assets accounting 85, 87, 242 aggregate asset rule 65 assets-at-risk 104, 133, 236 assets in perpetuity 91–2 auditing 57–8 and capital maintenance 222, 225 and GDP 9, 221 inheritance of 56–7 regulated asset base 186 see also natural assets assets-at-risk 104, 133, 236 assets in perpetuity 91–2 assumed economic growth rate 40–1 Australia 218 balance sheet of accounts 86–7, 92 Baltic 217 Barrett, S. 215 Bateman, I. 125, 126 BBC 181–2 beaches 217 Beckerman, W. 67 benefits, valuation 116 see also cost-benefit analysis benefits risk register 108–9 biodiversity 27–9 and habitats 202–5 hotspots 101, 114, 183, 218, 245 loss of 29, 69–70, 73, 101 offsetting 152–4 risk registers 108–9 TEEB 111, 236 biofuels 173 biomass 27, 49, 151, 173 birds 69 bison 29, 69, 111 Black Death 20 Black Sea 216 bogs see peatlands borrowing 193–4 Botswana 148 Brazil 163, 173, 201 Britain agricultural subsidies 172

267

deer 112 deficits 83 economic growth 22, 225 flood defences 186–8 great crested newts 154 Green Belt 145–6 green national income accounts 93 house-building 143 infrastructure investment 221 man-made habitats 52 natural capital institutional design 234 nightingales 154 North sea oil and gas 1, 93, 149 protected areas 183–4 sewage 162 underground natural assets 184 voluntary sector 182 wealth funds, lack of 148 White Papers 234, 235 woodlands 153 see also under specific places and organisations Brown, G. 84 Brundtland Commission 39–40, 54, 56, 65 Bryher, Isles of Scilly 1, 141 business-as-usual scenario 7–8, 23–9 and accounting 9 assumed growth rate 45 climate change 70 future prospects 23–9, 74–5, 201, 241 public goods 197 unsustainability of 193 Canada 127, 148, 214 Canal and River Trust 208 canals 205 CAP (Common Agricultural Policy) 172, 174, 228 capital defined 2 measuring 98 types of 50 see also human capital; natural capital capital maintenance 90–4 capital maintenance charge 89, 92 and financing 221–3, 225 measuring 104 as mechanism 80 natural capital accounting 95, 96 thresholds 116 The Carbon Crunch (Helm) 26, 245

268 carbon emissions 26, 128–9, 163, 233 Emissions Trading Scheme (EU) 129, 167, 169–70 see also climate change carbon framework 231–2 carbon tax 128, 129, 165, 169, 193 Carson, R. 48 Catskill Mountains watershed, United States 2 charities 182, 196 Chimney Meadows, Britain 203–4, 207 China development 70, 71 economic growth 22, 23, 32, 49, 72, 225 and environment 72, 201, 206, 246 infrastructure investment 61 population 20, 21, 24 resource depletion 87 transformation 83 choices, economics 3 climate, as essential asset 114 climate change challenges of 245 consequences 26 developing countries 150 ‘fat tail problem’ 70 institutions 231 measuring 100–1 policy 120–1 public scepticism 34 speed of 26 temperatures 5, 26 Climate Change Committee 232, 233 climate mitigation 71 Club of Rome report (The Limits to Growth) 31, 32, 36 clubs 181–3 coal 33, 34 Coase, R. 162–3 coastal fringes 217 colonialism 48 Common Agricultural Policy (CAP) 172, 174, 228 Common Fisheries Policy 218 commons, problem of the see problem of the commons companies 161, 162, 236 company accounts 79, 94–5 compensation 139–59 aggregate natural capital rule 11, 142, 158, 244 economics 142

INDEX investing payments 51, 226–7 non-renewables depletion 14, 73, 146–51 objections to 143–6, 152–4 planning system as default 156–9 and property rights 140–3 renewables 152–6 competitive economy 134 comprehensive wealth accounting 89 conifer forests 189 conservation 3, 13–14, 59, 119 consumers compensation costs 11 and pollution 6, 161, 162, 227 and resource depletion 229 consumption energy 245 future patterns 25 and pollution 6, 161, 162, 227 consumption-based approach, economics 56 contained seas 212, 216–17 coral reefs 28, 102 corridors, protected areas 210 corruption 149, 157 cost-benefit analysis 124, 132, 133–6 Cotswold Flyfishers 182 critical thresholds see thresholds Crown Estate 184 culling animals 112 debt 84–6 economic crisis 222, 242 financing 193–4 and GDP 83, 85 national debt 224 deep-water technology, fossil fuels 33 Deepwater Horizon oil spill 139 deer 103, 112, 132 deficits 83 demand side, food 27 demographic transition 24 Department for Environment, Food and Rural Affairs (DEFRA) 208 depletion of resources see resource depletion depreciation 91 developed countries 72 developers, and environmentalists 156, 157 developing countries 20, 72, 150, 225 development 70–2 developmental land, value 144 disaggregation 135

INDEX discontinuities, thresholds 131–2 distance effect, biodiversity 203 Domesday Book 88 Dubos, R. 48 Earth Summit (Rio Summit; UN Conference on Environment and Development) 31 East Anglia 187 economic crisis 222, 225, 242 economic growth assumed rate of 40–1 Britain 22, 225 and capital maintenance 222, 223 China 22, 23, 32, 49, 72, 225 cumulative effects of 25 and environment 22–3, 72 future 5, 19, 24–5 nature of 5 and non-renewable natural capital 243 and proper accounting 80 twentieth century 21–3 unsustainable 38 zero-growth society 37, 50 see also sustainable growth path economics and choices 3 compensation 142 consumption-based approach 56 economic production 6 and environment 6, 36, 234 environmental 131 margins and marginal changes 133 and natural capital 6–7, 11 optimal resource allocation 110 pricing 124 ecosystems climate change impacts 100 core ecosystem services 63 as environmental infrastructures 135 habitats as proxies for 52, 99–100 human intervention 52–3 marginal analysis 113 renewable natural capital units 51 TEEB 111, 236 thresholds 68 Ehrlich, P. R. 31, 48 electricity 34, 66 emissions see carbon emissions Emissions Trading Scheme (EU) 129, 167, 169–70

269

endangered species 102, 106–7 energy biomass 27, 49, 151, 173 consumption 245 fossil fuels 34 geothermal 34 investment 86 nuclear 34, 49, 57, 93, 157, 233, 245 prices 233 solar 34, 67, 151, 245 sources of 20, 49 technology 44, 151, 245 see also wind power environment collapse of 240 damage to 5–6, 45 and economic growth 22–3, 72 and economics 6, 36, 234 enhancing 12–14 government ministries of 230 humanization of 52–3, 111 as natural capital 6 as social primary good 60 see also infrastructures; natural capital Environment Agency 120, 175, 208 environmental economics 131 environmental movements climate change 231 and compensation 144–5, 158 criticism of 3 and developers 156, 157 and Keynesian macroeconomic management 242 and sustainability 38 and technology 245–6 Environmental Protection Agency (EPA) 120 environmental regulations 150, 167 environmental subsidies 132 environmental taxes 132, 150, 166 environmentalists see environmental movements equity 71 intergenerational 57–8, 146–8, 193 estuaries 217 ethanol production 27, 173 ethical socialism 43 ethics 42 EU (European Union) Common Agricultural Policy 172, 174, 228 Common Fisheries Policy 218

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EU (European Union) (cont.) deficits 83 Emissions Trading Scheme 129, 167, 169–70 fish 123 infrastructure investment 61 regulation 167 Water Framework Directive 113, 205–6, 208–9 evolution 36 exclusiveness 140 Exe, River, Britain 186, 188 Exmoor, Britain 1, 131, 141 externalities and compensation 150 pollution 141 positive 159, 171 pricing 132 renewable natural capital 140 extinction episodes 28, 35, 62–3 Exxon Valdez oil spill 139 failed states 58 falcons, peregrine 102–3 farmers’ unions 131, 175 ‘fat tail problem’ 70 Fens, Britain 187 fertilizers 29, 48, 129, 166, 201, 227 financing natural capital 13–14, 220–30 aggregate natural capital rule 13, 220 capital maintenance 221–3, 225 investing compensation payments 226–7 non-renewables 223–5 and perverse subsidies 220, 228 pollution taxes 227 see also natural capital funds; wealth funds fish 122–3, 213, 217–18 see also salmon fishing 212–13, 218 clubs 182 flood defences 186–8, 189, 191 food production 26–7, 245 Forestry Commission 183, 189 forests 68, 151, 183, 189–90, 195, 210 see also rainforests fossil fuels 33–4 see also coal; gas; oil fracking gas 14, 33, 49, 150, 156 fragmentation of responsibilities, rivers 208 future people 40–4, 53–4 and compensation 147

future prospects business-as-usual 23–9, 74–5, 201, 241 climate change 5, 26 economic 5, 19, 24–5, 44, 57 near future 44 pessimistic view 19, 240 population 5, 23–4, 246 resource depletion 32 sustainable growth path 241–2 wealth 24, 40 gas fracking 14, 33, 49, 150, 156 generational selfishness 93 liquid 33 North Sea 1, 93, 149 reserves 34, 184, 213 technical progress 213 United States 2 GDP (gross domestic product) 80–6 and assets 9, 221 and debt 83, 85 and natural capital 79 political and economic discourse 79 generational approach, pairwise 44 generational selfishness 93 genetically modified crops 176 geographical areas, habitats 101–2 geothermal power 34 Germany 22, 206 global warming see climate change Goldsmith, E. 31 good life 57, 59, 60 grandfathered permits 169 Great Barrier Reef, Australia 218 Great Britain see Britain Great Plains, United States 29, 69, 111 Green Belt, Britain 145–6 green national income accounts 93 Green Party 49 green wash 38 greenhouse gases 70, 100, 120, 245 see also carbon emissions; climate change Greenland 213, 214 gross domestic product see GDP habitats and biodiversity 202–5 creation and restoration 154–5, 210–11 marginal analysis 113 measuring 101–2 as proxies for ecosystems 52, 99–100

INDEX as proxies for species 99–100 re-wilded 53 state of 104 targets 113 Hails, R. 105 Hamilton, K. 89 happiness 57 Hardin, G. 48, 118, 119, 180 health benefits, forests 190 Heller, J. 172–3 Helm, D., The Carbon Crunch 26, 245 Hicks, J. R. 196 Hill, O. 59 Hobbes, T. 46 house-building 143–4 human capital 240 human nature 42–3, 242 humanization of environment 52–3, 111 humans see people hypothecation, pollution taxes 170–1, 193, 227 Iceland 214 imperialism 48 imported natural capital products 229–30 improving natural capital 109–14 incentives, perverse 129 income-based approach, economics 56 India 20, 59, 72, 103, 201 indicator species 102 Indonesia 173 inequality 71 information technology 83 infrastructure assets 90, 114 infrastructures assets in perpetuity 91 enhancing 136 environmental 135 infrastructure assets 90, 114 as public goods 184 and sustainability 90 and sustainable growth path 114 infrastructures (man-made) features of 65–6 investment 61 investment programmes 221, 226 maintenance neglect 85 national income accounting 88 inshore waters 217 institutions climate change 231 and compensation 146, 159

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institutional capability 14 see also natural capital institutions interest groups 143 intergenerational equity 57–8, 146–8, 193 intergenerational fund 51 international dimension natural capital funds 229 restoration plans 219 international law 214, 216 International Union for Conservation of Nature (IUCN) 106 introduction of alien species 28 irreversibility, thresholds 68 Israel 33 ivory 229 Japan 22 Keats, J. 154 Keynes, J. M. 25, 82 Keynesian economists 85, 148, 222, 242 keystone assets 90 Keystone Pipeline 127 keystone species 102 Kuwait 148 Kuznets, S. 81 Kyoto Protocol 71 land restoration 209–11, 228 land value agricultural 130–1 developmental 144 large-scale restoration 202–5, 247 law, international 214, 216 Lawson, N. 148 ‘learning-by-taxing’ 166 legislation 120 liabilities 81, 93–4 ‘like-for-like’ habitats 154–5 The Limits to Growth (Club of Rome report) 31, 32, 36 Living Planet Report 2014 (WWF) 28 living standards 221–2, 223 lobbying 143, 218, 230–1 local habitats 101–2 locational impacts, permits 168 Locke, J. 59 Lucas, R. 84 Mace, G. 105 mahogany 229 Malthus, T. 30, 47

272

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Malthusians, modern 29–32 marginal analysis, ecosystems 113 margins and marginal changes 133 marine conservation areas 217, 218 marine habitats 102 marine restoration 211–18 market-based mechanisms, pollution 177–8 markets case for 117 competitive economy 134 market failures 141, 142 market response 33 and natural capital 124 property rights 141, 142 and public goods 179 Marx, K. 62 Mayer, C. 89 measurement of natural capital 10, 65, 98–104 meat-eating 27 Mediterranean 216, 217 Mersey (river), Britain 206 Middle East oil 34, 80 population 20–1, 24 rent-seeking behaviour 149 resource curse 147 wealth funds 148 Mill, J. S. 47 minerals 184, 213 mires see peatlands modern Malthusians 29–32 monopolies, infrastructure 185 Muir, J. 59 national debt 224 National Farmers’ Union (NFU) 131, 175 national income accounting and assets 87 business-as-usual 9 and capital maintenance 221, 223 cash-based 82, 85 development of 81–2 green national income accounts 93 and natural capital 79 and sustainability 88 National Infrastructure Plan 221 national natural capital institutions, case for 14 national parks 183, 189, 190 National Trust 12, 59, 182, 192, 195, 196, 208

nationalization 185 native peoples 48 natural assets ethical case for protecting 58–60 financing enhancement of 13–14 and GDP 9 and natural capital 179 as primary factor of production 60–3 protection of responsibilities 72 public good characteristics 179 see also assets; natural capital natural capital asset-based approach 55–8 disaggregation 135 and economics 6–7, 11 elements of nature 2 enhancing 136 environment as 6 examples of 2 human dependence on 240–1 improving 109–14 increase in 12–14 location-specific 74 measurement of 10, 65, 98–104 and natural assets 179 natural capital accounting 89, 94–6 optimal level 10, 224, 229 pricing 124–7, 130–3, 136 type of asset 2 unilateral action 74 and value of nature 3 see also aggregate natural capital rule; capital maintenance; environment; financing natural capital; natural assets; natural capital funds; natural capital institutions; natural capital public goods; non-renewable natural capital; prize; renewable natural capital; restoring natural capital natural capital accounting 89, 94–6 natural capital assets see natural assets Natural Capital Committee 2, 105, 234–7 natural capital funds and aggregate natural capital rule 10, 64, 229, 243 and compensation 146–7, 159 financing of 226, 228–30, 244 investments 149–50, 224 in perpetuity 225 pollution taxes 171 requirement for 8–9, 87 see also wealth funds

INDEX natural capital institutions functions of 233–4 institutional framework 226, 237–9 Natural Capital Committee 234–7 need for 14, 230–3 natural capital public goods 179–97 clubs and voluntary organisations 181–3 ownership 194–7 problem of 180–1 protected areas and the state 183–4 revenue for utilities 191–4 utilities model 184–91, 195 see also problem of the commons ‘The Natural Choice’ (White Paper) 234 Natural England 154, 183 natural environment see environment nature as economic input 3 elements of 2 and good life 59, 60 pricing 4, 116 role of 47 value of 3, 6–7 see also natural assets Nature Conservancy 12, 52 nature reserves 102, 210 Chimney Meadows 203–4, 207 Netherlands 149 Neumayer, E. 48 newts, great crested 154 NFU (National Farmers’ Union) 131, 175 nightingales 154 non-excludability 180 non-renewable natural capital compensation for depletion 14, 73, 146–51 consumption choices 50–1 defined 2, 50 and economic growth 243 financing 223–5 identifying 151 measuring 99 national income accounts 87 resource abundance 32–4 valuing 10 see also coal; gas; minerals; oil North Africa 72 North America see United States North Sea 216–17 oil and gas 1, 93, 149 Norway 14, 147, 149, 214, 223–4, 243

273

not-for-profit organisations 95–6 nuclear power 34, 49, 57, 93, 157, 233, 245 oceans 102, 114, 211, 216 Office for National Statistics (ONS) 93 offsetting 152–4, 226 Ohio River, United States 206 oil generational selfishness 93 North Sea 1, 93, 149 peak oil 32, 33, 34, 48 pollution incidents 139 prices 33, 83 reserves 33, 34, 184, 213 technical progress 213 United States 2 valuing 10 ONS (Office for National Statistics) 93 Open Space Society 59 optimal pollution level 162–3 optimal resource allocation 110 optimal stock, species 73, 111–12 optimum natural capital 10, 224, 229 orchids, western prairie fringed (Platanthera praeclara) 2 organizational forms 191, 195–6 Ostrom, E. 119 Otmoor, Britain 208 Outer Hebrides, Britain 28–9 ownership natural capital public goods 194–7 problem of the commons 214 pairwise generational approach 44 Pakistan 21, 103 palm oil imports 229 pansies, dwarf (Viola kitaibeliana) 1, 141 passenger pigeons 69 peak oil 32, 33, 34, 48 Pearce, D. 66, 235 peatlands (bogs and mires) 1, 131, 141, 210 people dependence on natural capital 240–1 future 40–4, 53–4 human capital 240 human nature 42–3, 242 humanization of environment 52–3, 111 native peoples 48 see also consumers; consumption; population (human) permits, pollution 167–8, 169 see also EU, Emissions Trading Scheme

274 perverse incentives 129 perverse subsidies 7, 13, 173, 220, 228 pesticides impact of 6, 29, 95, 201, 245 and peregrine falcons 102–3 pricing 227 problem of the commons 118 regulation 176 subsidies 174 pigeons 69, 103 Pigou, A. C. 164 planning system 156–9 Plantlife 182 plants 106 policy instruments 141 political implications, aggregate natural capital rule 242 politicians, and compensation 146 pollution and consumers 6, 227 externalities 141 incidents 139 optimal level of 162–3 pricing 11, 127–9, 159 uncertainty issues 167, 168 see also taxing pollution poor countries see developing countries population (human) future 5, 23–4, 246 twentieth century 20–1 positive externalities 159, 171 poverty, aggregate natural capital rule 70–2 precautionary principle 68 pricing calculating prices 124–7 case for using 117–22 difficulties of 136 and natural capital values 130–3 nature 4, 116 pollution 11, 127–9, 159 values and prices 116, 122–3, 136 privatization 185, 195 prize (natural capital prize) 6, 12–13, 159, 224, 244, 247 see also restoring natural capital problem of the commons fishing 102, 118, 213 non-excludability 180 ownership 214 pricing 118–19, 122, 123 and public goods 12

INDEX social norms 119–20 thresholds 181 see also natural capital public goods production, economic 6 property rights 140–3, 180 protected areas 12, 183–4, 209–10 protestors 156 public bodies 12 public goods 12, 141, 159, 180–1 see also natural capital public goods public scepticism 34 Pula Fund, Botswana 148 Qatar 148 rainforests 28, 52, 68, 101, 114, 118 Rawls, J. 59 Ray, River, Britain 208 re-wilded habitats 53 Reagan, R. 83 recreational benefits, forests 190 Red List of Endangered Species (IUCN) 106 Rees, M. 241 regulated asset base 186 regulations environmental 150, 167 international law 214 regulatory capture 175–6 utilities 185–6 regulatory capture 175–6 renewable natural capital and compensation 152–6 defined 2–3, 50 depletion of 35–6, 62–3, 73 externalities 140 as factors of production 62 measuring 97, 99–104 offset investments in 14 problem of the commons 181 public good elements 141 restoration finance 65 risk aversion 68 units 51 value of 242–3 valuing 10 see also problem of the commons; thresholds (renewable natural capital) rent-seeking behaviour 149, 232 research priorities, and Natural Capital Committee 236–7

INDEX resource curse 147, 149, 243 resource depletion China 87 compensation 14, 73, 146–51 and consumers 229 future prospects 32 and wealth funds 148, 243 resource scarcity, and technology 33 restoring natural capital 201–19 aggregate natural capital rule 244 components, restoration plan 219 financing 224 land 209–11, 228 large-scale 202–5, 247 marine restoration 211–18 rivers 205–9 see also financing natural capital Rhine (river), Germany 205, 206 rhino horn 229 rich countries 72 Rio Summit (Earth Summit; UN Conference on Environment and Development) 31 risk aversion 68 risk registers 106–9 rivalry 140–1 river catchments 101, 186, 188, 189, 209 rivers area effects 204 Britain 186, 188, 203–4, 206–7, 207–8 fragmentation of responsibilities 208 Germany 205, 206 pollution 161, 162 restoration 205–9 United States 206 Rousseau, J.-J. 46 RSPB (Royal Society for the Protection of Birds) 182, 196, 208 Russia 147, 214, 216 see also Soviet Union St James’s Park, London 134, 141 salmon climate change 100–1 decline of 103 pollution 141, 165 problem of the commons 118 restoration options 206–7 species studies 29 valuing 99 Saudi Arabia 34, 148 saving 93

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scepticism, public 34 Scilly Isles, Bryher 1, 141 Scott, M. 66–7, 91 sea lanes, access to 216 seas, contained 212, 216–17 seed banks 106 selfishness, generational 93 Sen, A. 59 sewage 162 shareholders 161, 162 Siberia 33 Sierra Club 59 Simberloff, D. 202 simple life 246 ‘sin taxes’ 227 single-species studies 102 social norms, problem of the commons 119–20 social primary goods 58, 60 socialism, ethical 43 soil 29 solar power 34, 67, 151, 245 Somerset Levels, Britain 186–8 South Africa 69, 201 South-East Asia 21, 27, 72, 229 South West Water 188 sovereign wealth funds see wealth funds Soviet Union 83 see also Russia species alien 28 endangered 102, 106–7 habitats as proxies for 99–100 indicator 102 keystone 102 measuring 102 optimal populations 73, 111–12 as renewable natural capital unit 51 studies of 29, 102 SSSIs (sites of special scientific interest) 102, 154, 183, 209, 210 standard of living 221–2, 223 state, and protected areas 183–4 Stern, N. 41–2 Stern Report 236 strategic informational game, pollution 165 strong aggregate natural capital rule 64, 143, 149, 224 strong sustainability 46–9, 54, 63, 242 subsidies environmental 132 natural capital accounting 94

276 subsidies (cont.) perverse 7, 13, 173, 220, 228 and pollution taxes 171–4 substitution and aggregate natural capital rule 55 non-renewable natural capital 51 renewable natural capital 51 and sustainability 46–54 sustainability Brundtland Commission 65 ethical basis 42 future focus 40 and infrastructures 90 and national income accounting 88 natural capital maintenance 66 strong 46–9, 54, 63, 242 and substitution 46–54 terminology 38 values behind 80 weak 46, 50–1, 63 sustainability thresholds see thresholds sustainable development, Brundtland Commission 39–40, 54, 56 sustainable economy see sustainable growth path sustainable growth path achieving 14, 239, 241–2, 244 and aggregate natural capital rule 11, 74–5, 220, 229, 241–2 baseline for 79 and capital maintenance 222 challenge of 8, 36 defined 11, 87–8 and natural capital funds 225 and natural infrastructures 114 and technology 244–5 terminology 38 systems and cost-benefit analysis 133–6 identifying 135 man-made infrastructure 65–6 modelling 70 system-wide approaches 13 see also ecosystems tax system, design of 171 taxes, environmental 132, 150 taxing pollution 160–78 hypothecation 170–1, 193, 227 income effects 168–70 market-based mechanisms 177–8 optimal pollution level 162–3

INDEX permits 167–8, 169 polluter pays principle 160–4 regulatory failure 174–6 subsidies 171–4 taxes 13, 164–7, 227 technology agriculture 245 energy 44, 151, 245 fossil fuels 33–4 information technology 83 progress 15, 44–5 and resource scarcity 33 and sustainable growth path 244–5 TEEB (The Economics of Ecosystems and Biodiversity) 111, 236 Thames, River, Britain 141, 203–4, 207–8 Thames Barrier 90, 208 Thames Water 208 Thatcher, M. 83, 148 ‘This Common Inheritance: Britain’s Environmental Strategy’ (White Paper) 235 Thomas, K. 46, 47 Thoreau, H. D. 3, 4, 46 thresholds (renewable natural capital) biodiversity loss 73 capital maintenance 116 discontinuities 131–2 and extinction 35 identifying 10, 50, 75, 104–6 irreversibility 68 maintaining renewables above 65 Natural Capital Committee 236 and optimal populations 73 pricing 123 problem of the commons 181 and restoration plans 219 thresholds analysis 105, 106 timber 189 trade, environmental consequences 74 tragedy of the commons see problem of the commons trusts, risk registers 236 trusts model 196 Tweed (river), Britain 206–7 twentieth century 20–3 Twyford Down, Britain 125–7 UK (United Kingdom) see Britain UN see United Nations

INDEX uncertainty aggregate natural capital rule 67 and compensation 158 modelling complex systems 70 pollution impacts 167, 168 unilateral action 74 unions 131, 175 United Nations (UN) Conference on Environment and Development (Rio Summit; Earth Summit) 31 Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (UN REDD) 72 United States (US) agricultural subsidies 172, 173 agriculture 69, 173 bison 29, 69, 111 conservation movements 59 deer 112 deficits 83 infrastructure investment 61, 221 natural capital examples 2 pollution incidents 139 underground natural assets 184 utility regulation 185 wealth funds, lack of 148 unsustainable growth 38 Upper Thames Valley, Britain 203–4, 207–8 urbanization 61 US see United States utilitarians 41 utilities model 184–91, 195 utility regulation 185–6 utopian revolutions 43 valuation techniques 110–1, 116, 132 values, and prices 116, 122–3, 136 vested interests 177

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voluntary organisations 181–3 vultures 103 Ward, B. 48 weak aggregate natural capital rule 64, 90, 143 weak sustainability 46, 50–1, 63 wealth 24, 40 wealth accounting 89 wealth funds 14, 51, 147, 148, 223–4, 243 see also natural capital funds Weitzman, M. L. 70 welfare states 58, 60 whales 214–15 White Papers 234, 235 Wildlife Trusts 182, 203–4, 208 William the Conqueror 88 Wilson, E. O. 19, 28, 202–3, 247 wind power climate change policy 121 costs 233 Green Party 49 North Sea 217 planning 156, 157 rent-seeking behaviour 232 simple life 246 and taxes 165 valuation techniques 110 wolves 29, 103, 132 Woodland Trust 208 woodlands 189–90 ancient 68, 153 Wordsworth, W. 3, 46 WWF, (Living Planet Report 2014) 28 Yellowstone National Park, United States 59, 101 zero-growth society 37, 50 Zoological Society 28

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