The problem is that, so far, no one has developed a good way to estimate the monetary value of natural resources. But now, a group of scholars may have finally come up with a solution. In a paper published Monday in Proceedings of the National Academy of Sciences, they’ve published a formula for computing the price of what they refer to as “natural capital” — including everything from groundwater to forests. And they argue that using this formula will allow policymakers to compare the value of natural capital with the value of more traditional forms of capital, thus encouraging better investments and more sustainable decisions in the future.
“To me, the main reason to worry about this has to do with [the question of] can we measure sustainability, and does it mean anything that’s measurable that can guide policy and progress for the way that we allocate resources?” said the new paper’s lead author Eli Fenichel, a professor in the Yale School of Forestry and Environmental Studies.
He and his colleagues developed their formula using many principles of classical economic theory, closely basing their work on a pricing approach previously developed by economist Dale Jorgenson. The formula takes a number of different factors into account, including the depreciation (or appreciation) of the resource over time and the value of the ecosystem services it provides, such as drinking water, carbon storage or recreation.
Economists have frequently attempted to place monetary values on “ecosystem services,” which are closely related to — but not identical to — the value of natural capital. The difference between the two is similar to the difference between income and wealth, Fenichel said.
“Income is the money you have in your wallet at the moment,” he said. “Your wealth is whatever you have in the bank account, 401(k), your stocks, your house — a broad set of assets you have that contribute to your overall wealth.”
It’s important to remember that selling off some of your wealth — selling a home, for example — can temporarily increase your income, but the overall value of all your capital will have decreased, Fenichel pointed out. The same relationship is true for ecosystem services and natural capital. If you have a limited supply of water, for instance, and you use half of it, you will immediately benefit from using the water — but your overall supply of water will have diminished.
“Ecosystem services, or ‘ecosystem income,’ is sort of a flow measure, where natural capital or wealth is a stock measure,” Fenichel said. Keeping such relationships in mind is important for policymakers if they want to be sure their use of a resource is sustainable — and is a major reason calculating the value of natural capital, instead of just the value of a service it provides, is important.
In fact, to illustrate their work’s significance, Fenichel and his colleagues conducted a case study on a specific piece of natural capital: a groundwater body in Kansas known as the High Plains Aquifer. The water from this aquifer is used almost entirely for agriculture and its use has been carefully recorded by the state, factors that made it ideal for a simple example.
The researchers applied their formula to the aquifer and the amount of water humans have removed from it between 1996 and 2005. Taking into account a myriad of different factors, including changes in the technology humans use to remove and distribute the water and the amount by which the water stock declined over time, they ultimately concluded that the value of the aquifer fell at a rate of approximately $110 million per year during the study period.
The researchers noted that one particular technological change during the study period — the adoption of a new “highly efficient” nozzle by farmers for spraying water — actually had the effect of making water seem less scarce than it actually was. They argue that the adoption of this technology actually contributed to the aquifer’s dramatic yearly declines in value.
It’s an example that illustrates “the importance of how institutions, technology and other factors shape the dividend flows from natural capital and the economic program,” the authors write in the paper. “By failing to anticipate and mitigate the perverse consequences of the technological transition, statewide ‘investments’ in improved technology actually destroyed wealth.”
It’s important not to get too hung up on the numbers in this particular example, though, Fenichel cautioned. The whole idea behind the formula is that different resources — and even the same type of resource in different locations — will have different values depending on a variety of circumstances. An aquifer in California might have a totally different value than the one in Kansas, for instance, depending on how it’s used and what kinds of other external factors might affect it over time.
What’s most important is that the new paper has laid a framework that allows natural capital to be compared, in monetary terms, with more traditional forms of capital, opening the door for policymakers to make better informed decisions about where they make investments. And if natural resources can be shown to have great economic value, then policymakers might be more inclined to invest in protecting them.
“I think this is actually one of the great challenges for sustainability, generally speaking, which is how do we make these allocation decisions,” Fenichel said. “I don’t think our paper tells you how to make them. What we’re saying is if we’re going to make informed and defensible decisions, we need to be measuring all bits of the capital that we’re using — and we’re laying out a framework for doing it.”