New research from a team of Oxford economists launched at the World Forum on Natural Capital in Edinburgh today shows that governments’ Ministries of Finance and Treasuries are often blind to how dependent economies are on nature. As a result, businesses and politicians are failing to register the systemic risk building up as the natural world fails.
Professor Cameron Hepburn, who led the research at the Institute for New Economic Thinking at the Oxford Martin School, says that flawed economic and political institutions are to blame. “Much of the value that economies create is built upon a natural foundation – the air, water, food, energy and raw materials that the planet provides. Without this natural capital, no other value is possible.”
The authors highlight that extreme weather, mass extinctions, falling agricultural yields, and toxic air and water are already damaging the global economy, with pollution alone costing 4.6 trillion USD every year.
“We are poisoning the well from which we drink,” says Oliver Greenfield, convenor of the Green Economy Coalition, who commissioned the research. “The dire state of nature and the implications for our future, barely registers in economic decision-making. To put this another way, we are building up a big systemic risk to our economies and societies, and just like the financial crisis, most economists currently don’t see it”.
The research finds three central failings are to blame. First, natural capital is not being accurately measured or valued in the context of ecological tipping points and thresholds. Second, aggregate economic models are ill-equipped for seeing the dependencies between ‘capitals’. Most cost-benefit analyses and economic methodologies used in everyday decisions assume that natural capital can be easily substituted by man-made capital, when in fact it cannot. Third, there are a lack of appropriate political and economic institutions to manage natural capital effectively; even national wealth accounts provide an incomplete picture of the value of natural capital.
However, the research finds encouraging signs that our economy can be rapidly rewired to protect the planet. Governments and businesses can start measuring their stocks of natural capital in comprehensive natural wealth accounts, and ensure that those assets are protected and improved. In addition, better data can be gathered on the value of the natural wealth that underpins economic activity, so that value can be accounted for by treasuries and financial centres. And critical natural assets must be given special status so that they cannot be squandered.
“The opportunity to properly value nature is not just a task for economists but for all of us,” Oliver Greenfield added. “The societies and economies that understand their dependency on nature are healthier and more connected, with a brighter future.”