By Pushpam Kumar, Chief, Ecosystem Services Economics Unit, UNEP
Nairobi, 29 July 2016: With the endorsement of a resolution on Sustainable
Management of Natural Capital for Sustainable Development and Poverty Reduction during
the recently held United Nations Environment Assembly in Nairobi, Kenya, a new
era of correcting the compass to measure sustainable human well-being has
begun.
Conventional income
(the market value of output during a fixed period in a given region) has been
treated as a proxy for human well-being for too long. The limitations of the
system of national accounts – where pollution abatement activities show up as
income and biodiversity loss goes unnoticed – are becoming better understood.
From an environmental
sustainability perspective, traditional income measurement is defective because
it only partially treats natural capital stock in its coverage. While wealth
(and natural capital) is a stock, income is a flow (a return on wealth).
Understanding this difference is critical. Conventional GDP is adept at
measuring flow, but it can only partially measure wealth.
GDP can capture net
financial assets, physical assets, partial human capital (e.g. intellectual
property) and up to a point the commercial component of natural capital (fish,
timber). It has great difficulty in capturing and measuring the physical
aspects of natural capital like ecosystem services, let alone their economic
value. Most existing valuation in accounting processes relies heavily on exchange/transaction
values, where there is no measure in place to capture what economists and
ecologists call ”environmental externalities” (the depletion and degradation of
natural capital).
It is not surprising
that conventional wisdom – that resource allocation based on robust income
estimates brings about a balance in the economy, including in the production,
distribution and consumption of resources – has failed terribly. Today, we, the
global population, are each emitting about five tons of carbon per annum into
the atmosphere; a quarter of global land has been degraded since the beginning
of the 21st century; and biodiversity is declining at an alarming rate.
Tropical forests are continuing to be cleared for crops, and overfishing
continues to damage marine ecosystems causing a collapse in fish stocks.
Economists have been
warning about these types of anomalies for a long time. More recent thinking –
such as in Beyond GDP, Potsdam 2007, the G8+5 Initiative, The Economics of
Ecosystems and Biodiversity (TEEB), Wealth Accounting and Valuation of
Ecosystem Services (WAVES), and the Stieglitz/ Sen/ Fitoussi report, along with
the Inclusive Green Economy Initiative – highlights the need to look for better
measurements of changes in human prosperity.
The error of equating
income with well-being can be rectified if the accounting profession pays
attention to wealth (stock) measurement in an inclusive/comprehensive manner.
Here it may be remembered that while writing An Enquiry into the Nature
and Causes of the Wealth of Nations, Adam Smith was
referring to wealth, not income. Even today, multilateral
institutions consider the wealth of a nation, not its income, before extending
any financial help, and don’t accept poor quality balance sheets.
UNEP, with others, has
been working on this. The Inclusive Wealth (IWR) Report 2014 emphasizes
the need to measure man-made, human and natural capital. The methodology and
data can easily be extended to social and cultural capital. The report analyses
140 countries over the past 20 years. (The forthcoming 2016 report aims to do
this for over 170 countries). Using this tool, countries are able to envision
how their holistic wealth components have evolved over time. Country capacities
can continue to be built as new breakthroughs in calculating and reporting on
the Independent Wealth Index (IWI) are developed.
IWR 2014 suggests that
produced capital, as measured by GDP, represents only about 18 percent of the
total wealth of nations.
While there have been
increases in GDP and the Human Development Index, natural capital actually
declined in 127 out of 140 countries between 1990 and 2010, according to IWR.
Worldwide, while GDP rose by 50 percent from 1992 to 2010, IWI rose by only 6
percent. This is because in the wider ambit of sustainable development GDP
fails to account for sources of wealth such as nature and human progress, which
are covered by IWI.
Assessing and valuing
natural capital and the change in per capita inclusive/comprehensive wealth
over time has the potential to keep track of progress on most Sustainable
Development Goals (SDGs).
IWI is a
multi-purpose, multi-target measure of sustainable development. An increase in
IWI will indicate poverty eradication (SDG, 1) and food security, while
promoting sustainable agriculture (SDG 2) and healthy lives and well-being (SDG
3). An increase in IWI will also show sustained and inclusive economic growth
(SDG 8), and sustainable consumption and production patterns (SDG 12). A
decrease in IWI will indicate degradation of natural capital and failure to
take steps to combat climate change and its impacts (SGD 13), conserve and
sustainably using the oceans, seas, and marine resources (SDG 14), protect,
restore, and promote the sustainable use of terrestrial ecosystems, sustainably
manage forests, combat desertification, reverse land degradation and halt
biodiversity loss (SDG 15). IWI can measure the strength of the means of
implementation for sustainable development (SDG 17).
Countries cognisant of
their stock of natural capital through IWI can invest in the protection and
restoration of natural capital. IWI is a macroeconomic tool that enables
policymakers to understand the trade-offs of different scenarios and policies.
For example, Brazil, which has 56 per cent of its land under forest cover,
experienced a decline in its forest wealth from 1990 to 2000. However, it was
able to reverse this trend between 2000 and 2010 due to its conservation
policies, the strict enforcement of forest laws, and by discouraging
agricultural expansion in forest lands. (IWR, Ch. 6, p153).
IWI complements GDP as
a multi-purpose indicator. It is capable of tracking stocks of wealth in human,
natural and produced capital. IWI lends itself to monitoring and reviewing
progress towards the SDGs.
IWI has a specific
role to play in complementing SDG Target 8.1 which is currently measured by GDP
growth with a target of 7 per cent per year (a measure of growth in the level
of transactions). IWI complements this by emphasizing the growth of wealth –
something that is much better aligned with the SDGs. A reasonable target for
IWI would be to grow stocks of wealth at a global average of 3-5 per cent per
year, though actual targets in some countries could be more ambitious.
For more information,
please contact: Pushpam Kumar: Pushpam.Kumar@unep.org
- See
more at:
http://www.unep.org/stories/Ecosystems/Natural-Capital-Wealth.asp#sthash.9SyloV6s.dpuf