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

Detail

1. Why value nature at all?

• The basic problem: markets give no price to clean air, a healthy river or pollination by bees.
• No price → people treat these as free → they overuse them.

• GDP counts a cut-down forest as income (timber sold). It does not count the forest that is lost.

• Valuation means putting a money value on what nature gives us. Measurement means building that value into national accounts. Economists do both so that the loss of nature shows up in policy decisions.

• This connects to the Brundtland idea (1987) of sustainable development: meeting today's needs without harming the ability of future generations to meet theirs. If we do not measure nature, we cannot tell whether we are running it down.

2. Natural capital and ecosystem services

• Natural capital is the stock of natural assets: soil, water, air, forests, minerals and biodiversity.
• Like a bank deposit, the stock gives a flow of goods and services each year, like interest.

• Using only the flow keeps the stock safe. Eating into the stock (for example, cutting forests faster than they regrow) is depletion.

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

Type	What it means	Example
Provisioning	Products we take directly	food, timber, water
Regulating	Natural control of 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

• Exam trap: supporting services (soil formation, nutrient cycling) reach people only indirectly, through the other three. Pollination is regulating, not supporting.
• The economics literature:
• TEEB (The Economics of Ecosystems and Biodiversity) shows the money value of ecosystem services and biodiversity.
• Dasgupta Review (2021), The Economics of Biodiversity, was written for the UK Treasury by Partha Dasgupta. Its core argument: nature is an asset, and we need to measure "inclusive wealth" (produced + human + natural capital), not only GDP.

3. Total Economic Value (TEV)

• Formula: TEV = Use values (direct + indirect + option) + Non-use values (existence + bequest)

Component	Category	Meaning	Forest example
Direct use	Use	Value from using or consuming it directly	timber, fuelwood, tourism
Indirect use	Use	Value from the services it provides	watershed protection, carbon storage
Option	Use	Value of keeping the choice to use it later	a plant that may give a future medicine
Existence	Non-use	Value of just knowing it exists	people who will never see a tiger still want tigers to survive
Bequest	Non-use	Value of passing it on to heirs	saving the forest for grandchildren

• Trap: option value is a use value, not a non-use value.
• Worked example: a forest gives timber worth ₹40 crore a year (direct), flood control worth ₹25 crore (indirect) and an option value of ₹5 crore. Surveys show existence value of ₹20 crore and bequest value of ₹10 crore.
• Use value = 40 + 25 + 5 = ₹70 crore
• Non-use value = 20 + 10 = ₹30 crore
• TEV = ₹100 crore a year. A timber-only view sees just ₹40 crore, so it undervalues the forest by 60%.

4. How to value what markets do not price

Method	Type	How it works	Example
Contingent valuation (CVM)	Stated preference (people say what they value)	Surveys ask people their willingness to pay (WTP) for a benefit or willingness to accept (WTA) payment for a loss	"How much would you pay each year to keep this lake clean?"
Hedonic pricing	Revealed preference (value is read from what people actually do in markets)	Value of clean air or a nice view is inferred from differences in house prices	A flat near a clean park costs more than a similar flat near a dump
Travel-cost method	Revealed preference	A park's value is inferred from what visitors spend to get there (fares, fuel, time)	Visitors to a national park

• Why CVM is the only way to capture non-use values: existence and bequest values leave no trace in any market, so the only way to learn them is to ask people.
• Hedonic worked example: two identical flats cost ₹80 lakh (clean-air area) and ₹72 lakh (polluted area). The ₹8 lakh gap is the implied value that buyers put on clean air.
• Weakness of CVM: people's stated answers can be hypothetical and may differ from what they would really pay.

5. Payment for Ecosystem Services (PES)

• PES pays landowners or communities to manage land so that it keeps providing services such as watershed protection or carbon storage.
• The logic: the people who benefit (downstream cities, the world) pay the people who provide the service (upstream farmers, forest dwellers).

• This turns an externality (an effect on others that the market does not price) into an income.

• Example: Costa Rica's PSA scheme (1997) (Pagos por Servicios Ambientales) pays landowners to conserve forest.

• India's fiscal analogue: the 15th Finance Commission gives 10% weight to "forest and ecology" in the formula that shares central taxes among states (tax devolution). States with more dense forest get more money, which pays them for protecting forests instead of clearing them. (Mechanics are covered in fiscal federalism.)
• The same valuation logic sets the NPV (Net Present Value) of forests, the amount charged when forest land is diverted to non-forest use (Section 4).

6. Green accounting: bringing nature into national income

• Green accounting deducts resource depletion (using up stocks such as minerals or forests) and degradation (damage from pollution) from national income. The result is often called "green GDP".
• Simple formula: Green NDP = NDP − value of natural resource depletion − cost of environmental degradation
• Worked example: NDP = ₹100 lakh crore. Coal and forest depletion = ₹3 lakh crore. Pollution damage = ₹2 lakh crore.
• Green NDP = 100 − 3 − 2 = ₹95 lakh crore. Conventional accounts overstate "sustainable income" by 5%.

International standards: the UN System of Environmental-Economic Accounting (SEEA)

• SEEA Central Framework (SEEA-CF), 2012: the first international standard. It records stocks and flows of individual environmental assets (water, minerals, energy, timber) alongside the economy [1][3].
• SEEA Ecosystem Accounting (SEEA-EA), 2021: the UN Statistical Commission adopted chapters 1–7 of SEEA-EA as an international statistical standard at its 52nd session in March 2021 [4].
• It measures habitats and landscapes, ecosystem services, and changes in ecosystem assets, and links them to economic activity [4].
• Ecosystem accounts had informed policy in more than 34 countries [4].

India's practice

• MoSPI / NSO (the National Statistical Office, under the Ministry of Statistics and Programme Implementation) began compiling environment accounts in the SEEA framework in 2018, published as EnviStats India Vol. II: Environment Accounts [3].
• India took part in the UN Statistics Division's NCAVES project (Natural Capital Accounting and Valuation of Ecosystem Services), launched in 2017 [3].
• EnviStats India 2024: Environment Accounts was the 7th consecutive issue, released on 30 September 2024 [2].
• It covers both SEEA-CF and SEEA-EA [3].
• It includes accounts of ecosystem extent, condition and services [3].

• It added a new area: Ocean Accounts [3].

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

7. Adjusted Net Savings (ANS), or "genuine savings"

• ANS is a World Bank measure. It checks whether a country's savings are big enough to make up for the natural capital it uses up and the pollution damage it causes.
• Formula: ANS = net national saving + education spending − energy depletion − mineral depletion − net forest depletion − CO2 damage − particulate damage
• The World Bank defines it the same way: net national savings plus education spending, minus energy, mineral and net forest depletion and CO2 and particulate emissions damage [5].
• Net national saving = gross national saving − depreciation of produced capital (wear and tear of machines and buildings) [5].

• Education spending is added because it builds human capital (people's skills), which is part of a nation's wealth.

• How to read it:

• Positive ANS → the country is adding to its total wealth, so growth is on a sustainable path [5].

• Negative ANS → the country is running down its total wealth, so growth is unsustainable.

• Worked example (all as % of GNI): net national saving 20, education 4, energy depletion 3, mineral depletion 1, net forest depletion 1, CO2 damage 2, particulate damage 1.

• ANS = 20 + 4 − 3 − 1 − 1 − 2 − 1 = 16% of GNI → sustainable.

• Suppose instead an oil exporter has net saving of 5, education of 2 and energy depletion of 12: ANS = 5 + 2 − 12 = −5% → it is consuming its wealth.

• ANS sits inside the World Bank's wider work, The Changing Wealth of Nations [5].

8. Footprints: measuring human demand on nature

• Ecological footprint: the area of productive land and water needed to supply a population and absorb its waste. It is measured in global hectares (gha).
• It is compared with biocapacity, the area that can actually regenerate resources (Global Footprint Network).
• Footprint > biocapacity → ecological deficit (overshoot).

• Example: a country with a footprint of 1.2 gha per person and biocapacity of 0.4 gha per person has a deficit of 0.8 gha per person. It uses 3 times what its own land can regenerate.

• Earth Overshoot Day: the date each year when humanity's demand on nature passes what Earth can regenerate in that year. It fell on about 24 July in 2025 (NCERT scaffold figure; not confirmed from the allowed sources).

• Carbon footprint: the total greenhouse gas (GHG) emissions of a person, firm, product or country, in CO2-equivalent (CO2e).
• India's per capita emissions are about 2 t, against a world average of about 4.7 t and about 14–15 t for the US (NCERT scaffold figures; not confirmed from the allowed sources).

• This gap is the basis of India's equity argument: responsibility should match per capita and historical emissions (the principle of CBDR-RC, Common But Differentiated Responsibilities and Respective Capabilities).

• Water footprint (concept by Arjen Hoekstra): the total freshwater used to produce what we consume.

Colour	Source
Green water	Rainwater stored in soil and used by crops
Blue water	Surface water and groundwater (rivers, canals, wells)
Grey water	Water needed to dilute pollution to safe levels

• Embodied carbon: the emissions released in making and transporting a product, such as steel or cement. It is the basis of the EU's CBAM (Carbon Border Adjustment Mechanism, a charge on the carbon content of imports) (Section 11).

9. Environmental Performance Index (EPI)

• EPI is published every two years by Yale and Columbia universities.
• It ranks countries on three pillars: climate change performance, environmental health and ecosystem vitality.
• India ranked 176 of 180 in 2024 (NCERT scaffold figure; not confirmed from the allowed sources).
• India contests the method:
• It objects to the weight given to per capita emissions and to projected 2050 emissions.
• Replying to the 2022 EPI, the Ministry of Environment, Forest and Climate Change (MoEFCC) said the index drew conclusions from metrics whose parameters were "unscientific and subjective" [6].
• The core argument: a low-income country that emits little per person is penalised by indicators that reward rich countries whose emissions are already falling from a high base.

Prelims Hooks

• MEA (2005) gives four ecosystem service types. Pollination and flood control are regulating services. Soil formation and nutrient cycling are supporting services.
• TEV = use (direct + indirect + option) + non-use (existence + bequest). Option value is a use value.
• Contingent valuation = stated preference (WTP/WTA surveys). Hedonic pricing and travel cost = revealed preference. Only CVM can capture non-use values.
• SEEA-CF (2012) was the first international standard. The UN Statistical Commission adopted SEEA-EA in March 2021 (52nd session) [4].
• EnviStats India comes from MoSPI/NSO, not MoEFCC or CPCB. The 2024 edition was the 7th issue and added Ocean Accounts [2][3].
• ANS ("genuine savings") is a World Bank measure. It adds education spending and subtracts resource depletion and pollution damage. Negative ANS = unsustainable [5].
• Water footprint: green = rain, blue = surface and groundwater, grey = water to dilute pollution. The concept comes from Hoekstra.
• Ecological footprint is measured in global hectares and compared with biocapacity (Global Footprint Network).
• EPI is published by Yale and Columbia, every two years. It is not a UNEP or World Bank index.
• 15th Finance Commission: a 10% weight for forest and ecology in tax devolution, India's fiscal PES analogue.

Mains Points

• GDP vs green accounting: GDP counts forest felling and mining as income but ignores the loss of the asset. Green GDP and ANS reveal whether growth is simply drawing down natural capital. India's annual SEEA-based EnviStats accounts [2][3] are a base for this, but the next step is to value depletion in the main national accounts, as the Dasgupta Committee (2013) proposed.
• Valuation as a policy tool: TEV, CVM and hedonic methods give nature a price in cost-benefit analysis, for example in forest NPV for diversion of forest land, in environmental impact assessments (EIA) and in setting PES payments. The limits are that money values can be unreliable and that some things, such as sacred groves or tribal cultural value, may not fit any price.
• Fiscal incentives for conservation: Costa Rica's PSA (1997) and the 15th Finance Commission's 10% forest-and-ecology weight both reward the people who provide ecosystem services. The debate is whether 10% makes up for the development forgone by forest-rich states such as those in the North-East and central India.
• Index politics and climate equity: India's per capita carbon footprint is low (~2 t against ~4.7 t for the world), yet it ranks near the bottom of the EPI. MoEFCC's objection that the metrics are "unscientific and subjective" [6] shows how the choice of indicator (per capita vs total, historical vs projected) shapes global narratives, and how it links to CBDR-RC and to CBAM's embodied-carbon charges.