What is Natural Capital and why should you care about it?

We are all intimately familiar with financial capital: cash, cake, stacks, bands, bills, dollars, euros, whatever you want to call it. We use financial capital everyday as a medium of exchange to purchase goods and services, but what is the true value of the cash you possess? Think of it this way: you are very thirsty and have $1 million in your pocket. Today a bottle of water might only cost a couple bucks, but imagine a future world where there are only a few bottles of water left and millions of thirsty people. You would likely spend all of your dollars to outbid others for this life-sustaining resource.

The above scenario while extreme shows how the value of financial capital is ultimately dependent on the capacity of the environment to support humans. Indeed natural capital is the stock of renewable and non-renewable natural resources (plants, animals, air, water, soils, minerals) and natural processes(climate regulation, carbon sinks, etc.) combining to provide benefits to people. These benefits are also called ecosystem services. All economic activity is ultimately derived from the environment and ecosystem services. Financial capital is merely how we trade “shares” of natural capital. In a truly sustainable world the price of natural capital would be accurately represented in the market for financial capital. Unfortunately today this is not the case. To make matters worse we are rapidly consuming our stock of natural capital, preventing the potential for future returns, and inviting a sustainability crisis.

Another way to look at this concept is to imagine the environment as a massive trust fund and all humans as beneficiaries. We would ideally live off the “interest” this environmental fund returns keeping the stock of natural capital intact.  In our capitalistic, consumption-based society, we are not only spending the “interest” but the “principal” as well, lessening the potential of future generations to enjoy a return on our natural capital. When we clear forests, burn fossil fuels, and pollute air/water we are dipping into the global stock of natural capital. Consequently the value of the environment and it’s services to humanity are massively undervalued. One study found that unpriced natural capital costs totaled $7.3 trillion for one year, which equates to 13% of global economic output in 2009! These externalities (costs not reflected in financial capital) include greenhouse gas emission, water/land use, and pollution. Not factoring external costs into the financial markets allows us to continue to blindly consume while subsequently depleting the global stock of natural capital. If a person spends too much financial capital, he goes into debt. If humanity spends too much natural capital, our global ecosystem could collapse.

Part of my goal for this blog is to assess how we can preserve and grow the global stock of natural capital. Everything I have learned about economics and the environment points to the necessity of preserving natural capital for future generations. There will be more to come on our current food system and how it works against us in terms of preserving/growing the stock of natural capital.

All For Now,

Adam

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