Natural capital

Topic: Environment and Sustainable Development · NCERT: Beyond NCERT

Meaning

Natural capital is the stock of natural assets, such as soil, water, air, forests, minerals and biodiversity. This stock gives people a steady flow of goods and services every year.

It matters because GDP counts the timber from a cut-down forest as income, but it does not record that the forest itself is gone. If we do not measure natural capital, we cannot tell whether growth is sustainable or whether we are simply using up nature.

Explanation

Stock and flow: the bank-deposit idea

• Natural capital works like a bank deposit.
• The deposit is the stock (the forest, the aquifer, the soil).

• The yearly flow of goods and services is like interest (timber, water, crops, clean air).

• Living on the flow keeps the stock safe. If we use only what nature regrows each year, the asset lasts for ever.

• Eating into the stock is called depletion. For example, cutting a forest faster than it regrows means the stock shrinks and future flows shrink too.
• Degradation is a separate kind of damage. It means harm from pollution, such as a river made dirty or air made unsafe.
• Renewable natural capital (forests, fish, groundwater) can regrow if it is used carefully. Non-renewable natural capital (coal, minerals, oil) cannot, so every unit used is depletion.

What the stock gives: ecosystem services

• The flows from natural capital are called ecosystem services (the benefits people get from ecosystems).
• The Millennium Ecosystem Assessment (MEA, 2005) puts them into four groups:

Type	Meaning	Example
Provisioning	Products we take directly	food, timber, water
Regulating	Nature controlling natural processes	climate, flood control, pollination
Cultural	Non-material benefits	recreation, spiritual value
Supporting	Base processes that make the other three possible	soil formation, nutrient cycling

• Trap: supporting services reach people only indirectly, through the other three. Pollination is regulating, not supporting.

Putting a value on natural capital

• The problem: markets do not charge for clean air or pollination by bees.

• No price → people treat these things as free → they overuse them → the stock runs down.

• Total Economic Value (TEV) adds up everything a natural asset is worth: TEV = Use values (direct + indirect + option) + Non-use values (existence + bequest)

• Option value (keeping the choice to use something later) is a use value.

• Worked example (a forest, per year):

• Direct use (timber) ₹40 crore + indirect use (flood control) ₹25 crore + option ₹5 crore = use value ₹70 crore
• Existence ₹20 crore + bequest ₹10 crore = non-use value ₹30 crore

• TEV = ₹100 crore. Someone who counts only the timber sees ₹40 crore, so they undervalue the forest by 60%.

• Valuation methods:

• Contingent valuation (CVM): a stated preference method. It uses surveys that ask people their willingness to pay (WTP) or willingness to accept (WTA). It is the only method that captures non-use values.
• Hedonic pricing and travel-cost: revealed preference methods. They read value from what people actually pay, in house prices or in the cost of travel.

What makes the stock rise or fall

• Falls: depletion (mining, deforestation, over-pumping of groundwater) and degradation (pollution damage).
• Rises or holds steady: natural regrowth, afforestation, conservation, and Payment for Ecosystem Services (PES), where the people who benefit pay the people who protect the asset.
• Measuring the fall: green accounting.
• Green NDP = NDP − value of natural resource depletion − cost of environmental degradation
• Example: NDP ₹100 lakh crore, coal and forest depletion ₹3 lakh crore, pollution damage ₹2 lakh crore → Green NDP = ₹95 lakh crore. Normal accounts overstate sustainable income by 5%.

In India

• MoSPI / NSO (the National Statistical Office, under the Ministry of Statistics and Programme Implementation) began compiling environment accounts under the UN SEEA framework in 2018. These were published as EnviStats India Vol. II: Environment Accounts [2].
• India took part in the UN Statistics Division's NCAVES project (Natural Capital Accounting and Valuation of Ecosystem Services), launched in 2017 [2].
• EnviStats India 2024: Environment Accounts, released on 30 September 2024, was the 7th consecutive issue [1].
• It covers both SEEA-CF and SEEA-EA [2].
• It includes accounts of ecosystem extent, condition and services [2].

• It added a new area: Ocean Accounts [2].

• Partha Dasgupta Committee (2013): set up by MoSPI, it proposed a framework for green national accounts for India.

• 15th Finance Commission: gives a 10% weight to "forest and ecology" when central taxes are shared among states. States with more dense forest get more money, which rewards them for protecting their natural capital instead of clearing it.
• NPV (Net Present Value) of forests: a charge collected when forest land is diverted to non-forest use. It puts a price on the natural capital that is lost.

Don't confuse with

• Ecosystem services: natural capital is the stock (the forest). Ecosystem services are the flow of benefits from it (timber, flood control, pollination).
• Produced capital and human capital: produced capital is made by people (machines, buildings). Human capital is people's skills. Natural capital is given by nature. Inclusive wealth adds all three together.
• Depletion vs degradation: depletion means using up a stock (minerals, forests). Degradation means damage from pollution. Green accounting subtracts both.
• Biocapacity: this is the area of land and water that can regenerate resources, measured in global hectares. It is used with the ecological footprint to measure human demand on nature. It is not a money value of natural assets.

Prelims Hooks

• Natural capital is a stock. Ecosystem services are the flow from it. Using up the stock faster than it regrows is depletion.
• Dasgupta Review (2021), The Economics of Biodiversity, was written by Partha Dasgupta for the UK Treasury. It treats nature as an asset and calls for measuring inclusive wealth (produced + human + natural capital), not only GDP.
• SEEA-CF (2012) was the first international standard for environmental-economic accounts [NCERT][2]. The UN Statistical Commission adopted SEEA-EA at its 52nd session in March 2021 [3].
• EnviStats India is published by MoSPI/NSO, not MoEFCC or CPCB. The 2024 edition was the 7th issue and added Ocean Accounts [1][2].
• Adjusted Net Savings (ANS) is a World Bank measure. It subtracts energy, mineral and net forest depletion and pollution damage, and adds education spending [4]. Negative ANS means a country is running down its wealth.
• TEV trap: option value is a use value. Pollination is a regulating service, not a supporting one.

Mains Points

• GDP hides the loss of natural capital: GDP counts mining and forest felling as income but ignores the asset that is lost. India's yearly SEEA-based EnviStats accounts [1][2] are a base for change. The next step is to subtract depletion inside the main national accounts, as the Dasgupta Committee (2013) proposed, so that Green NDP and ANS guide policy.
• Valuation as a policy tool, and its limits: TEV, CVM and hedonic pricing give nature a price in cost-benefit analysis, in forest NPV, in environmental impact assessments (EIA) and in setting PES payments. But money values can be unreliable (CVM answers are hypothetical), and some values, such as sacred groves or tribal cultural ties, may not fit any price.
• Paying the guardians of natural capital: Costa Rica's PSA scheme (1997) and the 15th Finance Commission's 10% forest-and-ecology weight both reward the people who keep natural capital standing. The debate is whether 10% makes up for the development that forest-rich states in the North-East and central India give up.

Related concepts

• Ecosystem services
• Total economic value
• Contingent valuation
• Hedonic pricing
• Payment for ecosystem services
• Green accounting
• Adjusted net savings
• Ecological footprint
• Earth Overshoot Day
• Carbon footprint

Read more

• Valuing and measuring nature: natural capital, ecosystem services and green accounting