Guest Author: Dr. Sangay
Natural capital is the value of everything that comes from nature; however, the economic contributions it makes are not adequately reflected in any national gross domestic product (GDP), the main economic indicator of most countries. This highlights the need to measure the role of nature, which is an essential part of not only economies, but also people’s livelihoods and wellbeing.
GDP and its critique
Many countries measure their economic growth through GDP, which measures the economic value of goods and services produced within a given territory and accounting period. This has been the standard for compiling economic measures based on accounting and economic principles since the adoption of the System of National Accounts (SNA) in the early 1950s. According to the World Bank, global GDP is estimated at $105.44 trillion for 2023, while the International Monetary Fund reports that it is still going to grow by 3.2% in 2025.
The question is, do these numbers reflect the true wealth of the world? Is the GDP standard appropriate to measure economic prosperity? Is GDP truly the single most powerful economic measure?
A brief history of the GDP
It begins in England with Sir William Petty creating a framework to measure wartime income and expenditure to sustain the British economy. Further methodological additions were made by Adam Smith and Colin Cark to include foreign trade and national income as indicators. An American economist and Nobel Laureate, Simon Kuznets is eventually credited for creating the modern GDP and SNA framework aiming to capture the economic output of all economic agents (individuals, household, and government) produced within a given territory in a specific period.
However, Kuznets himself had some doubts whether GDP can measure overall prosperity when a good proxy for welfare was still missing. US politician and lawyer, Robert F. Kennedy, said, ‘GDP measures everything except that which makes life worthwhile.’ This points towards the fact that GDP currently only measures market-based transactions and income. Non-market-based activities such as home care, household work, or leisure, which are important to wellbeing, are not considered.
Most recently, economist Sir Partha Dasgupta highlighted the neglected role of natural capital, which has plummeted nearly 40% whilst GDP per capita has doubled from 1992–2014 in economic assessments (Figure 1), which exposes the consequences of valuing short-term gains over long-term planetary health. Traditional economic models fail to include nature in their application as natural capital is taken for granted. GDP can be seen as an example of a faulty measure that does not consider nature as an asset, nor does it consider the adverse impacts of the depreciation of this asset. This needs to be considered to make sure that nature is as much part of the economy and vice-versa.
Nature-economy relationship
The relationship between nature and economy has always been one-sided. For the economy to develop, it has mostly relied on nature as a source of raw materials whilst also using it as a sink for waste from economic processes, overlooking nature’s contribution to people (Figure 2). This has exacerbated the triple planetary crisis of pollution, climate change, and biodiversity loss and efforts made are not sufficient to counter adverse effects. Instead, looking at it as a two-sided relationship will contribute towards a holistic wellbeing that not only benefits the economy but also individuals, society, and the environment.
Emergence of Natural Capital Accounting
The idea of NCA is rooted in the concept of ‘Green GDP’ which was conceptualised in the 1980s to include environmental and social costs into the National Accounts Framework.
Two international events flagged the importance of natural capital in economic decision making. The 1987 Brundtland Report (also entitled ‘Our Common Future’) highlighted the need for a new methodology to reflect the value of natural resources and ecosystems and to mainstream it. The 1992 Rio Summit addressed NCA as part of its broader agenda through Agenda 21, which recommended signatory countries to undertake environment and economic accounting for an integrated approach to development.
In 1993, the UN Statistics Division developed a framework to prepare the System of Environment Economic Accounts (SEEA) and published a handbook which allowed environmental data to be integrated with the existing National Accounts Framework. Integrating SEEA with the System of National Accounts (SNA) meant that SEEA used the concepts and principles of SNA which allowed for consistency and comparability. Further revisions were made until 2013, when the UN Statistical Commission officially adopted the SEEA Central Framework (SEEA-CF) as the international standard for environment economic accounting. This was complemented by two documents: SEEA Experimental Ecosystem Accounting (SEEA-EEA) and Applications and Extensions aligning with SNA.
Framework
The methodology behind SEEA is outlined in three documents: i) Central Framework ii) Experimental Ecosystem Accounting, and iii) Applications and Extension. The main objective of these accounts is to record different kinds of environmental data and link it with the economy.
The SEEA Central Framework mainly focuses on environmental flows, stocks of environmental assets, and economic activities related to the environment. Experimental Ecosystem Accounting, on the other hand, accounts for various types of ecosystems and their services in terms of their extent, condition, flow of services, and monetary assets. Lastly, Applications and Extension highlights how to integrate the data from these accounts with SNA in contributing towards indicators for the Sustainable Development Goals (SDGs) and Global Biodiversity Targets of the Convention on Biological Diversity (CBD) for policy makers and decision makers (Figure 3).
Global practice and results
According to the 2023 Global Assessment of Environmental-Economic Accounting and Supporting Statistics, 90 countries have already implemented SEEA in their statistical compilation and disseminate the accounts on a regular basis. Other countries are still in the process of adopting the SEEA methodology.
The United Kingdom released their natural capital accounts in 2023, following the SEEA-Ecosystem Accounting methodology, which showed their natural capital assets to be worth just over £1.5 trillion with recreation and aesthetic services having the highest contribution (~29%). Just for comparison, the current UK GDP stands at around £3 trillion, which means the value of natural assets is half of its GDP, underscoring the substantial importance of environmental accounting.
The European Union’s pilot ecosystem accounts have paved the way, contributing towards various SDG indicators as well their own biodiversity targets. For example, ecosystem services contribute around 21% to the total yield in crop production, underscoring the essential role ecosystems play in supporting agricultural productivity and food security. China uses the Gross Ecosystem Product (GEP), which follows the SEEA framework. In Qinghai Province in 2000 and 2015, the GEP higher was than its GDP, showcasing that investing in large-scale restoration activities provides multiple benefits. India has also been releasing environmental accounts since 1997 whilst also publishing their ecosystem accounts consistently since 2018, each having a different theme and objective, with a specialised biodiversity thematic account.
Bhutan’s NCA
Bhutan began its NCA journey by assessing its readiness in terms of the legal, science, policy, and capacity requirements for NCA. Below are key factors that enable Bhutan to innovate their national economic accounting system:
Unique approach to development and wellbeing
Bhutan’s approach to growth consists of attempts to harmonise economic prosperity with enhanced wellbeing. As a country that prioritises Gross National Happiness (GNH) rather than GDP, Bhutan emphasises the importance of environmental conservation, cultural preservation, good governance, sustainable socio-economic development and each citizen’s overall wellbeing. This holistic development philosophy places the wellbeing of its citizens and the health of the environment at the forefront of national priorities. NCA complements this approach by putting nature at the heart of economic decision making, ensuring that its values are fully recognised and integrated.
Alignment with national policies and plans
Bhutan has a strong mandate towards environmental conservation which provides a good foundation for NCA. In 2008, the GNH index was instituted in the Constitution as one of the government’s goals, ensuring its commitment towards a holistic view of development. With one of the pillars being environmental conservation, Bhutan’s 13th Five Year Plan has also emphasised the development of an NCA system that provides guidance to integrate environmental stability to economic decision making. This is also supported by Milestone 13 of Bhutan for Life’s mandate which states that natural capital valuation of key ecosystem services should be incorporated in the country’s national Five-Year Plans and the management plans of PAs. These strong policy mandates and commitments demonstrate that Bhutan has established a solid foundation and is well-prepared to implement NCA initiatives.
Conservation practices and results
Bhutan has always had a strong conservation ethos in terms of environmental stewardship that is deeply engrained in its culture and policies, leading to pro-active measures for preserving its natural resources. Two statistics that highlight this are the total forest cover of the country and the Protected Area Network. The current forest cover stands at an impressive 71%, with a mandate of maintaining at least 60% cover in perpetuity. Meanwhile, the Protected Area Network covers nearly 52% of the country, revealing the country’s commitment to the conservation and sustainable management of its ecosystems. This can be attributed to a strong conservation ethos backed up by sound policies, which is another reason why NCA makes sense for Bhutan.
Bhutan possesses a wealth of natural resources and has been committed to being carbon neutral forever. Despite forests and PAs covering more than half of the country protecting natural resources and supporting a wide range of social and economic benefits, the true potential to support Bhutan’s economy, climate resilience, and social wellbeing is not adequately recognised. Traditional economic measures have failed to capture this hidden figure which can truly be seminal. NCA can be that bridge to help show Bhutan’s unwavering efforts towards conservation and management by providing a comprehensive framework for valuing and integrating natural assets into national economic planning.
Dr. Sangay is a Principal Forestry Officer at the Ugyen Wangchuck Institute for Forestry Research and Training, Bhutan.
