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Integrating Natural Capital into National Accounts: Three Decades of Promise

and Challenge

Article in Review of Environmental Economics and Policy · March 2021

DOI: 10.1086/713075

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Integrating Natural Capital into National
Accounts: Three Decades of Promise
and Challenge
Carter Brandon*, Katrina
§
Brandony, Alison Fairbrassz,
and Rachel Neugarten

Introduction
Economists and ecologists have worked for over three decades to better define and measure
sustainability—that is, achieving both sustained economic growth and ecosystem health. A
key question is “Are a country’s natural resources managed equitably and sustainably, both
now and for the future?” Answering this question is increasingly urgent given the world’s eco-
logical crisis, accelerated by climate change (UNEP 2019) and demonstrated by the facts that a
quarter of species face extinction, a quarter of all land has been degraded, and more frequent
and severe extreme climate events have occurred. Humanity is nearing ecological tipping points,
and over five billion people will lack clean drinking water by 2050 (Dı́az et al. 2019).
Given these threats, applying natural capital concepts to inform decisions and better manage
social welfare (Ambrey, Fleming, and Manning 2016) and the world’s environment (Chaplin-
Kramer et al. 2019) is urgently needed. Concepts and tools related to natural capital, natural cap-
ital accounting, ecosystem services, and ecosystem assets have been developed to respond to
these interlinked economic and environmental concerns.
This article, which is part of a symposium on the Economics of Natural Capital,1 describes
how these concepts and tools have been applied at the national scale. We first provide a short
history of natural capital and national accounts and then describe efforts to link natural capital
to national measures of income and wealth. We then review the broad challenges faced and

*World Resources Institute (email: [email protected]); yAlliance of Bioversity International and Inter-
national Center for Tropical Agriculture (CIAT), Climate Action Program; zInstitute for Sustainable Resources,
University College London (UCL), and Centre for Biodiversity and Environment Research, UCL; §Cornell
University
The authors would like to dedicate this article to the memory of Georgina Mace, who was pivotal to many
global efforts to understand how biodiversity and natural capital support human well-being.

1
The other symposium articles are Polasky and Daily (2021), which provides an introduction to the symposium;
Barbier and Di Falco (2021), on agricultural land and living standards in developing countries; and Fisher, de
Wit, and Ricketts (2021), on natural capital and human health.

Electronically published March 23, 2021

Review of Environmental Economics and Policy, volume 15, number 1, winter 2021.
© 2021 Association of Environmental and Resource Economists. All rights reserved. Published by The University of
Chicago Press for AERE. https://doi.org/10.1086/713075
Integrating Natural Capital into National Accounts: Three Decades of Promise and Challenge 135

alternative options for incorporating natural capital into national-scale decision-making. The
final section presents conclusions.

A Brief History of Natural Capital and National Accounts

This section introduces the concepts of natural capital, natural capital accounting, and ecosystem
services and then provides a brief history of the System of National Accounts (SNA) and gross
domestic product (GDP), the most common metrics of economic growth, and their shortcom-
ings. We then describe approaches used for valuing natural capital and ecosystem services, which
are fundamental to bringing them into the SNA and other forms of economic decision-making.

Natural Capital, Natural Capital Accounting, and Ecosystem Services

Natural capital is defined as “the naturally occurring living and non-living components of the
Earth, together constituting the biophysical environment, which may provide benefits to hu-
manity” (UN 2014a, 13). Natural capital accounting refers to reporting systematically on nat-
ural capital stocks and flows (UN 2014a). Ecosystem services are biophysical flows from nat-
ural capital stocks from which humans derive benefits, including provisioning, regulating, and
cultural services (UN 2014b). Ecosystem assets refer to whole ecosystems providing these ser-
vices; assets are a stock measure that cannot be divided into constituent parts (UK ONS and
DEFRA 2017).
The concept of natural capital was first explicitly defined over a hundred years ago with the
observation by Alvin Johnson that “men speak of investing capital in land, as of investing cap-
ital in buildings or machinery . . . We shall call the one artificial capital, the other natural cap-
ital” (Missemer 2018, 92). The term originally referred to the productive and consumptive value
of renewable (e.g., timber, fisheries) and nonrenewable (e.g., oil, natural gas, coal, minerals)
natural assets, but over time definitions of natural capital became broader. Ekins and colleagues
(2003) defined four categories of natural capital—air, water, land, and living systems—and in-
cluded nature’s ability to absorb negative externalities such as pollution and siltation. Later defini-
tions included broader aspects of nature’s intrinsic value (Turner, Badura, and Ferrini 2019b).
While natural capital is a stock, ecosystem services are the biophysical flows from natural
capital that benefit people (Mace 2019). The Millennium Ecosystem Assessment (Millennium
Ecosystem Assessment 2005)2 helped develop a typology for classifying ecosystem services.
These classifications include regulating services (e.g., filtering pollution, coastal protection, pest
regulation, pollination), material provisioning services (e.g., food, energy, materials), and non-
material services (e.g., aesthetics, experience, learning, physical and mental health, recreation;
Polasky et al. 2019).
However, classifying and quantifying ecosystem services has been contentious as ecologists
and economists try to disentangle the values of the ecosystem services delivered directly to peo-
ple from the value of the underlying ecosystems themselves. As noted earlier, the concept of
“ecosystem assets” refers to entire ecosystems that provide services that cannot be divided into
2
The Millennium Ecosystem Assessment was a four-year global effort beginning in 2001 to assess the con-
dition of the world’s ecosystems, the services they provide, and the need for decision makers to better value
and protect these ecosystems and their services.
136 C. Brandon et al.

constituent parts (UK ONS and DEFRA 2017). Discussions among ecologists and economists
have focused on the overlaps between services and the challenges of assigning values to differ-
ent users and uses, now and into the future (Hein et al. 2016). The issue of valuation is discussed
in more detail below.

System of National Accounts

The SNA, developed in the 1930s, standardized in 1953, and periodically revised ever since,
is a globally recognized accounting framework that measures a nation’s economic activity. It
measures output via market transactions between producers and consumers and arrives at a
single measure of total output known as GDP. Economists have long criticized GDP, arguing
that its emphasis on output and growth means that it fails to measure welfare and improve-
ments in well-being (Hueting 1992). Here we briefly review key attempts to reframe GDP.
Nordhaus and Tobin (1972) developed the Measure of Economic Welfare, describing the
costs associated with damages from environmental problems (e.g., pollution) and urbanization
(e.g., congestion, low health standards, land scarcity). Other economists included additional
concerns such as intergenerational equity and exhaustible resources (Solow 1974), which lower
economic welfare. Daly and Cobb (1989) strengthened the environmental dimension by creat-
ing the Index of Sustainable Economic Welfare. This was the basis for the Genuine Progress In-
dicator (GPI), which tracks 26 economic, social, and environmental indicators (Anielski 2001;
Lawn 2003). Meanwhile, Tinbergen, who helped develop the SNA, worked with Hueting
(1992) to develop the Environmentally Sustainable National Income Indicator (Tinbergen and
Hueting 1992), which was presented at the 1992 UN Conference on Environment and Devel-
opment (the Rio Summit).3
The main criticisms of GDP at the time were that it failed to count environmental degra-
dation and pollution as negative or investments in human capital as positive. In response, the
UN revised the SNA in 1993, creating supplemental accounts for energy, water, and land (Har-
rison 2005). Unsatisfied with this, Hamilton (1994) built on Solow’s (1974) work and piloted
the genuine or adjusted net savings concept, aimed at improving how natural capital depletion
and human capital gains were valued. For development economists especially, it was critical to
value the way natural capital benefited future generations and how its depletion represented
an economic loss, even if those benefits and losses were not valued in market transactions at
the present time (Hamilton 1994).
In 1996, the UN Framework Convention on Climate Change asked countries to report on
greenhouse gas emissions and carbon sequestration (Paustian, Ravindranath, and van Amstel
2006). This was the first time many countries had ever analyzed or reported on environmental
stocks and flows. In 2007, a European Commission conference concluded that the SNA and
GDP should remain unchanged but supplemented with environmental and social progress in-
dicators (European Union 2007). This recommendation was supported by a high-level com-
mission on the Measurement of Economic Performance and Social Progress (Stiglitz, Sen, and
Fitoussi 2009).
3
The 1992 Rio Earth Summit challenged the world to think and act differently, leading to dramatic growth in
the literature, indicators, frameworks, methodologies and accounts seeking to integrate environmental con-
cerns into economic development policies, programs, and investments.
Integrating Natural Capital into National Accounts: Three Decades of Promise and Challenge 137

The 2008 recession led G20 leaders to build on this recommendation and call for a “new,
sustainable growth model” with new “measurement methods” (G20 2009). In 2010, German
Chancellor Angela Merkel persuaded the International Monetary Fund, World Bank, and
World Trade Organization to complement GDP through supplemental or “satellite” accounts
rather than alter it (Daly and Posner 2011). However, development economists pushed back,
arguing that having two sets of accounts (traditional national accounts with the GDP output
measure and satellite environmental accounts) would not bridge the gap between environmen-
tal health and human welfare. For example, Arrow and colleagues (2012) argued that sustain-
ability measures must be based on nondeclining generational well-being; improved wealth ac-
counting; and appropriate shadow prices for renewable and nonrenewable resources, human
capital, and health. Despite these and other efforts by some of the world’s most prominent econ-
omists4 to integrate sustainability measures into the SNA, their impact has remained largely
academic.

Valuing Natural Capital and Ecosystem Services

Valuing natural capital and ecosystem services is essential if they are to be integrated into na-
tional accounts (Atkinson and Obst 2017; Weber 2018). This means finding a common mea-
surement unit. National accounts are structured in monetary terms, and productive natural
assets such as fossil fuels, minerals, agricultural land, and timber can be easily valued in mon-
etary terms because standard principles of productive asset valuation can be used (Obst, Hein,
and Edens 2016; Islam et al. 2019). However, values for other forms of natural capital and eco-
system services are not directly observed in markets. In these cases, to the extent possible,
exchange values are used, that is, “valuing the quantity of ecosystem services at the market
prices that would have prevailed if the services had been freely traded and exchanged” (UN
2014b, 108).
To better value ecosystem services, many techniques have been developed using exchange
values, but techniques differ depending on the ecosystem service being valued, its location, and
the scale of the benefits (Freeman, Herriges, and Kling 2014). Examples include pollination,
which contributes to agricultural production; carbon sequestration, which is valued using the
social cost of carbon dioxide emissions; and water filtration, which is valued for reducing water
treatment costs. Global-scale data have been used to estimate total global ecosystem service
value (Turner et al. 2012; Costanza et al. 2014), values of specific ecosystem types such as wet-
lands and coral reefs (Spalding et al. 2017; Davidson et al. 2019), specific services such as pol-
lination (Potts, Imperatriz-Fonseca, and Ngo 2016), and alternative land uses such as agriculture
versus forest (Carrasco et al. 2017). Using exchange values, one global estimate shows that the
average economic value of global renewable assets (forestry, agricultural land, fish) slightly ex-
ceeds that of nonrenewable assets (oil, coal, gas, minerals; Islam et al. 2019).
Since some nonmarket ecosystem service values cannot be determined by approximating
exchange values, a wide range of methods have emerged, from nonmonetary to monetary and
from qualitative to quantitative (Turner, Badura, and Ferrini 2019b). Atkinson and Obst (2017)
identify quantitative valuation techniques that can integrate multiple ecosystem services into a
monetary framework, including:
4
Tinbergen, Arrow, Sen, Stiglitz, Tobin, and Nordhaus are all Nobel laureates in economics.
138 C. Brandon et al.

1. Production, cost, and profit function techniques, used in valuing ecosystem services that
provide an input to businesses, such as waste processing, raw materials (e.g., food, fiber), and
water purification
2. Hedonic techniques, used to estimate the value of specific ecosystems that affect property
markets, such as premium prices for waterfront homes.
3. Techniques using expenditure information, to estimate demand for specific ecosystem
services, including defensive spending (such as sea wall construction) and travel costs (to mea-
sure recreation).
4. Stated preferences techniques, such as contingent valuation and choice experiments, to
produce a demand curve for ecosystem services that provide public goods.
Ecosystem service values that rely on nonmarket techniques are considered inappropriate
for national accounting purposes (given the SNA accounting standard cited above), and this
limits the potential for integrating them fully (Chee 2004; King et al. 2021). More fundamentally,
there are heated debates about including nature’s value in economic decision-making at all
(Lele et al. 2013; Hein et al. 2016; Costanza et al. 2017). Some argue that valuing nature is in-
appropriate because its value is effectively infinite (McCauley 2006) or because the complexity,
uncertainty, and irreversibility of ecosystem degradation are not addressed by current valu-
ation methods (Chee 2004; Victor 2020). There are also concerns that technological innovations
will replace ecosystems, leading to greater environmental destruction (McCauley 2006; Mayer
2019). Yet many researchers have continued to work under the assumption that valuing na-
ture is essential because decision makers ignore goods and services that lack monetized value
(Miteva 2019). The next section presents examples of these efforts to value natural capital and
ecosystem services.

Integrating Natural Capital with Measures

of National Income and Wealth
Efforts to revise GDP by fully integrating nonmarket values of environmental degradation,
health, and welfare have not succeeded. Nonetheless, there is important ongoing work to sup-
plement the SNA with satellite accounts and to inform national-level economic decision-making
with other indicators. This section explores several such approaches. We first discuss adjusted
net savings, the first widely accepted adjustment to national accounts. We then examine the
UN System of Environmental-Economic Accounting (SEEA), an approach first published in
2012 and subsequently expanded. Finally, we discuss comprehensive wealth measures and other
national-scale approaches that use natural capital concepts to inform assessments of national
economic and environmental sustainability.

Adjusted Net Savings

Starting in the 1970s, economists have argued that a country’s net national income, which
corrects for depreciating fixed capital, should also include net depletion of the country’s natural
resources (World Bank 2005). Adjusted net savings (ANS), also called genuine savings, makes
these adjustments, corrects for changes in human capital from education, and incorporates dam-
ages from air pollution and carbon emissions (Bolt et al. 2002). By summing up total annual
Integrating Natural Capital into National Accounts: Three Decades of Promise and Challenge 139

changes in a country’s natural, human, and fixed capital, ANS indicates whether a country is
saving for future generations. The advantage of ANS is that its units and terms are clearly un-
derstood by economists; a positive value suggests that the present value of social welfare is in-
creasing. However, ANS calculations exclude important natural assets such as water, fisheries,
land degradation, and ecosystems. In addition, ANS incorporates only one form of pollution
and estimates changes in human capital based on public expenditure rather than learning out-
comes (Lange, Wodon, and Carey 2018). Thus, ANS is an incomplete measure of changes in
natural capital and an imprecise measure of changes in human capital (Daly and Posner 2011;
Howarth and Kennedy 2016).
The World Bank has tracked ANS since 1970. From 1970 to 2014, OECD member countries
had declining (yet mostly positive) ANS rates, while in 28 low-income countries, ANS rates de-
clined and often became negative (Barbier 2019). These negative values are a red flag for eco-
nomic sustainability, as they reveal that countries are inadequately reinvesting current income
into any form of capital. Evidence of natural capital degradation is especially problematic for nat-
ural resource–dependent countries, and ANS highlights the importance of investing rents from
resource depletion into future national savings (Hamilton 2000).

System of Environmental-Economic Accounting

The UN Statistical Commission introduced the SEEA to provide a consistent framework and
definitions for measuring the contributions of ecosystems to economic activity. SEEA accounts
are based on analyses of natural capital stocks and ecosystem service flows. After years of devel-
opment, the SEEA Central Framework (SEEA-CF) was published in 2012 and the SEEA Exper-
imental Ecosystem Accounts (SEEA-EEA) in 2014 (UN 2014a, 2014b).5

SEEA Central Framework

The SEEA-CF is an international standard for measuring the use of productive assets (i.e.,
water resources, energy resources, forests, fisheries, agricultural land). It also accounts for the
flows of those assets back into the environment in the form of waste, air emissions, and water
pollution (UN 2014a). A SEEA forestry account can, for example, track changes in forest assets
over time by combining data on forest cover, biophysical modeling of forest ecosystem service flows,
and quantities of goods produced through activities that exploit or destroy forests (e.g., Mkanta
and Chimtembo 2002). Figure 1 presents a sample SEEA-CF template for physical asset accounts.
SEEA-CF accounts allow for consistent comparisons over time and across countries. To the
extent that they are monetized, they can also become satellite accounts in the SNA.

SEEA-EEA framework
The SEEA-EEA framework was launched two years later (UN 2014b). While SEEA-CF accounts
focus on the stocks and changes in productive assets such as minerals, timber, and land, the
SEEA-EEA measures ecosystem assets and their associated goods and ecosystem service flows.
As figure 2 shows, ecosystem physical accounts are divided into ecosystem extent, condition,
and services, while ecosystem monetary accounts use the various techniques cited above to
5
SEEA used alone includes both subcomponents SEEA-CF and SEEA-EEA.
140 C. Brandon et al.

Figure 1 Structure of the SEEA-CF physical asset accounts. Source: Modified from UN (2014a).

value both the supplies and uses of the services that flow from these ecosystems. Countries
must have comprehensive ecological data, strong statistical expertise, and significant re-
sources to create SEEA-EEA accounts (Hein et al. 2020).
The 2014 SEEA-EEA framework left unresolved many technical challenges related to eco-
system spatial extent, condition, services, and valuation and accounting. A UN-hosted revision
process to address these concerns began in 2018 and will report back in 2021 (UN 2019).

SEAA applications
National governments, international organizations, businesses, and civil society organiza-
tions use both SEEA-CF and SEEA-EEA. Over 80 national governments have compiled or
published at least one SEEA-CF account, and 24 countries have published SEEA-EEA anal-
yses (Hein et al. 2020). SEEA accounts are typically developed by government statistical agen-
cies and used by departments responsible for natural resources, specific geographical areas,
or planning. Most national SEEA applications focus on water and forest resources accounts
and, less frequently, minerals and energy (Ruijs et al. 2019). The European Environment Agency
has developed land, water quality, and fish biomass accounts and pilot accounts for nutri-
ent pressures, biodiversity, and freshwater conditions (European Environment Agency 2018).
SEEA accounts have been used to inform reporting on the UN Sustainable Development Goals
and the Post-2020 Biodiversity Framework (Miteva 2019; UNEP-WCMC and UNSD 2019).
Given the difficulties in conducting comprehensive environmental valuation, most SEEA
applications contain physical but not monetary accounts (Turner, Badura, and Ferrini 2019a).
One exception is efforts to link SEEA accounts with computable general equilibrium (CGE)
models, although these promising efforts have been narrowly focused, with specific case studies
Integrating Natural Capital into National Accounts: Three Decades of Promise and Challenge 141

Figure 2 Ecosystem service accounts in physical and monetary terms. Source: Adapted from Bright,
Connors, and Grice (2019).

including British Columbia (Ochuodho and Alavalapati 2016), the forestry sector (Banerjee
et al. 2019), and Rwanda’s land use sector (Banerjee et al. 2020).
The United Kingdom’s Office for National Statistics has developed the most comprehensive
application of SEEA accounts to date. In 2016, it published monetary estimates for three cate-
gories of ecosystem services6 and estimated a total national net present value of ecosystem
services of £958 billion (US$1.22 trillion; UK ONS 2019). Even supporters of this effort ac-
knowledge that “the estimates look low—equivalent to around half a year’s GDP”—but note
that some ecosystem services were not included in these estimates, such as flood control, hu-
man health, and genetic material (Bright, Connors, and Grice 2019, 99). Nevertheless, this effort
was deemed useful given that its main purpose was to provide order-of-magnitude estimates
and a baseline for tracking trends over time (UK ONS and DEFRA 2017).
While the number of SEEA applications is growing, surveys have shown little evidence of
policy impact at the national level (Fairbrass et al. 2020). This likely results from the difficulty
of converting SEEA-EEA physical accounts into monetary values, which has limited both ac-
count development and their use in discussions of GDP, growth, and economic policy (Boerema
et al. 2017; Hime, Sharman, and Cranston 2017). We will discuss these challenges further in
the next section.

Comprehensive Wealth Measures

Another approach for incorporating natural capital into national accounts is comprehensive
wealth, which was proposed by Arrow and colleagues (2012). They argued that measuring all
forms of a country’s total capital stock was better than measuring annual income, since capital
stocks are required to generate income (a flow). A country’s ability to generate sufficient income
6
The three categories of ecosystem services are provisioning (agricultural biomass, fish capture, fossil fuels,
minerals, timber, water abstraction, renewables generation), regulating (carbon sequestration, air pollutant
removal, urban cooling, noise mitigation), and cultural (recreation, aesthetics).
142 C. Brandon et al.

for future generations therefore depends on maintaining or growing its total capital base. In
addition to valuing productive natural capital, comprehensive wealth measures include such
assets as nonagricultural land, nontimber forest products, and protected areas (Polasky, Tallis,
and Reyers 2015). However, unlike ANS, which is an annual savings rate estimate that can be
compared to the SNA, comprehensive wealth is a measure of total capital stock and does not
directly relate to GDP or other SNA indicators.
Both the World Bank (Lange, Wodon, and Carey 2018) and the UN Environment Pro-
gramme (Managi and Kumar 2018) have developed comprehensive wealth measures. These
measures show that natural capital typically declines as a share of a nation’s total wealth as it
builds other forms of capital (see figure 3). This is because the process of development is largely
defined by investing in human and fixed capital (e.g., infrastructure, construction, machinery)
and increasing labor productivity. This process is often fueled by depleting a nation’s nonre-
newable resources and leaving renewable resources overexploited or even extinct. However, as
figure 3 also shows, the per capita value of a country’s natural capital typically increases even
as its share of total capital declines, since its value to the economy and population increases.
Comprehensive wealth analyses lack the detail of SEEA and, as with ANS, do not align with
a country’s SNA indicators. But they serve as a reliable indicator of the sustainability of a given
economy (Cohen et al. 2017). They provide useful information for a country deciding whether
to deplete its capital stock to increase current economic activity and welfare or to save it for
the future and, ultimately, the well-being of future generations (Barbier 2019). As Daly (2020)
argues, if a country degrades its renewable natural capital below a certain point, ecosystem

Figure 3 Natural capital: share of total wealth versus per capita value. Source: Lange, Wodon, and Carey
(2018).
Integrating Natural Capital into National Accounts: Three Decades of Promise and Challenge 143

services are lost, and the country’s population cannot sustain itself. Thus, comprehensive wealth
measures highlight fundamental macrolevel choices that affect both current and future wel-
fare and natural capital in a way that disaggregated natural capital estimates and accounts can-
not (Hamilton and Hepburn 2017).

Other National-Level Assessments of Natural Capital

There are many other approaches to quantifying natural capital at a national scale, each with
different methods, data requirements, units of measurement, strengths, and weaknesses. Table 1

Table 1 Other national-level assessments of natural capital

Initiatives Description

Footprint and biocapacity (Global Footprint How much of the biosphere’s regenerative capacity do
Network: http://www.footrpintnetwork.org) humans use (measured in hectares), and how is biocapacity
distributed on Earth? Biocapacity is a limiting factor for
the global economy; this shows how much you have, use,
and trends. Provides a bottom-line answer to a central
question: is there enough biocapacity to support the
economy? Currently no direct link to financial figures.
Planetary boundaries (PBs; Stockholm Resilience What are the limits of PBs, and for each one, how close is
Centre: http://www.stockholmresilience.org) humanity to those limits? PBs make a scientific global
case for multiple dimensions and the possibility of global
overshoot. PBs are not easily applicable at the local scale.
Each PB can be conveyed, building on independent scientific
assessments. Some PBs are global (e.g., carbon dioxide) and
others are local (e.g., water, nitrogen). Hard to understand
trade-offs among PBs and apply at subplanetary scale.
Material flow analysis (Wuppertal Institute: How much mass moves through an economy (kg/per capita/
http://www.wupperinst.org, http://www year)? Mass flow is a proxy for the overall amount of
.materialflows.net resource being used. Easy to grasp. Having good material
statistics is key but interpreting or using results to guide policy
is not obvious (e.g., 1 kg of gravel has different impact on
nature and links to supply than 1 kg of wood).
Carbon footprint (IEA/IPCC: http://www.Ipcc.ch) How much carbon dioxide from fossil fuel is released in a
country (kg/year), including by activity? Much global
attention to carbon accounting, yet carbon dioxide is only a
subset of broader environmental and ecological issues.
Genuine Progress Indicator (GPI; https://en What is the net income of a country, including nonmarket
.wikipedia.org/wiki/Genuine_progress benefits and excluding defensive expenditures? Can be used
_indicator) to adjust GDP but is not part of SNA. Uses monetary
units, but only accepted by a few countries and US states.
Selecting the 26 indicators to add or subtract from GDP
to get GPI is complicated, and valuating each can be arbitrary.
Better for macrolevel messaging than policy analysis.
The Economics of Ecosystems and Biodiversity What is the economic value of ecosystem services, and how
(TEEB; UNEP: http://www.teebweb.org) do ecological benefits compare to economic benefits?
Powerful case stories applicable to business and policy
contexts, but not comprehensive and mostly based
on assessments of financial values.

Source: Adapted from Galli et al. (2016).

144 C. Brandon et al.

shows six such approaches. Some are indexes, such as the GPI; others are accounts, such as mass
flow analysis and carbon footprint; and still others are modeled data, such as ecological foot-
print and The Economics of Ecosystems and Biodiversity (TEEB). Clearly, no single ap-
proach fully captures the complexity of a country’s environmental and economic sustainabil-
ity, given the diversity of theoretical assumptions, value judgements, and data availability. In
fact, Evans, Underwood, and Seidl (2012) compared several of these approaches and found that
comparative sustainability rankings across 20 countries varied greatly, implying that each ap-
proach may be answering a different question and thus needs to be interpreted carefully.
One notable approach to natural capital measurement is the Chinese gross ecosystem prod-
uct (GEP; Ouyang et al. 2020). GEP is distinct from SEEA, but analogous to GDP: it uses mar-
ket prices and modeled surrogate values to calculate the value of ecosystem services and aggre-
gates them into a measure of ecosystem contributions to the economy. One fully monetized
provincial GEP account has been completed for Qinghai province. It shows that aggregate
ecosystem services values are trending upward, mainly as a result of the rising value of water pro-
vided by Qinghai’s ecosystems to downstream provinces. This finding raises awareness of na-
ture’s value, allows monitoring over time, can be used for policy planning and evaluation, and
helps determine financial compensation for ecosystem services provision (Ouyang et al. 2020).
Given the large number of national-level methods and indicators developed in recent years
to assess sustainability, Fairbrass and colleagues (2020) have placed them in a framework de-
signed to help national decision makers select the best approach for their needs, capacities,
and resources. However, because this framework is new, additional work is required to test its
utility.

Challenges of Incorporating Natural Capital

into National Accounts
While numerous approaches have been developed to integrate concepts and methodologies
related to natural capital and ecosystem services into national economic accounts, challenges
remain. These include (1) understanding the complex links between a country’s natural capital,
ecosystems, and sustainability; (2) improving the quality of data, methods, technical capacity,
and institutional coordination; and (3) strengthening the necessary political will.

Challenge 1: Natural Capital: Assessing Complexity, Threats, and Uncertainty

Natural capital concepts and applications are complex. Mace (2019, 61) and others have iden-
tified ecosystem complexity as a key challenge to accounting and valuation: “the asset–benefit
relationships are complicated, multi-dimensional, multi-scale, and non-linear.” For example,
while a machine can be deconstructed into component parts, the same cannot be done for eco-
systems. An ecosystem’s mechanisms are hard to delineate. Most ecosystem services depend
on a combination of assets, and most ecosystem assets contribute to many services. Further-
more, an ecosystem’s value is greater than the sum of its parts (Maechler and Graz 2020), which
hinders efforts to map assets to services. Further complexities arise when the use of a natural
asset, such as timber, reduces the flow of other ecosystem services, such as soil retention, rec-
reation, and carbon sequestration. As another example, when peatlands are drained, their
Integrating Natural Capital into National Accounts: Three Decades of Promise and Challenge 145

agricultural value is improved, but this process generates disservices by emitting significant
quantities of carbon dioxide (Obst, Hein, and Edens 2016).
The relationship between biodiversity and ecosystem services is also complicated. Biodi-
versity is the foundation of a healthy ecosystem, so its loss affects ecosystem assets and flows
(Oliver 2015). Although biodiversity is captured implicitly in several components of the SEEA
framework,7 it is not considered an ecosystem service in and of itself (UN 2014b). This means
that SEEA measures ecosystem assets and service flows that are generated by healthy ecosys-
tems (see figure 1), but it may undervalue biodiversity’s role in supporting resilience and main-
taining ecosystem health and productivity (UNEP-WCMC 2015). Recognizing this problem,
the SEEA-EEA revision process has established a dedicated subgroup on accounting for bio-
diversity, due to report back in 2021.
Identifying and assessing threats to natural capital and the uncertainty about how an eco-
system might respond is also difficult. Recent assessments indicate that threats to natural cap-
ital are increasing as both direct and indirect drivers of change are accelerating (Diaz et al.
2019; UNEP 2019). Such threats can be proximate (land clearing) or distant (climate change),
and there is uncertainty about the speed, extent, and impact of these accelerating threats
(Bowler et al. 2020). There is also uncertainty about how changes in natural capital affect eco-
system service flows. For example, Steffen and colleagues (2015) report considerable uncer-
tainty about the specific thresholds of climate change, biosphere integrity, and freshwater
use that would trigger abrupt changes in environmental processes. Trisos, Merow, and Pigot
(2020) find that wildlife die-offs and ecosystem collapse will likely be abrupt as climate change
causes temperature thresholds to be surpassed. In short, ecosystem degradation is often irre-
versible, leads to sudden collapse, and may trigger broader effects far beyond the degraded
ecosystem itself (Lenton 2013). Yet these frightening and lasting impacts are not included
in estimates of market- or exchange-based estimates of natural capital value because the risks
of abrupt but uncertain changes are not included in valuation methods. This failure to cap-
ture ecosystem complexity, threats, and uncertainty undervalues the benefits of investing in
natural capital.

Challenge 2: Closing Data, Methodological, Capacity, and Coordination Gaps

The extent and complexity of data requirements, valuation methodologies, institutional ca-
pacity, and institutional coordination have hindered the uptake of natural capital applications
(Guerry et al. 2015; Boerema et al. 2017; Recuero Virto, Weber, and Jeantil 2018). Below we
describe four of these challenges.

Data challenges
Information gaps related to a lack of data and data-sharing between agencies have limited the
development of natural capital accounting and hence its role in economic decision-making
(Milligan et al. 2014; Hime, Sharman, and Cranston 2017). A review of 28 natural capital-related
data platforms highlighted their variability in relevance, accessibility, transparency, and flex-
ibility (GGKP 2020). These findings suggest that there are challenges at multiple stages of

7
These include land cover, timber, fish, ecosystem extent, ecosystem condition, and local species accounts.
146 C. Brandon et al.

natural capital accounting, from data collection to reporting, analysis, policy application, and
use in decision-making. In particular, primary data are rarely collected for natural capital ac-
counting, and it is difficult to use secondary data for the specialized purpose of natural capital
assessments (Recuero Virto, Weber, and Jeantil 2018). Additional challenges relate to aligning
the geographic boundaries of the data with the requisite analysis. The boundaries of biophysical
modeling of natural capital and ecosystem services are typically determined by ecological bound-
aries, while economic decision-making is typically aligned with administrative boundaries.
Over time, further development of natural capital accounts may catalyze data collection and
sharing, and recognition of data challenges may help prioritize data collection efforts (Bordt
2018). Recent efforts to address these challenges include computer-based modeling tools such
as InVEST (Natural Capital Project), Co$ting Nature (Kings College London and United Na-
tions [UN] Environment Programme-World Conservation Monitoring Centre), and ARtificial
Intelligence for Environment and Sustainability (ARIES; Martı́nez-Ló pez et al. 2019). Other ef-
forts include data platforms such as NatureMap (led by the International Institute for Applied
Systems Analysis) and the UN Biodiversity Lab (led by the UN Development Programme).
There are also efforts leading up to the 2020 UN Convention on Biological Diversity Conference
of Parties to identify the world’s most critical natural assets from the combined points of view
of biodiversity, climate mitigation, and ecosystem service provision (Watson et al. 2018; Chaplin-
Kramer et al. 2019).

Methodological challenges
A second gap that needs to be addressed concerns methodological issues related to natural
capital valuation, which, as described earlier, have severely limited efforts to integrate physical
accounts into economic decision-making. For example, the challenges of converting the many
components of the SEEA-CF and SEEA-EEA frameworks into monetary terms limit their use
in mainstream national accounting (Obst, Hein, and Edens 2016). Atkinson and Obst (2017)
recommend future work aimed at (a) improving valuation methods for specific ecosystems
services and their benefits; (b) developing methodologies for valuing ecosystem assets, such as
the estimation of asset lives, the choice of discount rates, and integration with existing national
accounts balance sheet values; and (c) promoting extended discussion between national accoun-
tants and environmental economists, to increase understanding of the nature of the differences
in their approaches to valuation.

Limited government capacity

A third gap is the limited capacity of governments to develop and use information about nat-
ural capital (UNEP-WCMC and UNSD 2019). Surveys show that government representatives do
not understand how to best implement natural capital applications or how to combine natural
capital with existing national environmental statistics (Recuero Virto, Weber, and Jeantil 2018).
To address this problem, both the World Bank and UN Statistical Office have long-running
technical assistance programs promoting the SEEA approach and its use. Since SEEA is only
one of many environmental and economic decision-making tools, policy makers can be over-
whelmed by the diversity of approaches. An assessment by the European Environment Agency
led the agency to combine SEEA accounting efforts with other analytical approaches such as
Integrating Natural Capital into National Accounts: Three Decades of Promise and Challenge 147

life cycle analysis, ecosystem assessments, sectoral and economy-wide models, national ac-
counts, and ideas about what environmental status is socially acceptable (EEA 2018). Ruijs and
colleagues (2019) found that countries with relatively mature SEEA accounts have had time
to develop complementary policy-focused methods and supporting institutional structures
and so were better able to integrate a range of environment-related analyses into policy-making.

Lack of institutional coordination

A final gap is the lack of coordination across government agencies and ministries, which is es-
pecially important for SEEA approaches. Since SEEA approaches are standardized and imple-
mented by national statistical offices, sectoral policy makers are infrequently engaged and may
ignore them in decision-making (Feger et al. 2019). This absence of collaboration between policy
makers and the SEEA statisticians has led to a lack of “pull” from policy makers for natural
capital accounting information (Vardon, Burnett, and Dovers 2016). Avoiding this mismatch
of SEEA supply and demand requires the engagement of finance and planning ministries before
and during the development of accounts to ensure that they see natural capital accounting in-
formation as relevant to policy making (Recuero Virto, Weber, and Jeantil 2018).

Challenge 3: Lack of Political Will

The third major challenge to scaling up the use of natural capital–related concepts and approaches
in economic policy-making is the lack of political support. While environmental economists
and ecologists may recognize the need for action to protect critical resources and better under-
stand linkages to GDP (Bright, Connors, and Grice 2019; Chaplin-Kramer et al. 2019; Ouyang
et al. 2020), government leaders may not share this view, or they may prioritize other concerns. Yet
high-level leadership is crucial to catalyzing and financing the integration of natural capital ap-
plications into government decision-making processes (Milligan et al. 2014; Ruckelshaus et al.
2020). One barrier is the perceived risk that natural capital accounting may highlight politically
sensitive issues about the rate, value, and economic importance of unsustainable natural cap-
ital dependence and depletion (Vardon, Burnett, and Dovers 2016).
As Polasky and colleagues (2019, 5234) note, “The center of gravity in economics remains
far removed from the challenge of sustainable development,” and economists are much closer to
decision-making power in ministries of finance, commerce, and planning than are ecologists.
To build political support, Guerry and colleagues (2015) suggest more targeted efforts, such as
securing water for cities, coastal development planning, fishery management, corporate supply
chains, and infrastructure investment. Garnering high-level political support will require both
bottom-up and top-down pressure on national leaders to manage the earth’s resources better
to benefit current and future generations.

Conclusion
This article has examined how natural capital concepts and applications can be incorporated
into national economic policy-making. There are many approaches, ranging from SEEA to
other indexes and modeled data tools such as ANS, comprehensive wealth measures, the GPI,
148 C. Brandon et al.

and China’s GEP. We find that these approaches are often fragmented and incomplete, in terms
of both the types of natural capital and ecosystems they include (e.g., water, land, different eco-
system types) and the values they measure (e.g., market vs. nonmarket values). Integration with
national economic accounts and analysis has been elusive, if not impossible, given the lack of
common metrics and monetary values. SEEA accounts may be too complex, and the require-
ments for data and capacity too steep, to address many environmental-economic problems in the
near term (Narita et al. 2018; Stage and Uwera 2018).
Still, the need for natural capital applications is urgent. Fenichel and Hashida (2019) argue
that “economists and natural scientists need to continue to expand collaborative efforts to col-
lect data since measuring economic programmes and valuing natural capital is an inherently
interdisciplinary endeavour.” Environmental decision-making, given today’s growing ecolog-
ical and climate crises and rapidly changing financing opportunities, needs more timely data
and analytics. Other disciplines, such as biophysical modeling, and new data streams, such as
social media and citizen science, can dramatically improve data on changes in ecosystem stocks
and service flows. However, these newer techniques are still of limited use in economic applica-
tions (such as SEEA) that rely on government-collected data, such as environmental expendi-
tures, production of environmental goods and services, and flows of environmental taxes and
subsidies.
Ideas raised by Nobel prizewinners almost 40 years ago related to improving GDP to better
reflect environmental and welfare concerns remain unrealized for conceptual, empirical, and
political reasons. The question “Is it better to adjust or supplement GDP?” has been answered
in favor of supplements, not adjustments. While the need to fundamentally rethink GDP is still
important, the need to proceed with practical approaches to analyze today’s environmental
problems is more urgent. Alternatives for incorporating the value of natural capital into economic
decision-making, such as those outlined above, are vitally important and more accessible to
countries where data, capacity, and political will for formal natural capital accounting are lacking.
Helm (2019, 1) argues that “natural capital is a concept whose time has come” and chal-
lenges practitioners to ground “the objectives in positive freedom and the entitlements of future
generations” (11). Ultimately, advancing reforms to GDP, and making natural capital ap-
proaches part of the economic mainstream, will be a political process—one that makes it more
and more difficult for politicians, business leaders, and the media to hide behind GDP growth
while ignoring deteriorating ecosystem health, declining living standards, decreased well-being,
and unsustainable environmental impacts (Howarth and Kennedy 2016).

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