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Natural Capital: The True Wealth of Nations

Economists have still not caught up with the most important capital of all: Natural Capital.

Last year the UN Climate Change Convention met in Copenhagen, attracting an incredible media frenzy. In a month's time its sister Convention on Biological Diversity will meet in Nagoya, to discuss why whole species are moving into extinction at a rate that is (barring the loss of the dinosaurs) unprecedented in the entirety of the fossil record of life on this planet. So far this convention has met with total radio silence from the world's press. Why?

Top of the agenda will be the idea of Natural Capital. One of the great advances in economics over the past 100 years was the realization that there is such a thing as human and social capital. A well-functioning judicial or education system is just as much part of the wealth of a nation as its roads, ports and factories. But the irony is that economists have still not caught up with the most important capital of all: Natural Capital.

Natural capital can be defined as the benefits that accrue to human society from the different species of life that inhabit our world. Classical economics values things by seeing how much someone will pay for them. But this is where classical economics is wrong. What it fails to account for are all the "externalities"-- the services people regard as free goods: pollination services, flood protection, climate regulation, soil stabilization, carbon sequestration. Although immensely valuable, these wider benefits do not accrue to the individual property owner. They are benefits to the community at large. Because they are not captured by the land owner they do not feature in his decision about how to dispose of the land. His economic benefit increases. Everyone else's is reduced.

Last month saw the fifth anniversary of the sacking of New Orleans by Hurricane Katrina. In that tragedy 1,800 people died, damage has been estimated at up to $125 billion. Today a new 350 mile strong system of levees is being built at a cost of $16billion. Many saw this as an engineering failure: politicians and administrators had failed to maintain the levees around that city with devastating consequences. That is only partly true. It was actually the inevitable consequence of the failure to properly value Natural Capital.

In 1956 the U.S. Congress gave approval for the construction of The Mississippi River Gulf Outlet (MRGO). The economic case seemed overwhelming. This man-made navigational channel would reduce the passage by 40 miles and straighten the route making it a safer and more efficient passage for shipping than the winding channels of the Mississippi River below New Orleans. MRGO was cut through are shallow estuarine waters and sub-delta marshes. Much wetland was lost by the original excavation, but more important has been the soil erosion and rise in salinity that has seen the destruction of the cypress swamp.

Over 120,000 square miles of wetland habitat have been lost on the Lower Mississippi Basin. Recently the US Army Engineering Corps made an astonishing admission: every levee that had wetland protection in front of it remained intact. Every levee that had no wetland protection was breached.

In 50 years time we will look back and say that our governments were economically illiterate. They simply did not understand the true value of the most important service providers on our planet. We will marvel that they failed to capture and make explicit the value of Natural Capital and ecosystem services in their national accounts.