Capitalism without natural capital isn’t sustainable

The fire is not out.
The fire is not out.
Image: REUTERS/Daniel Munoz
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Capitalism has destruction woven into its DNA. The endless stream of new inventions and ideas supplying new jobs and new things for businesses to sell comes courtesy of “creative destruction.”

In those cases, destruction begets creation.

Yet some destruction is needless environmental devastation. Amazonian rainforest is burned for cattle pasture, then abandoned. Fertile soil is washed away by industrial farming. Even something as innocuous as a Google search is powered by fossil fuel plants far away emitting greenhouse gases. After two centuries of this accumulated damage, and an overheating climate, capitalism’s trajectory is beginning to look like a bad ending to one of Hollywood’s apocalypse movies. 

The question before us: Is capitalism sustainable?

The answer comes down to growth. The relentless drive for consumption— or consumerism—is not a side-effect of capitalism. Rather, argues the World Economic Forum,  “it is embedded in the core tenets of capitalism as an economic system.” Without rising consumption, the production cycle falters. Productivity gains in capitalism are generally plowed back into stimulating consumption, and thus profits, but not necessarily improving welfare. Changing this will be difficult, perhaps impossible. As the popular sentiment goes, “it is easier to imagine the end of the world than to imagine the end of capitalism.” (It’s true: Try it).

Free markets (well-regulated ones at least) have proven effective at lifting billions out of poverty. Gross domestic product (GDP) has quadrupled since 1970. But they have proven less effective at protecting the world’s capacity to sustain itself (and us). Governments sometimes step in to correct these market failures. If the market doesn’t value the benefits of the natural world, or “externalities” as economists call them, minimum standards can be set with policies such as the Clean Air Act and the Endangered Species Act. Yet the growth imperative remains. The overall trajectory of environmental degradation can continue, as greenhouse gas emissions demonstrate.

To balance nature’s books (and our own), we can account for natural capital. First proposed by E.F. Schumacher in his 1973 book Small Is Beautiful, natural capital describes the soil, air, water, animals, plants, and the ecosystem services that make human life possible. Like a trust fund, humans and wildlife draw on its benefits. It’s renewable if used wisely. But when a natural resource is over-consumed, it can vanish, and its value erased from an invisible ledger forever. And that poses a question: How much richer is the capitalist world if it buys growth at the expense of poisonous air or lifeless oceans? Some might be acceptable, but the loss of natural capital means we’re actually far less well off than we imagine.

Accounting for natural capital as a resource would be a radical departure after nearly a century of treating GDP as virtually equivalent to national wealth. In classical economics, capital is neatly divided into two camps: physical capital (machines and factories) and human capital (skills, expertise, and knowledge). The natural world is an input. We tabulate gains in the private economy, but fail to subtract the loss of resources, or the goods that flow from them. 

“Industrial Capitalism does not fully conform to its own accounting principles,” states Paul Hawken, Amory Lovins, and Hunter Lovins in their 1999 book, Natural Capitalism: Creating the Next Industrial Revolution. “It liquidates its capital and calls it income. It neglects to assign any value to the largest stocks of capital it employs—the natural resources and living systems, as well as the social and cultural systems that are the basis of human capital.”

A more sustainable capitalism 

That narrow approach to accounting began to change in the 1980s. Research by ecological economist Herman Daly and theologian John Cobb led to measures such as the Genuine Progress Indicator to assess economic, social, and environmental progress. Governments began putting those principles into practice. Among the most famous cases was New York City’s decision to invest $1.5 billion in its own watershed in upstate New York to protect its drinking water rather than build an $8 billion filtration plant. Beset by deteriorating water quality, the city government transformed the region’s land management practices. Farmers and landowners were paid to adopt improved agricultural practices. Livestock was removed from streams. Forests were protected. Since the 1990s, New York’s natural capital investment has delivered huge dividends: 1.3 billion gallons of clean water per day.

Gretchen Daily, an ecologist and founder of the Natural Capital Project at Stanford University, says more than 500 active programs, from Costa Rica to Pakistan, are now based on this model worldwide with $40 billion in annual transactions. 

The Natural Capital Project is attempting to turn these into national accounting standards. “The question is how to replicate success,” she said. It’s putting natural capital on firm scientific footing by first mapping how much natural capital—such as forests, rivers, wetlands, and other biomes—exists in a nation’s piggy bank, valuing their output of environmental goods and services, and recommending ways to finance their protection. The vision is to work at every level of government to make natural capital as fundamental to decision-making as GDP is today.

China stands out for the sheer scale of what’s possible. The country has poured $150 billion into conservation and development initiatives since 2000. After devastating floods and erosion from unchecked deforestation left millions of people homeless along the Yangtze River in 1998, China has since paid more than 200 million residents for restoration and conservation work, the largest ecosystem service program in history. Wary of more natural disasters, the Chinese government is now zoning the entire country for ecosystem services, restricting certain development, and investing in sustainable livelihoods across nearly half of the country. 

Recently, it has begun adopting Gross Ecosystem Product to rival conventional economic metrics  as part of its push to become an “ecological civilization.” While GDP is a simple formula — a country’s goods and services produced multiplied by price — GEP measures the flow of goods and services such as flood control, pollination, climate change, and public health from its ecosystems. Unlike its conventional counterpart, GEP rarely has a market to price nature’s benefits. This January, researchers did so in China’s Qinghai province, the headwaters for the Mekong, Yangtze, and Yellow Rivers. Qinghai’s GEP, they found in results published in Proceedings of the National Academy of Sciences, exceeded its GPD in 2000, most of which flowed downstream as clean water and wildlife. Recognizing this, the government invested heavily in watershed restoration, more than doubling its ecosystem services value between 2000 and 2015. Plans are underway to scale this up nationwide.

Price of everything, value of nothing

Policymakers armed with a single metric to measure this natural capital may make radically different decisions than ones suggested by GDP alone, a number never intended to measure welfare, just economic activity. Sensing an opportunity, private capital is beginning to flow into the arena. 

Sustainability funds now hold a record $1 trillion in assets globally. Groups like HSBC’s Global Asset Management division has positioned natural capital as its own asset class, valuing farmland and forests for their carbon storage rather than just the real estate. Former US Treasury secretary Henry Paulson touts a global “economic case for protecting nature.” As Europe has begun mandating financial disclosures around climate risk, attention is turning to require similar disclosures on the destruction of natural capital as well. The Task Force on Nature-Related Disclosures is poised to set standards for governments and financial institutions to begin documenting the impact of their businesses on ecosystem services. “These topics have been discussed for a long, long time but with very little action,” says Richard Mattison, founder of Trucost, part of S&P Global, which helps companies assess their environmental impact. “But this transparency is leading to action.”

It’s still early days. GDP took decades to win acceptance as a universal metric after rising to prominence in the 1940s. GEP is likely to take just as long. New economic paradigms are just emerging to challenge the notion of GDP as a central measure of economic health. The “doughnut economics” model by Oxford University economist Kate Raworth, explicitly rejects this view. It proposes measuring economic health as a balance between promoting enough growth for a healthy society while preventing unsustainable withdrawals from natural systems. The city of Amsterdam recently adopted it.

But time is short. Nature’s bank account is running a deficit, and bankruptcy is within sight. Humans are now consuming more resources than at any point in history, far beyond the natural world’s ability to regenerate itself. Since 2000, goods and services consumed by billions of people each year effectively demands more than 4.2 hectares (pdf) per person of biologically productive space—such as arable land, pasture, forest, and ocean—most of it in industrialized nations. Yet the amount of such productive land available for each person on the planet at the end of the 20th century was just 2.3 hectares. That is expected to roughly halve by 2100 as the earth’s population continues to grow.

Stanford’s Daily argues capitalism needs to renegotiate its contract with the natural world if it—and we—are going to survive. “If we fail to do this, there’s not much future for humanity,”  she says. “Our prosperity and health and every other dimension of what makes life meaningful is being liquidated with the approach we’re taking today…It’s hard to know if we’re going to win this race. The odds are against us.”