Natural Capital: From Metaphor to Measurement

• Environmental and Resource Economics Workshop

Date and Location

Wednesday, April 9, 2014, 4:10 PM - 5:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

Current efforts to value ecosystem services have contributed little to the valuation of natural capital, which suggests that in practice "nature is capital" primarily serves as a metaphor. We provide a theoretically motivated approach for recovering natural capital prices that expands beyond idealized management to encompass current, likely inefficient, management institutions. Theoretically consistent capital valuation requires adjusting for the net marginal productivity of the natural capital asset and price appreciation. We develop a numerical approach, based on polynomial approximation, for approximating the value of capital that integrates estimates from ecological and economic research. Then we demonstrate the approach is capable of recovering the accounting price of capital when it is known a priori. Third, we show that the common approach of valuing natural capital as a simple marginal annuity of ecosystem services suffers from sever biases relative to our full capital-theoretic approach. Finally, we employ the method to value the Gulf of Mexico reef fish complex as a capital asset under real-world management conditions. This generates credible accounting prices for a pound of reef fish. Our approach to valuation reveals the essential interdisciplinarity of natural capital valuation and highlights the critical importance of understanding the feedbacks between the state of natural capital stocks, human behavior impacting these stocks, and the role of institutions in shaping that feedback.