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Viable long-term economic plan needs a natural capital “Stress test”

 

Nature is fundamental to human life, underpinning our well-being, and our economies.

It provides the food, energy and materials that are vital to economic prosperity and development, and provides other ‘ecosystem services’ such as flood protection, pollination of our crops, and clean air and water that are crucial for the living standards we enjoy today. Natural capital is the stock of natural assets (oceans, forests, seas, geology, atmosphere etc.) that yield this flow of ecosystem services into the future. Natural capital depletion and its impact on the economy must be assessed and addressed.

Sardine shoal © WanderlasssSardine shoal © Wanderlasss

Despite this fundamental importance, every unit of human development over past decades has been matched by an equal measure of decline in our natural capital.  Global wildlife populations alone have halved over the past 40 years. Put simply, we are exceeding the environmental limits of our one planet, living off the capital, rather than the interest. So it’s essential that we decouple the two – we continue to enjoy growing economies, pulling people out of poverty, but ensure this is not at the expense of nature.

Uprooted Tree © John McIntyreUprooted Tree © John McIntyre

It follows therefore that future trends in natural capital will have potentially very significant impacts on the UK economy, and these will vary considerably by economic sector. WWF-UK believes a natural capital stress test is needed to analyse these impacts, and generate results of interest to policymakers including HM Treasury, Defra and Cabinet Office.  The analysis should help to assess the potentially most material risks (in economic terms) from ongoing or worsening environmental degradation and/or depletion, which would help to inform policy responses by government and business.

Open cast mining © Hazel OwenOpen cast mining © Hazel Owen

Assessing the value of nature

Natural capital depletion should be looked at as part of HM Treasury’s work on productivity. Not just in the context of the vexed issue of the UK’s productivity “gap” – where output refuses to resume its pre-recession trend, and continues to lag behind other leading economies – but also in the context of longer-term resource scarcity, higher input costs and so on.
The natural capital approach – by which we mean assessing the value of nature in terms of its economic and social benefits to humans in addition to its intrinsic value, and incorporating that value into decision making – has the potential to generate a step change in the way the environment is managed, helping to achieve much more sustainable and efficient management of the natural environment.  This is because rather than allowing nature to be seen as something that is nice to have – yet ultimately unconnected to the economy and other aspects of our wellbeing as it has often been perceived – the natural capital approach recognises nature as a key foundation to our society and economy.

Stocks of natural capital are being better measured over time showing their significant depletion, and this is taking place alongside a growing realisation of the economic and social costs associated with that depletion – costs which have often gone largely unnoticed to date, as nature is usually unpriced, and excluded from economic calculations.  But as we now increasingly approach environmental limits, those costs are becoming increasingly apparent in very tangible ways, from water shortages, to flooding, coastal erosion, loss of soil quality, and healthcare costs.

Flooded city © Patrick McFallFlooded city © Patrick McFall

A stress testing approach is fundamentally a scenario analysis exercise, whereby the economic and financial impact of future potential changes in natural capital is modelled.  The Government already requires the financial sector to conduct stress testing in relation to financial risks. And stress testing is also being conducted in relation to future climate change impacts. It follows therefore that to be credible, the government’s long-term economic plan must address natural capital depletion, and we believe a stress test, published annually alongside the Budget, would be an excellent step in the right direction.

Read more about our Greener Budget Report and how the Treasury could use it for natural capital stress testing.

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