Economics Need New Metrics on the Price of Nature

Tensions between economic growth and responsible environmental stewardship have come under scrutiny at the World Economic Forum in Davos, 2024. The past three decades have been marked by a stark divergence: while global Gross Domestic Product (GDP) has more than doubled, our natural capital—a term referring to the planet’s stock of renewable and non-renewable resources—has declined nearly 40%. Given that more than half of the world’s GDP is deeply dependent on nature, there’s an urgent need for a new calculus, one that reincorporates ecology into our understanding of economics.

The Need for New Metrics: Gross Ecosystem Product

GDP, the conventional measure of an economy’s output, is increasingly seen as an incomplete metric, one that turns a blind eye to environmental degradation and the depletion of natural resources. The rallying cry for a more encompassing measure has gained momentum, leading to the proposal of the Gross Ecosystem Product (GEP). Drawing on the tenets of environmental science, the GEP attempts to quantify the value of ecosystem services like clean air, water, and biodiversity—elements vital to humanity’s survival and economic stability.

Adopting the GEP as a metric could yield a holistic view of an economy’s health. It takes into consideration the value of natural goods and services which in turn could act as a motivator for the sustainable use of resources. Moreover, it lays the groundwork for better-informed policies that blend economic growth with environmental preservation. For instance, a study conducted on the Qinghai-Tibet Plateau revealed the immense value inherent in the region’s ecosystem services, arguing for consideration of such natural capital in subsequent policymaking processes.

Integrating Nature into Decision-Making

Environmental Accounting

Environmental accounting could serve as a crucial instrument in incorporating ecological concerns into our national accounts. By integrating natural resources and environmental assets into the existing System of National Accounts (SNA), nations can gain an in-depth understanding of the economic contributions made by natural resources and the costs associated with their preservation or depletion.

Payment for Ecosystem Services

Payment for Ecosystem Services (PES) schemes are market solutions incentivising the conservation of earth’s ecosystems. They reward the maintenance and enhancement of ecosystem services. These schemes have seen successful implementations in sectors like watershed protection and forest conservation, proving a viable medium to align economic with ecological objectives.

Natural Capital Accounting

Natural capital accounting takes a step further from environmental accounting by measuring stocks and flows of natural resources through economic lenses. It provides a systematic approach in ascribing economic value to ecosystem services. Such measures can greatly help policymakers to take into account the true costs and benefits associated with the conserved versus exploited natural resources.

Ecosystem Services in Cost-Benefit Analysis

When conducting cost-benefit analyses for projects or policies, it is paramount to factor in the value of ecosystem services. This provides a fuller accounting of costs incurred, including the impact on the environment. This can deter short-sighted decision-making that, while seemingly beneficial in the short term, could lead to long-term ecological and economic detriment.

Opinion and Conclusion

The import of nature’s integration in our decision-making processes cannot be overstated. In my view, metrics such as the Gross Ecosystem Product, alongside tools like environmental accounting, PES, and natural capital accounting, can bring us closer to capturing the economic value of nature. This approach can pave the way towards a more sustainable future by setting us on a path of natural capital preservation.

Incorporating these approaches into mainstream policy and business structure require an increased awareness among all stakeholders of the inextricable relationship between the economy and the environment. The tools discussed here need to be met with a sense of urgency and commitment if they are to be effective.

International collaboration and knowledge exchange must be at the forefront to further refine these tools and approaches. The adoption of more comprehensive metrics and tools such as the GEP and environmental economics is essential. This will ensure that nature’s value ceases to be overlooked in our economic systems and becomes a central component in our quest for prosperity.